<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
TELEBANC FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6712 13-3759196
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
(703) 247-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
AILEEN LOPEZ PUGH
TELEBANC FINANCIAL CORPORATION
1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
(703) 247-3705
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S AGENT FOR SERVICE)
------------------
Copies of communications to:
ELLEN CANAN GRADY, ESQ. CARTER STRONG, ESQ.
SHAW PITTMAN POTTS & TROWBRIDGE ARENT FOX KINTNER PLOTKIN & KAHN, PLLC
1501 FARM CREDIT DRIVE 1050 CONNECTICUT AVENUE
MCLEAN, VIRGINIA 22102 WASHINGTON, D.C. 20036
(703) 790-7946 (202) 857-6252
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
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PROPOSED
MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1) FEE(1)
- -----------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share...................... $40,000,000 $11,800
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(1) In accordance with Rule 457(o) under the Securities Act, the registration
fee has been calculated on the basis of the maximum aggregate offering price
of the securities being offered.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement relates to the offering (the "Offering") by the
Company of 2,800,000 shares of common stock, par value $.01 per share (the
"Common Stock"), to the public, and an additional 420,000 shares of Common Stock
issuable upon the exercise of an over-allotment option granted by the Company to
the underwriters of the Offering.
In addition, the Company is also filing a Registration Statement
substantially simultaneously herewith relating to the offering to the public of
$25 million % Beneficial Unsecured Securities, Series A by TeleBanc Capital
Trust II, a new statutory business trust formed under the laws of Delaware by
the Company. The Company is the owner of all of the beneficial ownership
interests represented by common securities of such trust.
<PAGE> 3
SUBJECT TO COMPLETION, DATED , 1998
[TELEBANK LOGO]
2,800,000 SHARES
COMMON STOCK
All of the 2,800,000 shares of common stock, par value $.01 per share
("Common Stock"), offered hereby (the "Offering") are being sold by TeleBanc
Financial Corporation (the "Company"), the holding company of TeleBank
("TeleBank"). The Common Stock has been traded over the counter under the symbol
"TBFC" since May 1994. Prior to the Offering, there has been a limited public
market for the Common Stock. See "Risk Factors -- Marketability of Common
Stock." It is currently expected that the offering price of the Common Stock
offered hereby will be between $ and $ per share. For information
relating to the determination of the offering price, see "Determination of
Offering Price" and "Underwriting." The Company has applied to have the Common
Stock quoted on the Nasdaq National Market under the symbol "TBFC." On ,
1998, the last reported sale price of the Common Stock was $ per share.
Simultaneously with the Offering, TeleBanc Capital Trust II ("TCT II"), a
newly formed Delaware business trust beneficially owned by the Company, is
offering to the public $25 million % Beneficial Unsecured Securities,
Series A (the "BLUS(SM) Offering").
------------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE
SECURITIES ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
Per Share.................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)................... $ $ $
==================================================================================================================
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting Offering expenses payable by the Company estimated at
$ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 420,000 shares of Common Stock to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco, California
on or about , 1998.
------------------------------
BANCAMERICA ROBERTSON STEPHENS
CIBC OPPENHEIMER
LEGG MASON WOOD WALKER
INCORPORATED
The date of this Prospectus is , 1998
<PAGE> 4
[TELEBANK LOGO]
[ON THE GATEFOLD IS BACKGROUND MAP OF THE UNITED STATES UPON WHICH IS
SUPERIMPOSED THE PRODUCTS AND PROPOSED PRODUCTS OF THE COMPANY. THE PRODUCTS ARE
LISTED IN A COLUMN ON THE LEFT SIDE OF THE GATEFOLD (CDS, MONEY MARKET ACCOUNTS,
CHECKING ACCOUNTS, ANNUITIES, RESIDENTIAL MORTGAGE LOANS AND MUTUAL FUNDS) WITH
EACH PRODUCT IN ITS OWN BOX; IN THE SECOND COLUMN IS THE COMPANY'S LOGO; IN THE
THIRD COLUMN ARE THE VARIOUS ALTERNATIVE DELIVERY CHANNELS THROUGH WHICH
CUSTOMERS CAN ACCESS THE COMPANY'S PRODUCTS AND SERVICES; IN THE FOURTH COLUMN
IS A PHOTOGRAPH OF A GROUP OF PEOPLE REPRESENTING CUSTOMERS. ARROWS POINT FROM
THE LIST OF PRODUCTS, THE ALTERNATIVE DELIVERY CHANNELS AND THE PHOTOGRAPH OF
THE CUSTOMERS TO THE COMPANY'S LOGO.]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 5
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER TO
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 4
Summary Consolidated Financial Data......................... 6
Risk Factors................................................ 7
Use of Proceeds............................................. 13
Determination of Offering Price............................. 13
Price Range of Common Stock................................. 13
Dividend Policy............................................. 14
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Pro Forma Condensed Consolidated Statement of
Financial Condition and Statements of Operations.......... 18
Selected Consolidated Financial and Other Data.............. 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 35
Management.................................................. 50
Principal Stockholders...................................... 59
Description of Securities................................... 61
Shares Eligible for Future Sale............................. 67
Underwriting................................................ 68
Legal Matters............................................... 69
Experts..................................................... 69
Incorporation of Certain Documents by Reference............. 69
Available Information....................................... 70
Index to Consolidated Financial Statements.................. F-1
</TABLE>
THE COMPANY
TeleBanc Financial Corporation ("TeleBanc Financial") was organized under
the laws of the State of Delaware in January 1994 as a savings and loan holding
company. TeleBanc Financial operates its business principally through two wholly
owned subsidiaries, TeleBank, and TeleBanc Capital Markets, Inc. ("TCM").
TeleBank offers savings and investment products insured up to applicable limits
by the Federal Deposit Insurance Corporation (the "FDIC"), and TCM is a
registered broker-dealer and investment advisor specializing in mortgage-backed
securities and mortgage loans, that manages the portfolios of TeleBanc Financial
and TeleBank. In addition, TeleBanc Servicing Corporation ("TSC"), a wholly
owned subsidiary of TeleBank, has invested in a joint venture engaged in the
acquisition and collection of delinquent consumer loans for its own portfolio.
The Company has formed another wholly owned subsidiary, TeleDirect, Inc.,
through which it intends to offer co-branded insurance products. Unless the
context indicates otherwise, references herein to the Company include TeleBanc
Financial and all of its subsidiaries, references to TeleBanc Financial refer to
TeleBanc Financial Corporation, the holding company, and references to TeleBank
refer to TeleBank, a federally-chartered savings bank.
RECENT DEVELOPMENTS
Consistent with the Company's direct marketing operating strategy, the
Company has signed an agreement to acquire Direct Financial Corporation ("DFC"),
a regional thrift holding company, and its wholly owned subsidiary, Premium Bank
F.S.B., a federal savings bank ("Premium Bank"), in a merger transaction for
approximately $21.4 million in cash and the repayment by the Company of
approximately $6 million in subordinated debt and other liabilities (the "DFC
Acquisition"). DFC employs a direct marketing strategy similar to that of the
Company. At December 31, 1997, DFC reported total assets of $326.1 million,
total deposits of $273.9 million, total stockholders' equity of $12.3 million
and approximately 15,000 customer accounts. Although there can be no assurance,
the DFC Acquisition is expected to be completed in the summer of 1998, subject
to receipt of regulatory approval. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements, including the Notes thereto, appearing elsewhere in this
Prospectus. The information presented in this Prospectus (i) reflects a 100%
stock dividend declared and paid to holders of record of the Common Stock on
June , 1998 by the Company, and (ii) assumes the Underwriters' over-allotment
option is not exercised. See "Description of Capital Stock," "Underwriting," and
Note 2 to the Consolidated Financial Statements.
THE COMPANY
The Company is a leading national provider of high value savings,
investment and other financial products and services. The Company utilizes a
branchless banking strategy to offer financial products and services to
customers nationwide and to maintain its low cost structure through the use of
alternative delivery channels, such as telephones, the Internet, ATMs, facsimile
and mail. The Company's broad selection of high value savings and investment
products generally have higher interest rates or carry lower fees than similar
products offered by traditional, branch-based financial institutions. The
Company also emphasizes high quality customer service and provides customers
with "anywhere, anytime" convenience for accessing its financial products and
services. The Company intends to broaden its financial products and services to
include in 1998 annuities, residential mortgage loans, credit cards and mutual
funds. At March 31, 1998, the Company had more than 22,000 customer accounts,
$561 million in deposits and $1 billion in assets.
The financial services industry is the fifth largest in the United States.
In 1997, deposits held in U.S. financial institutions totaled more than $4
trillion and assets held by such institutions totaled more than $6 trillion. The
financial services industry is experiencing rapid change, characterized by the
demand for electronic delivery channels of products and services, the emergence
of nationwide, full-service financial institutions and growing price
competition. Increasingly, customers are seeking higher value products, as well
as access to financial services and products through electronic delivery
channels, such as the Internet, telephones, ATMs and facsimile. The use of such
electronic media has grown through the development of network technologies, the
increased use of personal computers in the home and workplace and faster and
less expensive Internet access. According to an April 1997 report by the U.S.
Department of Commerce (the "Commerce Report"), businesses will trade as much as
$300 billion annually over the Internet during the next five years. Although
Internet banking is still relatively new, the Commerce Report estimated that
approximately 4.5 million households were banking online in 1997, and that
number is expected to increase to 10 to 16 million households by the year 2000.
To meet changing customer demands, the Company has developed a low cost
operating strategy designed to reach potential customers through alternative
delivery channels and to build brand awareness of "TeleBank." As part of this
strategy, through a variety of advertising and promotional media, including
print, the Internet, radio advertising and public relations, the Company targets
customers in all 50 states who seek higher rates, convenience and service. The
Company also has implemented an affinity marketing program, through which it
directly markets its savings and investment products to members of the
participating organizations. Currently, TeleBank has affinity programs with 10
organizations having an aggregate of more than 1,000,000 members nationwide. The
Company also intends to broaden its financial product and service offerings by
forming strategic alliances with other financial service providers to develop
and market co-branded products. For example, the Company has entered into
agreements with, among others, USG Annuity & Life Company and Jackson National
Life Insurance Company to offer through the Company's licensed insurance
subsidiary co-branded annuities. The Company has also entered into an agreement
with E-Loan, an Internet-based mortgage loan broker to offer residential
mortgage loans.
------------------------
The Company's executive offices are located at 1111 North Highland Street,
Arlington, Virginia 22201, telephone (703) 247-3700. The Company's Web site
address is located at www.telebankonline.com.
4
<PAGE> 7
THE OFFERING
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Common Stock offered by the Company......................... 2,800,000 shares
Common Stock to be outstanding after the Offering(1)........ 9,814,448 shares
Use of Proceeds............................................. The Company intends to use the proceeds of the
Offering to fund the continued growth of the
Company, including its national direct marketing
initiatives, and for working capital and general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol(2)................... TBFC
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SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts and other operating data)
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YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------------- ---------------------------------------
PRO FORMA ACTUAL ACTUAL PRO FORMA
1995 1996 1997 1997(3) 1997 1998 1998(3)
--------- --------- --------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Interest income.................. $40,511 $45,800 $59,301 $82,609 $12,837 $18,071 $23,599
Interest expense................. 31,946 34,815 46,063 64,494 9,878 14,477 19,045
--------- --------- --------- ------- --------- --------- ----------
Net interest income.............. 8,565 10,985 13,238 18,115 2,959 3,594 4,554
Non-interest income.............. 3,777 2,756 4,093 7,248 618 1,947 2,175
Non-interest expense............. 6,240 9,075 10,142 14,863 2,105 4,204 5,212
Net income available to common
stockholders................... 2,720 2,552 3,671 5,874 814 274 311
Earnings per share:
Basic........................ $0.66 $0.62 $0.84 $1.34 $0.19 $0.06 $0.07
Diluted...................... 0.66 0.58 0.57 0.89 0.15 0.05 0.06
Weighted average shares:
Basic........................ 4,099 4,099 4,383 4,393 4,212 4,468 4,478
Diluted...................... 4,104 4,406 7,411 7,421 5,790 5,757 5,767
</TABLE>
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DECEMBER 31, MARCH 31, 1998
-------------------------------- -------------------------
1995 1996 1997 ACTUAL PRO FORMA(3)
-------- -------- ---------- ---------- ------------
(UNAUDITED)
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STATEMENT OF FINANCIAL CONDITION DATA:
Total assets............................................... $553,943 $647,965 $1,100,352 $1,048,153 $1,373,847
Loans receivable and mortgage-backed securities............ 482,877 536,564 859,907 817,209 1,024,812
Investment securities...................................... 40,058 78,826 91,237 123,963 161,477
Retail deposits............................................ 306,500 390,486 522,221 560,554 849,285
Brokered callable certificates of deposit.................. -- -- -- 42,286 42,286
Borrowings(4).............................................. 215,901 218,967 509,523 373,642 426,110
Trust preferred securities(5).............................. -- -- 9,572 9,526 9,526
Total stockholders' equity................................. 21,565 24,658 45,824 46,540 46,640
OTHER OPERATING DATA(6):
Number of accounts......................................... 12,919 16,506 21,817 22,916 37,916
Customers with two or more accounts........................ 28% 31% 30% 31% (7)
Accounts referred by or cross-sold to existing customers... 25% 27% 38% 50% (7)
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(1) Includes 2,399,486 shares of Common Stock issuable upon conversion of the
Company's outstanding preferred stock, and 119,974 shares of Common Stock
issuable as a dividend on the outstanding preferred stock. Excludes (i)
1,086,176 shares of Common Stock issuable upon the exercise of outstanding
warrants with a weighted average exercise price of $4.17 per share, (ii)
794,794 shares of Common Stock issuable upon the exercise of options granted
to David A. Smilow and Mitchell H. Caplan with a weighted average exercise
price of $4.96 per share, and (iii) 850,402 shares of Common Stock issuable
upon the exercise of options granted to other employees of the Company with
a weighted average exercise price of $7.33 per share. See "Management" and
"Description of Capital Securities."
(2) The Common Stock currently is traded over-the-counter. The Company has filed
an application for quotation of the Common Stock on the Nasdaq National
Market. See "Risk Factors -- Marketability of Common Stock," "-- Application
for Quotation on Nasdaq National Market" and "Price Range of Common Stock."
(3) The Pro Forma Statement of Operations Data and Pro Forma Statement of
Financial Condition Data give pro forma effect to the MET Holdings
Transaction, which is described below under "Capitalization," and the DFC
Acquisition. The Pro Forma Statement of Operations data gives pro forma
effect to the above-mentioned transactions as if they had occurred on
January 1, 1997 for the year ended December 31, 1997, and on January 1, 1998
for the three months ended March 31, 1998. The Pro Forma Statement of
Financial Condition Data gives effect to the above-mentioned transactions as
if they had occurred on March 31, 1998. See "Pro Forma Selected Consolidated
Financial Data."
(4) Consists of advances from the Federal Home Loan Bank ("FHLB") of Atlanta,
securities sold under agreements to repurchase, subordinated debt, net and
other liabilities.
(5) Consists of 10,000 shares of Company-Obligated Mandatorily Redeemable
Capital Securities of a subsidiary trust, TeleBanc Capital Trust I ("TCT
I"), which was formed to issue such securities and invest the net proceeds
in 11.0% Junior Subordinated Deferrable Interest Debentures, Series A (the
"TCT I Junior Subordinated Debentures"). See Note 12 to Consolidated
Financial Statements.
(6) The Other Operating Data has been derived from the Company's records.
Account data for DFC is approximate.
(7) Data giving pro forma effect to the DFC Acquisition is not available as of
the date of this Prospectus.
5
<PAGE> 8
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing any of the Common Stock offered hereby.
Information contained in this Prospectus contains forward-looking statements
which are subject to risks and uncertainties. When used anywhere in this
Prospectus, the words "anticipate," "believe," "could," "estimate," "expect,"
"may," "will," "should" or the negative thereof and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results could differ materially
from those discussed in this Prospectus. Factors that could contribute to such
differences include, but are not limited to, those discussed in this section and
in sections entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as those discussed
elsewhere in this Prospectus.
INTEREST RATE RISK
The Company's results of operations substantially depend upon the level of
its net interest income, which is the difference between interest income from
interest-earning assets (such as loans and mortgage-backed securities) and
interest expense on interest-bearing liabilities (such as deposits and
borrowings). Interest rates are highly sensitive to many factors beyond the
control of the Company, including governmental monetary policies, domestic and
international economic and political conditions and other factors. If interest
rate fluctuations cause TeleBank's cost of funds to increase faster than the
yield on TeleBank's interest-bearing assets, its net interest income will be
reduced.
The market value of most of the Company's financial assets also is
sensitive to fluctuations in market interest rates. Fixed-rate investments,
mortgage-backed and related securities and mortgage loans generally decline in
value as interest rates rise. Based on a simulation analysis used by the
Company, and excluding TeleBank's trading portfolio, the Company estimates that
a hypothetical instantaneous 100 basis point rise in rates would cause the fair
value of the Company's equity as of March 31, 1998 to decrease by 0.50%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's net interest income, margins and results of operations have
fluctuated in the past and are expected to continue to fluctuate in the future,
on an annual and quarterly basis, as a result of several factors. Such factors
include fluctuating interest rates, changes in non-interest income economic
factors, the performance of the Company's loan portfolio and other
interest-earning assets, the Company's level of marketing expenditures,
introduction of new products by the Company or by its competitors, the changing
mix of products and services sold and the effectiveness of the Company's
customer service. For the foregoing reasons, the Company believes that quarter
to quarter comparisons of the Company's results of operations are not
necessarily meaningful and that the Company's results of operations in any
particular quarter should not be relied upon as indicative of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEVELOPMENT OF BRAND AWARENESS
The Company believes that the importance of brand recognition will increase
as more companies engage in commerce over the Internet and through other
nontraditional commercial means. The Company's success in introducing new
financial products and services through alternative delivery channels will
depend in part upon the Company's ability to increase brand awareness of the
name "TeleBank." There can be no assurance that the Company will be able to
develop effectively an association between the brand name "TeleBank" and the
financial products and services it provides, or that, if successful, such
association will have a substantial favorable effect upon the Company's
business, financial condition and results of operations. The Company anticipates
that its efforts to develop and, if developed, maintain brand awareness will
increase marketing and related costs significantly. These significant additional
expenses could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company currently does not
have any
6
<PAGE> 9
intellectual property rights to the tradename "TeleBank" or any trademarks
associated therewith. If the Company is successful in developing a branded
identity for "TeleBank" and a competitor were to challenge successfully the
ability of the Company to use this name, it could have a material adverse effect
on the Company's business, financial condition and results of operation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANAGEMENT OF GROWTH
Since 1996, the Company has experienced rapid growth and anticipates that
it will continue to experience rapid growth in the future. However, the
Company's ability to maintain continued growth depends to a significant degree
on numerous factors, including: (i) the Company's ability to maintain high value
products and services; (ii) the extent to which the Company increases its
existing customer base and attracts new customers; (iii) the Company's ability
to recruit, train, motivate and retain qualified personnel, including customer
service representatives and marketing and sales personnel; (iv) the Company's
ability to raise additional capital for operational and regulatory capital
requirements; and (v) the Company's ability to build enhanced operating and
financial systems and to attract the additional management required to manage
effectively such growth. The Office of Thrift Supervision ("OTS") also has the
authority to restrict asset growth by TeleBank based on safety and soundness
considerations. There can be no assurance that, if rapid growth occurs, the
Company will be able to manage such growth effectively. If the Company is unable
to manage growth effectively, its business, financial condition and results of
operations could be materially adversely affected.
DEPENDENCE ON NEW PRODUCTS AND SERVICES
The Company's growth will depend in part upon the ability of the Company to
offer new financial products and services that satisfy changing consumer
demands. Through TeleBank, the Company currently offers FDIC-insured checking
accounts, money market accounts, savings accounts and certificates of deposit
("CDs"). In 1998, the Company intends to offer credit cards and, through
strategic alliances, annuities, residential mortgage loans, and mutual funds.
There can be no assurance that the Company will be successful in offering new
financial products and services or in its efforts to enter into arrangements
with other companies to offer co-branded products and services. Further, if
offered by the Company, there can be no assurance that customers will accept any
new financial products and services. In addition, the Company's ability to
develop and offer new products or services may be subject to regulatory
limitations.
CUSTOMER ACCEPTANCE OF ALTERNATIVE DELIVERY CHANNELS
The Company's branchless banking strategy differs from that of traditional
financial institutions and relies on alternative delivery channels such as
telephone, the Internet, facsimile and mail to market the Company's financial
products and services. The success of the Company's strategy will depend, in
substantial part, upon customer acceptance of these means of marketing and
delivering financial products and services. The market for financial products
and services through alternative delivery channels is new and evolving, and the
degree to which customers will utilize such channels for their financial
transactions is not yet fully determined. Many potential customers have only
limited experience with the Internet as a communications medium, and even less
experience with it as their primary method of banking. There can be no assurance
that customers will be persuaded to conduct banking and other financial
transactions through such alternative channels, and if so persuaded, that they
will find that such alternative channels effectively meet their demands.
RELIANCE ON THIRD PARTY SERVICE PROVIDERS
The Company receives essential technical and customer service support from
third party providers, including M&I Data Services, Inc. and Security First
Technologies. Such outsourced functions include check processing, check imaging,
Internet processing, Internet software, home page hosting and statement
rendering. The Company's agreements with each of these service providers may be
terminated without cause by either party upon specified notice periods. If the
Company's agreement with one of its third party service providers is terminated,
and the Company is unable to replace the provider, its operations would be
interrupted. If such an
7
<PAGE> 10
interruption were to continue for a significant period of time, the Company's
business, financial condition and results of operations could be materially
adversely affected.
COMPETITION
The Company believes that the principal competitive factors in the
financial services industry in which it operates are price (e.g., interest rates
paid on savings products and fees associated with investment products), service,
convenience and product quality. Although the Company believes its operating
strategy enables it to offer competitive financial products on a nationwide
basis, there can be no assurance that the Company will be able to differentiate
its products from the products of its competitors in the financial services
industry.
The financial services industry, which is highly competitive and dynamic,
has recently undergone, and continues to undergo, a major consolidation of
participants. Competing providers of direct-marketed savings and investment
products include Net.B@nk and other Internet-based financial institutions.
Additionally, more traditional, branch-based financial services companies may be
able to adopt business strategies similar to those of the Company with relative
ease, and there are few barriers to market entry. Many of the companies with
which the Company competes or may compete in the future have significantly
greater capital and management resources than does the Company. Increased
competition could materially adversely affect the Company's business, financial
condition and results of operations. See "Business -- Competition."
SYSTEMS FAILURE AND SECURITY RISKS
The computer systems and network infrastructure used by TeleBank and the
Company may be vulnerable to unforeseen problems. TeleBank's operations are
dependent upon its ability to protect its computer equipment against damage from
fire, power loss, telecommunications failure or a similar catastrophic event.
Any damage or failure that causes an interruption in TeleBank's operations could
have a material adverse effect on the Company's business, financial condition
and results of operations. TeleBank also must protect its computer systems and
network infrastructure from physical break-ins, security breaches and other
disruptive problems caused by the Internet or other users. Such computer
break-ins and power disruptions could jeopardize the security of information
stored in and transmitted through such computer systems and network
infrastructure, which may result in significant liability to TeleBank and the
Company and would likely adversely affect the Company's ability to retain or
attract customers. The Company employs security systems, including firewalls and
password encryption, designed to minimize the risk of security breaches, and
relies on an outside third-party service provider for back-up Internet services
and facilities. The Company also maintains insurance designed to compensate the
Company in the event of any accident, system failure or breach of security. In
addition, depositors' funds are insured by the FDIC to a maximum of $100,000 per
depositor. Although the Company intends to continue to implement security
technology and establish operational procedures to prevent break-ins, damage and
failures, there can be no assurance that these security measures will be
successful. A failure of such security measures could result in a material
adverse effect on the Company's business, financial condition and results of
operations.
MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS
The Company intends to use the proceeds of the Offering to support the
continued growth of the Company, including its national direct marketing
initiatives, and for working capital and general corporate purposes. Management
will have broad discretion with respect to the expenditure of net proceeds of
the Offering. See "Use of Proceeds."
DEPENDENCE ON KEY PERSONNEL
The Company's success may depend upon the continued service of its senior
management team, including David A. Smilow, Chairman of the Board of Directors,
Mitchell H. Caplan, Vice Chairman of the Board of Directors, Chief Executive
Officer and President, Aileen Lopez Pugh, Executive Vice President and Chief
Financial Officer and Laurence Greenberg, Executive Vice President and Chief
Marketing Officer. The
8
<PAGE> 11
loss of service of any key personnel, or the inability to attract additional
qualified personnel, could have an adverse effect upon the Company's business,
financial condition and results of operations.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the Offering, Mr. Smilow, Mr. Caplan and the Company's
directors and executive officers as a group will beneficially own approximately
14.3%, 7.5% and 28.4%, respectively, of the outstanding Common Stock
(approximately 13.7%, 7.2% and 27.3%, respectively, if the over-allotment option
granted to the Underwriters is exercised in full). As a result of such
ownership, Mr. Smilow, Mr. Caplan and the Company's directors and executive
officers as a group will be able to exercise significant control over the
Company's management and affairs, including the election of directors and the
determination of all other matters requiring stockholder approval, and will
retain the power to block certain business combinations in accordance with the
Company's Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and bylaws (the "Bylaws"). See "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have an aggregate of
9,814,448 shares of Common Stock outstanding. Of these shares, all of the
2,800,000 shares sold in the Offering and the 1,058,112 shares sold in the
Company's initial public offering will be freely transferable without
restriction or limitation under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares held by "affiliates" of the Company, as
such term is defined in Rule 144 under the Securities Act. The remaining
5,956,336 shares constitute "restricted securities" within the meaning of Rule
144. Of these "restricted securities," 3,405,951 shares have been held for two
years or longer and will be freely tradable upon completion of the Offering,
subject to the 180-day lock-up period described below (except for any shares
held by affiliates of the Company). In addition, the holders of 2,519,460 shares
have certain rights to have shares registered in the future under the Securities
Act pursuant to agreements between such holders and the Company. The Company,
its directors and executive officers and certain other stockholders who will
hold, collectively, 3,026,798 shares of Common Stock after the Offering, have
agreed not to offer or sell any shares of Common Stock for a period of 180 days
following the date of this Prospectus without the prior written consent of
BancAmerica Robertson Stephens, except that the Company may issue shares of
Common Stock in connection with acquisitions and pursuant to the exercise of
stock options described in this Prospectus. On the date of this Prospectus, the
Company had outstanding options to purchase 1,645,196 shares of Common Stock and
warrants to acquire 1,086,176 shares of Common Stock. Sales of substantial
amounts of shares of Common Stock in the public market after the Offering, or
the perception that such sales could occur, may adversely affect the market
price of the Common Stock. See "Shares Eligible for Future Sale."
MARKETABILITY OF COMMON STOCK
The Underwriters have advised the Company that they intend to make a market
in the Common Stock following consummation of the Offering. To date, however,
there has been a limited market for the Common Stock, and there can be no
assurance that, upon consummation of the Offering, an active market will develop
or be sustained. The trading price of the Common Stock could be subject to
significant fluctuations in response to quarterly fluctuations in the Company's
actual or anticipated results of operations, changes in general market
conditions and other factors. See "Price Range of Common Stock."
APPLICATION FOR QUOTATION ON NASDAQ NATIONAL MARKET
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market upon the consummation of the Offering. The Company believes
that, upon consummation of the Offering, the Company will satisfy the
requirements for its Common Stock to be quoted on the Nasdaq National Market.
There can be no assurance, however, that such application will be approved or,
if approved, that the listing will be maintained. If the Company does not obtain
Nasdaq National Market listing approval or if the Company fails to comply with
the maintenance criteria, the Common Stock may be delisted from quotation or
trading on such system and will be traded over the counter. The effects of
delisting include the limiting of public
9
<PAGE> 12
release of the market prices of the Company's securities and coverage of the
Company. Also, delisting may restrict investors' interest in the Common Stock,
materially adversely affect the trading market and price of the Common Stock and
the Company's ability to issue additional securities or to secure additional
financing.
LEGISLATIVE AND REGULATORY CONSIDERATIONS
Congress has been considering legislation in various forms which could
require a federally chartered thrift, such as TeleBank, to convert its charter
to a national or state bank charter. If legislation is adopted that requires
TeleBank to convert its charter, TeleBanc Financial would become a bank holding
company subject to additional regulation, including restrictions on its
activities and the imposition of regulatory capital requirements. In the absence
of appropriate "grandfather" provisions, such legislation could have an adverse
effect on TeleBank and the Company. The Company is unable to predict whether,
and in what form, any such legislation is likely to be passed and the effect
such legislation might have on the Company or TeleBank. See
"Business -- Government Regulation -- Thrift Charter Legislation."
GOVERNMENT REGULATION
The Company is subject to federal regulatory oversight by the OTS as a
savings and loan holding company. TeleBank is subject to extensive regulation by
the OTS as its primary federal regulator and also by the FDIC and the Board of
Governors of the Federal Reserve Board (the "Federal Reserve Board"). Future
legislation or regulations may be adopted which could have an adverse effect on
the Company or TeleBank. In addition, TeleBank's non-traditional operating plan
may subject it to increased regulatory scrutiny.
TeleBank is subject to minimum capital and leverage requirements prescribed
by federal statute and OTS regulations. At March 31, 1998, TeleBank's regulatory
tangible, core, tier 1 and total capital ratios were 5.5%, 5.5%, 11.0% and
11.6%, respectively. TeleBank's capital ratios exceeded the requirements under
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") as well as the standards established for "well-capitalized"
institutions under the prompt corrective action regulations issued pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). If
TeleBank were to fail to meet its regulatory capital requirements it would be
subject to additional restrictions and would be required by statute to file a
capital restoration plan with the OTS setting forth, among other things, the
steps TeleBank would take to become "adequately capitalized." The OTS could
choose not to accept the plan unless the Company guaranteed TeleBank's
compliance with the plan in writing. Finally, if TeleBank were to become
"critically undercapitalized" (which is defined to include institutions that
still have a positive net worth) it would be subject to the appointment of a
receiver or conservator.
TeleBank's ability to maintain or increase its capital levels in future
periods will be subject, among other things, to general economic conditions, the
Company's ability to raise new capital and the Company's ability and willingness
to make additional capital contributions to TeleBank. As a result, although
TeleBank's regulatory capital ratios at March 31, 1998 met the ratios
established for "well-capitalized" institutions, there can be no assurance that
TeleBank will be able to maintain capital levels that meet the standards for
classification as "well capitalized" under the prompt corrective action
standards. See "Business -- Government Regulation -- Thrift Charter
Legislation."
RESTRICTIONS ON ABILITY TO PAY DIVIDENDS; PAYMENT OF FIXED OBLIGATIONS
The Company has never paid dividends on its Common Stock. The Company
currently does not intend to contribute all of the net proceeds from the
Offering to TeleBank, but to retain such funds for business purposes. The
Company does not intend to pay cash dividends on its Common Stock for the
foreseeable future. Further, the Company's ability to pay dividends to its
stockholders is derived primarily from, and dependent upon, TeleBank's ability
to pay dividends to the Company. In general, TeleBank historically has paid
dividends to the Company only to the extent that funds are needed to cover
operating expenses, to service the debt of the Company and pay dividends to
preferred stockholders, if any. TeleBank is subject to substantial regulatory
restrictions on its ability to pay dividends on its common stock. In addition,
the Company is subject to a number of contractual agreements that restrict its
ability to pay dividends on the Common Stock.
10
<PAGE> 13
The Company relies on cash dividends from TeleBank to make payments on
certain obligations, including payments of interest on its debt. Additionally,
OTS regulations prohibit thrift institutions, such as TeleBank, from making
"capital distributions" (defined to include a cash distribution or a stock
redemption, but to exclude dividends in the form of additional capital stock)
unless the institution is at least "adequately capitalized." Currently, an
institution is considered "adequately capitalized" for this purpose if it has a
core capital ratio of at least 4.0%, a tier 1 capital ratio of at least 4.0%,
and a total capital ratio of at least 8.0%. At March 31, 1998, TeleBank's core
capital, tier 1 and total capital ratios of 5.5%, 11.0% and 11.6%, respectively,
met the ratios established for "well capitalized" institutions and, thus,
exceeded the ratios established for "adequately capitalized" institutions.
Under current OTS capital distribution regulations, as long as TeleBank
meets the OTS capital requirements before and after the payment of dividends, it
may pay dividends without prior OTS approval equal to the higher of (i) 100% of
net income to date over the calendar year and 50% of surplus capital existing at
the beginning of the calendar year or (ii) 75% of its net income over the most
recent four-quarter period. The OTS could require prior approval if it were to
determine that TeleBank was "in need of more than normal supervision." In
addition, the OTS retains general discretion to prohibit any otherwise permitted
capital distribution on general safety and soundness grounds, and must be given
30 days' advance notice of all capital distributions, during which time it may
object to any proposed distribution. As of March 31, 1998, approximately $11.0
million were available for payment of dividends by TeleBank to the Company under
applicable restrictions without regulatory approval. Regulatory authorities
could impose stricter limitations on TeleBank's ability to pay dividends to the
Company if such limits were deemed appropriate to maintain the safety and
soundness of TeleBank. The Company's aggregate annual interest payment on the
Subordinated Debentures and the TCT I Junior Subordinated Debentures is $4.4
million. In addition, under the terms of the indenture for the 1994 Subordinated
Debentures and the TCT I Junior Subordinated Debentures, the Company presently
is required to maintain, on an unconsolidated basis, liquid assets in an amount
equal to or greater than $3.3 million. Any restrictions on TeleBank's payment of
dividends could adversely affect the Company's ability to make payments on the
debt, which could adversely affect the Company's stockholders. See "Dividend
Policy", "Business -- Government Regulation -- Sources of Funds for Cash
Dividends" "Description of Securities -- Subordinated Debt" and Note 12 to
Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
Significant uncertainty exists in the software industry concerning the
potential effects associated with "Year 2000" issues. In 1997, the Company
initiated a review and assessment of its hardware and software to confirm that
it will function properly in processing dates pertaining to the year 2000. The
Company's core processing software vendor and the majority of its other vendors
have represented to the Company that their hardware and software are Year 2000
compliant. The Company intends to arrange for independent testing of its
hardware and software for compliance to be substantially completed not later
than December 1998. There can be no assurance that the Company's software
contains all necessary date code changes. In addition, the Company outsources to
third party service providers many administrative functions associated with the
financial services that it provides to customers. Compliance with Year 2000
requirements may disrupt the Company's ability to conduct its business or
otherwise service its customers. Management does not currently expect that the
costs related to Year 2000 requirements will be material to the Company's
financial condition or results of operation. However, the Company's ability to
predict the costs associated with Year 2000 compliance is subject to some
uncertainties, and the Company may incur additional unexpected expenditures in
connection with Year 2000 compliance which could be material. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CERTAIN ANTI-TAKEOVER PROVISIONS AND REGULATORY RESTRICTIONS
The Company is subject to certain anti-takeover provisions of the General
Corporation Law of the State of Delaware (the "GCL") which could have the effect
of discouraging, delaying or preventing a change in control of the Company. In
addition, the Company's Certificate of Incorporation and Bylaws contain certain
provisions that could delay, discourage or prevent an attempted acquisition or
change of control of the
11
<PAGE> 14
Company. These provisions include: (i) a staggered Board of Directors; (ii)
certain advance notice procedures for nomination of candidates for election as
directors and for stockholder proposals to be considered at an annual meeting of
stockholders; (iii) requirements for special meetings of stockholders of the
Company to be called by stockholders only upon the written request of holders of
at least a majority of the outstanding shares of capital stock entitled to vote
at any such meeting; (iv) the authorization of preferred stock; (v) required
approval for acquisitions of control; (vi) limitations on control share
acquisitions; and (vii) required two-thirds vote on amendments of the Company's
Certificate of Incorporation and Bylaws. See "Description of Securities."
Under the Home Owners' Loan Act of 1933 and the OTS regulations relating to
the acquisition of control of savings associations, an individual or company,
alone or "acting in concert with others," that seeks to acquire more than 25% of
the Common Stock (or more than 10% of the Common Stock coupled with certain
"control factors") would be required to obtain prior approval of OTS (or rebut
the presumption of control in the case of less than 25% shareholdings). Any
company that acquires control (as broadly defined in OTS regulations) of the
Company would become a "savings and loan holding company" subject to
supervision, regulation and examination by the OTS.
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,800,000 shares of
Common Stock offered hereby (3,220,000 if the Underwriters' over-allotment
option is exercised in full) are estimated to be $ million ($
million if the Underwriters' over-allotment option is exercised in full),
assuming a price to the public of $ per share (the mid-point of the
price range set forth on the cover of this Prospectus), and after deducting the
estimated underwriting discount and offering expenses payable by the Company.
The Company currently does not intend to contribute all of the net proceeds from
the Offering to TeleBank. The Company intends to use the proceeds of the
Offering to fund the continued growth of the Company, including its national
direct marketing initiatives, and for working capital and general corporate
purposes.
Simultaneously with the Offering, TCT II, a newly formed Delaware business
trust the beneficial ownership interests of which are owned by the Company, is
offering $25 million of BLUS(SM), the net proceeds of which will be invested in
% Junior Subordinated Deferrable Interest Debentures, Series A (the "TCT
II Junior Subordinated Debentures") to be issued by TeleBanc Financial. The net
proceeds from the BLUS(SM) Offering, estimated to be $ million after
deducting the underwriters' compensation and other expenses of the BLUS(SM)
Offering payable by the Company, will be used for working capital and general
corporate purposes. The Common Stock and the BLUS(SM) are being sold in separate
offerings, and the Company intends to complete the Offering regardless of
whether the BLUS(SM) Offering is consummated.
DETERMINATION OF OFFERING PRICE
The public offering price per share of Common Stock to be sold in the
Offering is estimated to be in the range of $ to $ . The
actual price per share of Common Stock sold in the Offering will be determined
by negotiations between the Company and the Underwriters of the Offering. See
"Underwriting." It is currently expected, however, that the price per share at
which shares of Common Stock are offered and sold in the Offering will be above
the current price per share at which the Common Stock is trading in the
over-the-counter market. The Company and the Underwriters do not believe that
the current trading price reflects the fair value of the Common Stock as a
result of the relatively small amount of Common Stock that has been available to
trade in the public market prior to the Offering.
At , 1998, the last reported sale price of the Common Stock in the
over-the-counter market was $ per share. As of that same date, the Company
had outstanding 7,014,448 shares of Common Stock, of which 3,026,798 shares of
Common Stock (38.4%), were held by the Company's executive officers, directors
and Employee Stock Ownership Plan (the "ESOP") in the aggregate.
PRICE RANGE OF COMMON STOCK
Subject to completion of the Offering, the Company has applied to have the
Common Stock listed on the Nasdaq National Market under the symbol TBFC.
Currently, the Common Stock is traded in the over the counter market under the
symbol TBFC.
13
<PAGE> 16
The following table sets forth, for the periods indicated, the range of
high and low sale price information per share of Common Stock, as reported on
the over-the-counter market:
<TABLE>
<CAPTION>
PERIOD HIGH(1) LOW(1)
- ------ ------- ------
<S> <C> <C> <C>
1995
First Quarter...................................................... $ 2.813 $2.750
Second Quarter..................................................... 3.000 2.500
Third Quarter...................................................... 3.313 3.032
Fourth Quarter..................................................... 3.875 3.250
1996
First Quarter...................................................... $ 4.000 $3.750
Second Quarter..................................................... 4.875 4.000
Third Quarter...................................................... 5.000 4.438
Fourth Quarter..................................................... 6.625 4.875
1997
First Quarter...................................................... $ 8.500 $6.000
Second Quarter..................................................... 8.500 6.250
Third Quarter...................................................... 9.500 7.875
Fourth Quarter..................................................... 10.625 8.750
1998
First Quarter...................................................... $10.625 $9.000
Second Quarter (through , 1998)...........................
</TABLE>
- ---------------
(1) The high and low sale price information per share of Common Stock has been
adjusted to reflect a 100% stock dividend declared and paid to holders of
record of the Common Stock on June , 1998.
As of May 14, 1998, the Company had approximately 250 holders of record of
Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development and
growth of its business.
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<PAGE> 17
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at March 31, 1998 (i) on an actual basis, (ii) on a pro forma basis
to reflect the consummation of (a) the Company's acquisition of substantially
all of the assets and its assumption of substantially all of the liabilities of
Met Holdings, Inc. ("MET Holdings") in exchange for the issuance of 2,876,162
shares of Common Stock (the "MET Holdings Transaction") which was completed on
April 30, 1998 and (b) the DFC Acquisition, and (iii) on a pro forma, as
adjusted basis to give effect to (a) the sale of Common Stock in the Offering
and the investment of the net proceeds therefrom, (b) the BLUS(SM) Offering and
the investment of the net proceeds therefrom in the TCT II Junior Subordinated
Debentures, (c) the issuance of 2,399,486 shares of Common Stock upon the
conversion (the "Preferred Stock Conversion") of 18,850 outstanding shares of
Series A Voting Convertible Preferred Stock, par value $.01 per share (the
"Series A Preferred Stock"), 4,050 outstanding shares of Series B Nonvoting
Convertible Preferred Stock, par value $.01 per share (the "Series B Preferred
Stock"), and 7,000 shares of Series C Nonvoting Convertible Preferred Stock, par
value $.01 per share (the "Series C Preferred Stock" and, collectively with the
Series A Preferred Stock and the Series B Preferred Stock, the "Preferred
Stock") upon completion of the Offering, and (d) the issuance of 119,974 shares
of Common Stock as a dividend on the Preferred Stock prior to completion of the
Offering. See "Use of Proceeds," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The information set forth in the
table should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
-------- -------------- ------------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Subordinated debt, net................................... $ 29,672 $ $
Trust preferred securities (1)........................... 9,526
Stockholders' equity (2):
Preferred Stock, $.01 par value, 500,000 shares
authorized:
Series A Voting Convertible Preferred Stock, 18,850
issued and outstanding actual and pro forma, no
shares issued and outstanding pro forma, as
adjusted............................................ 9,634
Series B Nonvoting Convertible Preferred Stock, 4,050
issued and outstanding actual and pro forma, no
shares issued and outstanding, pro forma, as
adjusted............................................ 2,070
Series C Nonvoting Convertible Preferred Stock, 7,000
issued and outstanding actual and pro forma, no
shares issued and outstanding, pro forma, as
adjusted............................................ 3,577 -- --
Common stock, $.01 par value, 29,500,000 shares
authorized, 7,014,448 shares issued and outstanding
actual and pro forma; 9,814,448 shares issued and
outstanding, pro forma, as adjusted.................... 22
Additional paid-in capital............................... 16,387
Retained earnings........................................ 11,850
Net unrealized loss on securities available for sale,
net of tax.......................................... 3,000
Total stockholders' equity (3)...................... 46,540
-------- ------- -------
Total capitalization........................... $ 85,738 $ $
======== ======= =======
</TABLE>
- ---------------
(1) Consists of 10,000 shares of Company-Obligated Mandatorily Redeemable
Capital Securities of a subsidiary trust, TCT I. See Note 12 to Consolidated
Financial Statements.
(2) Does not include 1,086,176 shares of Common Stock issuable upon the exercise
of outstanding warrants or 1,645,196 shares of Common Stock reserved for
issuance upon exercise of outstanding options granted to directors,
executive officers and key employees under the Company's 1994 Stock Option
Plan and 1997 Stock Option Plan. See "Management" and "Description of
Securities."
(3) If the over-allotment option granted to the Underwriters is exercised in
full, total stockholders' equity, pro forma, as adjusted, at March 31, 1998
would be $ million.
15
<PAGE> 18
DILUTION
The net tangible book value of the Company at March 31, 1998 was
approximately $44.8 million, or $6.40 per share of Common Stock. Net tangible
book value per common share represents the amount of total tangible assets of
the Company reduced by the amount of its total liabilities and Trust Preferred
Securities, divided by the total number of shares of Common Stock outstanding.
After giving effect to the net proceeds from the Offering and assuming the price
to the public is $ per share of Common Stock (the mid-point of the range set
forth on the cover of this Prospectus), the pro forma net tangible book value of
the Company as of March 31, 1998 would have been $ million, or $ per
share of Common Stock. This represents an immediate dilution in pro forma net
tangible book value of $ per share to the purchasers of Common Stock in the
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $
Pro forma net tangible book value per share at March 31,
1998................................................... $ 6.40
Increase attributable to new investors in the Offering....
Pro forma net tangible book value per share after the
Offering..................................................
------
Dilution per share to new investors......................... $
======
</TABLE>
- ---------------
The foregoing table (i) includes 2,399,486 shares of Common Stock to be
issued upon the Preferred Stock Conversion and 119,974 shares of Common Stock to
be issued as a dividend on the Preferred Stock prior to completion of the
Offering and (ii) does not include an aggregate of 1,645,196 shares and
1,086,176 shares, respectively, issuable at March 31, 1998 upon exercise of
outstanding stock options and warrants. In addition, the pro forma net tangible
book value per share does not include adjustments for the DFC Acquisition. See
"Management" and "Description of Capital Securities."
16
<PAGE> 19
SELECTED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION AND STATEMENT OF OPERATIONS
The unaudited Pro Forma Condensed Consolidated Statement of Financial
Condition and Statement of Operations are presented to give pro forma effect to
(i) the MET Holdings Transaction, and (ii) the DFC Acquisition. The DFC
Acquisition is expected to be completed in the summer of 1998, subject to
receipt of regulatory approval. The pro forma financial information has been
prepared using the historical Consolidated Financial Statements of the Company.
The Pro Forma Condensed Consolidated Statement of Financial Condition gives
effect to the transactions described above as if they had occurred as of March
31, 1998. The Pro Forma Condensed Consolidated Statement of Operations gives pro
forma effect to the above transactions as if they had occurred on January 1,
1997 for the year ended December 31, 1997, and on January 1, 1998 for the three
months ended March 31, 1998.
The pro forma consolidated financial data of the Company have been derived
from and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere herein. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the financial position that would have occurred had the
transactions described above been effected on the dates assumed nor is the pro
forma financial information intended to be indicative of the Company's future
financial position or results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
MET HOLDINGS
TELEBANC AND DFC
FINANCIAL COMBINED PRO FORMA
(In thousands, except for per share data) HISTORICAL HISTORICAL(a) ADJUSTMENT PRO FORMA
- ----------------------------------------- ---------- ------------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income......................... $59,301 $23,308 $ -- $82,609
Interest expense........................ 46,063 18,431 -- 64,494
------- ------- ----- -------
Net interest income................. 13,238 4,877 -- 18,115
Provision for loan losses............... 921 456 -- 1,377
Non-interest income..................... 4,093 3,155 -- 7,248
Non-interest expense:
Selling, general and administrative
expenses.......................... 9,041 4,212 -- 13,253
Other non-interest expense.......... 1,100 -- 510(b) 1,610
------- ------- ----- -------
Income before income tax, minority
interest and preferred dividend....... 6,269 3,364 (510) 9,123
Income tax expense...................... 1,657 471 -- 2,128
Minority interest....................... 395 -- -- 395
------- ------- ----- -------
Net income from continuing operations
before nonrecurring charges directly
attributable to the transaction and
preferred dividend.................... $ 4,217 $ 2,893 $(510) $ 6,600
======= ======= ===== =======
Preferred dividend...................... 546 180 -- 726
Net income available to common
stockholders.......................... $ 3,671 $ 2,713 $(510) $ 5,874
======= ======= ===== =======
Earnings per share:
Basic............................... $ 0.84 $ 1.34
Diluted............................. $ 0.57 $ 0.57
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------
MET HOLDINGS
TELEBANC AND DFC
FINANCIAL COMBINED PRO FORMA
(In thousands, except for per share data) HISTORICAL HISTORICAL(a) ADJUSTMENT PRO FORMA
- ----------------------------------------- ----------- ------------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income......................... $18,071 $5,528 $ -- $23,599
Interest expense........................ 14,477 4,568 -- 19,045
------- ------ ----- -------
Net interest income................. 3,594 960 -- 4,554
Provision for loan losses............... 250 130 -- 380
Non-interest income..................... 1,947 228 -- 2,175
Non-interest expense:
Selling, general and administrative
expenses.......................... 3,889 880 -- 4,769
Other non-interest expense.......... 315 -- 128(b) 443
------- ------ ----- -------
Income before income tax, minority
interest and preferred dividend....... 1,087 178 (128) 1,137
Income tax expense...................... 475 13 -- 488
Minority interest....................... 176 -- -- 176
------- ------ ----- -------
Net income from continuing operations
before nonrecurring charges directly
attributable to the transaction and
preferred dividend.................... $ 436 $ 165 $(128) $ 473
======= ====== ===== =======
Preferred dividend...................... 162 -- -- 162
Net income available to common
stockholders.......................... $ 274 $ 165 $(128) $ 311
======= ====== ===== =======
Earnings per share:
Basic............................... $ 0.06 $ 0.07
Diluted............................. $ 0.05(c) $ 0.06
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------------------------------------
MET HOLDINGS
TELEBANC AND DFC
FINANCIAL COMBINED PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENT PRO FORMA
----------- ------------ ------------ -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA(D):
Assets:
Cash and cash equivalents............................... $ 31,559 $ 6,471 $ (8,566)(e) $ 29,464
Loans receivable, net................................... 418,676 182,079 -- 600,755
Loans receivable........................................ 138,381 -- -- 138,381
Mortgage-backed securities.............................. 260,152 25,524 -- 285,676
Investment securities................................... 123,963 33,914 3,600(f) 161,477
Other assets............................................ 75,422 94,154 (11,482)(g) 158,094
---------- -------- -------- ----------
Total assets............................................ $1,048,153 $342,142 $(16,448) $1,373,847
========== ======== ======== ==========
Liabilities:
Retail deposits......................................... $ 560,554 $288,731 $ -- $ 849,285
Brokered callable certificates of deposit............... 42,286 -- -- 42,286
Advances from the FHLB.................................. 190,000 10,500 -- 200,500
Reverse repurchase agreements and other borrowings...... 153,970 2,495 19,000(h) 175,465
Other liabilities....................................... 45,277 8,925 (4,057)(i) 50,145
---------- -------- -------- ----------
Total liabilities....................................... 992,087 310,651 14,943 1,317,681
Trust preferred securities(k)............................... 9,526 -- -- 9,526
Total stockholders' equity.................................. 46,540 31,491 $(31,391)(j) $ 46,640
---------- -------- -------- ----------
Total liabilities and stockholders' equity.............. $1,048,153 $342,142 $(16,448) $1,373,847
========== ======== ======== ==========
</TABLE>
- ---------------
(a) Reflects the combined statement of operations of MET Holdings and DFC for
the year ended December 31, 1997 and the three months ended March 31, 1998.
(b) Reflects the amortization of goodwill for the year ended December 31, 1997
and the three months ended March 31, 1998 ($510 and $128, respectively)
recognized in conjunction with the DFC Acquisition.
(c) The impact of the convertible preferred stock is antidilutive for the three
months ended March 31, 1998. The Preferred Stock will convert to Common
Stock in the Preferred Stock Conversion. See "Capitalization." Basic
earnings per share in future periods will be reduced as a result of the
issuance of 2,399,486 shares of Common Stock in the Preferred Stock
Conversion.
(d) Reflects the combined statements of financial condition of MET Holdings and
DFC as of March 31, 1998.
(e) Reflects the cash amount paid by TeleBanc Financial to acquire DFC
($21,400), plus the amount paid for expenses related to the MET Holdings
Acquisition and the elimination of intercompany deposits ($1,109) and the
amount used to payoff the outstanding subordinated debentures of DFC
($5,057), net of the proceeds received through borrowings ($19,000).
(f) Reflects the mark-to-market adjustment recognized in conjunction with the
acquisition of AFS Investment Securities, a wholly owned subsidiary of DFC
which will be acquired by the Company in the DFC Acquisition ($3,600).
(g) Reflects the elimination of MET Holdings' equity interest in TeleBanc
Financial ($19,169), net of a mark-to-market adjustment for MET Holdings'
equity investment in an unrelated entity ($31). These adjustments also
include goodwill to be recognized in conjunction with the DFC Acquisition
($7,656).
(h) Reflects additional reverse repurchase agreements entered into in connection
with the DFC Acquisition ($19,000).
(i) Reflects the payoff of outstanding subordinated debentures of DFC ($5,057)
in connection with the DFC Acquisition net of additional liabilities
incurred in connection with the DFC Acquisition.
(j) Reflects the acquisition by the Company of DFC's assets and liabilities and
the assets (including 2,866,162 shares of Common Stock owned by MET
Holdings) and liabilities, and the issuance of 2,876,162 shares of Common
Stock to MET Holdings. The DFC Acquisition and the MET Holdings Transaction
are accounted for as a purchase in which the assets and liabilities of DFC
and MET Holdings will be recorded at fair value on the Consolidated
Financial Statements of the Company.
(k) Consists of 10,000 shares of Company-Obligated Mandatorily Redeemable
Capital Securities of a subsidiary trust, TCT I. See Note 12 to Consolidated
Financial Statements.
18
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents selected statement of operations data and
statement of financial condition data of the Company on a consolidated basis for
each of the five years in the period ended December 31, 1997, and for the three
months ended March 31, 1997 and 1998. The selected historical consolidated
financial data presented below for each of the years in the period ended
December 31, 1997, are derived from the audited Consolidated Financial
Statements of the Company. Such data should be read in conjunction with the
Consolidated Financial Statements of the Company and the related notes included
elsewhere in the Prospectus. The selected unaudited consolidated financial data
for the three months ended March 31, 1998, presented below are based on the
unaudited Consolidated Financial Statements of the Company for the period ended
and as of March 31, 1998, which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(In thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income............................... $ 16,667 $ 22,208 $ 40,511 $ 45,800 $ 59,301 $ 12,837 $ 18,071
Interest expense.............................. 11,828 17,513 31,946 34,815 46,063 9,878 14,477
--------- --------- --------- --------- --------- --------- ---------
Net interest income....................... 4,839 4,695 8,565 10,985 13,238 2,959 3,594
Provision for loan losses..................... 211 492 1,722 919 921 243 250
Non-interest income........................... 1,157 175 3,777 2,756 4,093 618 1,947
Non-interest expenses:
Selling, general and administrative
expenses................................ 2,997 3,503 5,561 8,375 9,042 1,897 3,889
Other non-interest expenses............... 739 153 679 700 1,100 208 315
--------- --------- --------- --------- --------- --------- ---------
Income before income tax, cumulative effect of
change in accounting principle and minority
interest.................................... 2,049 722 4,380 3,747 6,268 1,229 1,087
Income tax expense............................ 842 182 1,660 1,195 1,657 355 475
Cumulative effect of change in accounting
principle................................... 170 -- -- -- -- -- --
Minority interest............................. -- -- -- -- 394 -- 176
Preferred stock dividend...................... -- -- -- -- 546 60 162
--------- --------- --------- --------- --------- --------- ---------
Net income available to common stockholders... $ 1,377 $ 540 $ 2,720 $ 2,552 $ 3,671 $ 814 $ 274
========= ========= ========= ========= ========= ========= =========
Earnings per share:
Basic..................................... $ 0.53 $ 0.16 $ 0.66 $ 0.62 $ 0.84 $ 0.19 $ 0.06
Diluted................................... $ 0.53 $ 0.16 $ 0.66 $ 0.58 $ 0.57 $ 0.15 $ 0.05
Weighted average shares:
Basic..................................... 2,599 3,498 4,099 4,099 4,383 4,212 4,468
Diluted................................... 2,599 3,498 4,104 4,406 7,411 5,790 5,757
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------- -----------
(Dollars in thousands) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets.................................... $220,301 $427,292 $553,943 $647,965 $1,100,352 $1,048,153
Loans receivable, net........................... 100,859 154,742 248,492 351,821 540,704 418,676
Mortgage-backed securities (1).................. 80,782 236,464 234,385 184,743 319,203 260,152
Investment securities (1)....................... 18,110 12,444 40,058 78,826 91,237 123,963
Retail savings and certificates of deposit...... 113,132 212,411 306,500 390,486 522,221 560,554
Advances from the FHLB.......................... 61,000 96,000 105,500 144,800 200,000 190,000
Securities sold under agreements to
repurchase.................................... 29,642 79,613 93,905 57,581 279,909 153,970
Trust preferred securities (2).................. -- -- -- -- 9,572 9,526
Total stockholders' equity...................... 12,378 17,028 21,565 24,658 45,824 46,540
OTHER FINANCIAL AND OPERATING DATA:
Return on average total assets.................. 0.61% 0.17% 0.53% 0.61%(3) 0.45% 0.11%
Return on average stockholders' equity.......... 11.79% 3.17% 14.10% 16.50%(3) 9.17% 2.58%
SG&A expenses to total assets................... 1.36% 0.82% 1.00% 1.03%(3) 0.82% 1.48%
Number of deposit accounts...................... 2,932 8,564 12,919 16,506 21,817 22,916
CAPITAL RATIOS OF TELEBANK:
Core............................................ 5.39% 6.27% 5.31% 5.08% 5.06% 5.48%
Tangible........................................ 5.38 6.35 5.36 5.07 5.06 5.48
Total capital................................... 14.75 15.96 11.74 10.41 11.91 11.60
</TABLE>
- ---------------
(1) Includes available for sale, held to maturity, held for sale, and trading.
(2) Consists of 10,000 shares of Company-Obligated Mandatorily Redeemable
Capital Securities of a subsidiary trust, TCT I. TCT I is a business trust
formed for the purpose of issuing capital securities and investing the
proceeds in the TCT I Junior Subordinated Debentures issued by the Company.
See Note 12 to Consolidated Financial Statements.
(3) Excludes one-time pre-tax charge of $1.7 million ($1.1 million after tax) to
recapitalize the Savings Association Insurance Fund ("SAIF"). Giving effect
to the charge, return on average assets, return on average stockholders'
equity, and selling, general and administrative expenses to total assets for
1996 were 0.42%, 11.4% and 1.29%, respectively.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company has adopted a branchless banking strategy through which it
offers financial products and services to customers nationwide using alternative
delivery platforms, including telephone, Internet, ATMs, facsimile and mail.
Prior to its acquisition by members of present management in 1989, the Company
operated as a traditional community savings bank. In 1989, management changed
the Company's growth strategy using direct marketing to offer high value
financial products and services, which generally offer higher interest rates or
lower fees than those offered by traditional financial institutions.
The Company primarily generates revenue in the form of net interest income
and, to a lesser degree, non-interest income which includes fees and commissions
for services and gains on the sale of assets. Net interest income is the
"spread" or difference between the rates of interest earned on its loans and
other interest-earning assets, and the rates of interest paid on its deposits
and borrowed funds. Fluctuations in interest rates as well as volume and
composition changes in interest-earning assets and interest-bearing liabilities
may materially affect net interest income.
The Company's asset acquisition strategy is to purchase pools of mortgages
secured by one- to four-family residences and mortgage-related securities. The
Company does not currently originate loans. The Company believes that by
purchasing a seasoned and geographically diverse loan portfolio, it reduces
expenses related to loan origination, and is able to actively manage credit
quality risk.
TeleBank manages its interest rate risk by analyzing the maturities and
repricing of its deposits and other sources of funding, and seeking to match the
maturities of these instruments with the maturities of the assets in its loan
portfolio. In an effort to manage interest rate exposure, TeleBank uses various
hedging techniques such as interest rate swaps, caps, swaptions, floors, collars
and financial options. TeleBank actively monitors its interest rate sensitivity
in a variety of interest rate environments.
The Company plans to build the "TeleBank" franchise identity based on its
high value savings and investment and other financial products, superior
customer service and anywhere, anytime convenience. The Company believes that
associating its brand name with its services and delivery channels will enable
it to capture the growing market of customers who are increasingly relying on
alternative channels for the delivery of their financial services. In pursuing
this strategy, TeleBanc plans to increase significantly its marketing
expenditures for the foreseeable future to implement a targeted, national
advertising campaign and marketing initiative.
DFC ACQUISITION
Consistent with its operating strategy, the Company has signed an agreement
to acquire DFC, a thrift holding company and its federally chartered savings
bank subsidiary, Premium Bank, in a transaction expected to be consummated in
the summer of 1998, subject to regulatory approval. TeleBanc Financial is
acquiring DFC because DFC has employed a direct marketing strategy similar to
that of the Company, and thus presents the opportunity for the Company to
acquire the deposits and customers of a financial institution without acquiring
significant infrastructure. DFC currently operates from a single branch in New
Jersey located approximately 30 miles outside of Philadelphia, Pennsylvania, and
its customer and deposit base is concentrated in the Mid-Atlantic region of the
United States. The Company does not intend to retain any significant portion of
DFC's employees and intends to close DFC's single branch location. DFC also
originates residential mortgage loans, although the Company intends to
discontinue mortgage loan origination upon its acquisition of DFC. DFC also
offers credit cards to its customers through a relationship with First Data
Resources and Card Management Services. In 1998, in reliance upon DFC's existing
credit card relationships, the Company also intends to offer its customers a
co-branded credit card.
20
<PAGE> 23
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997.
Total interest income increased by $5.3 million to $18.1 million for the
three months ended March 31, 1998 from $12.8 million for the three months ended
March 31, 1997, an increase of 41.4%. Total interest expense increased $4.6
million to $14.5 million for the three months ended March 31, 1998 from $9.9
million for the three months ended March 31, 1997, an increase of 46.6%.
Non-interest income increased by $1.3 million to $1.9 million for the three
months ended March 31, 1998 from $618,000 for the three months ended March 31,
1997, an increase of 215%, primarily as a result of increased income from the
Company's loans held for sale portfolio, loan fees on the Company's loan
portfolio, and sales of liquid securities. Non-interest expenses increased $2.1
million to $4.2 million for the three months ended March 31, 1998, compared to
$2.1 million for the three months ended March 31, 1997, an increase of 99.7%,
primarily attributable to marketing and operating expenses directly associated
with TeleBank brand building and customer acquisition campaigns. Net income for
the three months ended March 31, 1998 decreased $438,000 to $436,000, compared
to $874,000 for the three months ended March 31, 1997, a decrease of 50%.
With the anticipated consummation of the DFC Acquisition and a
corresponding increase in assets of approximately $320 million, management
maintained assets at relatively stable levels in the first quarter of 1998. As
of March 31, 1998, assets totaled $1.0 billion, a $52.2 million decline, from
the $1.1 billion level as of December 31, 1997. Cash and cash equivalents
declined by $60.6 million to $31.6 million at March 31, 1998, from $92.2 million
at December 31, 1997, a decrease of 65.7%. Trading securities, investment
securities available for sale and mortgage-backed securities available for sale
decreased by $5.4 million to $426.2 million at March 31, 1998 from $431.6 at
December 31, 1997. Loans receivable, net increased $27.1 million to $418.7
million at March 31, 1998 from $391.6 million at December 31, 1997, an increase
of 6.9%. Loans receivable held for sale decreased $10.7 million to $138.4
million at March 31, 1998 from $149.1 million at December 31, 1997. While the
Company's corresponding liability levels also remained stable, deposits
increased $38.3 million, or 7.3%, to $560.5 million at March 31, 1998 from
$522.2 million at December 31, 1997 and retail customer accounts grew 4.6% from
the prior quarter to approximately 22,000 at March 31, 1998. In the first
quarter of 1998, the Company also sold brokered callable certificates of
deposit, which totaled $42.3 million at March 31, 1998. FHLB advances and other
borrowings declined by $133.5 million to $389.2 million at March 31, 1998 from
$522.7 at December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Interest Income. Total interest income increased by $13.5 million to $59.3
million for the year ended December 31, 1997 from $45.8 million for the year
ended December 31, 1996, an increase of 29.5%. This increase is due primarily to
the $11.6 million increase in interest income on mortgages and other loans, an
increase of 50.4% in 1997, principally due to a significant increase in the
average loan balance during the period. Interest income on mortgage-backed and
related securities decreased slightly to $17.6 million at December 31, 1997 from
$18.0 million at December 31, 1996 largely as a result of a decline in the
yield.
Interest Expense. Total interest expense increased by $11.3 million to
$46.1 million for the year ended December 31, 1997 from $34.8 million for the
year ended December 31, 1996, an increase of 32.5%. The increase is attributable
to both an increase in interest-bearing-liabilities and a slight increase in the
average interest rate paid.
Loan Loss Provision. The provision for loan losses is the annual cost of
providing an allowance for estimated losses in the loan portfolio, and reflects
management's judgment as to the reserve necessary to absorb loan losses based
upon the Company's assessment of a number of factors, including its delinquent
loan trends and historical loss experience, current and anticipated economic
conditions, the mix of loans in the Company's portfolio, and the Company's
internal credit review process. The provision for loan losses remained
substantially unchanged at $921,000 for the year ended December 31, 1997,
compared to $919,000 for the year ended December 31, 1996, despite a significant
increase in the loan portfolio primarily because the Company historically has
experienced a low level of net charge-offs due in part to its focus on
residential mortgage assets. The ratio of net charge-offs to net average loans
outstanding during 1997 was 0.06%,
21
<PAGE> 24
compared to 0.10% during 1996. Total loan loss allowance as a percentage of
total non-performing loans was 31.0% as of December 31, 1997, compared to 26.3%
as of December 31, 1996.
Non-interest Income. Total non-interest income increased by $1.3 million
to $4.1 million for the year ended December 31, 1997, from $2.8 million for the
year ended December 31, 1996, an increase of 46.4%. Non-interest income
increased primarily because the Company recognized $1.2 million of non-interest
income as gain on trading securities during 1997. In addition, the Company
recognized an $864,000 decline in equity investment primarily attributable to
the write-off of the equity investment by TeleBank in AGT Mortgage Services,
LLC, which had provided loan servicing services for a fee and ceased operations
in July 1997.
Non-interest Expenses. Total non-interest expenses, principally selling,
general and administrative expenses, increased $1.1 million to $10.1 million for
the year ended December 31, 1997, from $9.1 million for the year ended December
31, 1996, an increase of 11.0%. Selling, general and administrative expenses
increased $600,000 to $9.0 million during 1997 from $8.4 million during 1996, an
increase of 7.1%, primarily as a result of a $1.2 million increase in
compensation and employee benefits in 1997. During 1996, the Company incurred a
one-time $1.7 million assessment to recapitalize the SAIF. See
"Business -- Government Regulation." Other general and administrative expenses
increased $1.1 million, principally as a result of increased marketing expenses
to support a growing deposit base and the building of brand identity.
Other non-interest expenses increased $1.1 million to $4.1 million during
the year December 31, 1997 from $3.0 million during the year ended December 31,
1996, an increase of 36.7%, primarily as a result of increased advertising
expenses, increased office occupancy costs and an increased amortization of
purchased mortgage servicing rights.
Income Tax Expense. Income tax expense for the year ended December 31,
1997 was $1.7 million, compared with $1.2 million for the year ended December
31, 1996. The Company's effective tax rate for 1997 was 26.4%, compared to 31.9%
for 1996. The effective tax rate decreased largely as a result of an increase
during 1997 in interest earned on municipal bonds, which generally were
tax-exempt.
Net Income. Net income for the year ended December 31, 1997 increased $1.1
million to $3.7 million from $2.6 million for the year ended December 31, 1996,
an increase of 42.3%. 1997 net income consisted primarily of $12.3 million in
net interest income, $3.3 million in net gain on the sale of trading securities,
principally loans held for sale, and mortgage-backed and investment securities,
which was offset by $10.1 million in non-interest expenses, $921,000 in
provision for loan losses, and $1.7 million in income tax expense. The Company's
return on average assets and return on average equity for the year ended
December 31, 1997 were 0.45% and 9.17%, respectively.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Interest Income. Total interest income increased by $5.3 million to $45.8
million for the year ended December 31, 1996 from $40.5 million for the year
ended December 31, 1995, an increase of 13.1%. The increase is due primarily to
a $5.4 million increase in interest income on mortgages and other loans, an
increase of 30.5% in 1996, principally due to a $77.3 million increase in the
average loan balance during the period. Interest income on mortgage-backed
securities held-to-maturity and available-for-sale decreased to $18.0 million at
December 31, 1996 from $20.2 million at December 31, 1995 largely as a result of
a decline in average balances.
Interest Expense. Total interest expense increased by $2.9 million to
$34.8 million for the year ended December 31, 1996 from $31.9 million for the
year ended December 31, 1995, an increase of 9.1%. The increase is attributable
to an increase in interest bearing-liabilities, offset in part by a decline in
interest cost.
Loan Loss Provision. The provision for loan losses declined to $919,000
for the year ended December 31, 1996, compared to $1.7 million for the year
ended December 31, 1995 despite a significant increase in the size of the loan
portfolio, primarily because the Company experienced a low level of actual net
charge-offs due in part to its focus on residential mortgage assets. The total
loan loss allowance as of December 31, 1996 was $3.0 million from $2.3 million
at December 31, 1995, which were 0.80% and 0.90% of total loans
22
<PAGE> 25
outstanding at such dates, respectively. Total loan loss allowance as a
percentage of total non-performing loans was 26.3% as of December 31, 1996,
compared to 43.4% as of December 31, 1995.
Non-interest Income. Total non-interest income declined by $1.0 million to
$2.8 million for the year ended December 31, 1996, from $3.8 million for the
year ended December 31, 1995, a decrease of 26.3%. Fees, service charges and
other income increased by $756,000 in 1996, in large part as a result of fees
collected on $2.8 million in purchased mortgage servicing rights, and gain on
loans held for sale increased by $642,000 in 1996, which were primarily offset
by an $870,000 decrease in mortgage-backed securities available for sale, a
$924,000 decrease in investment securities available for sale and a $628,000
decrease in trading account income.
Non-interest Expenses. Total non-interest expenses increased $2.9 million
to $9.1 million for the year ended December 31, 1996 from $6.2 million for the
year ended December 31, 1995, an increase of 46.8%. Selling, general and
administrative expenses increased $2.8 million to $8.4 million for the year
ended December 31, 1996 from $5.6 million for the year ended December 31, 1995,
an increase of 50%, primarily because of the $1.7 million one-time SAIF
assessment incurred in 1996. See "Business -- Government Regulation." In
addition, compensation and employee expenses increased by $660,000 as a result
of adding employees and higher performance-based bonuses, the TeleBank federal
deposit insurance premium increased by $483,000, and administrative expenses
generally increased as a result of an increased deposit base.
Other non-interest expenses increased slightly because of an increase in
amortization of purchased mortgage servicing rights, offset by a decline in real
estate owned expense.
Income Tax Expense. Income tax expense for the year ended December 31,
1996 was $1.2 million, compared with $1.7 million for the year ended December
31, 1995. The Company's effective tax rate for the year ended December 31, 1996
was 31.9%, compared to 37.9% for the year ended December 31, 1995.
Net Income. Net income for the year ended December 31, 1996 decreased
$168,000 to $2.6 million from $2.7 million for the year ended December 31, 1995,
a decrease of 6.2%. Net income for the year ended December 31, 1996 included the
one-time $1.7 million SAIF assessment. Excluding the one-time assessment, 1996
net income would have been $3.6 million. Net income consisted primarily of $11.0
million in net interest income and $1.8 million in net gain on the sale of
trading securities, principally loans held for sale and mortgage-backed and
investment securities, which was offset by $9.1 million in non-interest
expenses, $919,000 in provision for loan losses, and $1.2 million in income tax
expense. The Company's return on average assets and return on average equity for
the year ended December 31, 1996 were 0.42% and 11.46%, respectively. Earnings
per share, on a fully diluted basis, were $1.16 for 1996.
QUARTERLY RESULTS
The following table sets forth certain selected unaudited quarterly
financial data of the Company for each of the eight quarters in the period ended
March 31, 1998. The consolidated financial data presented below have been
prepared on a basis consistent with the Company's audited Consolidated Financial
Statements included elsewhere in this Prospectus and, in the opinion of
management, include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of such information. This information should
be read in conjunction with the Company's audited Consolidated Financial
Statements and the Notes thereto
23
<PAGE> 26
included elsewhere in this Prospectus. The operating results for any quarter are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- --------- -------- --------- -------- ---------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Interest income............. $11,364 $11,871 $11,433 $12,837 $15,275 $14,821 $16,368 $18,071
Interest expense............ 8,449 9,034 8,975 9,878 11,865 11,548 12,772 14,477
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... 2,915 2,837 2,458 2,959 3,410 3,273 3,596 3,594
Provision for loan losses... 200 125 175 243 308 120 250 250
Non-interest income......... 291 540 1,320 607 1,244 1,084 1,158 1,947
SG&A........................ 1,749 3,287 1,660 1,897 2,251 2,078 2,816 3,889
Other non-interest operating
expenses.................. 81 247 71 208 202 260 430 315
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes
and minority interest..... 1,176 (282) 1,872 1,218 1,893 1,899 1,258 1,087
Income tax expense.......... 417 (220) 667 355 618 709 (25) 475
Minority interest in
subsidiary................ -- -- -- -- 67 285 42 176
------- ------- ------- ------- ------- ------- ------- -------
Net income.................. 759 (62) 1,205 863 1,208 905 1,241 436
Preferred stock dividends... -- -- -- 60 162 162 162 162
Net income available to
common stockholders....... $ 759 $ (62) $ 1,205 $ 803 $ 1,046 $ 743 $ 1,079 $ 274
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share.... $ 0.18 $ (0.01) $ 0.29 $ 0.19 $ 0.24 $ 0.16 $ 0.24 $ 0.06
Diluted earnings per
share..................... 0.18 (0.01) 0.26 0.15 0.22 0.15 0.20 0.05
</TABLE>
The Company's quarterly results of operations may be subject to significant
fluctuations due to several factors, including interest rate fluctuations,
economic factors, the level of marketing expenditures to implement the Company's
growth strategy, the performance of the Company's loan portfolio and other
interest-earning assets, retention and growth of deposits, and other factors.
The Company anticipates that its operating expenses, principally marketing and
compensation expenses, will increase significantly for the foreseeable future.
If the Company's net interest income in any quarter does not increase
correspondingly, the Company's results of operations for that quarter would be
materially adversely affected. Accordingly, the Company does not believe that
quarter-to-quarter comparisons of the results of operations are meaningful and
the results of operations in any particular quarter should not be relied upon as
necessarily indicative of future performance.
FINANCIAL CONDITION
The Company's total assets increased by $452.0 million to $1.1 billion at
December 31, 1997 from $648.0 million at December 31, 1996, an increase of
69.8%. The growth in total assets is primarily the result of a $188.9 million
increase in loans receivable and a $134.5 million increase in mortgage-backed
securities. The primary sources of funds for this growth in assets were deposits
and borrowings.
Loans receivable, net and loans receivable held for sale, increased $188.9
million to $540.7 million at December 31, 1997 from $351.8 million at December
31, 1996, an increase of 53.7%. The increase reflects whole loan purchases of
$342.9 million, offset in part by $95.1 million of principal repayments and
$60.7 million of loans sold in 1997. During 1996, the Company recorded whole
loan purchases of $183.1 million, offset in part by $50.2 million of principal
repayments and $27.1 million of loans sold. In mid-1996, as part of a change in
its loan investment strategy, the Company reclassified certain loans as "loans
held for sale." Loans held for sale generally are susceptible to sale after
restructuring or credit enhancement and are recorded at the lower of cost or
market.
Mortgage-backed securities available-for-sale increased $134.5 million to
$319.2 million at December 31, 1997 from $184.7 million at December 31, 1996, an
increase of 72.8%. Investment securities available-for-sale increased $12.4
million to $91.2 million at December 31, 1997 from $78.8 million at December 31,
1996, an
24
<PAGE> 27
increase of 15.7%. These securities are held for liquidity purposes and the
increases in these categories of assets is consistent with the overall growth of
the Company's assets in 1997.
Deposits increased $131.7 million to $522.2 million at December 31, 1997
from $390.5 million at December 31, 1996, an increase of 33.7%, largely as a
result of the Company's continued targeted marketing efforts to attract money
market accounts and CDs. During the year ended December 31, 1997, approximately
$25.9 million of interest was credited to deposit accounts and deposits exceeded
withdrawals by $105.8 million, resulting in the net overall increase in
deposits. During 1997, the Company completed a systems conversion to an
integrated platform for marketing, deposit operations, and accounting and
finance, to support future growth and the introduction of new products and
services.
FHLB advances increased $55.2 million to $200.0 million at December 31,
1997, from $144.8 million at December 31, 1996, an increase of 38.1%. Other
borrowings, composed of securities sold under agreements to repurchase,
increased $222.3 million, to $279.9 million at December 31, 1997 from $57.6
million at December 31, 1996, an increase of 385.9%. At December 31, 1997,
subordinated debt, net of original issue discount, consisting of the 9.5% Senior
Subordinated Debentures of the Company (the "9.5% Subordinated Debentures")
issued in February 1997, and the 11.5% Subordinated Debentures of the Company
(the "11.5% Subordinated Debentures" and, together with the 9.5% Subordinated
Debentures, the "Subordinated Debentures") issued by the Company in the second
quarter of 1994, totaled $29.6 million. In June 1997, the Company formed TCT I
for the purpose of offering and selling in a private placement an aggregate of
$10.0 million in shares of Capital Securities, Series A, which have an annual
dividend rate of 11.0% payable semi-annually, beginning in December 1997.
Stockholders' equity increased $21.1 million to $45.8 million at December
31, 1997 from $24.7 million at December 31, 1996. The increase is the result of
the receipt of $15.3 million in proceeds from the issuance of the Preferred
Stock in February 1997, the receipt of $1.5 million from the issuance of 162,461
shares of Common Stock in February 1997 in exchange for the assets of Arbor
Capital Partners Inc., a former affiliate of the Company, $4.6 million in net
income, and an unrealized gain on securities available for sale of $642,000, net
of taxes, in 1997, which increased the Company's stockholders' equity, but did
not impact the Company's results of operations.
LIQUIDITY
Liquidity represents the Company's ability to raise funds to support asset
growth, fund operations and meet obligations, including deposit withdrawals,
maturing liabilities, and other payment obligations, to maintain reserve
requirements and to otherwise meet its ongoing obligations. During the past
three years, the Company has met its liquidity needs primarily through financing
activities, consisting principally of increases in core deposit accounts,
maturing short-term investments, loans and repayments of investment securities,
and to a lesser extent, sales of loans or securities. The Company believes that
it will be able to renew or replace its funding sources at then existing market
rates, which may be higher or lower than current rates. Pursuant to applicable
OTS regulations, TeleBank is required to maintain an average liquidity ratio of
5.0% of certain borrowings and its deposits, which requirement it fully met
during 1997 and 1996. Effective November 24, 1997, this requirement has been
lowered to 4.0%. See "Business -- Government Regulation -- Liquidity
Requirements."
The Company seeks to maintain a stable funding source for future periods in
part by attracting core deposit accounts, which are accounts that tend to be
relatively stable even in a changing interest rate environment. Typically,
accounts that maintain a relatively high balance and time deposit accounts
provide a relatively stable source of funding. At March 31, 1998, the average
account balance at TeleBank was $24,000, and the average customer maintained 1.8
accounts with TeleBank, which the Company believes are relatively high
statistics compared to the customer and account base at most traditional
depository institutions. Deposits increased $38.3 million to $560.5 million an
increase of 7.3% during the three months ended March 31, 1998. Retail customer
accounts increased 4.6% from the prior quarter to approximately 22,000 accounts
at March 31, 1998. Savings deposits increased $11.7 million to $123.6 million
during the year ended
25
<PAGE> 28
December 31, 1997, an increase of 10.5%. CDs increased $120.0 million to $ 398.6
million during the year ended December 31, 1997, an increase of 43.1%.
The following table shows the changes in deposits for each of the periods
indicated:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------- MARCH 31,
1995 1996 1997 1998
------------ -------- -------- ---------
(Dollars in thousands) (UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period.................... $212,411 $306,500 $390,486 $522,221
Deposits in excess of withdrawals................. 76,866 62,629 105,777 30,278
Interest credited on deposits..................... 17,223 21,357 25,958 8,055
-------- -------- -------- --------
Balance at end of period.......................... $306,500 $390,486 $522,221 $560,554
======== ======== ======== ========
</TABLE>
The Company also relies upon borrowed funds to provide liquidity. The
Company's total borrowings increased $277.5 million to $ 479.9 million at
December 31, 1997, an increase of 137.1%. Advances from the FHLB increased $55.2
million to $200.0 million during 1997, an increase of 38.1%. Securities sold
under agreements to repurchase increased $222.3 million to $279.9 million at
December 31, 1997, an increase of 386.1%. At December 31, 1997, TeleBank had
approximately $154.0 million in additional borrowing capacity.
At December 31, 1997, the Company had outstanding approximately $31.0
million face amount of 11.5% Subordinated Debentures and 9.5% Subordinated
Debentures. In addition, at the same date, the Company also had outstanding
$10.0 million face amount of the TCT I Junior Subordinated Debentures and $16.2
million of Preferred Stock. The Company's aggregate annual interest expense on
the Subordinated Debentures and the TCT I Junior Subordinated Debentures is $4.4
million and the annual dividend payment on the cumulative preferred stock is
$648,000. Subject to the approval of the OTS and compliance with federal
regulations, TeleBank pays a dividend to the Company semi-annually in an amount
equal to the aggregate debt service and dividend obligations. Under the terms of
the indenture pursuant to which the 11.5% Subordinated Debentures were issued
and the terms of the 9.5% Subordinated Debentures, the Company presently is
required to maintain, on an unconsolidated basis, liquid assets in an amount
equal to or greater than $3.3 million, which represents 100% of the aggregate
interest expense for one year on both the 1994 Subordinated Debentures and the
TCT I Junior Subordinated Debentures. The Company had $48.6 million in liquid
assets at December 31, 1997.
CAPITAL
At March 31, 1998, TeleBank was in compliance with all of its regulatory
capital requirements and its capital ratios exceeded the ratios for
"well-capitalized" institutions under OTS regulations.
26
<PAGE> 29
The following table sets forth TeleBank's regulatory capital levels at
March 31, 1998 in relation to the regulatory requirements in effect at that
date. The information below is based upon the Company's understanding of the
regulations and interpretations currently in effect and may be subject to
change.
<TABLE>
<CAPTION>
REQUIRED TO BE WELL
REQUIRED FOR CAPITALIZED UNDER
CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands) ------- ----- --------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Core Capital (to adjusted tangible
assets)............................ $31,726 5.08 >$24,999 > 4.0 >$31,248 > 5.0
Tangible Capital (to tangible
assets)............................ 31,711 5.07 > 9,374 > 1.5 N/A N/A
Tier I Capital (to risk weighted
assets)............................ 31,726 9.69 N/A N/A > 19,654 > 6.0
Total Capital (to risk weighted
assets)............................ 34,104 10.41% > 26,205 > 8.0% > 32,756 > 10.0%
As of December 31, 1997:
Core Capital (to adjusted tangible
assets)............................ $52,617 5.06 >$41,606 > 4.0 >$52,008 > 5.0
Tangible Capital (to tangible
assets)............................ 52,608 5.06 > 15,602 > 1.5 N/A N/A
Tier I Capital (to risk weighted
assets)............................ 52,617 11.25 N/A N/A > 28,057 > 6.0
Total Capital (to risk weighted
assets)............................ 55,701 11.91% > 37,409 > 8.0% > 46,761 > 10.0%
As of March 31, 1998 (Unaudited):
Core Capital (to adjusted tangible
assets)............................ $54,533 5.48 >$39,783 > 4.0 >$49,728 > 5.0
Tangible Capital (to tangible
assets)............................ 54,526 5.48 > 14,918 > 1.5 N/A N/A
Tier I Capital (to risk weighted
assets)............................ 54,533 11.00 N/A N/A > 29,844 > 6.0
Total Capital (to risk weighted
assets)............................ 57,859 11.60% > 39,792 > 8.0% > 49,739 > 10.0%
</TABLE>
RATE/VOLUME TABLE
The following table allocates the period-to-period changes in the Company's
various categories of interest income and expense between changes due to changes
in volume (calculated by multiplying the change in average volume of the related
interest-earning asset or interest-bearing liability category by the prior
year's rate) and due to changes in rate (changes in rate multiplied by prior
year's volume). Changes due to changes in rate-volume (change in rate multiplied
by changes in volume) have been allocated proportionately between changes in
volume and changes in rate.
27
<PAGE> 30
<TABLE>
<CAPTION>
1996 VS. 1995 1997 VS. 1996 MARCH 31, 1998 VS. MARCH 31, 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------- --------------------------- ----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
(In thousands) ------- -------- -------- ------- ------- ------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1)... $ 6,333 $ (968) $ 5,365 $12,732 $(1,092) $11,640 $3,060 $(267) $2,793
Mortgage-backed and related
securities............... (9,307) (9,307) (18,614) -- -- -- -- -- --
Investment securities(2)... 16 (134) (118) 220 (27) 193 44 (26) 18
Mortgage-backed and related
securities available for
sale..................... 16,404 (45) 16,359 373 (682) (309) 1,440 (171) 1,269
Investment securities
available for sale(3).... 2,194 (305) 1,889 809 8 817 476 31 507
Federal funds sold......... 2 (8) (6) 54 2 56 (10) 4 (6)
Trading account............ 17 (185) (168) 562 562 1,124 275 274 549
------- -------- -------- ------- ------- ------- ------ ----- ------
Total interest-earning
assets............... $15,659 $(10,952) $ 4,707 $14,750 $(1,229) $13,521 $5,285 $(155) $5,130
------- -------- -------- ------- ------- ------- ------ ----- ------
Interest-bearing liabilities:
Savings deposits........... $ 2,803 $ (100) $ 2,703 $ 1,111 $ 454 $ 1,565 $ 43 $ 18 $ 61
Time deposits.............. 2,208 (596) 1,612 3,315 (279) 3,036 2,567 10 2,577
FHLB advances.............. 972 (292) 680 2,400 796 3,196 384 71 455
Other borrowings........... (1,778) (446) (2,224) 2,838 (466) 2,372 1,073 46 1,119
Subordinated debt.......... -- 112 112 1,207 (128) 1,079 257 (20) 237
------- -------- -------- ------- ------- ------- ------ ----- ------
Total interest-bearing
liabilities.......... 4,205 (1,322) 2,883 10,871 377 11,248 4,324 125 4,449
------- -------- -------- ------- ------- ------- ------ ----- ------
Change in net interest
income....................... $11,454 $ (9,630) $ 1,824 $ 3,879 $(1,606) $ 2,273 $ 961 $(280) $ 681
======= ======== ======== ======= ======= ======= ====== ===== ======
</TABLE>
- ---------------
(1) Includes mortgage and other loans.
(2) Includes interest-bearing deposits, repurchase agreements, investment
securities held to maturity, and FHLB stock.
(3) Interest income and average yields on municipal bonds, included in
investment securities, are presented on a tax equivalent basis.
28
<PAGE> 31
YIELD TABLE
The following table presents certain consolidated balance sheet data,
income and expense and related interest yields and rates at December 31, 1997,
and for each of the preceding three years and for the three months ended March
31, 1998 as set forth below. The table also presents information for the periods
indicated with respect to the difference between the weighted average yield
earned on interest-earning assets and weighted average rate paid on
interest-bearing liabilities, or "interest rate spread," which is traditionally
used as an indication of the profitability of a savings institution. Another
indicator of an institution's profitability is its "net yield on
interest-earning assets," which is its net interest income divided by the
average balance of interest-earning assets. Net interest income is affected by
the interest rate spread and by the relative amounts of interest-earning assets
and interest-bearing liabilities.
29
<PAGE> 32
<TABLE>
<CAPTION>
MARCH 31,
1996 1997 MARCH 31, 1998
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE 1998 AVERAGE
BALANCE INC./EXP YIELD/COST BALANCE INC./EXP. YIELD/COST BALANCE BALANCE
-------- --------- ---------- -------- --------- ---------- ----------- -----------
(Dollars in thousands)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable,
net................ $279,038 $23,089 8.28% $441,819 $34,729 7.86% $ 557,057 $545,827
Mortgage-backed &
related
securities......... -- -- -- -- -- -- -- --
Investment
securities......... 12,841 871 6.79 16,203 1,064 6.48 38,874 14,859
Mortgage-backed &
related securities,
available for
sale............... 221,656 17,955 8.10 226,064 17,646 7.81 260,152 271,001
Investment
securities,
available for
sale............... 61,169 3,959 6.47 73,649 4,776 6.49 123,963 109,270
Federal funds sold... 842 44 5.22 1,844 100 5.37 -- 951
Trading account...... -- -- -- 12,581 1,124 8.81 42,129 29,672
-------- ------- ------ -------- ------- ------ ---------- --------
Total interest-
earning
assets......... $575,546 $45,918 7.98% $772,160 $59,439 7.70% $1,022,175 $971,580
Non-interest earning
assets................. 26,929 41,465 25,978 27,382
-------- -------- ---------- --------
Total assets..... $602,475 $813,625 $1,048,153 $998,962
======== ======== ========== ========
Interest-bearing
liabilities:
Savings deposits..... $ 99,346 $ 4,815 4.85% $120,901 $ 6,380 5.28% $ 123,435 $123,391
Time deposits........ 258,870 16,542 6.39 311,740 19,578 6.28 437,119 416,702
Brokered callable
certificates of
deposit............ -- -- -- -- -- -- 42,286 22,720
FHLB advances........ 120,678 6,689 5.54 160,681 9,885 6.07 190,000 177,055
Other borrowings..... 68,154 4,569 6.70 117,515 6,941 5.83 153,970 163,059
Subordinated debt,
net................ 17,250 2,200 12.75 27,434 3,279 11.95 29,672 29,944
-------- ------- ------ -------- ------- ------ ---------- --------
Total interest-
bearing
liabilities.... $564,298 $34,815 6.14% $738,271 $46,063 6.21% $ 976,482 $932,871
-------- ------- ------ -------- ------- ------ ---------- --------
Non-interest-bearing
liabilities............ 15,900 25,719 15,605 23,591
-------- -------- ---------- --------
Total
liabilities.... $580,198 $763,990 $ 992,087 $956,462
Trust preferred
securities..... -- 9,597 9,526 --
Total
stockholders'
equity......... 22,277 40,038 46,540 42,500
-------- -------- ---------- --------
Total liabilities and
stockholders' equity... $602,475 $813,625 $1,048,153 $998,962
======== ======== ========== ========
Excess of
interest-earning assets
over interest-bearing
liabilities/net
interest income........ $ 11,248 $11,103 $ 33,889 $13,376 $ 45,693 38,709
======== ======= ======== ======= ========== ========
Net interest spread..... 1.84% 1.49%
Net interest
margin(1).............. 1.94% 1.73%
====== ======
Ratio of
interest-earning assets
to interest-bearing
liabilities............ 101.99% 104.59%
====== ======
<CAPTION>
INTEREST AVERAGE
INC./EXP. YIELD/COST
---------- ------------
(Dollars in thousands)
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest-earning assets:
Loans receivable,
net................ $10,358 7.59%
Mortgage-backed &
related
securities......... -- --
Investment
securities......... 246 6.68
Mortgage-backed &
related securities,
available for
sale............... 5,074 7.49
Investment
securities,
available for
sale............... 1,736 6.35
Federal funds sold... 14 5.82
Trading account...... 549 7.41
------- ------
Total interest-
earning
assets......... $17,977 7.40%
Non-interest earning
assets.................
Total assets.....
Interest-bearing
liabilities:
Savings deposits..... $ 1,629 5.36%
Time deposits........ 6,433 6.26
Brokered callable
certificates of
deposit............ 374 6.67
FHLB advances........ 2,718 6.14
Other borrowings..... 2,385 5.85
Subordinated debt,
net................ 880 11.75
------- ------
Total interest-
bearing
liabilities.... $14,419 6.23%
------- ------
Non-interest-bearing
liabilities............
Total
liabilities....
Trust preferred
securities.....
Total
stockholders'
equity.........
Total liabilities and
stockholders' equity...
Excess of
interest-earning assets
over interest-bearing
liabilities/net
interest income........ 3,558
=======
Net interest spread..... 1.17%
Net interest
margin(1).............. 1.47%
======
Ratio of
interest-earning assets
to interest-bearing
liabilities............ 104.15%
======
</TABLE>
- ---------------
(1) Net interest margin is the ratio of annualized net interest income to
average interest-earning assets.
30
<PAGE> 33
As a result of the Company's strategy of offering high value savings and
investment products through alternative distribution channels, the Company's
interest rate spread is lower than that of traditional depository institutions.
The Company's interest rate spread was 1.84%, 1.49%, and 1.17% for 1996, 1997,
and the three month period ended March 31, 1998, respectively. The Company's net
interest margin on interest-earning assets for such periods was 1.94%, 1.73%,
and 1.47%, respectively.
INTEREST RATE SENSITIVITY MANAGEMENT
The Company actively monitors its net interest rate sensitivity position.
Effective interest rate sensitivity management seeks to ensure that net interest
income and the market value of equity are protected from the impact of changes
in interest rates.
The Company employs an interest rate risk management process that allows
risk-taking within well-defined limits. The Company has implemented a risk
measurement guideline employing "market value of equity" and "gap" methodologies
and other measures. By actively managing the maturities of its interest-
sensitive assets and liabilities, the Company seeks to maintain relatively
consistent net interest spreads and mitigate much of the interest rate risk
associated with such assets and liabilities.
The Company's policy seeks to reduce the variability of the market value of
its equity in a variety of interest rate environments. The Company uses the
concept of fair value of equity (FVE), which represents the net fair value of
the Company's financial assets and liabilities, including off-balance sheet
hedges, and monitors the sensitivity of changes in its FVE with respect to
various interest rate environments. The Company seeks to maximize net interest
income, while limiting changes in the FVE within changing interest rate
environments to prescribed levels deemed acceptable by the Company. The Company
utilizes sensitivity analysis to evaluate the rate and extent of changes to its
FVE in various market environments.
The Company utilizes interest rate swaps, caps, swaptions, floors, collars,
financial options and other mortgage derivative products to reduce the
variability of FVE and its overall interest rate risk exposure. The Company's
Board of Directors prohibits the use of the aforementioned financial instruments
for speculative purposes.
The Company also monitors its assets and liabilities by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring interest rate sensitivity "gap." An asset or liability is said to be
interest rate sensitive within a specific period if it will mature or reprice
within that period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within the same time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities and is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income; conversely, during a period
of falling interest rates, a negative gap would result in an increase in net
interest income and a positive gap would adversely affect net interest income.
31
<PAGE> 34
The following table sets forth an interest rate sensitivity analysis for
the Company at March 31, 1998.
<TABLE>
<CAPTION>
REPRICING REPRICING REPRICING
BALANCE AT WITHIN WITHIN WITHIN REPRICING
MARCH 31, PERCENT 0-3 4-12 1-5 MORE THAN
1998 OF TOTAL MONTHS MONTHS YEARS 5 YEARS
---------- -------- ----------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:.......
Loans receivable, net...... $ 557,057 54.50% $ 67,409 $ 176,729 $ 226,467 $ 86,452
Mortgage-backed securities,
available for sale and
trading.................. 302,281 29.57 61,891 81,073 83,260 76,057
Investment securities
available for sale,
interest-bearing accounts
and FHLB stock........... 162,837 15.93 72,892 371 46,192 43,382
---------- ------ ----------- --------- --------- --------
Total interest-earning
assets................... 1,022,175 100.00% 202,192 258,173 355,919 205,891
======
Non-interest-earning assets:... 25,978
----------
Total assets............... $1,048,153
==========
Interest-bearing liabilities:
Savings deposits........... $ 123,435 12.64% $ 123,435 $ -- $ -- $ --
Time deposits.............. 479,405 49.09 31,241 158,061 287,413 2,690
FHLB advances.............. 190,000 19.46 180,000 10,000 -- --
Other borrowings........... 153,970 15.77 153,970 -- -- --
Subordinated debt.......... 29,672 3.04 -- -- 29,672 --
---------- ------ ----------- --------- --------- --------
Total interest-bearing
liabilities.............. 976,482 100.00% 488,646 168,061 317,085 2,690
======
Non-interest-bearing
liabilities.................. 15,605
----------
Total liabilities.......... 992,087
Total trust preferred...... 9,526
Stockholders' equity........... 46,540
----------
Total liabilities and
stockholders' equity......... $1,048,153
==========
Periodic repricing difference
(periodic gap)............... $ (286,454) $ 90,112 $ 38,834 $203,201
Cumulative repricing difference
(cumulative gap)............. $ (286,454) $(196,342) $(157,508) $ 45,693
Cumulative gap to total
assets....................... (27.3)% (18.7)% (15.0)% 4.4%
Cumulative gap to total assets
hedge affected(1)............ (6.5)% 2.3% (12.5)% 4.4%
</TABLE>
- ---------------
(1) The hedge effected cumulative gap to total assets includes the effect of
hedging instruments on the Company's gap at March 31, 1998. For purposes of
determining the effect of such hedging instruments, interest rate swap
agreements are treated as part of the hedged liability; hence, the cash
flows from the swap and the hedged asset or liability are netted and the
resulting cash flows are used in the gap calculation. Interest rate cap
agreements also are treated as part of the hedged asset or liability and
weighted by the market's estimate of the likelihood the cap strike will be
met or exceeded. The estimated net cash flows are used in the gap
calculations.
Shortcomings are inherent in gap analysis since certain assets and
liabilities may not move proportionately as interest rates change. Based on the
Company's projected March 31, 1998 simulation analysis, and excluding TeleBank's
trading portfolio, the Company estimates that a hypothetical instantaneous 100
basis point rise in rates would cause FVE to decrease by 0.50%.
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<PAGE> 35
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation on the Company is different from the impact on an
industrial company because substantially all of the assets and liabilities of
the Company are monetary in nature and interest rates and inflation rates do not
always move in concert. A bank's asset and liability structure differs
significantly from that of industrial companies in that virtually all assets and
liabilities are of a monetary nature. Management believes that the impact of
inflation on financial results depends upon the Company's ability to manage
interest rate sensitivity and, by such management, reduce the inflationary
impact upon performance. The most direct impact of an extended period of
inflation would be to increase interest rates and to place upward pressure on
the operating expenses of the Company. However, the actual effect of inflation
on the net interest income of the Company would depend on the extent to which
the Company was able to maintain a spread between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities,
which would depend to a significant extent on its asset-liability sensitivity.
As discussed above, management seeks to manage the relationship between interest
sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation. The effect of inflation
on the Company's results of operations for the past three years has been
minimal.
YEAR 2000 ISSUES
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems include various
software packages licensed to the Company by outside vendors and a client server
core processing system which are run on in-house computer networks. In 1997, the
Company initiated a review and assessment of all hardware and software to
confirm that it will function properly in the year 2000. The Company's core
processing software vendor and the majority of the vendors which have been
contacted have indicated that their hardware and/or software are Year 2000
compliant. Testing will be performed for compliance. Although the Company may
incur additional expenses during the next two years to confirm Year 2000
compliance and to remedy problems, if any, the Company does not anticipate that
such expenditures will be material or that Year 2000 compliance will otherwise
have a material effect on the Company's financial condition or results of
operations. See "Risk Factors -- Year 2000 Compliance."
CHANGES IN ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" were issued in June 1997. SFAS 130 requires
that certain financial activity typically disclosed in stockholders' equity be
reported in the financial statements as an adjustment to net income in
determining comprehensive income. SFAS 131 requires the reporting of selected
segmented information in quarterly and annual reports. The Company implemented
SFAS No. 130 effective for the first quarter of 1998 and will implement SFAS No.
131 effective for the year ending December 31, 1998. The Company does not
anticipate any material financial impact from the implementation of SFAS Nos.
130 and 131.
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<PAGE> 36
BUSINESS
OVERVIEW
The Company is a leading national provider of high value savings,
investment and other financial products and services. The Company utilizes a
branchless banking strategy to offer financial products and services to
customers nationwide and to maintain its low cost structure through the use of
alternative delivery channels, such as telephones, the Internet, ATMs, facsimile
and mail. The Company's broad selection of high value savings and investment
products generally have higher interest rates or carry lower fees than similar
products offered by traditional, branch-based financial institutions. The
Company also emphasizes high quality customer service and provides customers
with "anywhere, anytime" convenience for accessing its financial products and
services. The Company intends to broaden its financial products and services to
include in 1998 annuities, residential mortgage loans, credit cards and mutual
funds. At March 31, 1998, the Company had more than 22,000 customer accounts,
$561 million in deposits and $1 billion in assets.
INDUSTRY BACKGROUND
Financial Services
The financial services industry, including depository institutions (such as
banks and savings and loan associations), securities brokerage firms, mutual
fund companies, insurance companies and other financial institutions, is the
fifth largest industry in the United States. In 1997, deposits held in financial
institutions in the United States totaled more than $4 trillion and total assets
by such institutions totaled more than $6 trillion, according to the fourth
quarter FDIC Quarterly Banking Profile. Financial institutions earn revenues
principally in the forms of interest income earned on assets and fees or
commissions. In 1997, according to the same source, depository institutions
recognized more than $203 billion in revenues in the form of net interest income
alone.
The financial services industry is currently experiencing rapid market
change, which is characterized by the demand for alternative delivery channels
for products and services, the emergence of nationwide banks and full-service
financial services franchises and growing price competition. Increasingly,
customers are seeking higher value products that offer higher returns or lower
fees, as well as access to financial products and services through "anywhere,
anytime" technology-based delivery channels, such as the Internet, telephones,
ATMs, facsimile and other electronic channels. To compete effectively for
customer savings and investment dollars in this environment, financial
institutions have attempted to diversify product lines and increase access to
prospective customers through both the geographic expansion of traditional
branch and office networks and the use of alternative delivery channels. As a
result, customers increasingly are exposed to a wider selection of products and
services that can satisfy their financial demands.
Electronic Commerce
Over the past 30 years, the use of electronic media, such as electronic
data interchanges, private telephone networks, credit cards, automated teller
machines (ATMs) and electronic bill payment systems, to facilitate commercial
functions has become routine. Over the last several years, the development of
network technologies, the growth of personal computers in the home and workplace
and faster and cheaper Internet access have converged to establish the necessary
infrastructure to support broad-based electronic commerce. The growth of the
Internet, in particular, is evidenced in the significant increase in the number
of domain names in recent years. According to the Commerce Report, from July
1993 to July 1997, the number of domain names increased from 26,000 to
1,301,000. The Commerce Report also estimates that traffic on the Internet is
doubling every 100 days.
The increasing functionality, accessibility and overall usage of the
Internet has made it an attractive channel for electronic commerce. According to
the Commerce Report, analysts predict that businesses will trade as much as $300
billion annually over the Internet during the next five years. Currently within
the financial services industry, Internet banking is relatively new and the
market for such services is relatively undeveloped. According to the Online
Banking Report, in April 1998, only 163 banks in the United States
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<PAGE> 37
permitted customers to review balances, transfer funds and pay bills on the
financial institutions' web sites. Like the rapid proliferation of ATM's in
recent years, the growth of online banking as the newest medium through which
banks can offer their customers remote access to their accounts is significant.
According to the Commerce Report, approximately 4.5 million households were
banking online in 1997, and that number is expected to increase to 10 to 16
million households by the year 2000.
MARKET TRENDS
Demand for Alternative Delivery Channels
The increased use of alternative delivery channels has simplified and
reduced the costs of financial transactions for consumers, businesses and
financial institutions. Instead of conducting financial transactions at branch
offices, customers are increasingly using ATMs, online banking and online bill
payment and electronic fund transfers to communicate with financial services
providers. These remote or electronic financial service delivery mechanisms
offer consumers the ease and convenience of conducting their financial business
"anywhere, anytime," whether through their home or office computer, at one of
hundreds of thousands of ATMs located worldwide, or over the phone from wherever
they may be. Documenting this trend, a study by the American Bankers Association
and Ernst & Young has projected that personal computers, ATMs and telephones
will be used for more than half of all customer banking transactions in 1998,
replacing visits to branches as the primary channel for conducting customer
banking transactions.
Development of National Franchises
As a result of technological developments and less restrictive regulations,
financial institutions today are providing financial products and services in a
highly competitive, global market. To gain market share in this environment,
financial institutions are striving to create competitive advantages by
establishing a national market presence, national distribution channels and
national brand identities. Nationwide banks and super-regional banks have
emerged to compete for customer deposits across previously segregated geographic
markets, and seek to achieve operating scale efficiencies by operating extensive
branch networks.
One-Stop Shopping for Financial Services
Regulatory changes and cross-sector acquisitions have diminished the
distinctions among various types of financial institutions such as banks,
insurance companies and securities brokerage firms. Financial institutions today
have the capability to leverage their client base, expand their market share and
compete for an increased share of customers' financial services business by
offering a diverse range of products and services that formerly may have been
offered only by one particular type of financial institution. These new
financial services companies seeks to become a "one-stop shop" for customers'
financial needs. For example, securities brokerage firms now offer savings
products similar to deposit accounts offered by depository institutions.
Likewise, depository institutions are offering savings and investment products
that are not insured, such as mutual funds, insurance products and other
financial or investment products. In today's market, these financial
institutions are either increasing their own product offerings internally or
acting as a broker or distributor for financial products provided by other
firms.
Priced-Based Competition
Increasingly, customers are differentiating among financial institutions
based on price and convenience. Generally, today's financial services customers
are well-informed regarding their finances and their options for financial
services. Well-informed customers have forced financial institutions to focus on
lowering the costs to consumers in obtaining financial services. Together with
industry deregulation, this development has increased the commoditization of
financial products and services which, in turn, has intensified fee competition
for those products and services. For example, in the brokerage services
industry, the average online brokerage commission ranged from $8 to $30 which is
substantially less than the average commission of a full service broker. As a
result, on line investing accounts are gaining popularity and the aggregate
value of these accounts is expected to increase by 2001 by $524 billion from
$ , according to Forrester Research, Inc.
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<PAGE> 38
CURRENT SITUATION
Given these market trends, financial institutions must compete nationally
for cost-conscious customers who are demanding better value, increased personal
convenience and enhanced service. Traditional financial institutions have
responded to these competitive pressures in large part by building extensive
national and regional branch networks with a significant physical infrastructure
and expanding product offerings. The maintenance of the physical infrastructure
associated with a national or regional branch network is costly to the financial
institution and, in turn, to the customer. For instance, according to a study by
Booz Allen & Hamilton, the cost of the average payment transaction at a bank
branch is $1.07 as compared with the cost of $.01 for a transaction on the
Internet. The geographically-present retail delivery strategy based on an
extensive, costly network of branch offices prohibits traditional financial
institutions from offering the high value financial products needed to compete
for increasingly price-sensitive customers. In this environment, traditional
financial institutions are being increasingly challenged by financial services
innovators, such as electronic securities companies and Internet-based banks,
which capitalize on their low-cost infrastructure to offer value products that
meet customer demands.
THE COMPANY'S SOLUTION
The Company's branchless banking strategy permits the Company to offer high
value financial services and products to customers nationwide and to lower its
cost structure through the use of alternative delivery channels, such as the
telephone, the Internet, ATMs, facsimile and mail. The Company also emphasizes
customer service by attentive and knowledgeable employees and convenience for
customers in accessing its financial product offerings. The Company intends to
use these low-cost, scaleable alternative delivery channels to continue to
increase its core deposit base and to market and sell other financial and
investment products, including insurance products, residential mortgage loans,
credit cards and mutual funds.
The Company's solution offers the following benefits to customers:
Broad Selection of High Value Financial Products. The Company believes
that its use of alternative delivery channels permits it to operate nationally,
but with a lower cost structure than many traditional depository institutions.
Such a low cost structure allows the Company to offer a broad selection of "high
value" savings and investment products, which have higher interest rates and
lower fees than traditional, branch-based financial institutions. Building on
its low-cost alternative delivery channels, the Company intends to expand its
product offerings to include credit cards and, through strategic alliances with
third party providers, annuities, residential mortgage loans and mutual funds.
High Quality Service. The Company also capitalizes on its low cost
structure by prioritizing and investing in its customer service. Recognizing
that superior customer service is critical for attracting and retaining
customers, the Company uses its highly trained, primarily college-educated
customer service representatives, known as "TeleBankers," both to sell savings
and investment products and to serve existing customers from the Company's call
center. TeleBankers can access electronically data relating to the customer
accounts, and information about additional product requests, which the Company
believes promotes better customer service and offers substantial cross-marketing
opportunities. Based on data generated by the Company's automatic call
distributor system, over the past three months, the average time that an
existing or prospective customer waits to speak with a TeleBanker on the
telephone is approximately ten seconds. In contrast to many of its competitors,
the Company offers free ATM transactions through the Cirrus network and free
Internet banking to customers.
Convenience. The Company emphasizes "anywhere, anytime" convenience to
existing and prospective customers by offering several different media through
which a customer can consummate his or her financial transactions or otherwise
communicate with the Company. The Company believes that its alternative delivery
channels permit customers to choose the most convenient method and time to
transact business. For example, customers may open a new account, invest in a
financial product or service or conduct an electronic financial transaction by
telephone (1-800-TeleBank), through the Internet via the Company's Web site at
www.telebankonline.com, by facsimile or by mail. The Company's customer service
call center operates from 8:00 a.m. to 12:00 a.m. EST/EDT Monday through Friday,
and from 8:00 a.m. to 6:00 p.m. EST/EDT on
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<PAGE> 39
Saturdays. Customers also can access TeleBank's computer-operated voice response
system 24 hours a day, seven days a week.
THE COMPANY'S STRATEGY
The Company's objective is to be the premier national provider of high
value savings, investment and other financial products, without the overhead and
operating cost infrastructure of traditional financial institutions. To achieve
this objective, the Company has adopted a growth strategy that includes the
following key elements:
Increase TeleBank Brand Visibility Nationally. The Company seeks to build
the "TeleBank" franchise identity based on its high value savings and investment
products, superior customer service and anywhere, anytime convenience. The
Company believes that building the TeleBank brand will increase customer
conversion and retention rates, customer referrals, the number of accounts per
customer and customer receptivity to new products. In pursuing this strategy,
TeleBanc plans to increase significantly its marketing expenditures for the
foreseeable future to implement a targeted, national advertising campaign and
marketing initiative.
Expand Customer Base. The Company seeks to attract new customers to expand
its stable customer and core deposit base by further leveraging its scaleable
alternative delivery channels. The Company intends to continue to employ
targeted marketing techniques designed to attract more profitable customers,
rather than adopting the geographically-based marketing approach often used by
traditional financial institutions. In addition, the Company intends to attract
new customers by establishing additional affinity relationships through
strategic alliances. The Company currently has affinity relationships with 10
organizations with more than 1,000,000 members in the aggregate. Such
organizations include the National Association of Realtors and the National
Council of Senior Citizens. Additionally, while the Company does not anticipate
many such opportunities, it may pursue selective acquisitions of complementary
financial institutions.
Broaden Product Lines and Increase Cross-Marketing Initiatives. The
Company intends to leverage further its national distribution platforms through
expanded product offerings and increased cross-marketing efforts. The Company
monitors customer inquiries about additional financial products and services and
seeks to provide new product offerings based, in part, on customer requests. The
Company intends to broaden its savings and financial and investment products by
the end of 1998 to offer credit cards and, through strategic alliances,
fixed-rate and variable annuities, residential mortgage loans and mutual funds.
The Company currently has contractual arrangements with several non-affiliated
insurance companies, including USG Annuity & Life Company and Jackson National
Life Insurance Company, through which the Company intends to offer fixed-rate
annuities commencing in 1998, subject to required regulatory approvals and other
contingencies. The Company will also offer residential mortgage loans through
E-Loan.
Outsource Non-Core Operations. To maintain its relatively low operating
costs and to capitalize on the technical capabilities of selected vendors, the
Company intends to continue to outsource specific non-core operations and
systems. The Company currently outsources check processing, check imaging,
statement rendering, Internet processing and home page hosting. The Company
generally determines whether to outsource a particular service or operations
based on anticipated cost savings to the Company, while continuing to provide
high quality service to its customers. Companies to which the Company outsources
services or operations include M & I Data Services, Inc. and Security First
Technologies.
Maintain Conservative Asset Strategy. The Company intends to continue its
conservative asset investment strategy of purchasing and managing pools of
one-to-four family residential mortgage loans and investment-grade
mortgage-backed securities. The Company does not currently originate residential
mortgage or other loans. Management believes that purchasing assets, including
residential mortgage loans and mortgage-backed securities, lowers its loan
investment costs and permits the Company to manage the geographic
diversification of its loan portfolio, in an effort to reduce its exposure to
regional economic downturns.
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<PAGE> 40
PRODUCTS
Through TeleBank, the Company currently offers customers the account
products listed below, all of which are FDIC-insured up to applicable limits.
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION
------------ -----------
<S> <C>
Interest Checking Premium yield NOW account with unlimited free check
writing, free Internet banking, free bill payment
service and ATM/Debit card
Money Market Account Premium yield money market account with immediate
access to funds via checks and ATM card
SmartSaver Savings Account Super premium yield account without term restrictions
Certificates of Deposit Guaranteed premium yields in terms ranging from three
months to five years
Callable Certificates of Deposit Super premium yield CDs, subject to redemption after
two years, with terms ranging from seven to ten years
</TABLE>
The Company also intends to offer the following additional, co-branded
products prior to the end of 1998 pursuant to agreements with select providers.
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION
------------ -----------
<S> <C>
Fixed Annuities Line of premium yield flexible and single premium
fixed annuities offering a variety of value-added
features
Variable Annuities Line of variable annuities with value-added features
including low expense structure and no surrender
charges
Residential Mortgage Loans Competitively priced selection of residential mortgage
loans
Credit Cards Credit cards offering low rates, Internet statement
presentation and RateReward program tying usage to
bonus savings rates on TeleBank deposit products
Mutual Funds No load mutual funds and discount brokerage services
</TABLE>
FDIC-Insured Account Products
TeleBank currently offers a full spectrum of premium yield FDIC-insured
transaction and time deposit products designed to attract customers who are
seeking high interest rates and low fees.
Interest Checking. TeleBank's Interest Checking is designed for customers
who are seeking a premium yield checking account and certain additional
benefits, including unlimited personal check writing, free check printing, free
Internet banking, free unlimited bill paying via personal computer and an
ATM/Debit card. At April 30, 1998, Interest Checking customers earned 3.15%
annual percentage yield ("apy") for balances of $2,500 to $9,999, 3.95% apy for
balances of $10,000 to $24,999 and 4.65% apy for balances $25,000 or more.
38
<PAGE> 41
Money Market and SmartSaver Accounts. TeleBank's Money Market and
SmartSaver Accounts are designed for consumers who are seeking premium and super
premium yields with immediate access to funds and without term restrictions or
early withdrawal penalties. At April 30, 1998, Money Market Account customers
earned 5.00% apy for a minimum balance of $2,500, and SmartSaver Account
customers earned 5.40% apy for a minimum balance of $2,500.
Certificates of Deposit. TeleBank CDs are designed for consumers who want
a fixed premium yield for terms ranging from three months to five years. For
those consumers who seek an even higher premium yield CD, TeleBank offers seven-
to ten- year callable CDs which are subject to redemption by TeleBank anytime
after two years. At April 30, 1998, CD rates ranged from 5.70% apy for a
three-month CD to 6.85% apy for a ten-year callable CD.
The following table compares the rates on TeleBank's FDIC-insured account
products to similar account products offered by other depository institutions.
COMPARISON OF PRODUCT RATES
AS OF APRIL 30, 1998(1)
<TABLE>
<CAPTION>
NATIONAL
TELEBANK AVERAGE
RATE(2) RATE(2)
-------- --------
<S> <C> <C>
Interest Checking........................................... 3.15% 1.51%
Money Market Checking....................................... 5.00% 2.56%
Money Market Savings........................................ 5.40% 3.03%
One year Certificate of Deposit............................. 5.92% 5.08%
Five year Certificate of Deposit............................ 6.22% 5.44%
</TABLE>
- ---------------
(1) Source: Bank Rate Monitor, May 4, 1998.
(2) Represents annual percentage yield on the account.
Investment and Other Financial Products
During 1998, the Company intends to introduce the additional investment and
other financial products described below which, in contrast to its FDIC-insured
account products, would be expected to generate sales fees and commissions.
Annuity Products. The Company's wholly owned subsidiary, TeleDirect
Insurance Services, Inc. ("TeleDirect"), a licensed insurance agency, is
expected to offer co-branded products to attract customers who are seeking fixed
or variable annuities with value-added features. The Company has entered into
agreements with several nationally-recognized insurance companies, including USG
Annuity & Life Company, Jackson National Life Insurance Company and First
Penn-Pacific Life Insurance Company, through which the Company will offer
co-branded insurance products to its existing and new customers at commissions
that are expected to be significantly less than the average commission generated
by traditional insurance agencies. The Company intends to design these products
to have a higher value than products available through traditional channels of
distribution.
Through TeleDirect, the Company intends to offer a selection of high value
fixed annuity products, with interest rates in the range of 50 to 100 basis
points above the interest rates on full commission products. These products are
expected to provide customers with multiple year guarantees, cumulative free
withdrawals, introductory year bonus rates and no surrender charges. Also
through TeleDirect, the Company intends to offer a selection of variable annuity
products, which will provide customers with no surrender charges, low expense
ratios and extensive mutual fund selections. The Company currently expects that
its fixed annuity
39
<PAGE> 42
products will be available by the summer of 1998, and its variable annuity
products will be available by the fall of 1998.
Residential Mortgage Loans. The Company has entered into a strategic
alliance with E-Loan, an online mortgage broker, to offer to the Company's
customers co-branded, rate-competitive residential mortgage loans, and to offer
to E-Loan's customers the Company's financial products and services. The
Company, however, does not intend to originate such loans.
Credit Cards. Responding to customer requests and to expand further its
affinity relationships, the Company intends to offer credit cards to its
customers. Such credit cards are expected to have value-added features such as
low fee or no fee if certain transaction minimums are maintained, lower interest
rates and additional purchasing initiatives. As a result of the DFC Acquisition,
which is expected to occur in the summer of 1998, TeleBank, will have the
capability to offer its customers credit cards.
Mutual Funds. The Company is also considering a strategic alliance with a
licensed securities brokerage firm to offer TeleBank customers value-added
mutual funds and discount brokerage services through alternative delivery
channels.
Other Financial Products. The Company is also exploring strategic
alliances with select insurance companies to offer high value term life
insurance and automobile insurance products.
Although the Company currently intends to offer the above-described
products and services within the time periods indicated, if any, its ability to
offer such products is subject to numerous factors, many of which are beyond the
Company's control. In addition, based on its analysis of the feasibility and
profitability of such products and services, the Company (i) may determine not
to offer all or certain of such new products and services, (ii) may
significantly delay the time at which it introduces such new products and
services, or (iii) may determine to withdraw such products and services shortly
after their introduction based on management's assessment of certain factors,
including customer acceptance and costs. Accordingly, there can be no assurance
that the Company will actually introduce and offer all or any of the
above-described products and services within the time periods indicated or at
all, or that, if offered, such products and services will be profitable for the
Company. See "Risk Factors -- Dependence on New Products and Services."
CUSTOMER SERVICE AND CONVENIENCE
The Company believes that high quality customer service is critical to
attract and retain customers. Accordingly, the Company employs customer service
representatives, known as "TeleBankers," who are highly trained, primarily
college-educated, professionals who seek to satisfy customers' demands. When a
customer calls the Company, a TeleBanker can access electronically data relating
to the customer, his or her existing accounts, as well as information about
additional product requests. Based on data gathered by the Company's automatic
call distributor system, during the first quarter of 1998, the average customer
call to the Company is answered in person by a TeleBanker within ten seconds of
receipt of the call, and calls to the Company have a rate of abandonment by
customers before a TeleBanker can reach the customer of approximately 3%. The
TeleBankers also have access electronically to information about TeleBank's
other savings and investment products, which permits them not only to respond
fully to customers' questions and to assist with transactions, but also to
cross-market the Company's other savings and investment products.
The Company seeks to promote employee loyalty and high quality customer
service through a compensation package that is different from that of the
typical teller in a traditional depository institution. TeleBankers are
compensated through an annual salary, a year-end performance-based bonus that is
based on both the Company's and the employee's performances, monthly incentive
programs and an employee stock ownership plan in which every employee
participates.
Currently, TeleBank's customers can access TeleBankers from Monday through
Saturday by calling 1-800-TELEBANK from 8 a.m. to 12 midnight EST/EDT Monday
through Friday, and 8 a.m. to 6 p.m. EST/EDT on Saturdays. The Company plans to
extend these hours by routing calls to an overflow call center during
non-business hours. Customers also can access certain information or make
transactions on their own accounts 24 hours a day, seven days a week via the
Internet and a computer-operated voice-response system.
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<PAGE> 43
The Company believes that customers are seeking not only high value savings
and investment products, but also prompt, easy and convenient access to their
accounts. As a result, building on its alternative electronic and
technology-based communication channels, the Company seeks to attract customers
by offering a variety of remote media to access accounts and information and to
serve its nationwide customer base. As illustrated below, the Company currently
offers customers six different ways to access accounts and information:
[GRAPHIC: SMALL PICTURE OF TELEBANK SURROUNDED BY PICTURES OF THE DIFFERENT WAYS
TO COMMUNICATE WITH TELEBANK, SUCH AS ATM, TELEPHONE, FACSIMILE, VRU, INTERNET,
ATM/DEBIT CARDS (ATM MACHINES & CASH REGISTER)]
TARGET CUSTOMERS
The Company has customers in all 50 states, the District of Columbia and
many foreign countries. The Company believes that several key demographic trends
in the United States will contribute to significant growth in the market for
savings and investment products. Such trends include an aging population,
increased mobility and affluence, the rise in nontraditional and small
households and increasing dissatisfaction with substantially larger branch-based
financial institutions. The Company's customers include individuals of all
different age groups and an increasing number of small businesses. Based on
information complied by CACI Marketing Systems, an independent market research
company and Company research, the typical TeleBank customer is approximately 50
years old, owns his or her own home, is married, has a household income of
$50,000 and maintains 1.8 accounts with an average deposit of $24,000 per
account.
The Company believes that its high value products and alternative
distribution channels appeal to both younger, more transaction-oriented savers
who seek high rates, convenience and service, and older, longer-term savers who
choose term savings products. The Company believes that its savings and
investment products appeal to younger individuals with full-time careers who
manage their cash reserves through the use of TeleBank's Money Market and
SmartSaver accounts. These customers value the higher yields that TeleBank pays
and tend to utilize the telephone or the Internet to access accounts at
convenient opportunities. The Company believes such demographic groups will also
be receptive to new product and service offerings such as Internet checking,
variable annuities and mutual funds. Company customers close to or at retirement
age tend to hold their liquid assets in TeleBank savings accounts and invest
their long term savings in TeleBank's CD products. The Company's fixed annuity
products are being developed to meet the investment needs of this particular
group.
MARKETING
The Company has developed a multiple channel, consumer-oriented direct
marketing model designed to reach potential customers and build brand awareness
nationally. Based upon demographics and current regional banking conditions, the
Company targets key consumer markets through a variety of advertising and
promotional media, including print advertising in national periodicals, local
newspapers and specialty publications; Internet advertising; national radio
advertising predominately on talk/news stations; direct mail campaigns; public
relations; and affinity marketing programs. To fund its marketing activities,
the Company increased its marketing budget to $1.8 million in 1997 from $930,000
in 1996 and has substantially increased its marketing budget for 1998.
In addition to its national advertising, the Company undertakes more
concentrated advertising campaigns on a regional basis, utilizing print, radio
and billboards to build further brand awareness and target less rate-sensitive
consumers. As these regional campaigns penetrate each market, management plans
to combine them into a unified, national campaign. As part of these efforts, the
Company intends to establish, on a test basis, low-cost, small regional business
development offices to coordinate marketing activities and asset acquisition
activities in the market. The Company currently has a small regional business
development office in Los Angeles. Management believes that such offices will
increase customer response rates and sales of products to new and existing
customers in the regions in which such offices are located, while maintaining
the Company's low cost operating structure.
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Customer Incentive Programs
In addition to the Company's traditional advertising methods, the Company
employs the following programs designed to leverage its existing account base to
sell additional products and attract new customers.
Refer-A-Saver. In 1995, TeleBank introduced its Refer-a-Saver program,
pursuant to which it pays cash to existing customers who refer new customers to
TeleBank. This program, which saves approximately two-thirds of the marketing
cost allocated to each customer, is responsible for nearly 10% of all new
customers.
Preferred-Saver. As an incentive to maintain multiple accounts with
TeleBank, TeleBank offers lower minimum balances and higher rates on select
products for customers with multiple accounts through its Preferred Saver
program. Currently, approximately 30% of TeleBank's customers are enrolled in
this program. Multiple account holders are particularly profitable because they
require less marketing expense per dollar deposited than new accounts, reduce
the cost of funds per depositor and increase customer loyalty and franchise
value.
Affinity Programs
The Company's affinity marketing efforts are designed to reach targeted
groups of consumers with the endorsement of their membership organization. In
1996, TeleBank started its PartnersPlus Affinity program by contracting with
professional and other organizations to promote the Company's savings and
investment products. The Company has determined that such programs increase
customer conversion rates as a result of the association's third party
endorsement. Currently, TeleBank has affinity programs with 10 organizations,
with a total of more than 1,000,000 members, and is currently exploring possible
affinity programs with several additional organizations comprising more than
5,000,000 million members. The current PartnersPlus Affinity program
participants include the National Association of Realtors, the Association of
Women's Health, Obstetric and Neonatal Nurses and the National Council of Senior
Citizens.
STRATEGIC ALLIANCES
The Company continually seeks to complement its current value-based product
selection by forming strategic alliances with established third-party financial
service providers to develop and market new products. In addition, the Company
gains new distribution channels by offering its own product line through
consumer networks of its alliance participants. For example, the Company has
established strategic alliances with USG Annuity & Life Company and Jackson
National Life Insurance Company to provide annuities through TeleDirect and with
E-Loan to provide residential mortgage loans. The Company is considering other
alliances through which it intends to offer mutual funds to new or existing
customers. The Company's marketing strategy also contemplates joint marketing
initiatives which would highlight and provide the Company's alternative delivery
platform. For instance, the Company believes that an alliance with a web search
engine to offer the Company's products and services to targeted groups of
customers through the search engine's home page would be an effective platform
through which to market the Company's products and services, as well as its
alternative delivery channels. By expanding its product line and its Internet
accessibility, the Company seeks to leverage its existing customer base to
cross-sell these new products, thereby capturing such benefits as lower customer
acquisition costs and higher profit margins.
MODEL TRANSACTIONS
The following are descriptions of model transactions designed to illustrate
the implementation of the Company's strategy and the mechanics of a transaction
for a current or prospective customer.
Accessing TeleBank Through Multiple Remote Channels
A TeleBank customer accesses her accounts by going to the Internet banking
page on TeleBank's web site and typing in her secure access codes. The customer
checks account balances and transfers funds to her checking account from her
savings account, and pays some bills while logged onto TeleBank's Internet
banking system by using the bill paying function. The next day, the customer
withdraws cash from her
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<PAGE> 45
checking account from an ATM in the Cirrus network and confirms that funds wire
transferred to the customer's TeleBank account have been received. The customer
is not charged a transaction fee by TeleBank. Later, she telephones the
Company's call center and receives confirmation from a TeleBanker that funds
wire transferred to the customer's TeleBank account has been received.
Attracting New Customers Through PartnerPlus Affinity Program
Members of the ten organizations which participate in TeleBank's
PartnerPlus Affinity program, such as the National Association of Realtors,
receive newsletters or other communications from such organizations that include
information regarding the financial products and services that TeleBank offers
to such members. These communications alert members that they are eligible for
the special products that TeleBank has customized for their organization. For
example, a member of a PartnerPlus Affinity program participants may be offered
interest rates on accounts maintained with TeleBank that are higher than the
rates offered to the general public, may have a separate toll-free telephone
number to reach the TeleBankers for member accounts and may be offered lower
fees on specific products. The member, after reading the information in the
organization communications, calls a TeleBanker that evening to open up a
one-year CD because it offers a higher rate of interest than that offered by the
customer's current depository institution.
Cross-Selling Additional Value-Added Products
A prospective customer, interested in the rates available on the SmartSaver
account, calls TeleBank after hearing a Company radio promotion. The TeleBanker
advises the customer that she would earn a higher interest rate if she
transferred her savings account to TeleBank. The TeleBanker also mentions to the
prospective customer that TeleBank offers competitive CD rates, and she requests
additional information on the CD products as well as an application kit for the
SmartSaver account. During a customer service call a few months after the
customer has established accounts at TeleBank, another TeleBanker notes from the
Company's electronic database that the customer had inquired about savings
products, and informs her that the Company is now offering a fixed rate annuity
that may satisfy the customer's demands. At her request, the TeleBanker
transfers the customer to an insurance-licensed service representative in a
separate call center for the non-FDIC insured products offered by the Company.
This customer service representative informs the customer about the features of
the annuity and arranges for her to receive information regarding the fixed rate
annuity product offerings. Upon receiving the information, the customer
completes and mails the application and invests in a co-branded, fixed rate
annuity from the Company through an automatic debit from the customer's checking
account.
Certain products, such as fixed rate annuities, are not currently offered
by the Company. Although the Company intends to offer such products in 1998, its
ability to do so is subject to numerous factors, many of which are beyond the
Company's control. Accordingly, there can be no assurance that the Company will
actually introduce and offer such products within the time periods indicated, or
at all. See "Products and Services."
ASSET ACQUISITION STRATEGY
The Company's asset acquisition strategy is focused on investing in
one-to-four unit, single-family mortgage loans and mortgage-backed securities
purchased in the secondary market, rather than to originate loans. By purchasing
rather than originating mortgage assets, the Company eliminates expenses
associated with the loan origination function. At March 31, 1998, the Company's
residential mortgage assets represented 81.3% of the Company's total
interest-earning assets. The Company also believes that, by purchasing a
seasoned and geographically diverse portfolio, it is better able to manage
credit quality risk. The Company seeks to manage interest rate risk through
matching the maturities of its deposit solicitations and borrowings as compared
with its asset purchases and the use of certain hedging techniques to operate
profitably in various interest rate environments. In addition to retail
deposits, funding sources for the Company include borrowings from FHLB,
securities sold under agreements to repurchase, and subordinated debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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COMPETITION
The financial services industry in the United States is highly competitive
and characterized currently by rapid change. The Company competes throughout the
United States with other savings banks and savings and loan associations,
commercial banks, credit unions, brokerage firms, mutual funds, insurance
companies and other financial institutions. The Company's competitors range from
traditional financial institutions that operate on a nationwide scale, to
regional financial institutions to brokerage firms such as Charles Schwab & Co.,
Inc. and Merrill Lynch & Co., to Internet-based banks, such as Net.B@nk. As the
Company expands its products and services, it expects to face increased
competition from additional sources, including insurance brokers and mortgage
bankers. Many of the financial institutions and others with which the Company
currently competes or may compete in the future have substantially greater
product offerings and financial and other resources than the Company.
The Company believes that customers choose financial products and services
primarily on the basis of price, service, convenience and quality of product.
The Company believes that it attracts and retains customers primarily because of
its high value savings and investment products which offer a higher interest
rate or lower fee than the products offered by many of its competitors, the
convenience of its alternative delivery channels and its high quality customer
service.
Because the Company purchases rather than originates residential mortgage
loans and mortgage-backed securities, the Company's competitors for such
investments are primarily commercial banks, savings banks, mortgage brokers,
pension funds, real estate investment trusts and other financial service
providers that purchase mortgage-related products. The Company believes that the
secondary market for residential mortgage loans is large and relatively fluid,
with pricing typically a function of supply and demand and general market
conditions. As to such investments, the Company competes principally on the
basis of bid price. The Company believes that it is able to compete effectively
for mortgage loans and mortgage-backed securities primarily because of its
relatively low cost infrastructure. See "Risk Factors -- Competition."
GOVERNMENT REGULATION
General. TeleBanc Financial, as a savings and loan holding company, and
TeleBank, as a federally chartered savings bank, are subject to extensive
regulation, supervision and examination by the OTS as their primary federal
regulator. TeleBank also is subject to regulation, supervision and examination
by the FDIC and as to certain matters by Federal Reserve Board. See
"Management's Discussion and Analysis" and Notes to Consolidated Financial
Statements as to the effect of certain laws, rules and regulations on the
operations of the Company and TeleBank. Set forth below is a description of
certain key aspects of these regulatory requirements and of certain recent
regulatory developments.
Thrift Charter Legislation. In September 1996, legislation (the "1996
Legislation") was enacted to address the undercapitalization of SAIF, of which
TeleBank is a member. As a result of the 1996 Legislation, the FDIC imposed a
one-time special assessment of 0.657% on deposits insured by the SAIF as of
March 31, 1995. TeleBank incurred a one-time charge of $1.7 million (before
taxes) to pay for the special assessment based upon its level of SAIF deposits
as of March 31, 1995. After the SAIF was deemed to be recapitalized, TeleBank's
deposit insurance premiums to the SAIF were reduced as of September 30, 1996.
TeleBank expects that its future deposit insurance premiums will continue to be
lower than the premiums it paid prior to the recapitalization.
The 1996 Legislation requires the merger of the Bank Insurance Fund and
SAIF into a single deposit insurance fund on January 1, 1999, but only if the
thrift charter is eliminated by that date. Congress has been considering various
forms of financial modernization legislation some of which would have required a
federally-chartered thrift, such as TeleBank, to convert its charter to a
national or state bank charter. However, the House of Representatives passed a
financial modernization bill on May 13, 1998, that would not require TeleBank to
convert its charter. Nevertheless, if legislation ultimately were to be enacted
that required TeleBank to convert its charter, the Company would become a bank
holding company subject to Federal Reserve Board regulation.
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In the absence of appropriate "grandfather" provisions, such legislation
could have an adverse effect on TeleBank and the Company. Such legislation
could, for example, subject the Company to regulatory capital requirements for
the first time and place limitations on the type of business activities it can
conduct, although the current activities of the Company would remain
permissible. The Company is unable to predict whether, and in what form, any
such legislation is likely to be passed and the effect such legislation might
have on the Company and TeleBank.
Regulatory Capital Levels of TeleBank. As a federal savings association,
TeleBank is subject to minimum capital requirements prescribed by federal
statute and OTS regulations. At March 31, 1998, TeleBank's tangible, core, tier
1 risk-based and total risk-based regulatory capital ratios were 5.5%, 5.5%,
11.0%, and 11.6%, respectively. TeleBank's capital ratios exceeded the
requirements under FIRREA as well as the standards established for
"well-capitalized" institutions under the prompt corrective action regulations
established pursuant to FDICIA.
FDICIA requires OTS to take "prompt corrective action" with respect to
savings associations that do not meet minimum capital requirements. The OTS's
prompt corrective action regulations establish five capital categories for
thrift institutions: well capitalized, adequately capitalized, undercapitalized,
severely undercapitalized and critically undercapitalized. The OTS has the
discretion under the prompt corrective action regulations to reclassify an
institution from one category to the next lower category, for example, from
"well capitalized" to "adequately capitalized," if, after notice and an
opportunity for a hearing, the OTS determines that the institution is in an
unsafe or unsound condition or has received and has not corrected a less than
satisfactory examination rating for asset quality, management, earnings or
liquidity.
The OTS has indefinitely delayed implementation of an interest-rate risk
component of its risk-based capital regulation pending the testing of an OTS
appeals process. Under that component, an institution that would experience a
change in "portfolio equity" in an amount in excess of 2.0% of the institution's
assets as a result of a 200 basis point increase or decrease in the general
level of interest rates would be required to maintain additional amounts of
risk-based capital based on the lowest interest rate exposure at the end of the
three previous quarters. At March 31, 1998, TeleBank would not have been
required to maintain additional amounts of risk-based capital had the
interest-rate risk component of the capital regulations been in effect.
If TeleBank were to become "undercapitalized" under the prompt corrective
action regulations, it would be required by statute to file a capital
restoration plan with the OTS setting forth, among other things, the steps
TeleBank would take to become "adequately capitalized." The OTS could refuse to
accept the plan unless the Company guaranteed in writing TeleBank's compliance
with the plan. The aggregate liability of the Company under such a commitment
would be limited to the lesser of (i) an amount equal to 5.0% of TeleBank's
total assets at the time that TeleBank became "undercapitalized" and (ii) the
amount necessary to bring TeleBank into compliance with all applicable capital
standards as of the time that TeleBank fails to comply with its capital plan. If
the Company refused to provide the guarantee, TeleBank would be subject to the
more restrictive supervisory actions applicable to "significantly
undercapitalized" institutions. Moreover, if TeleBank were to become "critically
undercapitalized" (which is defined to include institutions that still have a
positive net worth) it would be subject to the appointment of a receiver or
conservator.
TeleBank's ability to maintain or increase its capital levels in future
periods will be subject, among other things, to general economic conditions. As
a result, although TeleBank's regulatory capital ratios at March 31, 1998 met
the ratios established for "well-capitalized" institutions, there can be no
assurance that TeleBank will be able to maintain levels of capital sufficient to
continue to meet the standards for classification as "well capitalized" under
the prompt corrective action standards.
Qualified Thrift Lender Requirement. In order for TeleBank to exercise the
powers granted to federally chartered savings institutions and maintain full
access to FHLB advances, it must constitute a qualified thrift lender ("QTL"). A
savings association will constitute a QTL if its qualified thrift investments
continue to equal or exceed 65% of its portfolio assets on a monthly average
basis in nine out of every 12 months. At March 31, 1998, TeleBank's qualified
thrift investments constituted 85.75% of portfolio assets, and TeleBank has been
in compliance with this requirement for at least nine out of the prior 12
months.
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Qualified thrift investments generally consist of various housing related
loans and investments (such as residential construction and mortgage loans, home
improvement loans, mobile home loans, home equity loans and mortgage-backed
securities), small business loans, credit card and educational loans, and shares
of stock issued by any FHLB, the Federal Home Loan Mortgage Corporation or the
Federal National Mortgage Association. In addition, the following assets may be
categorized as qualified thrift investments in an amount not to exceed 20% of
the savings association's aggregate portfolio assets: (i) 50% of the dollar
amount of residential mortgage loans originated and sold within 90 days of
origination; (ii) investments in securities of a service corporation that
derives at least 80% of its income from residential housing finance; (iii) 200%
of loans and investments made to acquire, develop or construct starter homes or
homes in credit needy areas (subject to certain conditions); (iv) 200% of loans
for the purchase or construction of churches, schools, community service
facilities, nursing homes and hospitals in credit needy areas; and (v) consumer
loans (other than credit card and education loans). For purposes of the QTL
test, the term "portfolio assets" means the savings association's total assets
minus goodwill and other intangible assets, the value of property used by the
savings association to conduct its business, and liquid assets held by the
savings association in an amount up to 20% of its total assets.
A savings association that fails to constitute a QTL must limit its future
investments and activities (including branching and payments of dividends) to
those permitted for both savings associations and national banks. Additionally,
any such savings association will be ineligible to receive further FHLB advances
and, beginning three years after the loss of QTL status, will be required to
repay outstanding FHLB advances and dispose of, or discontinue, any pre-existing
investment or activities not permitted for both savings associations and
national banks. Finally, within one year of the loss of QTL status, the holding
company of a savings association must register as a bank holding company and
will be subject to all statutes applicable to bank holding companies, including
capital requirements. While the restrictions on the investments and activities
of TeleBank and the Company that would be imposed if TeleBank were to fail the
QTL test should not have a material adverse effect on the Company or TeleBank
based on their current operations, the loss of FHLB advances could adversely
affect TeleBank's liquidity.
Restrictions on Brokered Deposits. A depository institution that is not
"well capitalized" under OTS prompt correction action regulations is prohibited
from accepting or renewing deposits through a deposit broker or offering rates
of interest on insured deposits that are "significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions in such depository institution's normal market area" unless a
waiver is received from FDIC. Institutions that receive a waiver from FDIC are
nevertheless subject to limits on the rates of interest they may pay on such
deposits. In January 1998, TeleBank began to use brokers to acquire CDs that
contain call features. At March 31, 1998, TeleBank had approximately $42.3
million in deposits obtained through such brokers in the form of callable CDs.
If TeleBank failed to remain well-capitalized under the prompt corrective action
regulations, it would no longer be permitted to issue callable CDs through a
broker, and the regulatory restrictions on the interest rate that could be paid
on deposits could adversely affect TeleBank's operations in light of TeleBank's
strategy of offering premium yield deposits.
Community Reinvestment Act. As an FDIC-insured savings association,
TeleBank is subject to the Community Reinvestment Act of 1977 ("CRA"), under
which it has a continuing and affirmative obligation to help meet the credit
needs of its local communities, including low- and moderate-income neighborhoods
(i.e., its assessment area). In addition, the OTS is required under the CRA to
take into account TeleBank's CRA record in determining whether to approve
various applications. As a result of TeleBank's non-traditional operating plan,
specifically its nationwide operations and its lack of direct lending
activities, there is considerable uncertainty as to how to evaluate TeleBank's
CRA performance. Currently, TeleBank has designated Arlington County, Virginia
as its "assessment area" and is evaluated on the basis of its acquisition of
residential mortgage loans secured by property located in this area. Based on an
OTS examination dated as of February 18, 1997, TeleBank was rated "Satisfactory"
for CRA purposes. TeleBank has requested that OTS designate it a "wholesale"
institution under recent revisions to CRA regulations. Such a designation would
provide the OTS with greater flexibility in reviewing TeleBank's CRA record,
including permitting
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TeleBank to define a broader assessment area and giving greater emphasis to
services provided by TeleBank to low- and moderate-income areas.
Sources of Funds for Cash Dividends. The Company has traditionally
invested substantially all of its available liquid assets in TeleBank. The
Company's liquidity and ability to pay dividends to its stockholders is
primarily derived from, and dependent on, the ability of TeleBank to pay
dividends to the Company. In general, TeleBank pays dividends to the Company
only to the extent that funds are needed to cover operating expenses, to service
the debt of the Company and pay dividends to preferred stockholders. In
addition, TeleBank's ability to pay dividends on its common stock is subject to
certain restrictions. The Company does not currently intend to contribute all of
the net proceeds of the Offering to TeleBank. Any restrictions on TeleBank's
payment of dividends could adversely affect the Company's ability to make
payment on its debt and preferred stock, which could in turn, adversely affect
its stockholders. See "Use of Proceeds."
The OTS prompt corrective action regulation prohibits thrift institutions,
such as TeleBank, from making "capital distributions" (defined to include a cash
distribution or a stock redemption, but excluding dividends in the form of
additional shares of capital stock) unless the institution is at least
"adequately capitalized." Currently, an institution is considered "adequately
capitalized" for this purpose if it has a leverage (or core capital) ratio of at
least 4.0%, a tier 1 risk-based capital ratio of at least 4.0%, and a total
risk-based capital ratio of at least 8.0%. At March 31, 1998, TeleBank's
leverage, tier 1 risk-based and total risk-based capital ratios of 5.5%, 11.0%,
and 11.6%, respectively, met the ratios established for "well-capitalized"
institutions and, thus, exceeded the ratios established for
"adequately-capitalized" institutions.
Under the current OTS capital distribution regulation, as long as TeleBank
meets the OTS capital requirements before and after the payment of dividends, it
may pay out dividends without prior OTS approval equal to the higher of (i) 100%
of net income to date over the calendar year and 50% of surplus capital existing
at the beginning of the calendar year or (ii) 75% of its net income over the
most recent four-quarter period. The OTS could require prior approval if it were
to determine that TeleBank was "in need of more than normal supervision." In
addition, the OTS retains general discretion to prohibit any otherwise permitted
capital distribution on general safety and soundness grounds, and must be given
30 days' advance notice of all capital distributions, during which time it may
object to any proposed distribution.
Recently proposed revisions to the OTS capital distribution regulation
would conform the definition of "capital distribution" to the definition used in
the OTS prompt corrective action regulations. Under the proposal, TeleBank would
continue to be required to provide a notice to OTS 30 days prior to the
declaration of a dividend. The Proposal would not impose a quantitative
limitation on the amount of permissible capital distributions, but the OTS could
disapprove a capital distribution if the institution would not be at least
adequately capitalized under the OTS prompt correction action regulations
following the distribution, if the distribution raised safety or soundness
concerns, or if the distribution violated a prohibition contained in any
statute, regulation, or agreement between the institution and the OTS, or a
condition imposed on the institution by the OTS. The OTS would consider the
amount of the distribution when determining whether it raised safety or
soundness concerns.
Interest on Deposits. Various proposals have been introduced in the
Congress to permit the payment of interest on required reserve balances, and to
permit savings institutions and other regulated financial institutions to pay
interest on business demand accounts. While this legislation appears to have
strong support from many constituencies, the Company is unable to predict
whether such legislation will be enacted.
Other Regulatory Proposals. During 1997 and 1998, the OTS continued its
comprehensive review of its regulations to eliminate duplicative, unduly
burdensome and unnecessary regulations. The OTS revised or has proposed revising
regulations addressing electronic banking operations, deposit accounts,
application processing and management of interest rate risk, investment
securities and derivatives activities. The proposal on electronic banking
operations would expand the services that TeleBank can provide electronically by
permitting savings institutions to engage in any activity through electronic
means that they may conduct through more traditional delivery mechanisms,
including opening new deposit accounts and the establishment of loan accounts.
The proposal also would allow savings institutions to market and sell electronic
capacities
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and by-products to third parties if the capacities and by-products are acquired
or developed in good faith as part of providing financial services.
Liquidity Requirements. Recently adopted revisions to the OTS liquidity
requirements lowered the minimum liquidity requirement for a federal savings
institution from 5% to 4%, but made clear that an institution must maintain
sufficient liquidity to ensure its safe and sound operation. The revisions also
added certain mortgage-related securities and residential mortgage loans to the
types of assets that can be used to meet liquidity requirements, and provided
alternatives for measuring compliance with the requirements.
ATM Surcharge Legislation. Various proposals have been introduced in
Congress to restrict or prohibit an operator of an ATM from requiring
non-customers to pay surcharges to use that operator's ATM. The Company is
unable to predict at this time whether such legislation will be enacted.
EMPLOYEES
At April 30, 1998, the Company had 70 full-time employees, and 14 part time
employees. Management considers its relations with its employees to be
excellent. The Company's employees are not represented by any collective
bargaining group.
PROPERTIES
The Company leases its principal office located at 1111 North Highland
Street, Arlington, Virginia. The Company leases approximately 19,000 square feet
in that location. The lease expires in 2005. Beginning in March 1998, the
Company leased approximately 1,500 square feet of office space in Los Angeles,
California as a small business development office. The Company believes that its
facilities are adequate for its current operations.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party, or to which any of its property is subject.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table lists the current directors, executive officers and
certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David A. Smilow....................... 36 Chairman of the Board of Directors
Mitchell H. Caplan.................... 40 Vice Chairman of the Board of
Directors, Chief Executive Officer and
President
Aileen Lopez Pugh..................... 30 Executive Vice President, Chief
Financial Officer
Laurence Greenberg.................... 36 Executive Vice President, Chief
Marketing Officer
Michael Opshal........................ 35 Executive Vice President, Chief Credit
Officer
Sang-Hee Yi........................... 34 Executive Vice President, Chief
Operating Officer
David R. DeCamp....................... 38 Director
Arlen W. Gelbard...................... 40 Director
Dean C. Kehler........................ 41 Director
Steven F. Piaker...................... 35 Director
Mark Rollinson........................ 61 Director
</TABLE>
David A. Smilow has served as the Chairman of the Board of Directors since
March 1994 and as Chief Executive Officer of the Company from March 1994 to
April 1998. He has also served as the Chairman of the Board of Directors of
TeleBank since January 1994 and as Chief Risk Management Officer of TeleBank
since February 1996. Prior to January 1994, Mr. Smilow served as President of
TeleBank. Mr. Smilow also serves as President of TCM. Mr. Smilow is the
brother-in-law of Mr. Opsahl.
Mitchell H. Caplan has served as the Vice Chairman of the Board of
Directors and President of the Company since January 1994 and has served as
Chief Executive Officer of the Company since April 1998. Mr. Caplan has also
served as Vice Chairman, President and Chief Executive Officer of TeleBank since
January 1994. Mr. Caplan also serves as Vice President of TCM. From 1990 until
December 1993, Mr. Caplan was a member of the law firms of Danziger & Caplan and
Zuckerman & Gore, where he represented and advised private and public commercial
institutions.
Aileen Lopez Pugh has served as Executive Vice President, Chief Financial
Officer and Treasurer of the Company and TeleBank since August 1994. Prior to
joining management of the Company and TeleBank, Ms. Pugh served as a director
from April 1993 to August 1994. From December 1993 to May 1994, she served as a
consultant to MET Holdings in connection with the organization of the Company
and its initial public offering.
Laurence Greenberg has served as Executive Vice President and Chief
Marketing Officer of the Company and TeleBank since 1995 where he is responsible
for developing and implementing the Company's marketing strategy and overseeing
the call center and deposit operations functions. From October 1994 to 1995, Mr.
Greenberg served as Senior Vice President of Marketing. Prior to joining
management of the Company and TeleBank, Mr. Greenberg served as consultant to
TeleBank between April and September 1994. From 1993 to April 1994, Mr.
Greenberg was a Senior Associate at T.H. Land Research Group, Inc., a marketing
research company serving direct marketing companies. From 1989 to 1993, Mr.
Greenberg was a Marketing Manager for specialty publications with Capital
Cities/ABC, Inc.
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Michael Opsahl has served as Executive Vice President and Chief Credit
Officer since 1990, responsible for the development of the loan acquisition
process, including the acquisition and pricing of loans and the swapping of
purchased loan pools for mortgage-backed securities. Prior to joining the
Company, Mr. Opsahl served as a trading assistant at the Federal Home Loan
Mortgage Corporation. Mr. Opsahl is the brother-in-law of Mr. Smilow.
Sang-Hee Yi has served as Executive Vice President and Chief Operating
Officer since April 1996, responsible for operations and regulatory compliance.
Prior to serving in her current position, Ms. Yi served as the compliance
officer of the Company. From 1986 to April 1994, she was a federal thrift
regulator at the OTS.
David R. DeCamp has served as a director of the Company since its formation
in March 1994 and as a director of TeleBank since July 1992. Mr. DeCamp is a
Senior Vice President of Grubb & Ellis, a commercial real estate broker. From
1988 to 1996, Mr. DeCamp was a commercial real estate broker with Cassidy &
Pinkard, Inc. Mr. DeCamp is the Chairman of the Audit and Compliance Committees
of the Company and TeleBank, respectively.
Arlen W. Gelbard has served as a director of the Company and TeleBank since
April 1996. Mr. Gelbard is a member of the law firm of Hofheimer Gartlir &
Gross, LLP, New York, New York where he specializes in transactional real
estate, lending, leasing, foreclosures and workouts since 1982. Mr. Gelbard is
the Chairman of the Compensation Committee of each of the Company and TeleBank.
On June 30, 1998, Mr. Gelbard will join the Company as its General Counsel and
resign his position as a director of the Company.
Dean C. Kehler has served as a director of the Company and TeleBank since
March 1997. Mr. Kehler has been a Managing Director of CIBC Wood Gundy
Securities, a subsidiary of CIBC World Markets, and co-head of the High Yield
Group since August 1995. From February 1990 to August 1995, Mr. Kehler was a
founding partner and Managing Director of The Argosy Group, L.P., which was
acquired by CIBC Wood Gundy Securities in August 1995.
Steven F. Piaker has served as a director of the Company and TeleBank since
March 1997. Since January 1997, Mr. Piaker has been a Senior Vice President of
Conning & Company, a provider of asset management, private equity capital,
corporate finance services and research to the insurance and financial services
industries, which he joined in 1994. From September 1992 to June 1994, Mr.
Piaker served as a Senior Vice President of Conseco, Inc. where he was involved
in company-sponsored leveraged buyouts and private placements in the insurance
industry.
Mark Rollinson has served as a director of the Company since its formation
in March 1994 and as a director of TeleBank since 1992. He has been a
self-employed attorney in Leesburg, Virginia, for the past ten years.
Messrs. Kelleher and Piaker were elected to the Board of Directors of the
Company pursuant to a provision in the Certificate of Designation of the Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (the
"Certificate of Designation").
COMMITTEES OF THE BOARD OF DIRECTORS
Each of the Board of Directors of TeleBanc Financial and TeleBank has a
Compensation Committee, an Audit and Compliance Committee and a Stock Option
Committee. The respective committees of the Boards of TeleBanc Financial and
TeleBank are comprised of the same members and meet simultaneously. The members
of each of the Compensation Committee and of the Audit and Compliance Committee
of TeleBanc Financial and TeleBank are Messrs. DeCamp, Gelbard, Kehler and
Piaker.
The Compensation Committee establishes compensation for directors, reviews
compensation for all executive officers on an annual basis and reviews the
overall bonus plan offered to all employees of TeleBanc Financial and TeleBank.
The Audit and Compliance Committee reviews TeleBank's compliance with regulatory
matters and the scope of the internal auditors and the independent annual audit.
It also reviews the
50
<PAGE> 53
independent accountants' letter to management concerning the effectiveness of
the Company's internal financial and accounting controls and management's
response to the letter. In addition, the Audit and Compliance Committee reviews
and recommends to TeleBanc Financial's Board of Directors the firm to be engaged
as the Company's independent accountants. The Audit and Compliance Committee may
also examine and consider other matters relating to the financial affairs of
TeleBanc Financial and TeleBank as it deems appropriate.
The Stock Option Committee, which consists of the same members as the
Compensation Committee, administers the 1997 Stock Option Plan. The Stock Option
Committee selects the employees and independent contractors of the Company to
whom options will be granted.
In addition, TeleBanc Financial's Board of Directors acts as a nominating
committee for selecting nominees for election as directors, and TeleBanc
Financial's Bylaws also permit stockholders eligible to vote for the election of
directors at the Annual Meeting to make nominations for directors if such
nominations are made pursuant to timely notice in writing to the Company's
corporate secretary.
DIRECTOR COMPENSATION
Non-employee directors of TeleBanc Financial receive $750 for each Board of
Directors and committee meeting attended, up to an aggregate of $3,000 per
director annually. Non-employee directors of TeleBank receive $750 for each
TeleBank Board of Directors and Committee meeting attended, up to an aggregate
of $12,000 per director annually. In addition, non-employee directors are
reimbursed for travel costs and other out-of-pocket expenses incurred in
attending such meetings.
As additional compensation for services provided to the Company, in May,
1994, the Company granted to each of Messrs. DeCamp and Rollinson options to
acquire 10,000 shares of Common Stock, at an exercise price of $3.063 per share.
As of the date of this Prospectus, these options are fully vested. Mr. Rollinson
has exercised options to acquire 10,000 shares of Common Stock. In August 1996,
the Company granted to each of Messrs. DeCamp, Gelbard and Rollinson options to
acquire 20,000 shares of Common Stock, of which options to acquire 24,000 in the
aggregate are vested. As of the date of this Prospectus, options to acquire
70,000 shares of Common Stock held in the aggregate by such directors are
outstanding.
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<PAGE> 54
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by TeleBanc Financial
and TeleBank to the executive officers of the Company named (the "Named
Executive Officers"), for services rendered to the Company in all capacities
during the periods indicated. The Company has not granted any stock appreciation
rights ("SARs").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
----------------------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- ---- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
David A. Smilow.......................... 1997 $205,000 $200,000 200,000 $15,000
Chairman of the Board 1996 205,000 188,000 -- 15,000
1995 205,000 150,000 -- 15,000
Mitchell H. Caplan....................... 1997 $205,000 $200,000 200,000 15,000
Vice Chairman, Chief Executive 1996 205,000 188,000 -- 15,000
Officer and President 1995 205,000 150,000 -- 15,000
Aileen Lopez Pugh........................ 1997 $ 79,500 $100,000 20,000 13,913
Executive Vice President, 1996 75,000 60,000 30,000 13,500
Chief Financial Officer 1995 75,000 60,000 10,000 13,500
</TABLE>
- ---------------
(1) The total amounts shown in the "All Other Compensation" column for each of
the years presented represents the dollar value of contributions made by the
Company to the Company's ESOP for the account of the Named Executive
Officer.
The following table sets forth certain information with respect to the
stock options to purchase Common Stock granted to the Named Executive Officers
in 1997. All options were granted under the Company's 1994 or 1997 Stock Option
Plan. The Company has not granted any SARs.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL EXERCISE STOCK PRICE APPRECIATION FOR
SECURITIES OPTIONS TO OR BASE OPTION TERM(1)
UNDERLYING EMPLOYEES PRICE PER EXPIRATION ----------------------------
NAME OPTIONS GRANTED IN FISCAL YEAR SHARE DATE 5% 10%
---- --------------- -------------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Smilow........... 200,000(2) 35.0% $ 6.75 2/28/07 $849,008 $2,151,552
Mitchell H. Caplan........ 200,000(2) 35.0 6.75 2/28/07 849,008 2,151,552
Aileen Lopez Pugh......... 20,000(3) 3.5 6.75 2/15/07 84,901 215,155
</TABLE>
- ---------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% assumed annual growth rates mandated by the rules and regulations
promulgated by the Securities and Exchange Commission and, therefore, are
not intended to forecast possible future appreciation, if any, in the Common
Stock price.
(2) Options vested 20% upon grant on February 28, 1997 and 20% become
exercisable ratably in each subsequent year through 2001.
(3) Option vested 20% upon grant on February 15, 1997 and 20% becomes
exercisable ratably in each subsequent year through 2001.
None of the Named Executive Officers exercised any stock options during
1997. The following table sets forth information with respect to outstanding
options held by the Named Executive Officers as of December 31, 1997.
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<PAGE> 55
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTION VALUE OF UNEXERCISED IN-THE-MONEY
AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END (1)
------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
David A. Smilow.................. 208,584 202,146 $1,014,696(2) $572,424(2)
Mitchell H. Caplan............... 208,584 202,146 1,014,696(2) 572,424(2)
Aileen Lopez Pugh................ 32,000 38,000 163,375(3) 148,500(3)
</TABLE>
- ---------------
(1) Based on last reported sale price of the Common Stock on December 31, 1997
of $8.875 per share and applicable per share exercise price for the options.
(2) On April 28, 1994, Messrs. Smilow and Caplan were each granted options to
purchase 85,234 shares of Common Stock with an exercise price of $3.063 per
share and options to purchase 124,956 shares of Common Stock with an
exercise price of $3.563 per share. These options expire in April 2004. The
options vested 20% upon grant, and 20% vests ratably on each of the next
four anniversaries of the grant. Also Messrs. Smilow and Caplan were granted
nonqualified options to purchase 200,000 shares of Common Stock on February
28, 1997 with an exercise price of $6.75 and an expiration date of February
28, 2007, which vested 20% upon grant, and 20% vest ratably on each of the
next four anniversaries of the grant. The options expire 10 years after
grant.
(3) The Company has granted a total of 70,000 options to Ms. Pugh: 10,000
options granted on April 28, 1994 with an exercise price of $3.063, 10,000
options granted on February 15, 1995 with an exercise price of $2.75, 30,000
options granted on February 15, 1996 with an exercise price of $3.875 and
20,000 options granted on February 15, 1997 with an exercise price of $6.75.
The options expire in April 2004, February 2005, February 2006 and February
2007, respectively. Twenty percent of each grant of options vested on the
date of grant and 20% vest ratably on the anniversary of each date of grant
in each of the subsequent four years.
STOCK OPTION PLANS
1997 Stock Option Plan.
The 1997 Stock Option Plan (the "1997 Plan") provides for the grant of
options to employees, non-employee directors and independent contractors of the
Company. The 1997 Plan is administered by the Stock Option Committee, which
consists of not less than two outside directors appointed by the Board of
Directors. A total of 928,402 shares of Common Stock are reserved for issuance
under the 1997 Plan. Under the 1997 Plan, 848,402 options have been issued to
eligible employees, directors or independent contractors of the Company as of
April 30, 1997. Options covering not more than 400,000 shares of Common Stock
may be granted to any employee during any calendar year.
The option exercise price under the 1997 Plan may not be less than 100% of
the fair market value of the Common Stock on the date of grant of the option (or
110% in the case of an incentive stock option granted to an optionee
beneficially owning more than 10% of the outstanding Common Stock). The maximum
option term is 10 years (or five years in the case of an incentive stock option
granted to an optionee beneficially owning more than 10% of the outstanding
Common Stock). Options become vested and exercisable at the time and to the
extent provided in the option agreement related to such option. Options become
exercisable in full upon the occurrence of a change in control of the Company,
as defined in the 1997 Plan. Generally, a change in control is deemed to occur
if any person (i) acquires direct or indirect beneficial ownership of at least
50% of the outstanding shares of Common Stock or (ii) has the power (whether as
a result of ownership of capital stock, by contract or otherwise) or ability to
elect or cause the election of directors who, at the time of such election,
constitute a majority of TeleBanc Financial's Board of Directors. The Stock
Option Committee has the discretion to accelerate the vesting and exercisability
of options.
There is a $100,000 limit on the value of stock (determined at the time of
grant) covered by incentive stock options that first become exercisable by an
optionee in any calendar year. No option may be granted
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<PAGE> 56
more than 10 years after the effective date of the 1997 Plan. Generally, during
an optionee's lifetime, only the optionee (or a guardian or committee if the
optionee is incapacitated) may exercise an option except that, upon approval by
the Stock Option Committee, nonqualified options may be transferred to certain
family members of the optionee, charitable organizations or to trusts for the
benefit of such persons. Incentive stock options are non-transferable except at
death of the optionee.
Payment for shares purchased under options granted pursuant to the 1997
Plan may be made either in cash or by exchanging shares of Common Stock with a
fair market value of up to the total option exercise price and cash for any
difference. Options may be exercised by directing that certificates for the
shares purchased be delivered to a licensed broker as agent for the optionee,
provided that the broker tenders to the Company cash or cash equivalents equal
to the option exercise price plus the amount of any taxes that the Company may
be required to withhold in connection with the exercise of the option.
If an employee's employment with the Company or a former subsidiary
following a spin-off (a "Spin-Off Corporation") terminates by reason of death or
permanent and total disability, his or her options, whether or not then
exercisable, may be exercised within one year after such death or disability,
unless otherwise provided with respect to a particular option (but not later
than the date the option would otherwise expire). If the employee's employment
by the Company or Spin-Off Corporation terminates for any reason other than
death or disability, options held by such optionee terminate three months after
such termination, unless otherwise provided with respect to a particular option.
In that event, each option would be exercisable to the extent it had become
vested before such termination of employment (unless otherwise provided in the
option agreement).
If the outstanding shares of Common Stock are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of TeleBanc Financial by reason or merger, consolidation, reorganization,
recapitalization, reclassification, stock split, combination of shares, exchange
of shares, stock dividend or other distribution payable in capital stock, or
other increase or decrease in such shares without receipt of consideration by
TeleBanc Financial, an appropriate and proportionate adjustment will be made in
the number and kinds of shares subject to the 1997 Plan, and in the number,
kinds and per share exercise price of shares subject to the unexercised portion
of options granted prior to any such change. Any such adjustment in an
outstanding option, however, will be made without a change in the total price
applicable to the unexercised portion of the option, but with a corresponding
adjustment in the per share option price.
Upon any dissolution or liquidation of TeleBanc Financial or upon a
reorganization, merger or consolidation in which TeleBanc Financial is not the
surviving corporation, or upon the sale of substantially all of the assets of
TeleBanc Financial to another corporation, or upon any transaction (including a
merger or reorganization in which TeleBanc Financial is the surviving
corporation) approved by TeleBanc Financial's Board of Directors which results
in any person or entity owning 80% or more of the total combined voting power of
all classes of stock of TeleBanc Financial, the 1997 Plan and the options issued
thereunder will terminate, unless provision is made in connection with such
transaction for the continuation of the 1997 Plan, the assumption of the options
or both the continuation of the 1997 Plan and the assumption of such options, or
for the substitution for such options of new options covering the stock of a
successor corporation or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kinds of shares and the per share exercise
price. In the event of such termination, all outstanding options shall be
exercisable in full during such period immediately prior to the occurrence of
such termination as TeleBanc Financial's Board of Directors in its discretion
shall determine.
TeleBanc Financial's Board of Directors may amend the 1997 Plan with
respect to the Common Stock as to which options have not been granted. However,
TeleBanc's stockholders must approve any amendment that would (i) change the
requirements as to eligibility to receive incentive stock options; (ii) increase
the maximum number of shares in the aggregate for which incentive stock options
may be granted (except for adjustments upon changes in capitalization); or (iii)
otherwise cause the 1997 Plan to fail to satisfy the requirement of Section
162(m) of the Internal Revenue Code of 1986, as amended, relating to limitations
on the deduction of amounts not constituting qualified performance-related
compensation.
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<PAGE> 57
TeleBanc Financial's Board of Directors may at any time terminate or
suspend the 1997 Plan. Unless previously terminated, the 1997 Plan will
terminate automatically on February 25, 2007. No termination, suspension or
amendment of the 1997 Plan may, without the consent of the person to whom an
option has been granted, adversely affect the rights of the holder of the
option.
1994 Stock Option Plan
In April 1994, the Company adopted the 1994 Stock Option Plan (the "1994
Plan"). Under the 1994 Plan, options to purchase up to an aggregate of 649,750
shares of Common Stock were granted to directors and employees of the Company,
and currently, 604,750 options to acquire Common Stock issued under the 1994 are
outstanding. The 1994 Plan is administered by the Company's Compensation
Committee.
The option exercise price under the 1994 Plan may not be less than the
greater of par value or 100% of the fair market value of the Common Stock on the
date of grant of the option (or 110% in the case of an incentive stock option
granted to optionee beneficially owning more than 10% of the Common Stock). The
maximum option term will be 10 years. No option will be granted more than 10
years after the effective date of the option plan.
Payment for shares purchased under the 1994 Plan may be made either in cash
or by exchanging Common Stock with a fair market value equal to or less than the
total option price plus cash for any difference. Payment of the option price
also may be made by the option holder directing that the shares of Common Stock
subject to the option be delivered to a licensed broker acceptable to the
Company in exchange for cash from the broker. Options may be exercised from time
to time as provided in the option agreement.
The 1994 Plan provides for the grant of options that are intended to
qualify as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended, as well as non-qualifying options. Non-employee
directors of the Company are eligible only for non-qualifying options. There is
a limit of $100,000 on the value of Common Stock (determined at the time of
grant) covered by incentive stock options that first became exercisable by an
optionee in any calendar year.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has adopted and is the sponsor of a combined stock bonus and
money purchase pension plan that constitutes an "employee stock ownership plan"
under applicable law. Employees who have completed six months of service are
eligible to participate in the ESOP. Total contributions to the ESOP by TeleBanc
Financial and TeleBank, which are reflected in compensation expense, were
$247,000, $224,000 and $210,000 for the years ending December 31, 1997, 1996 and
1995, respectively.
Under the ESOP, each employer is obliged annually to contribute 10% of the
aggregate compensation that such employer pays to eligible participants. The
required contribution is allocated to the individual ESOP accounts of eligible
participants based on a uniform percentage of compensation. A participant who is
not an employee of the employer on the last day of the plan year (December 31)
or who completes less than 500 hours of service during the plan year is not an
eligible participant. The employer is also required to make contribution to the
extent necessary to pay debt service on any funds borrowed by the ESOP to
finance the purchase of TeleBanc Financial's stock. Otherwise, additional
contributions are at the discretion of TeleBanc Financial's Board of Directors.
Contributions may be paid either in cash or in Common Stock. From time to
time, the ESOP may purchase additional shares of Common Stock through the
purchase of shares in the market or from individual stockholders, upon the
original issuance of additional shares, or upon the sale of treasury shares by
the Company. Under its terms, the ESOP may borrow funds to finance purchases of
Common Stock. As of March 31, 1998, the Company had loaned $305,000 to the ESOP
to finance the purchase of approximately 120,000 shares of Common Stock.
TeleBanc Financial's Board of Directors has appointed a committee to
administer the ESOP. Common Stock has been allocated to participants' accounts
and is voted by the trustees in accordance with the directions of participants
on all matters except for specified major corporate issues. Unallocated shares
will be
55
<PAGE> 58
voted by the trustees in their sole discretion. Messrs. Smilow and Caplan and
Ms. Jane Gelman, Vice President and Chief Administrative Officer of the Company,
serve as trustees of the ESOP. Participant accounts vest at the rate of 20% for
each year of service, so that accounts become 100% vested after five years of
service. Vesting will be accelerated upon retirement, death, disability, or when
the participant reaches the age of 65.
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<PAGE> 59
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 15, 1998, and as adjusted to give effect
to the sale of Common Stock offered hereby by (i) each person or entity known by
the Company to beneficially own 5% or more of the outstanding shares of Common
Stock, (ii) each current director and executive officer of the Company, and
(iii) all directors and executive officers of the Company, as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) SHARES BEING AFTER THE OFFERING(1)
------------------------ SOLD IN ----------------------
NAME OF BENEFICIAL OWNER(2) NUMBER PERCENT THE OFFERING NUMBER PERCENT
--------------------------- ----------- --------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
David A. Smilow(3)....................... 1,451,140 19.8% -- 1,451,140 14.3%
Mitchell H. Caplan(4).................... 763,468 10.4 -- 763,468 7.5
Aileen Lopez Pugh(5)..................... 82,600 1.2 -- 82,600 *
David R. DeCamp(6)....................... 20,000 * -- 20,000 *
Arlen W. Gelbard(7)...................... 8,000 * -- 8,000 *
Dean C. Kehler(8)........................ 682,590 9.6 -- 682,590 6.9
Steven F. Piaker(9)...................... -- -- -- -- --
Mark Rollinson(10)....................... 19,000 * -- 19,000 *
CIBC WG Argosy Merchant Fund 2(8)........ 682,590 9.6 -- 682,590 6.9
Conning & Company(11).................... 682,590 9.6 -- 682,590 6.9
General American Mutual Holding
Company(12)............................ 877,616 12.3 -- 877,616 8.8
PC Investment Company(13)................ 867,866 12.2 -- 867,866 8.7
The Northwestern Mutual Life Insurance
Company(14)............................ 487,564 6.9 -- 487,564 4.9
TeleBanc Employee Stock Ownership
Plan(15)............................... 422,838 6.0 -- 422,838 4.3
Directors and executive officers, as a
group (8 individuals)(16).............. 3,026,798 38.4% -- 3,026,798 28.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 7,014,448 shares of Common
Stock outstanding as of May 15, 1998, assuming the Preferred Stock
Conversion upon the consummation of the Offering, and 9,814,448 shares of
Common Stock outstanding upon completion of the Offering. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. For each beneficial owner, shares of Common Stock
subject to options or conversion rights exercisable within 60 days of May
15, 1998 are deemed outstanding.
(2) Except as specifically noted in the footnotes below, the address of each of
the named stockholders is c/o TeleBanc Financial Corporation, 1111 North
Highland Street, Arlington, Virginia 22201.
(3) Includes 264,064 shares of Common Stock issuable upon exercise of options
and 64,200 shares issuable upon the exercise of warrants. Excludes 372,838
shares of Common Stock and warrants to acquire 50,000 shares of Common
Stock held by the ESOP, of which Mr. Smilow is a Trustee.
(4) Includes 290,730 shares of Common Stock issuable upon exercise of options
and 46,000 shares issuable upon the exercise of warrants. Excludes 372,838
shares of Common Stock and warrants to acquire 50,000 shares of Common
Stock held by the ESOP, of which Mr. Caplan is a Trustee. Mr. Caplan
disclaims beneficial ownership as to options to acquire 23,000 shares of
Common Stock listed above.
(5) Includes 56,000 shares of Common Stock issuable upon exercise of options
and 12,400 shares of Common Stock issuable upon the exercise of warrants.
(6) Includes 18,000 shares of Common Stock issuable upon exercise of options.
Mr. DeCamp's address is Grubb & Ellis, 1717 Pennsylvania Avenue, N.W.,
Suite 250, Washington, D.C. 20006.
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<PAGE> 60
(7) Includes 8,000 shares of Common Stock issuable upon exercise of options.
Mr. Gelbard's address is c/o Hofheimer Gartlir & Gross, LLP, 633 Third
Avenue, New York, New York 10017.
(8) Mr. Kehler is the designated director for CIBC WG Argosy Merchant Fund 2
("CIBC Merchant Fund"), which directly holds 7,000 shares of Series C
Preferred Stock that will convert to 561,752 shares of Common Stock
immediately prior to the Offering and warrants to acquire 92,750 shares of
Common Stock. Mr. Kehler is a partner of CIBC Merchant Fund and disclaims
beneficial ownership of such shares. Mr. Kehler's address is c/o CIBC Wood
Gundy, 425 Lexington Avenue, 3rd Floor, New York, New York, 10017.
(9) Mr. Piaker is Senior Vice President of Conning & Company. Mr. Piaker does
not exercise voting or investment control over the shares held by Conning &
Company.
(10) Includes 8,000 shares of Common Stock issuable upon exercise of options.
Mr. Rollinson's address is P.O. Box 826, Leesburg, Virginia, 22075.
(11) Includes an aggregate of (i) 492,174 shares of Common Stock issuable upon
the Preferred Stock Conversion and warrants to acquire 81,262 shares of
Common Stock held by Conning Insurance Capital Limited Partnership III
("CICLP III"), and (ii) 69,576 shares of Common Stock issuable upon the
Preferred Stock Conversion and warrants to acquire 11,488 shares of Common
Stock held by Conning Insurance Capital International Partners III, L.P.
("CICIP III") Conning & Company controls the general partner of each of
CICLP III and CICIP III.
(12) Includes an aggregate of 160,500 shares of Common Stock issuable upon the
Preferred Stock Conversion and a warrant to acquire, 26,500 shares of
Common Stock held by General American Life Insurance Company, an indirect
subsidiary of General American Mutual Holding Company. General American
Mutual Holding Company indirectly controls Conning & Company and may be
deemed to beneficially own all of the shares held by CICLP III and CICIP
III.
(13) The address of PC Investment Company is 401 Theodore Freund Avenue, Rye,
New York 10580.
(14) The address of the Northwestern Mutual Life Insurance Company is 702 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202.
(15) Includes warrants to acquire 50,000 shares of Common Stock.
(16) Includes 644,794 shares of Common Stock issuable upon exercise of options
and 215,350 shares of Common Stock issuable upon exercise of warrants.
Excludes 372,838 shares of Common Stock and warrants to acquire 50,000
shares of Common Stock held by the ESOP, of which Messrs. Smilow and Caplan
act as Trustees.
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<PAGE> 61
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 29,500,000 shares
of Common Stock, par value $.01 per share, and 500,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock").
COMMON STOCK
As of the date of this Prospectus, there were 7,014,448 shares of Common
Stock outstanding. The Common Stock represents non-withdrawable capital and is
not of an insurable type or insured by the FDIC. The holders of Common Stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of a
majority of the Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. After dividends have been paid
in full, or declared and set aside for payment in full, to holders of preferred
stock, holders of Common Stock are entitled to receive ratably such dividends,
if any, as are declared by the Board of Directors out of funds legally available
therefor. Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. Holders of
Common Stock are not entitled to preemptive rights with respect to any Common
Stock or other securities of the Company which may be issued. The outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby will
be, when issued and paid for, fully paid and nonassessable.
The Certificate of Incorporation also authorizes the issuance of nonvoting
common stock (the "Nonvoting Stock") which is convertible upon certain events
(each a "Conversion Event") into Common Stock. The Nonvoting Stock has no voting
rights upon any matter, including without limitation, the election of directors.
A Conversion Event includes (i) a public sale of securities; (ii) any
disposition pursuant to Rule 144 or Rule 144A promulgated pursuant to the
Securities Act of no more than 2% of the outstanding voting securities of the
Company; (iii) any transfer pursuant to the right of first refusal in the Unit
Purchase Agreement, dated February 17, 1997 (the "Unit Purchase Agreement"); or
(iv) any transfer in a single transaction to an independent third party who
acquires at least a majority of the voting stock of the Company without regard
to the transfer of such securities. Holders of the Nonvoting Stock may convert
in connection with a Conversion Event if such holder reasonably believes that
such Conversion Event shall be consummated. The Company does not have any
Nonvoting Stock currently outstanding.
PREFERRED STOCK
Upon the completion of the Offering, TeleBanc Financial's Board of
Directors will be authorized, without further stockholder approval, to issue
from time to time up to an aggregate of 500,000 shares of preferred stock in one
or more series and to fix and alter the voting powers, designations, preferences
and other rights of the shares of each such series and the qualifications,
limitations and restrictions thereof (including sinking fund provisions). Any
series of preferred stock may rank senior to the Common Stock as to dividend
rights, liquidation preferences or both, and may have no voting rights. The
holders of the preferred stock are entitled to vote as a separate class or
series under certain circumstances, regardless of any other voting rights which
such holders may have.
Under the Certificate of Designation, the holders of the Preferred Stock
have the right to designate not more than two individuals for election to the
Board of Directors of the Company (the "Preferred Stock Directors") and the
Company is obligated to nominate such designated individuals for election to the
Board. The Certificate of Designation also provides that so long as an affiliate
of Conning & Company ("Conning") and CIBC Merchant Fund or an affiliate of CIBC
Merchant Fund hold Preferred Stock, each of them shall have the right to
designate one of the Preferred Stock Directors. CIBC Merchant Fund is an
affiliate of CIBC Oppenheimer, an Underwriter of the Offering. See
"Underwriting." If for any reason CIBC Merchant Fund or Conning elects not to or
is unable by reason of a regulatory prohibition to designate one of the
Preferred Stock Directors, the holder of the largest percentage of Series A
Preferred Stock other than Conning and CIBC Merchant Fund shall have the right
to designate the Preferred Stock Director. This right to elect the Preferred
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Stock Directors expires upon a public offering in which the aggregate price paid
for shares of Common Stock in such offering is equal to or greater than $25
million. The holders of the Preferred Stock have agreed to convert all of the
outstanding shares of Preferred Stock to Common Stock immediately prior to the
effective time of the registration statement of which this Prospectus
constitutes a part. Accordingly, upon completion of the Offering there will be
no preferred stock outstanding. See "Description of Securities -- Preferred
Stock."
WARRANTS
Upon completion of the Offering the following warrants to purchase an
aggregate of 1,086,176 shares of Common Stock will be outstanding: (i) warrants
to purchase up to 690,000 shares of Common Stock at an exercise price of $3.83
per share issued in connection with the units offered in the Company's initial
public offering (the "1994 Warrants"), and (ii) warrants to purchase up to
396,176 shares of Common Stock at an exercise price of $4.75 per share (the
"1997 Warrants") issued in connection with the Unit Purchase Agreement. In each
case, the exercise price of and the number of shares of Common Stock subject to
the warrants is subject to an adjustment based upon certain anti-dilution
provisions. Additionally, the Company issued warrants to acquire 411,126 shares
of Common Stock upon certain events (the "Contingent Warrants"). The following
discussion of the warrants is qualified in its entirety by reference to the
detailed provisions of the agreements relating to the issuance of the warrants
and the forms of warrants, which have been incorporated by reference as exhibits
to this Registration Statement on Form S-2, of which this Prospectus constitutes
a part.
1994 Warrants. The Company issued, in connection with its initial public
offering, the 1994 Warrants to acquire 690,000 shares of Common Stock. Each 1994
Warrant entitles the holder (the "1994 Warrantholder") to purchase one share of
Common Stock at an exercise price of $3.83 per share. The 1994 Warrants may be
exercised at any time prior to the close of business on May 1, 2004. The
exercise price of the 1994 Warrants may be adjusted in the event of certain
reclassifications, stock splits, stock dividends or other dilutive events. The
Company may also authorize the reduction of the exercise price as may be deemed
appropriate by its Board of Directors. In the event of a reclassification,
reorganization or merger of the Company, with or into another corporation (other
than a merger in which the Company is the surviving corporation and which does
not result in a reclassification or other change in the Common Stock of the
Company), the Company shall cause appropriate provision to be made so that the
holders of the 1994 Warrants shall have the right to receive upon the exercise
of the 1994 Warrants, the kind and amount of stock, securities or other
consideration which holders of the Common Stock will receive.
1997 Warrants. The Company issued, pursuant to the Unit Purchase
Agreement, the 1997 Warrants to acquire, in the aggregate, 396,176 shares of
Common Stock at an exercise price of $4.75 per share. The exercise price of the
1997 Warrants and the number of shares of Common Stock issuable to the holders
of such warrants (the "1997 Warrantholders") upon exercise of the 1997 Warrants
are subject to adjustment in certain circumstances, including in the event of a
stock dividend, subdivision or combination of the Common Stock, the issuance of
Common Stock or rights, options or warrants to acquire Common Stock at a price
per share lower than the greater of (i) the fair market value of Common Stock at
the time of issuance, and (ii) $6.75 (which is also subject to adjustment in
certain circumstances, including in the event of a stock dividend, subdivision
or combination of the Common Stock). The 1997 Warrants may be exercised in whole
or in part and expire on February 27, 2005.
Contingent Warrants. The Company issued, pursuant to the Unit Purchase
Agreement, the Contingent Warrants to acquire, in the aggregate, 411,126 shares
of Common Stock at an exercise price of $0.01 per share upon the occurrence of
certain events. The Contingent Warrants may be exercised either (i) upon the
occurrence of a change of control transaction (as defined in the Unit Purchase
Agreement) or (ii) on February 27, 2002 (each an "Exercise Event"). The exercise
price of the Contingent Warrants and the number of shares of Common Stock
issuable upon exercise of the Contingent Warrants are subject to adjustment in
certain circumstances, including in the event of a stock dividend, subdivision
or combination of the Common Stock, the issuance of Common Stock or rights,
options or warrants to acquire Common Stock at a price per share lower than the
greater of (i) the fair market value of Common Stock at the time of issuance,
and (ii) $6.75 (which is also subject to adjustment in certain circumstances,
including in the event
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of a stock dividend, subdivision or combination of the Common Stock). The
Contingent Warrants are exercisable in whole or in part, in an amount equal to
the number of shares of Common Stock necessary to provide an annual internal
rate of return (as defined in the Contingent Warrant) equal to at least 25% on
each unit purchased by such initial holder, provided that such number of shares
of Common Stock does not exceed that number obtained by multiplying 13.75 by the
number of units purchased by the initial holder of the applicable Contingent
Warrant pursuant to the Unit Purchase Agreement. The Contingent Warrants expire
on the later of (i) February 27, 2002, and (ii) 30 days following the completion
of all internal rate of return calculations required as a result of an Exercise
Event.
SUBORDINATED DEBT
As of the date of this Prospectus, the Company had outstanding $17.3
million in the 1994 Subordinated Debentures, $13.7 million in the 1997
Subordinated Debentures and $10.0 million in the TCT I Junior Subordinated
Debentures.
In May and June 1994, the Company issued 15,000 units at a price of $15.0
million and 2,250 units at a price of $2.3 million, respectively. The units each
consist of $1,000 of the 1994 Subordinated Debentures, and 20 detachable
warrants to purchase one share each of Common Stock. The notes may not be
redeemed prior to May 1, 1999. The notes are redeemable at the Company's option
after May 1, 1999, at an initial redemption price of 105.75% of the principal
amount plus accrued interest, with the redemption price declining to 104.90%,
103.45%, 102.30%, and 101.15% annually each year thereafter. Interest is payable
semi-annually on May 1 and November 1. The indenture for the 1994 Subordinated
Debentures restricts the Company's ability to incur additional indebtedness,
limits cash dividends and other capital distributions by the Company, requires
the maintenance of a reserve equal to 100% of the Company's annual interest
expense on all indebtedness, restricts disposition of TeleBank or its assets,
and limits transactions with affiliates.
On February 28, 1997, the Company sold $29.9 million of units in the form
of 4% convertible preferred stock, the 1997 Subordinated Debentures and warrants
to acquire Common Stock to investment partnerships managed by Conning, CIBC
Merchant Fund 2, General American Life Insurance Company, The Progressive
Corporation and The Northwestern Mutual Life Insurance Company. Upon the sale of
the units, one representative from Conning and one from the Merchant Fund 2 were
appointed to the Company's Board of Directors. The units consist of $13.7
million in the 1997 Subordinated Debentures with the 1994 Warrants to acquire
396,176 shares of Common Stock, $16.2 million in 4.0% Preferred Stock, and
rights to Contingent Warrants to acquire an aggregate of 205,563 shares of
Common Stock. The 1997 Subordinated Debentures are due in March 31, 2004 and
stipulate increases over time in interest rates subsequent to March 31, 2002
from 9.5% up to 15.25%. The 1997 Subordinated Debentures restrict the ability of
the Company under certain circumstances to make cash dividends and other capital
distributions or to make payments of principal and interest on indebtedness.
In June 1997, the Company formed TCT I, which in turn sold, at par, 10,000
shares of Capital Securities, Series A, liquidation amount of $1,000, for a
total of $10,000,000 in a private placement. TCT I is a business trust formed
for the purpose of issuing capital securities and investing the proceeds in the
TCT I Junior Subordinated Debentures issued by the Company. The trust preferred
securities mature in 2027 and have an annual dividend rate of 11.0%, or $1.1
million, payable semi-annually. The net proceeds were used for general corporate
purposes, including to fund TeleBank operations. The TCT I Junior Subordinated
Debentures bear interest at the rate of 11%, payable semi-annually, and mature
in 2027 contemporaneously with the Capital Securities, Series A. The Company can
defer interest payments for up to 10 consecutive interest periods under certain
circumstances, although no interest can be deferred beyond the maturity date.
The debentures may be redeemed prior to June 1, 2007 only upon the occurrence of
certain limited regulatory or tax events. If such events were to occur, the
Company could elect to redeem the notes in whole (but not in part) upon payment
of the present value of the remaining principal and interest payments due under
the TCT I Junior Subordinated Debentures. The TCT I Junior Subordinated
Debentures are redeemable at the option of the Company after June 1, 2007, at an
initial redemption price of 105.5% of the principal amount plus accrued
interest, with the redemption price declining annually thereafter until it
reaches 100.0% on the maturity date.
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The indenture for the TCT I Junior Subordinated Debentures requires the Company
to maintain 100% beneficial ownership of the common stock of the trust.
TELEBANC CAPITAL TRUST II
Immediately prior to the Offering, the Company formed TeleBanc Capital
Trust II, a Delaware business trust of which the Company owns all of the
beneficial ownership interests. TCT II was formed solely for the purposes of
issuing capital securities and investing the net proceeds in the TCT II Junior
Subordinated Debentures to be issued by the Company. Substantially
simultaneously with the Offering, TCT II will offer to the public $25 million of
BLUS(SM). The Common Stock and the BLUS(SM) are being sold in separate
offerings, and the Company intends to complete the Offering regardless of
whether the BLUS(SM) Offering is completed.
The BLUS(SM) mature in 2028 and have an annual dividend rate of %,
or $ million, payable semiannually. The net proceeds from the BLUS(SM)
Offering will be used for working capital and general corporate purposes. The
TCT II Junior Subordinated Debentures will bear interest at the rate of
%, payable semiannually, and mature in 2028 contemporaneously with the
BLUS(SM). The Company can defer interest payments for up to consecutive
interest periods under certain circumstances, although no interest can be
deferred beyond the maturity date. The TCT II Junior Subordinated Debentures may
be redeemed prior to 2008 only upon the occurrence of certain limited
regulatory or tax events. If such events were to occur, the Company could elect
to redeem the debentures in whole (but not in part) upon payment of the present
value of the remaining principal and interest payments due under the debentures.
The debentures are redeemable at the Company's option after 2008 at an initial
redemption price of % of the principal amount plus accrued interest, with
the redemption price declining annually thereafter until it reaches 100.0% on
the maturity date. The indenture for the TCT II Junior Subordinated Debentures
restricts the Company's ability under certain circumstances to make cash
dividends and other capital distributions or to make payments of principal and
interest on indebtedness, and requires the Company to maintain 100% beneficial
ownership of TCT II.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S
CERTIFICATE OF INCORPORATION AND BYLAWS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date such person became an interested stockholder, unless the interested
stockholder obtained such status with the approval of the board of directors or
the business combination is approved in a manner prescribed by the statute.
Subject to certain exceptions, an "interested stockholder" is a person who owns
(or an affiliate or associate of the corporation who within three years prior
did own) 15% or more of the corporation's outstanding voting stock, and the
affiliates and associates of such person. In addition, the Certificate of
Incorporation provides that certain business combinations with interested
stockholders or affiliates or associates must be approved by (i) the holders of
80% of the outstanding shares of voting stock and (ii) the holders of two-thirds
of the voting power of the outstanding shares of voting stock, excluding with
respect to clause (ii) all shares of the voting stock owned by the interested
stockholder or any affiliates or associates. The higher vote is not required,
however, when a business combination has been approved by two-thirds of the
continuing directors or when certain fair price and procedure requirements are
met.
Certain provisions of the Certificate of Incorporation and Bylaws,
summarized below, may be deemed to have an antitakeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider in his, her or its best interest, including those attempts that might
result in a premium over the market price for the shares held by stockholders.
Restrictions on Election and Size of Board of Directors. Certain
provisions of the Certificate of Incorporation and Bylaws will impede changes in
majority control of TeleBanc Financial's Board of Directors.
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The Certificate of Incorporation and Bylaws provide that TeleBanc Financial's
Board of Directors will be divided into three classes, with directors in each
class elected for three-year staggered terms. As a result, approximately
one-third of the Board of Directors will be elected each year. The Certificate
of Incorporation and the Bylaws provide that any vacancy occurring in the Board
of Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the Bylaws impose certain
restrictions on the nomination by stockholders of candidates for election to the
Board of Directors or the proposal by stockholders of business to be acted upon
at an annual meeting of stockholders.
The Certificate of Incorporation provides that a director may be removed
only for cause and then only by the affirmative vote of two-thirds of the total
shares eligible to vote at a duly constituted meeting of the stockholders called
expressly for that purpose. Furthermore, 30 days' written notice must be
provided to any director or directors whose removal is to be considered at a
stockholders' meeting called for such purpose.
Special Meetings. The Certificate of Incorporation provides that all
actions taken by the stockholders must be taken at an annual or special meeting
of stockholders or by unanimous written consent. It also provides that a special
meeting of stockholders may be called at any time by the Chairman of the Board
of Directors, a majority of the Board of Directors or by holders of not less
than 50 percent of the voting stock.
Authorization of Preferred Stock. The Company is authorized to issue
preferred stock from time to time in one or more series subject to applicable
provisions of law. The Board of Directors, without stockholder approval, is
authorized to fix the designations, powers, preferences, and other rights of
such shares, including voting rights, which could adversely affect the voting
power of the holders of the Common Stock. See "-- Preferred Stock." In the event
of a proposed merger, tender offer or other unwelcomed attempt to gain control
of the Company, the Board of Directors could authorize the issuance of a series
of preferred stock with rights and preferences that could impede the completion
of such a transaction. Currently, the Board of Directors has no plans or
understandings for the issuance of any additional preferred stock and does not
intend to issue any preferred stock except on terms which the Board deems to be
in the best interest of the Company and its stockholders.
Approval of Acquisitions of Control. The Certificate of Incorporation
provides that no person may acquire 25% or more of the Company's voting stock
without obtaining the prior approval of two-thirds of the Company's voting stock
at a stockholder meeting called for such purpose and obtaining prior federal and
state regulatory approvals. These provisions do not apply to the purchase of
shares by underwriters in connection with a public offering or any employee
stock purchase plan, pension plan, profit sharing plan or other employee benefit
plan of the Company. Shares acquired in excess of these limitations are not
entitled to vote or take other stockholder action or be counted in determining
the total number of outstanding shares of voting stock in connection with any
matter involving stockholder action. Such excess shares are not transferable,
except with the approval of the Board of Directors, or by an independent trustee
(selected by the Company) for sale on the open market or otherwise. The proceeds
of such sale are paid first, to the trustee for expenses; second, to the
beneficial owner, in an amount up to such owner's federal income tax basis in
such excess shares; and third, to the Company.
Limitation on Control Share Acquisitions. The Certificate of Incorporation
provides that any person who acquires stock in the Company that would increase
such person's voting power in the Company to or above any of three thresholds
(20%, 33 1/3% or 50%) must receive the approval of the other stockholders of the
Company (other than the interested shares) before such person can vote that
stock. The practical effect of this requirement is to condition the acquisition
of control of the Company on the approval of a majority of the pre-existing
disinterested stockholders. In general, the provision requires the person who
acquires, or seeks to acquire, Company shares in numbers that meet or exceed the
three thresholds to send a disclosure statement regarding the acquisition to the
Company and provide for a special meeting of stockholders to vote on the
proposal. It also provides for appraisal rights for dissenting stockholders if
the proposal is approved. The purpose of the control share provision is to
provide stockholders with an opportunity to vote on an acquisition that may lead
to or result in a change of control. The control share provision does not affect
the terms an acquiring person must offer to the stockholders. Certain
acquisitions are exempt from these restrictions,
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including, but not limited to, acquisitions that are (i) pursuant to
satisfaction of a pledge or other security interest, or (ii) pursuant to a
merger, plan of share exchange or tender or exchange offer if the Company is a
party to an agreement relating thereto.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Certificate of Incorporation must be approved by a two-thirds vote of the
Company's Board of Directors and also by a majority of the Company's outstanding
stock entitled to vote, provided, however, that approval by two-thirds of the
outstanding stock entitled to vote is required for amending certain provisions
(relating to the Board of Directors; stockholder action without a meeting; call
of special stockholder meetings; limitation on control share acquisitions;
acquisitions of control; criteria for evaluating certain offers;
indemnification; and amendments to the Certificate of Incorporation) and
approval by 80% of the outstanding stock entitled to vote is required for
amending the provisions which address the vote required for certain business
combinations. A majority of the Board of Directors may amend the Bylaws.
Criteria for Evaluating Certain Offers. The Certificate of Incorporation
authorizes the Board of Directors, when evaluating a tender or exchange offer,
merger, consolidation or certain acquisition proposals, to take into account
factors in addition to the potential economic benefit to the stockholders,
including the economic effects on depositors, borrowers and employees of the
insured institution subsidiary and on the communities in which such subsidiary
operates, as well as on the ability of such subsidiary to fulfill the objectives
of an insured institution under applicable federal statutes and regulations.
OTHER RESTRICTIONS ON THE ACQUISITION OF STOCK
Under the Home Owners' Loan Act and the OTS regulations relating to the
acquisition of control of savings associations, an individual or company, alone
or "acting in concert with others," that seeks to acquire more than 25% of the
Common Stock (or acquires more than 10% of the Common Stock and is subject to
certain control factors) would be considered to control the Company and TeleBank
and would be required to obtain prior approval of OTS. Any company that acquires
control (as broadly defined in OTS regulations) of the Company would become a
"savings and loan holding company" subject to supervision, regulation and
examination by the OTS.
LIMITATION ON LIABILITY AND INDEMNIFICATION
As permitted under the DGCL, the Certificate of Incorporation provides that
no director of the Company will be liable for monetary damages for any breach of
fiduciary duty as a director, except (i) for any breach of the director's duty
of loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or involving intentional misconduct or a knowing violation of law,
(iii) for approval of certain unlawful dividends or stock purchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. In appropriate circumstances, equitable remedies such
as an injunction or other forms of non-monetary relief would remain available
under Delaware Law. The Certificate of Incorporation also contains provisions
indemnifying the directors and officers of the Company to the fullest extend
permitted by the DGCL.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Fifth Third Bank,
Cincinnati, Ohio.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 9,814,448 shares of
Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option). Of these shares, the 2,800,000 shares sold in this
Offering and the 1,500,000 shares sold in the Company's initial public offering
will be freely tradable without restriction or further registration under the
Securities Act, except that any shares purchased by an "affiliate" of the
Company, as that term is defined in Rule 144 ("Rule 144") under the Securities
Act (an "Affiliate"), may generally be sold only in compliance with Rule 144 as
described below.
Approximately 5,514,440 of the outstanding shares of Common Stock are
"restricted securities" as that term is defined under Rule 144 (the "Restricted
Shares"). All of the Restricted Shares will be subject to lock-up agreements as
described below. Upon expiration of these agreements, all of the Restricted
Shares will be available for sale in the public market, subject to the
provisions of Rule 144 under the Securities Act. Upon completion of this
Offering, the holders of 2,915,636 of the Restricted Shares will be entitled to
registration rights. Sales of Restricted Shares in the public market, or the
availability of such shares for sale, could adversely affect the market price of
the Common Stock. See "-- Registration Rights."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
98,144 shares immediately after this Offering) or (ii) the average weekly
trading volume in the Common Stock on the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of such sale is filed with the
Securities and Exchange Commission. Such sales under Rule 144 are also subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. In addition, a
person who is not an Affiliate and has not been an Affiliate for at least three
months prior to the sale and who has beneficially owned Restricted Shares for at
least two years may resell such shares without regard to the requirements
described above. The Company is unable to estimate accurately the number of
Restricted Shares that ultimately will be sold under Rule 144 because the number
of shares will depend in part on the market price for the Common Stock, the
personal circumstances of the sellers and other factors. See "Risk
Factors -- Shares Eligible for Future Sale" and "Risk Factors -- Marketability
of Common Stock."
All directors and executive officers of the Company and certain of the
Company's stockholders, who upon the completion of this Offering will hold in
the aggregate 2,166,654 shares of Common Stock, options to purchase 644,794 and
warrants to purchase 215,350 shares of Common Stock, have agreed that they will
not, without the prior written consent of BancAmerica Robertson Stephens,
directly or indirectly, offer to sell, sell, contract to sell or otherwise
dispose of any shares of Common Stock beneficially owned by them for a period of
180 days after the date of this Prospectus, subject to certain exceptions.
BancAmerica Robertson Stephens may, in its sole discretion and at any time,
without notice, release all or any portion of the securities subject to lock-up
agreements.
Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Common Stock and could impair the Company's future ability to obtain capital
through an offering of equity securities.
REGISTRATION RIGHTS
The Company has granted certain demand and "piggyback" registration rights
with respect to the 2,915,636 shares of Common Stock underlying the Preferred
Stock and the 396,176 shares of Common Stock underlying the 1997 Warrants. Upon
the consummation of the Offering and subject to certain other conditions and
limitations, the registration rights grant the holders of the Preferred Stock
and the 1997 Warrants (the "Registration Rights Holders") the right to register
all or a portion of the Common Stock held by them or issuable upon the exercise
of 1997 Warrants or the conversion of the Preferred Stock, in connection with
any registration by the Company of shares of Common Stock. In addition each of
the Preferred Stock holders and the 1997 Warrant holders have the right to
require the Company to register its respective securities up to two
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times. The registration rights described herein are subject to certain notice
requirements, timing restrictions and volume limitations which may be imposed by
TeleBanc Financial's Board of Directors or the underwriters of an offering. The
Company is required to bear the expenses of all such registrations. The
Registration Rights Holders have expressly waived their respective registration
rights in connection with the Offering.
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UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, CIBC Oppenheimer and Legg Mason Wood Walker,
Incorporated (the "Representatives"), have severally agreed with the Company,
subject to the terms and conditions of the Underwriting Agreement, to purchase
the number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all such shares if
any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BancAmerica Robertson Stephens..............................
CIBC Oppenheimer............................................
Legg Mason Wood Walker, Incorporated........................
---------
Total.................................................. 2,800,000
---------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After the Offering, the offering price, concession
and reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Company as
set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 420,000
additional shares of Common Stock at the offering price per share set forth on
the cover page of this Prospectus. To the extent that the Underwriters exercise
the option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of Common Stock to be purchased by it shown in the above table represents
as a percentage of the total number of shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the shares offered hereby are being sold.
Immediately prior to the Offering, CIBC World Markets, an affiliate of CIBC
Oppenheimer, will beneficially own, through an indirect subsidiary, 589,840
shares of Common Stock upon the Preferred Stock Conversion held by such
subsidiary, 1997 Warrants to acquire 92,750 shares of Common Stock and
Contingent Warrants to acquire 96,250 shares of Common Stock.
The Underwriting Agreement contains covenants of indemnity among the
underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to the Offering, there has been only a limited public market for the
Common Stock. Consequently, the offering price for the Common Stock offered
hereby will be determined through negotiations among the Company and the
Representatives. Among the factors to be considered in such negotiations are the
prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant. See "Determination of Offering Price."
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining
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the market price of the Common Stock at a level above that which might otherwise
prevail in the open market. A "stabilizing bid" is a bid for or the purchase of
the Common Stock on behalf of the Underwriters for the purpose of fixing or
maintaining the price of the Common Stock. A "syndicate covering transaction" is
the bid for or the purchase of the Common Stock on behalf of the Underwriters to
reduce a short position incurred by the Underwriters in connection with the
Offering. A "penalty bid" is an arrangement permitting the Representatives to
reclaim the selling concession otherwise accruing to an Underwriter or syndicate
member in connection with the Offering if the Common Stock originally sold by
such Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shaw Pittman Potts & Trowbridge, Washington, D.C., a
partnership including professional corporations. Certain legal matters relating
to this Offering will be passed upon for the Underwriter by Arent Fox Kintner
Plotkin & Kahn, PLLC, Washington, D.C.
EXPERTS
The Consolidated Financial Statements included in this Prospectus and
Registration Statement to the extent and for the periods indicated in their
report have been audited by Arthur Andersen LLP, independent certified public
accountants, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to the Exchange Act are
incorporated by reference herein: Annual Report on Form 10-K for the year ended
December 31, 1997, and Amendment No. 1 to the Form 10-K on Form 10-K/A, as filed
on April 2, 1998, Amendment No. 2 to the Form 10-K on Form 10-K/A, as filed on
April 30, 1998, Amendment No. 3 to the Form 10-K on Form 10-K/A, as filed on May
14, 1998, and Amendment No. 4 to the Form 10-K on Form 10-K/A, as filed on May
15, 1998; Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, as
filed on May 15, 1998; and Current Reports on Form 8-K, as filed on January 29,
1998.
All other reports and other documents filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, since the end of the
fiscal year covered by the Annual Report referred to above and prior to the date
of this Prospectus, shall be deemed to be incorporated by reference in this
Prospectus and to be a part thereof.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents referred to above which have been incorporated
herein by reference, other than exhibits to such documents. Written requests for
such copies should be addressed to: TeleBanc Financial Corporation, 1111 North
Highland Street, Arlington, Virginia 22201, Attention: Investor Relations.
68
<PAGE> 71
AVAILABLE INFORMATION
The Company is subject to certain informational requirements of the
Exchange Act and, upon commencement of the Offering, in accordance therewith,
will file reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, such reports, proxy
statements and other information filed by TeleBanc may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60611 and 7 World Trade Center, Suite 1300, New York,
New York 10048. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site is
http://www.sec.gov.
The Company has filed with the Commission in Washington, D.C., a
registration statement on Form S-2 (together with all amendments thereto, the
"Registration Statement") under the Securities Act, with respect to the
securities covered by this Prospectus. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain items of which
are contained in or incorporated by reference as exhibits to the Registration
Statement as permitted by the Commission's rules and regulations. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits filed or
incorporated by reference as a part thereof. Statements contained herein
concerning the provisions of documents filed with, or incorporated by reference
in, the Registration Statement as exhibits are necessarily summaries of such
documents and each such statement is qualified in its entirety by reference to
the copy of the applicable document filed with the Commission. All of these
documents may be inspected without charge at the offices of the Commission as
described above, and copies may be obtained therefrom at prescribed rates.
69
<PAGE> 72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Statements of Financial Condition -- For the
Years Ended December 31, 1996 and 1997.................... F-3
Consolidated Statements of Operations -- For the Years Ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Changes in Stockholders'
Equity -- For the Years Ended December 31, 1995, 1996 and
1997...................................................... F-5
Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 73
The financial statements included herein have been adjusted to give effect to
the anticipated stock dividend discussed in Note 2 of the Notes to the
Consolidated Financial Statements. We expect to be in a position to render the
following audit report upon the effectiveness of such stock dividend assuming
from May 15, 1998 to the effective date of such events, no other events will
have occurred that would affect the accompanying financial statements or notes
thereto.
Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of TeleBanc
Financial Corporation (a Delaware Corporation) and Subsidiaries as of December
31, 1997 and 1996 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TeleBanc Financial
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years ended December
31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Vienna, VA
February 20, 1998
F-2
<PAGE> 74
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
-------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 3,259 $ 92,156
Trading securities.......................................... -- 21,110
Investment securities available-for-sale.................... 78,826 91,237
Mortgage-backed securities available-for-sale............... 184,743 319,203
Loans receivable held for sale.............................. 166,064 149,086
Loans receivable, net....................................... 185,757 391,618
Other assets................................................ 29,316 35,942
-------- ----------
Total assets........................................... $647,965 $1,100,352
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................................... $390,486 $ 522,221
Advances from the Federal Home Loan Bank of Atlanta......... 144,800 200,000
Securities sold under agreements to repurchase.............. 57,581 279,909
Subordinated debt, net...................................... 16,586 29,614
Other liabilities........................................... 13,854 13,212
-------- ----------
Total liabilities...................................... $623,307 $1,044,956
-------- ----------
Corporation--Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Corporation................ -- 9,572
Commitments and contingencies............................... -- --
Stockholders' equity:
4% Cumulative Preferred Stock, $0.01 par value, 500,000
shares authorized
Series A, 18,850 issued and outstanding................ -- 9,634
Series B, 4,050 issued and outstanding................. -- 2,070
Series C, 7,000 issued and outstanding................. -- 3,577
Common stock, $0.01 par value, 29,500,000 shares authorized;
4,099,000 and 4,458,322 issued and outstanding at December
31, 1996 and 1997 20 22
Additional paid-in capital.................................. 14,637 16,207
Retained earnings........................................... 7,905 11,576
Unrealized gain on securities available for sale, net of
tax....................................................... 2,096 2,738
Total stockholders' equity............................. 24,658 45,824
-------- ----------
Total liabilities and stockholders' equity............. $647,965 $1,100,352
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 75
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans.................................................. $17,726 $23,089 $34,729
Mortgage-backed and related securities................. 20,205 17,955 17,646
Investment securities.................................. 2,347 4,690 5,702
Trading securities..................................... -- -- 1,124
Other.................................................. 233 66 100
------- ------- -------
Total interest income............................. 40,511 45,800 59,301
Interest expense:
Deposits............................................... 17,033 21,357 25,958
Advances from the Federal Home Loan Bank of Atlanta.... 5,985 6,689 9,885
Repurchase agreements.................................. 6,839 4,569 6,941
Subordinated debt...................................... 2,089 2,200 3,279
------- ------- -------
Total interest expense............................ 31,946 34,815 46,063
------- ------- -------
Net interest income............................... 8,565 10,985 13,238
Provision for loan losses.............................. 1,722 919 921
------- ------- -------
Net interest income after provision for loan
losses.......................................... 6,843 10,066 12,317
------- ------- -------
Non-interest income:
Gain on sale of available for sale securities.......... 3,412 935 982
Gain on sale of loans.................................. 232 874 1,148
Gain on trading securities............................. -- -- 1,204
Fees, service charges, and other....................... 133 947 759
------- ------- -------
Total non-interest income......................... 3,777 2,756 4,093
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits................ 3,030 3,690 4,909
SAIF assessment................................... -- 1,671 --
Other............................................. 2,531 3,014 4,133
------- ------- -------
Total general and administrative expenses......... 5,561 8,375 9,042
Other non-interest expenses:
Net operating cost of real estate acquired through
foreclosure.......................................... 430 238 278
Amortization of goodwill and other intangibles......... 249 462 822
------- ------- -------
Total other non-interest expenses...................... 679 700 1,100
------- ------- -------
Total non-interest expenses............................ 6,240 9,075 10,142
------- ------- -------
Income before income tax expense and minority
interest........................................ 4,380 3,747 6,268
Income tax expense................................ 1,660 1,195 1,657
Minority interest in subsidiary................... -- -- 394
------- ------- -------
Net income........................................ 2,720 2,552 4,217
Preferred stock dividends......................... -- -- 546
------- ------- -------
Net income available to common stockholders....... $ 2,720 $ 2,552 $ 3,671
======= ======= =======
Earnings per share:
Basic.................................................. $ 0.66 $ 0.62 $ 0.84
Diluted................................................ $ 0.66 $ 0.58 $ 0.57
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 76
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
ADDITIONAL ON AVAILABLE-
PREFERRED COMMON PAID-IN RETAINED FOR-SALE
STOCK STOCK CAPITAL EARNINGS SECURITIES TOTAL
--------- ------ ---------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994..... $ -- $20 $14,637 $ 2,633 $ (262) $17,028
Net income........................ -- -- -- 2,720 -- 2,720
Unrealized gain on
available-for-sale securities,
net of tax effect............... -- -- -- -- 1,817 1,817
Balances at December 31, 1995..... -- 20 14,637 5,353 1,555 21,565
Net income........................ -- -- -- 2,552 -- 2,552
Unrealized gain on
available-for-sale securities,
net of tax effect............... -- -- -- -- 541 541
Balances at December 31, 1996..... -- 20 14,637 7,905 2,096 24,658
Net income........................ -- -- -- 4,217 -- 4,217
Common stock issued............... -- 2 1,570 -- -- 1,572
Issuance of 4% cumulative
preferred stock, Series A....... 9,634 -- -- -- -- 9,634
Issuance of 4% cumulative
preferred stock, Series B....... 2,070 -- -- -- -- 2,070
Issuance of 4% cumulative
preferred stock, Series C....... 3,577 -- -- -- -- 3,577
Dividends on 4% cumulative
preferred stock................. -- -- -- (546) -- (546)
Unrealized gain on available for
sale securities, net of tax
effect.......................... -- -- -- -- 642 642
------- --- ------- ------- ------ -------
Balances at December 31, 1997..... $15,281 $22 $16,207 $11,576 $2,738 $45,824
======= === ======= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 77
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 2,720 $ 2,552 $ 4,217
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in losses of subsidiaries........................ -- 274 1,129
Provision for loan losses............................... 1,722 919 921
Provision for losses on foreclosed real estate.......... 213 78 19
Other gains and losses, net............................. (153) (1,011) (399)
Proceeds from sales of loans held for sale.............. -- 27,865 60,145
Purchases of loans held for sale........................ -- (91,943) (72,804)
Purchases of trading assets............................. -- -- (100,630)
Proceeds from sale of trading assets.................... -- -- 77,902
Proceeds from maturities of and principal payments on
trading assets........................................ -- -- 3,088
Net realized gains on available-for-sale securities,
loans held for sale and trading....................... (3,412) (935) (3,926)
Increase in accrued interest receivable................. (4,954) (2,220) (1,492)
Increase in other assets................................ (80) (2,433) (2,831)
Interest credited to deposits........................... 17,033 21,361 25,958
Increase in accrued expenses and other liabilities...... 2,134 4,636 1,312
Depreciation and amortization........................... (2,153) (1,516) (1,038)
Deferred income taxes................................... -- (1,130) (1,189)
--------- --------- ---------
Net cash (used in) provided by operating activities......... 13,070 (43,503) (9,618)
--------- --------- ---------
Cash flows from investing activities:
Net increase in loans................................... (98,439) (90,717) (268,948)
Equity investments in subsidiaries...................... -- (2,359) (1,736)
Purchases of available-for-sale securities.............. (122,785) (356,882) (396,120)
Proceeds from sale of available-for-sale securities..... 71,084 220,293 144,718
Proceeds from maturities of and principal payments on
available-for-sale securities......................... 39,646 201,547 197,036
Net sales (purchases) of premises and equipment......... (537) (842) 110
Proceeds from sale of foreclosed real estate............ -- 1,156 1,563
--------- --------- ---------
Net cash used in investing activities....................... (111,031) (27,804) (323,377)
--------- --------- ---------
Cash flows from financing activities:
Net increase in non-interest bearing demand, savings and
NOW deposit accounts.................................. 77,056 62,625 105,777
Increase in advances from FHLB.......................... 59,000 273,500 322,000
Payments on advances from FHLB.......................... (49,500) (234,200) (266,800)
Net increase (decrease) in securities sold under
agreements to repurchase.............................. 14,292 (36,324) 222,328
Net increase in other borrowed funds.................... -- -- 13,028
Issuance of trust preferred stock, net.................. -- -- 9,572
Increase in common stock and additional paid in
capital............................................... -- -- 16,853
Interest paid to minority interest in subsidiary........ -- -- (542)
Dividends paid on common and preferred stock............ -- -- (324)
Net cash provided by financing activities................... 100,848 65,601 421,892
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 2,887 (5,706) 88,897
--------- --------- ---------
Cash and cash equivalents at beginning of period............ 6,078 8,965 3,259
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 8,965 $ 3,259 $ 92,156
========= ========= =========
Supplemental information:
Interest paid on deposits and borrowed funds................ $ 29,852 $ 32,660 $ 45,440
Income taxes paid........................................... 950 972 2,473
Gross unrealized gain (loss) on marketable securities
available-for-sale........................................ 2,926 795 873
Tax effect of gain (loss) on available-for-sale
securities................................................ 1,109 254 231
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 78
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
TeleBanc Financial Corporation ("TeleBanc" or the "Company") is a savings
and loan holding company organized under the laws of Delaware in 1994. The
primary business of the Company is the activities conducted by TeleBank (the
"Bank"), formerly known as Metropolitan Bank for Savings, F.S.B., TeleBanc
Capital Markets, Inc. ("TCM"), formerly known as Arbor Capital Partners, Inc.
("Arbor"), and TeleBanc Capital Trust I ("TCT"). The Bank is a federally
chartered savings bank, which provides deposit accounts insured by the Federal
Deposit Insurance Corporation ("FDIC") to customers nationwide. TCM is a
registered investment advisor, funds manager, and broker-dealer. TCT is a
business trust formed for the purpose of issuing capital securities and
investing the proceeds in junior subordinated debentures issued by the Company.
The Bank, through its wholly-owned subsidiary TeleBanc Servicing
Corporation ("TSC"), funded 50% of the capital commitment for two new entities,
AGT Mortgage Services, LLC ("AGT") and AGT PRA, LLC ("AGT PRA"). AGT services
performing loans and administers workouts for troubled or defaulted loans for a
fee. Management ceased operation of AGT on July 31, 1997. The primary business
of AGT PRA is its investment in Portfolio Recovery Associates, LLC ("PRA"). PRA
acquires and collects delinquent consumer debt obligations for its own
portfolio. The net equity investment in AGT PRA at December 31, 1997 is $2.1
million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TeleBank, TCM, TCT, and TSC, a wholly owned subsidiary of the Bank. All
significant intercompany transactions and balances are eliminated in
consolidation. The investment in AGT PRA is accounted for under the equity
method.
STOCK DIVIDEND
Immediately prior to the effectiveness of the proposed offering
comtemplated by this prospectus, the Company will effect a 100% stock dividend
payable on its outstanding Common Stock. The effect of the stock dividend has
been retroactively applied in the Consolidated Financial Statements for all
periods presented.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent assets and
liabilities, and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Material estimates for which a change
is reasonably possible in the near-term relate to the determination of the
allowance for loan losses, the fair value of investments and mortgage-backed
securities available-for-sale, loan receivables held for sale, trading
securities, and the valuation of real estate acquired in connection with
foreclosures and mortgage servicing rights.
In addition, the regulatory agencies which supervise the financial services
industry periodically review the Bank's allowance for losses on loans. This
review, which is an integral part of their examination process, may result in
additions to the allowance for loan losses based on judgments with regard to
available information provided at the time of their examinations.
F-7
<PAGE> 79
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are composed of interest-bearing deposits,
certificates of deposit, funds due from banks, and federal funds sold with
original maturities of three months or less.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company generally classifies its debt and marketable equity securities
in one of three categories: held-to-maturity, trading, or available-for-sale. In
December 1995, the Company reclassified the existing held-to-maturity investment
and mortgage-backed securities portfolios as available-for-sale.
Trading securities are bought and held principally for the purpose of
selling them in the near term. Securities purchased for trading are carried at
market value with the corresponding unrealized gains and losses being recognized
by credits or charges to income. The Company had $21.1 million classified as
trading securities at December 31, 1997. No securities were classified as
trading securities at December 31, 1996. For the period ending December 31,
1997, the Company recognized $564,000 in realized gains from the sale of trading
assets and $640,000 in unrealized appreciation of trading assets. All other
securities not included in held-to-maturity or trading are classified as
available-for-sale. Available-for-sale securities are recorded at fair value.
Unrealized gains and losses on available-for-sale securities, net of the related
tax effects, are reported as a separate component of stockholders' equity until
realized.
A decline in market value of any available-for-sale asset below its cost,
that is deemed other than temporary, is charged to earnings, resulting in the
establishment of a new cost basis for the asset. Transfers of securities into
the available-for-sale category are recorded at fair value at the date of the
transfer. Any unrealized gain or loss at the date of transfer is recognized as a
separate component of stockholders' equity, net of tax effect. Dividend and
interest income are recognized when earned. Realized gains and losses for
securities classified as available-for-sale and trading are included in earnings
and are derived using the specific identification method for determining the
cost of the security sold.
LOANS HELD FOR SALE
Mortgages acquired by the Company and intended for sale in the secondary
market are carried at lower of cost or estimated market value in the aggregate.
The market value of these mortgage loans is determined by obtaining market
quotes for loans with similar characteristics.
LOANS RECEIVABLE
Loans receivable consists of mortgages that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off and are
carried at amortized cost adjusted for charge-offs, the allowance for loan
losses, any deferred fees or costs on purchased or originated loans, and
unamortized premiums or discounts on purchased loans.
The loan portfolio is reviewed by the Company's management to set
provisions for estimated losses on loans which are charged to earnings in the
current period. In this review, particular attention is paid to delinquent loans
and loans in the process of foreclosure. The allowance and provision for loan
losses are based on several factors, including continuing examinations and
appraisals of the loan portfolio by management, examinations by supervisory
authorities, continuing reviews of problem loans and overall portfolio quality,
analytical reviews of loan loss experience in relation to outstanding loans, and
management's judgment with respect to economic conditions and its impact on the
loan portfolio.
F-8
<PAGE> 80
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NONPERFORMING ASSETS
Nonperforming assets consist of loans for which interest is no longer being
accrued, loans which have been restructured in order to increase the opportunity
to collect amounts due on the loan, real estate acquired through foreclosure and
real estate upon which deeds in lieu of foreclosure have been accepted. Interest
previously accrued but not collected on nonaccrual loans is reversed against
current income when a loan is placed on nonaccrual status. Accretion of deferred
fees is discontinued for nonaccrual loans. All loans past due ninety days, as
well as other loans considered uncollectible, are placed on non-accrual status.
Interest received on nonaccrual loans is recognized as interest income or
applied to principal when it is doubtful that full payment will be collected.
LOAN AND COMMITMENT FEES, DISCOUNTS AND PREMIUMS
Loan fees and certain direct loan origination costs are deferred and the
net fee or cost is recognized into interest income using the interest method
over the contractual life of the loans. Premiums and discounts on loans
receivable are amortized or accreted, respectively, into income using the
interest method over the remaining period to contractual maturity and adjusted
for anticipated prepayments. Premiums and discounts on loans held for sale are
recognized as part of the loss or gain upon sale and not amortized or accreted,
respectively.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE
Real estate properties acquired through foreclosure and held for sale are
recorded at fair value less estimated selling costs at acquisition. Fair value
is determined by appraisal or other appropriate method of valuation. Losses
estimated at the time of acquisition are charged to the allowance for loan
losses. Valuations are periodically performed by management and an allowance for
losses is established through a charge to income if the carrying value of a
property exceeds its estimated fair value less selling costs.
DEFERRED FINANCING COSTS
Deferred financing costs related to the issuance of the subordinated notes
have been capitalized and are being amortized using the interest method over the
life of the subordinated notes.
INCOME TAXES
Effective January 1, 1993, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
FINANCIAL INSTRUMENTS
Interest rate swaps and caps are used by the Company in the management of
its interest-rate risk. The Company is generally exposed to rising interest
rates because of the nature of the repricing of rate-sensitive assets as
compared with rate-sensitive liabilities. The objective of these financial
instruments is to match estimated repricing periods of rate-sensitive assets and
liabilities to reduce interest rate exposure. These instruments are used only to
hedge specific assets and liabilities and are not used for speculative purposes.
In order to be eligible for hedge accounting treatment, high correlation must be
probable at the inception of the hedge and must be maintained throughout the
hedge period. Once high correlation ceases, any gain or loss on the hedge, up to
the time high correlation ceased, should be recognized to the extent the results
of the hedging
F-9
<PAGE> 81
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
instrument were not offset by the effects of interest rate changes on the hedged
item. Upon the sale or disposition of the hedged item, the hedging instrument
should be marked-to-market with changes recorded in the income statement.
The net interest received or paid on these contracts is treated as an
adjustment to the interest expense related to the hedged obligations in the
period in which such amounts are due. Premiums and fees associated with interest
rate caps are amortized to interest expense on a straight-line basis over the
lives of the contracts.
OTHER ASSETS
Other assets include purchased loan servicing rights, premiums paid on
interest rate caps, and prepaid assets. The Bank services the loans underlying
these servicing rights. The cost of the loan servicing rights is amortized in
proportion to, and over the period of, the estimated net servicing income. For
the period ending December 31, 1997, amortization expense of loan servicing
rights was $547,000. Impairment of mortgage servicing rights is assessed based
on the fair value of those rights. Fair values are estimated using discounted
cash flows based on a current market interest rate. For purposes of measuring
impairment, the rights are stratified based on mortgage product types. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights exceed their fair value in aggregate. As of December 31, 1997,
the amortized cost and fair value of the loan servicing rights were $3.3 million
and $3.4 million, respectively. No valuation allowance was recognized at
December 31, 1997.
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS 125"), as amended by
Statement of Financial Accounting Standards No. 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125--An Amendment of FASB
Statement No. 125 ("SFAS 127"). The implementation of SFAS 125 did not have a
material impact on the company's final position.
COMMITMENTS AND CONTINGENT LIABILITIES
In managing the Company's interest-rate risk, the Company utilizes
financial derivatives in the normal course of business. These products consist
primarily of interest rate cap and swap agreements. Financial derivatives are
employed to assist in the management and/or reduction of interest rate risk for
the Company and can effectively alter the interest sensitivity of segments of
the balance sheet for specified periods of time.
The Company accounts for interest rate swap agreements and cap agreements
as hedges of debt issuances, deposit balances, and investment in loan portfolio
to which such agreements have been specifically designated. Cash remittances due
or received pursuant to these agreements are reported as adjustments to interest
expense on an accrual basis. Any premiums paid in conjunction with these
interest rate swap and interest rate cap agreements are amortized as additional
interest expense on a straight-line basis over the term of these agreements. Any
gain or loss upon early termination of these instruments would be deferred and
amortized as an adjustment to interest expense over the term of the applicable
interest rate agreement.
RECLASSIFICATIONS
Certain reclassifications of the 1995 and 1996 financial statements have
been made to conform to the 1997 presentation.
3. CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt
F-10
<PAGE> 82
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of December 31, 1997, that the Bank meets all capital
adequacy requirements to which it is subject. As of December 31, 1996 and 1997,
the OTS categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the table
below:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
---------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ -------- ------ -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Core Capital (to adjusted tangible
assets)........................ $31,726 5.08% >$24,999 >4.0% >$31,248 >5.0%
Tangible Capital (to tangible
assets)........................ $31,711 5.07% >$ 9,374 >1.5% N/A N/A
Tier I Capital (to risk weighted
assets)........................ $31,726 9.69% N/A N/A >$19,654 >6.0%
Total Capital (to risk weighted
assets)........................ $34,104 10.41% >$26,205 >8.0% >$32,756 >10.0%
As of December 31, 1997:
Core Capital (to adjusted tangible
assets)........................ $52,617 5.06% >$41,606 >4.0% >$52,008 >5.0%
Tangible Capital (to tangible
assets)........................ $52,608 5.06% >$15,602 >1.5% N/A N/A
Tier I Capital (to risk weighted
assets)........................ $52,617 11.25% N/A N/A >$28,057 >6.0%
Total Capital (to risk weighted
assets)........................ $55,701 11.91% >$37,409 >8.0% >$46,761 >10.0%
</TABLE>
On August 8, 1996, the OTS terminated the May 1993 Supervisory Agreement
with TeleBank subsequent to the completion of a full scope safety and soundness
examination of the Bank.
F-11
<PAGE> 83
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENT SECURITIES
The cost basis and estimated fair values of investment securities
available-for-sale at December 31, 1996 and 1997, by contractual maturity, are
shown below:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
--------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996:
Due within one year:
Repurchase agreement................... $ 1,730 $ -- $ -- $ 1,730
Margin account......................... 18 -- -- 18
Due within one to five years:
Corporate debt......................... 2,000 -- (10) 1,990
Agency notes........................... 988 1 -- 989
Municipal bonds........................ 565 3 -- 568
Certificate of deposit................. 499 -- -- 499
Due within five to ten years:
Corporate debt......................... 7,436 61 -- 7,497
Municipal bonds........................ 3,560 27 -- 3,587
Due after ten years:
Agency notes........................... 30,151 132 -- 30,283
Equities............................... 14,011 220 -- 14,231
Corporate debt......................... 13,089 994 -- 14,083
Municipal bonds........................ 3,200 151 -- 3,351
------- ------ ---- -------
$77,247 $1,589 $(10) $78,826
======= ====== ==== =======
1997:
Due within one year:
Agency notes........................... $ 539 $ -- $ -- $ 539
Other investments...................... 323 1 -- 324
Due within one to five years:
Municipal bonds........................ 565 12 -- 577
Other investments...................... 25,038 16 -- 25,054
Certificate of deposit................. 499 -- -- 499
Due within five to ten years:
Corporate debt......................... 7,433 242 -- 7,675
Municipal bonds........................ 3,562 130 -- 3,692
Other investments...................... 175 -- -- 175
Due after ten years:
Agency notes........................... 21,608 398 (40) 21,966
Equities............................... 15,038 436 (50) 15,424
Corporate debt......................... 11,103 797 -- 11,900
Municipal bonds........................ 3,200 212 -- 3,412
------- ------ ---- -------
$89,083 $2,244 $(90) $91,237
======= ====== ==== =======
</TABLE>
The proceeds from sale and gross realized gains and losses on investment
securities available-for-sale that were sold in 1995 were $24.1 million, $1.1
million, and $52,000, respectively. The proceeds from sale and gross realized
gains and losses on investment securities available-for-sale that were sold in
1996 were $25.1 million, $311,000, and $153,000, respectively. The proceeds from
sale and gross realized gains and losses
F-12
<PAGE> 84
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on investment securities available-for-sale that were sold in 1997 were $25.9
million, $423,000, and $34,000, respectively.
5. MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities represent participating interests in
pools of long-term first mortgage loans originated and serviced by the issuers
of the securities. The Company has also invested in collateralized mortgage
obligations ("CMOs"), which are securities issued by special purpose entities
generally collateralized by pools of mortgage-backed securities. The Company's
CMOs are senior tranches collateralized by federal agency securities or whole
loans. The fair value of mortgage-backed and related securities fluctuate
according to current interest rate conditions and prepayments. Fair value is
estimated using quoted market prices. For illiquid securities, market prices are
estimated by obtaining market price quotes on similar liquid securities and
adjusting the price to reflect differences between the two securities, such as
credit risk, liquidity, term, coupon, payment characteristics, and other
information. The amortized cost basis and estimated fair values of
mortgage-backed securities available-for-sale at December 31, 1996 and 1997, by
contractual maturity, are shown as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
--------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996:
Due within one to five years:
Private issuer......................... $ 4,172 $ -- $ (56) $ 4,116
Due within five to ten years:
Private issuer......................... 8,262 75 -- 8,337
Collateralized mortgage obligations.... 371 -- (3) 368
Due after ten years:
Private issuer......................... 132,791 1,367 -- 134,158
Collateralized mortgage obligations.... 24,896 461 -- 25,357
Agency certificates.................... 12,310 97 -- 12,407
-------- ------ ------- --------
$182,802 $2,000 $ (59) $184,743
======== ====== ======= ========
1997:
Due within one year:
Agencies............................... $ 939 $ -- $ -- $ 939
Due within one to five years:
Agencies............................... 627 2 (6) 623
Private issuer......................... 2,643 -- (22) 2,621
Due within five to ten years:
Private issuer......................... 5,982 39 -- 6,021
Due after ten years:
Agencies............................... 23,907 124 (27) 24,004
Private Issuer......................... 143,889 2,971 (1,443) 145,417
Collateralized mortgage obligations.... 139,663 536 (621) 139,578
-------- ------ ------- --------
$317,650 $3,672 $(2,119) $319,203
======== ====== ======= ========
</TABLE>
The Company pledged $61.4 million and $104.1 million of private issuer
mortgage-backed securities as collateral for repurchase agreements at December
31, 1996 and 1997, respectively. The proceeds from sale and realized gains and
losses on mortgage-backed securities available-for-sale that were sold in 1995
were $39.7 million, $1.6 million and $3,000.
F-13
<PAGE> 85
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The proceeds from sale and realized gains and losses on mortgage-backed
securities available-for-sale that were sold in 1996 were $185.2 million, $1.4
million and $707,000. The proceeds from sale and gross realized gains and losses
on mortgage-backed securities available-for-sale that were sold in 1997 were
$112.4 million, $845,000 and $253,000, respectively.
6. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans (principally conventional):
Secured by one-to-four family residences.............. $359,563 $547,734
Secured by commercial real estate..................... 4,017 3,009
Secured by mixed-use property......................... 1,180 856
Secured by five or more dwelling units................ 1,516 1,447
Secured by land....................................... 781 378
-------- --------
367,057 553,424
Less:
Net deferred loan origination fees.................... (42) (34)
Unamortized discounts, net............................ (13,750) (9,938)
-------- --------
Total first mortgage loans................................. 353,265 543,452
Other loans:
Home equity and second mortgage loans................. 1,208 541
Other................................................. 305 305
-------- --------
354,778 544,298
Less: allowance for loan losses............................ (2,957) (3,594)
-------- --------
Net loans receivable............................. $351,821 $540,704
======== ========
</TABLE>
The mortgage loans are located primarily in California, New York, and
Virginia according to the following percentages 15.1%, 13.3%, and 7.4%,
respectively. As of December 31, 1997, the mortgage loan portfolio consisted of
variable rate loans of $335.2 million, or 62%, and fixed rate loans of $205.5
million, or 38%. The weighted average maturity of mortgage loans secured by one
to four family residences is 266 months as of December 31, 1997.
The unpaid principal balance of mortgage loans owned by the Company but
serviced by other companies was $203.9 million and $301.5 million at December
31, 1996 and 1997, respectively.
Loans past due 90 days or more, and therefore on non-accrual status at
December 31, 1996 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans:
Secured by one-to-four family residences............... $ 8,979 $10,802
Secured by commercial real estate...................... 1,217 635
Home equity and second mortgage loans....................... 54 --
------- -------
Total............................................. $10,250 $11,437
======= =======
</TABLE>
F-14
<PAGE> 86
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The interest accrual balance for each loan that enters non-accrual is
reversed from income. If all nonperforming loans had been performing during
1995, 1996, and 1997, the Bank would have recorded $365,000, $789,000 and
$739,000, respectively, in additional interest income. There were no commitments
to lend additional funds to these borrowers as of December 31, 1996 and 1997.
Activity in the allowance for loan losses for the years ended December 31,
1995, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of the year.................... $ 989 $2,311 $2,957
Provision for loan losses......................... 1,722 919 921
Charge-offs, net.................................. (400) (273) (284)
------ ------ ------
Balance, end of year.............................. $2,311 $2,957 $3,594
====== ====== ======
</TABLE>
According to Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan, ("SFAS No. 114"), a loan is
considered impaired when, based upon current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The term "all amounts due" includes
both the contractual interest and principal payments of a loan as scheduled in
the loan agreement. The Company has determined that once a loan becomes 90 or
more days past due, collection of all amounts due is no longer probable and is
therefore considered impaired. The amount of impairment is measured based upon
the fair value of the underlying collateral and is reflected through the
creation of a valuation allowance.
F-15
<PAGE> 87
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below presents impaired loans as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
AMOUNT OF
TOTAL RECORDED
RECORDED INVESTMENT
INVESTMENT IN AMOUNT OF NET OF
IMPAIRED SPECIFIC SPECIFIC
DESCRIPTION OF LOANS LOANS RESERVES RESERVES
-------------------- ------------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
1996:
Impaired loans:
Commercial real estate.......................... $ 1,217 $ 318 $ 899
One-to-four family.............................. 9,033 1,492 7,541
------- ------ ------
Total...................................... $10,250 $1,810 $8,440
======= ====== ======
Restructured loans:
Commercial real estate.......................... $ 251 $ 8 $ 243
One-to-four family.............................. 184 -- 184
------- ------ ------
Total...................................... $ 435 $ 8 $ 427
======= ====== ======
1997:
Impaired loans:
Commercial real estate.......................... $ 635 $ 248 $ 387
One-to-four family.............................. 10,802 1,760 9,042
------- ------ ------
Total...................................... $11,437 $2,008 $9,429
======= ====== ======
Restructured loans:
Commercial real estate.......................... $ 248 $ -- $ 248
One-to-four family.............................. 177 -- 177
------- ------ ------
Total...................................... $ 425 $ -- $ 425
======= ====== ======
</TABLE>
The average recorded investment in impaired loans, with identified losses,
as of December 31, 1995, 1996 and 1997 was $2.0 million, $2.2 million and $2.3
million, respectively. The related amount of interest income the Company would
recognize as additional interest income for the years ended December 31, 1995,
1996 and 1997 was $365,000, $789,000, and $739,000, respectively. The Company's
charge-off policy for impaired loans is consistent with its charge-off policy
for other loans; impaired loans are charged-off when, in the opinion of
management, all principal and interest due on the impaired loan will not be
fully collected. Consistent with the Company's method for non-accrual loans,
interest received on impaired loans is recognized as interest income or applied
to principal when it is doubtful that full payment will be collected.
F-16
<PAGE> 88
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure at December 31, 1996 and December
31, 1997 was $1.2 million and $681,000, respectively. Activity in the allowance
for real estate losses for the years ended December 31, 1995, 1996, and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 92 $ 213 $ 65
Provision for real estate losses............................ 256 77 19
Charge-offs................................................. (135) (225) (84)
----- ----- ----
Balance, end of year........................................ $ 213 $ 65 $ --
===== ===== ====
</TABLE>
8. LOANS SERVICED FOR OTHERS
Mortgage loans serviced by the Bank for others are not included in the
accompanying consolidated statements of financial condition because the related
loans are not owned by the Company or any of its subsidiaries. The unpaid
principal balances of these loans at December 31, 1996 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans underlying pass-through securities:
Federal Home Loan Mortgage Corporation................. $ 2,843 $ 2,140
Federal National Mortgage Association.................. 11,548 28,417
------- -------
Subtotal............................................... $14,391 $30,557
Mortgage loan portfolio serviced for:
Other investors........................................ 31,465 27,125
------- -------
Total............................................. $45,856 $57,682
======= =======
</TABLE>
Custodial escrow balances held in connection with the foregoing loans
serviced were approximately $84,000 and $120,000 at December 31, 1996 and 1997,
respectively.
Included in other assets is purchased mortgage servicing rights of $2.8
million and $3.3 million as of December 31, 1996 and 1997, respectively.
9. DEPOSITS
The Bank initiates deposits directly with customers through contact on the
phone, the mail, and walk-in at its headquarters. On May 2, 1996, TeleBanc
entered into an agreement to assume certain deposit liabilities with First
Commonwealth Savings Bank FSB ("First Commonwealth"), First Commonwealth
Financial Corp., and John York, Jr. Pursuant to this agreement, TeleBanc assumed
certain brokered and telephone solicited deposits accounts of First Commonwealth
which had a current balance of approximately $53.1 million as of April 30, 1996.
In the deposit assumption, First Commonwealth paid TeleBanc the amount of the
F-17
<PAGE> 89
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deposit liabilities assumed, plus the amount of the deposit liabilities (less
certain renewals) multiplied by 0.25 percent. Deposits at December 31, 1996 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AT
DECEMBER 31, AMOUNT PERCENT
------------- ------------------- -------------
1996 1997 1996 1997 1996 1997
----- ----- -------- -------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts, non
interest-bearing.................... --% --% $ 309 $ 761 --% 0.2%
Money market.......................... 5.10 5.26 109,835 122,185 28.1 23.4
Passbook savings...................... 3.00 3.00 1,758 665 0.5 0.1
Certificates of deposit............... 6.28 6.24 278,584 398,610 71.4 76.3
---- ---- -------- -------- ----- -----
Total....................... $390,486 $522,221 100.0% 100.0%
======== ======== ===== =====
</TABLE>
Certificates of deposit and money market accounts, classified by rates as
of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNT 1996 1997
------ -------- --------
(IN THOUSANDS)
<S> <C> <C>
0- 1.99%................................................... $ 5,235 $ 5
2- 3.99%................................................... 148 --
4- 5.99%................................................... 210,481 231,048
6- 7.99%................................................... 170,056 289,046
8- 9.99%................................................... 1,709 696
10-11.99%................................................... 790 --
-------- --------
Total $388,419 $520,795
======== ========
</TABLE>
At December 31, 1997, scheduled maturities of certificates of deposit and
money market accounts are as follows:
<TABLE>
<CAPTION>
LESS THAN 1-2 2-3 3-4 4-5 5+
ONE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
--------- -------- ------- ------- ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
0- 1.99%............ $ 5 $ -- $ -- $ -- $ -- $ -- $ 5
2- 3.99%............ -- -- -- -- -- -- --
4- 5.99%............ 209,547 17,708 2,217 1,126 362 88 231,048
6- 7.99%............ 37,687 124,905 97,079 13,550 9,849 5,976 289,046
8- 9.99%............ 578 -- 82 -- 36 -- 696
10-11.99%............ -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------ --------
$247,817 $142,613 $99,378 $14,676 $10,247 $6,064 $520,795
======== ======== ======= ======= ======= ====== ========
</TABLE>
The aggregate amount of certificates of deposit with denominations greater
than or equal to $100,000 was $45.1 million and $47.5 million at December 31,
1996 and 1997, respectively.
F-18
<PAGE> 90
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense on deposits for the years ended December 31, 1995, 1996,
and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Money market............................................. $ 2,036 $ 4,740 $ 6,353
Passbook savings......................................... 78 59 27
Certificates of deposit.................................. 14,919 16,558 19,578
------- ------- -------
Total.......................................... $17,033 $21,357 $25,958
======= ======= =======
</TABLE>
Accrued interest payable on deposits at December 31, 1996 and 1997 was
$667,000 and $728,000, respectively.
10. ADVANCES FROM THE FHLB OF ATLANTA
Advances to the Bank from the FHLB of Atlanta at December 31, 1996 and 1997
were as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
1996 RATE 1997 RATE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1996.......................................... $ -- 5.52% $ -- --%
1997.......................................... 64,800 5.56 -- --
1998.......................................... 41,000 5.53 71,000 5.61
1999.......................................... 39,000 5.60 129,000 5.69
-------- ---- -------- ----
Total............................... $144,800 5.56% $200,000 5.66%
======== ==== ======== ====
</TABLE>
All advances, except for $2.0 million which matured in November of 1996,
are floating rate advances and adjust quarterly or semi-annually to the London
InterBank Offering Rate ("LIBOR") rate. In 1996 and 1997, the advances were
collateralized by a specific lien on mortgage loans in accordance with an
"Advances, Specific Collateral Pledge and Security Agreement" with the FHLB of
Atlanta, executed September 10, 1980. Under this agreement, the Bank is required
to maintain qualified collateral equal to 120 to 160 percent of the Bank's FHLB
advances, depending on the collateral type. As of December 31, 1996 and 1997,
the Company secured these advances with an assignment of specific mortgage loan
collateral from its loan and mortgage-backed security portfolio. These
one-to-four family whole first mortgage loans and securities pledged as
collateral totaled approximately $186.1 million and $259.9 million at December
31, 1996 and 1997, respectively.
The Company is required to be a member of the FHLB System and to maintain
an investment in the stock of the FHLB of Atlanta at least equal to the greater
of 1 percent of the unpaid principal balance of its residential mortgage loans
or 1 percent of 30 percent of its total assets or 1/20th of its outstanding
advances from the FHLB.
F-19
<PAGE> 91
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning borrowings under fixed and variable rate coupon
repurchase agreements is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Weighted average balance during the year.................... $117,431 $68,920
Weighted average interest rate during the year.............. 5.76% 5.77%
Maximum month-end balance during the year................... $279,909 $97,416
Balance at year-end......................................... $279,909 $57,581
Private issuer mortgage-backed securities underlying the
agreements as of the end of the year:
Carrying value, including accrued interest............. $295,556 $61,418
Estimated market value................................. $295,500 $61,426
</TABLE>
The securities sold under the repurchase agreements at December 31, 1997
are due in less than one year. The Company enters into sales of securities under
agreements to repurchase the same securities. Repurchase agreements are
collateralized by fixed and variable rate mortgage-backed securities or
investment grade securities. Repurchase agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a liability
in the balance sheet. The dollar amount of securities underlying the agreement
remains in the asset accounts. The securities underlying the agreements are
physical and book entry securities and the brokers retain possession of the
securities collateralizing the repurchase agreements. If the counterparty in a
repurchase agreement was to fail, the Company may incur an accounting loss for
the excess collateral posted with the counterparty. As of December 31, 1997,
Lehman Brothers Inc. represents the only counterparty with which the Company's
amount at risk exceeded 10% of the Company's stockholders' equity. The amount of
risk at December 31, 1997 with Lehman Brothers Inc. was $5.1 million with a
weighted average maturity of 47 days.
12. SUBORDINATED DEBT
In May and June 1994, the Company issued 15,000 units of subordinated debt
at a price of $15.0 million and 2,250 units at a price of $2.3 million,
respectively. The units each consist of $1,000 of 11.5% subordinated notes due
in 2004 and 40 detachable warrants to purchase one share each of TeleBanc common
stock. The notes may not be redeemed prior to May 1, 1999. The notes are
redeemable at the option of the Company after May 1, 1999, at an initial
redemption price of 105.75% of the principal amount plus accrued interest with
the redemption price declining to 104.60%, 103.45%, 102.30%, and 101.15%
annually each year thereafter. Interest is payable semi-annually on May 1 and
November 1, commencing November 1, 1994. The indenture, among other things,
restricts the ability of the Company under certain circumstances to incur
additional indebtedness, limits cash dividends and other capital distributions
by the Company, requires the maintenance of a reserve equal to 100% of the
Company's annual interest expense on all indebtedness, restricts disposition of
the Bank or its assets, and limits transactions with affiliates. The annual
interest expense to service the subordinated debt is $2.0 million.
The total value of the 690,000 warrants was $948,750 which resulted in an
original issue discount on the subordinated debt in the amount of $899,289. The
original issue discount is amortized on a level yield basis over the life of the
debt. The warrants became transferable on November 27, 1994 and are exercisable
on or after May 27, 1995. The exercise price of each warrant is $3.828.
On February 28, 1997, the Company sold $29.9 million of units in the form
of 4% convertible preferred stock and 9.5% senior subordinated notes and
warrants to investment partnerships managed by Conning & Co., CIBC Wood Gundy
Argosy Merchant Fund 2, LLC, General American Life Insurance
F-20
<PAGE> 92
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, The Progressive Corporation, and The Northwestern Mutual Life Insurance
Company. Upon the sale of the units, representatives from the Conning
partnerships and the CIBC Merchant Fund were appointed to the Company's Board.
The units consist of $13.7 million in 9.5% senior subordinated notes with
396,176 detachable warrants, $16.2 million in 4.0% convertible preferred stock,
and rights to 411,126 contingent warrants. The senior subordinated notes are due
on March 31, 2004 and stipulate increases over time in interest rates subsequent
to March 31, 2002 from 9.5% up to 15.25%. The warrants are exercisable at $4.75
with an expiration date of February 28, 2005. The preferred stock consists of
Series A Voting Convertible Preferred Stock, Series B Nonvoting Convertible
Preferred Stock, and Series C Nonvoting Convertible Preferred Stock and is
convertible to 2,399,486 shares of common stock. Series A and Series B shares
may be converted at any time into fully-paid and non-assessable shares of Voting
Common Stock. Series C shares may be converted at any time to Series A or Series
B shares or at any time into fully-paid and non-assessable nonvoting common
stock. The aforementioned preferred stock has no liquidation preferences. The
contingent warrants may be exercised upon a change of control or at any time
after February 19, 2002 ("Exercise Event"). If the Company's annual internal
rate of return is less than 25% at the time of an Exercise Event, unit holders
may exercise the contingent warrants for $0.01 until an internal rate of return
of 25% is reached. The annual interest expense to service the senior
subordinated notes is $1.3 million and the annual dividend requirement on the
preferred stock is $648,000.
In June 1997, the Company formed TeleBanc Capital Trust I, which in turn
sold, at par, 10,000 shares of trust preferred securities, Series A, liquidation
amount of $1,000, for a total of $10,000,000 in a private placement. TeleBanc
Capital Trust I is a business trust formed for the purpose of issuing capital
securities and investing the proceeds in junior subordinated debentures issued
by the Company. The trust preferred securities mature in 2027 and have an annual
dividend rate of 11.0%, or $1.1 million, payable semi-annually, beginning in
December 1997. The net proceeds will be used, for general corporate purposes,
including to fund Bank operations and the creation and expansion of its
financial service and product operations.
13. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"),
effective December 15, 1997. This statement specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock.
Basic earnings per common share, as required by SFAS 128, is computed by
dividing adjusted net income by the total of the weighted average number of
common shares outstanding during the respective periods. Diluted earnings per
common share for the years ended December 31, 1995, 1996, and 1997 were
determined on the assumptions that the dilutive options and warrants were
exercised upon issuance. The options and warrants are deemed to be dilutive if
(a) the average market price of the related common stock for a period exceeds
the exercise price or (b) the security to be tendered is selling at a price
below that at which it may be tendered under the option or warrant agreement and
the resulting discount is sufficient to establish an effective exercise price
below the market price of the common stock obtainable upon exercise. The
Company's year to date weighted average number of common shares outstanding was
4,099,000 at December 31, 1995 and 1996 and 4,382,910 at December 31, 1997. For
diluted earnings per share computation, weighted average shares outstanding also
include potentially dilutive securities.
F-21
<PAGE> 93
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EPS CALCULATION
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
---------- --------- ---------
FOR THE YEAR ENDED DECEMBER 31,
1995
----------------------------------
<S> <C> <C> <C>
Basic earnings per share
Net income.................................................. $2,719,875 4,099,000 $0.66
=====
Options issued to management................................ -- 5,388
---------- ---------
Diluted earnings per share.................................. $2,719,875 4,104,388 $0.66
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Net income.................................................. $2,552,044 4,099,000 $0.62
=====
Options issued to management................................ -- 182,062
Warrants.................................................... -- 125,088
---------- ---------
Diluted earnings per share.................................. $2,552,044 4,406,150 $0.58
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------
<S> <C> <C> <C>
Net income.................................................. $4,216,826
Less: preferred stock dividends............................. (546,182)
----------
Basic earnings per share
Income available to common shareholders..................... $3,670,644 4,382,910 $0.84
=====
Options issued to management................................ -- 448,290
Warrants.................................................... -- 500,820
Convertible preferred stock................................. 546,182 2,006,236
---------- ---------
Diluted earnings per share.................................. $4,216,826 7,338,256 $0.57
========== ========= =====
</TABLE>
14. INCOME TAXES
Income tax expense for the years ended December 31, 1995, 1996, and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current: Federal........................................... $2,038 $1,194 $1,881
State............................................. 181 225 221
------ ------ ------
2,219 1,419 2,102
Deferred: Federal........................................... (474) (78) (398)
State............................................. (85) (146) (47)
------ ------ ------
(559) (224) (445)
Total: Federal........................................... 1,564 1,116 1,483
State............................................. 96 79 174
------ ------ ------
$1,660 $1,195 $1,657
====== ====== ======
</TABLE>
F-22
<PAGE> 94
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 1995, 1996, and 1997
is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate........................ 34.0% 34.0% 34.0%
State taxes, net of federal benefit......................... 4.2 4.2 4.2
Municipal bond interest, net of disallowed interest
expense................................................... (7.0) (3.6) (5.8)
Other....................................................... 6.7 (2.7) (6.0)
---- ---- ----
37.9% 31.9% 26.4%
==== ==== ====
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of income and expense for tax versus financial reporting purposes. The sources
of these temporary differences and the related tax effects for the years ended
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Acquired Loan Servicing Rights......................... $ (12) $ --
Purchase Accounting Premium............................ (40) (75)
Depreciation........................................... (17) (44)
Tax Reserve in Excess of Base Year..................... (93) (134)
Tax Effect of Securities Available-for-sale Adjustment
to Fair Value (notes 4 and 5)......................... (1,030) (722)
FHLB Stock Dividends................................... (168) (129)
Other.................................................. (52) (89)
------- -------
Total............................................. (1,412) (1,193)
Deferred Tax Assets:
General Reserves & Real Estate Owned Losses............ 819 1,293
Other.................................................. 20 80
------- -------
Total............................................. 839 1,373
------- -------
Net Deferred Tax Asset (Liability).......................... $ (573) $ 180
======= =======
</TABLE>
The Company has a tax bad debt base year reserve of $264,000 for which
income taxes have not been provided. Certain distributions or transactions may
cause the Bank to recapture its tax bad debt base year reserve, resulting in
taxes of $100,000. In addition, the Bank has entered into a tax sharing
agreement with TeleBanc under which it is allocated its share of income tax
expense or benefit based on its portion of consolidated income or loss.
15. FINANCIAL INSTRUMENTS
The Company is party to a variety of interest rate caps and swaps to manage
interest rate exposure. In general, the Company enters into agreements to assume
fixed-rate interest payments in exchange for variable market-indexed interest
payments. The effect of these agreements is to lengthen short-term variable
liabilities into longer term fixed-rate liabilities or to shorten long-term
fixed rate assets into short-term variable rate assets. The net costs of these
agreements are charged to interest expense or interest income, depending on
whether the agreement is designated to hedge a liability or an asset.
F-23
<PAGE> 95
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate exchange agreements for the years ended December 31, 1996 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Weighted average fixed rate payments........................ 5.97% 6.15%
Weighted average original term.............................. 5.0 yrs 4.6 yrs
Weighted average variable rate obligation................... 5.62% 5.81%
Notional amount............................................. $130,000 $205,000
</TABLE>
The Company enters into interest rate cap agreements to hedge outstanding
FHLB advances and repurchase agreements. Under the terms of the interest rate
cap agreements, the Company generally would receive an amount equal to the
difference between 3 month LIBOR or 6 month LIBOR and the cap's strike rate,
multiplied by the notional amount. The interest rate cap agreements are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
EFFECTIVE NOTIONAL MATURITY
CAP STRIKE RATE DATE BALANCE DATE
--------------- ------------- -------- -------------
<S> <C> <C> <C>
4%....................................... July 1992 $10,000 July 1999
6%....................................... October 1996 $20,000 October 1999
7%....................................... January 1997 $10,000 January 2002
7%....................................... January 1995 $10,000 July 1998
7.5%....................................... July 1997 $25,000 July 1999
8%....................................... July 1997 $25,000 July 2000
8%....................................... June 1997 $25,000 June 2000
9%....................................... December 1994 $14,000 December 1998
10%....................................... April 1995 $10,000 January 2002
</TABLE>
The counterparties to the interest rate cap agreements are Goldman Sachs,
Lehman Brothers, Merrill Lynch, NationsBank, Nomura, Salomon Brothers, and UBS.
As of December 31, 1997, the associated credit risk with the aforementioned
counterparties are $332,000, $104,000, $117,000, $66,000, $30,000, $132,000, and
$605,000, respectively. The credit risk is attributable to the unamortized cap
premium and any amounts due from the counterparty as of December 31,1997. The
total amortization expense for premiums on interest rate caps was $213,000,
$638,000, and $777,000 for the years ended December 31, 1995, 1996, and 1997,
respectively.
16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The fair value information for financial instruments, which is provided
below, is based on the requirements of Statement of Financial Accounting
Standards No. 107, Disclosure About Fair Value of Financial Instruments ("SFAS
No. 107") and does not represent the aggregate net fair value of the Bank. Much
of the information used to determine fair value is subjective and judgmental in
nature, therefore, fair value estimates, especially for less marketable
securities, may vary. In addition, the amounts actually realized or paid upon
settlement or maturity could be significantly different. The following methods
and assumptions were used to estimate the fair value of each class of financial
instrument for which it is reasonable to estimate that value:
CASH AND INTEREST-BEARING DEPOSITS -- Fair value is estimated to be
carrying value.
FEDERAL FUNDS SOLD -- Fair value is estimated to be carrying value.
SECURITIES PURCHASED UNDER AGREEMENT TO RESELL -- Fair value is estimated
to be carrying value.
F-24
<PAGE> 96
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT SECURITIES -- Fair value is estimated by using quoted market
prices for most securities. For illiquid securities, market prices are estimated
by obtaining market price quotes on similar liquid securities and adjusting the
price to reflect differences between the two securities, such as credit risk,
liquidity, term coupon, payment characteristics, and other information.
MORTGAGE-BACKED AND RELATED SECURITIES -- Fair value is estimated using
quoted market prices. For illiquid securities, market prices are estimated by
obtaining market price quotes on similar liquid securities and adjusting the
price to reflect differences between the two securities, such as credit risk,
liquidity, term coupon, payment characteristics, and other information.
LOANS RECEIVABLE -- For certain residential mortgage loans, fair value is
estimated using quoted market prices for similar types of products. The fair
value of other certain types of loans is estimated using quoted market prices
for securities backed by similar loans.
The fair value for loans which could not be reasonably established using
the previous two methods was estimated by discounting future cash flows using
current rates for similar loans.
Management adjusts the discount rate to reflect the individual
characteristics of the loan, such as credit risk, coupon, term, payment
characteristics, and the liquidity of the secondary market for these types of
loans.
DEPOSITS -- For passbook savings, checking and money market accounts, fair
value is estimated at carrying value. For fixed maturity certificates of
deposit, fair value is estimated by discounting future cash flows at the
currently offered rates for deposits of similar remaining maturities.
ADVANCES FROM THE FHLB OF ATLANTA -- For adjustable rate advances, fair
value is estimated at carrying value. For fixed rate advances, fair value is
estimated by discounting future cash flows at the currently offered rates for
fixed-rate advances of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE -- Fair value is estimated
using carrying value. The securities are repriced on a semiannual basis.
SUBORDINATED DEBT -- For subordinated debt, fair value is estimated using
quoted market prices.
OFF-BALANCE SHEET INSTRUMENTS -- The fair value of interest rate exchange
agreements is the net cost to the Company to terminate the agreement as
determined from market quotes.
F-25
<PAGE> 97
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of financial instruments as of December 31, 1996 and 1997 is
as follows:
<TABLE>
<CAPTION>
1996 1996 1997 1997
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents...................... $ 3,259 $ 3,259 $ 92,156 $ 92,156
Investment securities available-for-sale....... 78,826 78,826 91,237 91,237
Mortgage-backed securities
available-for-sale........................... 184,743 184,743 319,203 319,203
Loans receivable............................... 351,821 365,401 540,704 562,270
Trading........................................ -- -- 21,110 21,110
Liabilities:
Deposits....................................... $390,486 $393,820 $522,221 $524,022
Advances from the FHLB Atlanta................. 144,800 144,800 200,000 200,000
Securities sold under agreements to
repurchase................................... 57,581 57,581 279,909 279,909
Subordinated debt, net......................... 16,586 16,625 29,614 30,953
Trust preferred................................ -- -- 9,572 10,000
Off-balance sheet instruments.................. -- 1,684 -- (1,342)
Commitments to purchase loans.................. -- -- -- --
</TABLE>
17. DISTRIBUTIONS
The Bank is subject to certain restrictions on the amount of dividends it
may declare without prior regulatory approval. At December 31, 1997,
approximately $10.6 million of retained earnings were available for dividend
declaration.
18. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan ("ESOP"). All
full-time employees of the Company who meet limited qualifications participate
in the ESOP. Under the ESOP, the Company contributes cash to a separate trust
fund maintained exclusively for the benefit of those employees who have become
participants. Participants will have shares of TeleBanc common stock, valued at
market value, allocated to their personal plan accounts based on a uniform
percentage of wages. At December 31, 1996 and 1997, the Company carried a
$305,000 note receivable from the ESOP which was collateralized by the Company's
common stock. The ESOP owned 135,200 shares of the Company's stock with
approximately 64,000 and 78,000 shares vested at December 31, 1996 and 1997,
respectively. The Company's contribution to the ESOP, which is reflected in
compensation expense, was $210,000, $224,000 and $247,000 for the years ended
December 31, 1995, 1996, and 1997, respectively.
19. STOCK BASED COMPENSATION
In 1996, officers and employees were issued 161,000 options to purchase
161,000 shares of TeleBanc common stock at prices ranging from $3.875 to
$4.4375. In 1997, the Company authorized and issued 698,402 options to
directors, officers and employees to purchase 698,402 shares of TeleBanc common
stock at prices ranging from $1.33 to $6.75. As of December 31, 1996 and 1997,
360,876 and 598,248 of the shares, respectively, were vested at exercise prices
ranging from $1.33 to $6.25. The maximum term for the
F-26
<PAGE> 98
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding options is 10 years. As of December 31, 1997, the total number of
authorized options is 1,802,862. The options' exercise price was the market
value of the stock at the date of issuance.
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OPTIONS (000'S) PRICE (000'S) PRICE (000'S) PRICE
------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................. 484 $3.32 542 $3.26 704 $ 3.45
Granted.......................................... 64 2.75 162 4.09 698 6.26
Exercised........................................ -- -- -- -- 34 3.26
Forfeited........................................ 6 3.07 -- -- 38 5.70
Outstanding at end of year....................... 542 3.26 704 3.45 1,330 4.86
Options exercisable at year-end.................. 220 3.28 360 3.35 598 4.03
Weighted avg. fair value of options granted...... 0.91 1.31 1.75
</TABLE>
The following table summarizes information about fixed options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING (000'S)
----------------------------------------------- OPTIONS EXERCISABLE (000'S)
WEIGHTED AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Less than $2.50........ 48 9.2 $1.33 10 $1.33
$2.50 - $3.74.......... 510 6.5 $3.275 404 $3.285
$3.75 - $4.99.......... 148 8.3 $4.105 60 $4.105
$5.00 - $6.24.......... -- -- -- -- --
$6.25 - $7.49.......... 624 9.2 $6.615 124 $6.615
----- ---
Less than
$2.50 - $7.49........ 1,330 8.0 $4.86 498 $4.03
===== ===
</TABLE>
Because the method of accounting required by SFAS No. 123 has not been
applied to options granted prior to January 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The fair value of each option grant is estimated on the date of grant
using the Roll Geske option pricing model with the following weighted average
assumptions for grants; risk-free interest rates of 6.00 percent, 5.25 percent,
and 5.08 percent for 1995, 1996, and 1997, respectively; expected life of 10
years for all options granted in 1995, 1996, and 1997; expected volatility of 16
percent, 23 percent, and 25 percent for 1995, 1996, and 1997, respectively.
The Company accounts for this plan under APB No. 25, under which no
compensation cost has been recognized. Had compensation cost for the plan been
determined consistent with SFAS No. 123, the
F-27
<PAGE> 99
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's net income and net income per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
12/31/95 12/31/96 12/31/97
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported.................................... $2,720 $2,552 $3,671
Pro forma...................................... $2,684 $2,409 $2,629
Basic earnings per share:
As reported.................................... $ .66 $ .62 $ .84
Pro forma...................................... $ .66 $ .59 $ .60
Diluted earnings per share:
As reported.................................... $ .66 $ .58 $ .57
Pro forma...................................... $ .66 $ .55 $ .43
</TABLE>
20. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments of the
Company are as follows:
At December 31, 1997, the Company was obligated under an operating lease
for office space with an original term of ten years. Net rent expense under
operating leases was approximately $127,000, $142,000, and $238,000 for the
years ended December 31, 1995, 1996, and 1997, respectively.
The projected minimum rental payments under the terms of the lease are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1998..................................................... $ 190,000
1999..................................................... 165,000
2000..................................................... 166,000
2001..................................................... 167,000
2002..................................................... 168,000
2003 and thereafter...................................... 267,000
----------
$1,123,000
==========
</TABLE>
As of December 31, 1997, the Company had commitments to purchase $24.0
million of mortgage loans.
The Company self-insures for a portion of health insurance expenses paid by
the Company as a benefit to its employees. At December 31, 1996 and 1997, there
was no reserve needed for incurred but not reported claims under this insurance
arrangement.
21. SUBSEQUENT EVENTS
In the first quarter of 1998, TeleBanc signed a definitive merger agreement
(the "DFC Acquisition") to acquire Direct Financial Corporation ("DFC"). DFC is
the parent holding company of Premium Bank, a federal savings bank headquartered
in New Jersey. At December 31, 1997, DFC reported total assets of $326.1
million, loans receivable, net of $187.2 million, total deposits of $273.9
million and total stockholders' equity of $12.3 million. TeleBanc will pay $12
for each share of Direct Financial common stock or common stock equivalent. The
transaction is valued at approximately $26.4 million. The DFC Acquisition is
expected to be consummated in the summer of 1998, subject to regulatory
approvals.
F-28
<PAGE> 100
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also in January 1998, TeleBanc announced that it had signed a definitive
acquisition agreement whereby MET Holdings will sell substantially all of its
assets, including approximately 2,866,162 shares of TeleBanc Common Stock owned
by MET Holdings, and assign substantially all of its liabilities, to TeleBanc.
Immediately following consummation of the acquisition, MET Holdings will
dissolve and distribute its remaining assets and liabilities to its
stockholders, assuming such dissolution is approved by the requisite number of
stockholders of MET Holdings and TeleBanc.
22. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENTS OF FINANCIAL CONDITION
Assets:
Cash................................................... $ 159 $ 5,401
Investment securities available-for-sale............... 4,132 4,186
Mortgage-backed securities available-for-sale.......... 14,086 26,219
Loans receivable, net.................................. 305 566
Loan receivable held for sale.......................... -- 6,367
Trading................................................ -- 14,011
Equity in net assets of subsidiary..................... 34,130 58,976
Deferred charges....................................... 940 1,460
Other assets........................................... 1,099 4,806
------- --------
Total assets...................................... $54,851 $121,992
======= ========
Liabilities and Stockholders' Equity
Liabilities:
Subordinated debt...................................... $16,586 $ 39,614
Securities sold under agreements to repurchase......... 12,831 33,555
Accrued interest payable............................... 357 1,037
Taxes payable and other liabilities.................... 419 1,962
------- --------
Total liabilities................................. $30,193 $ 76,168
------- --------
Stockholders' Equity
Preferred Stock........................................ $ -- $ 15,281
Common Stock........................................... 20 22
Additional Paid in Capital............................. 14,637 16,207
Retained earnings...................................... 7,905 11,576
Unrealized gain/loss on securities
available-for-sale.................................... 2,096 2,738
Total stockholders' equity........................ 24,658 45,824
------- --------
Total liabilities and stockholders' equity........ $54,851 $121,992
======= ========
</TABLE>
F-29
<PAGE> 101
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Interest income............................................. $ 429 $ 531 $ 2,683
Interest expense............................................ 2,111 2,163 4,352
Net interest loss........................................... (1,682) (1,632) (1,669)
Non interest income......................................... 92 133 13
Total general and administrative expenses......... 1,046 1,393 1,288
Non interest expenses....................................... 126 127 195
Net loss before equity in net income of subsidiary and
income taxes.............................................. (2,762) (3,019) (3,139)
Equity in net income of subsidiary.......................... 4,434 6,716 5,668
Income taxes................................................ (1,048) 1,145 (1,688)
Preferred stock dividend.................................... -- -- 546
------- ------- -------
Net income.................................................. $ 2,720 $ 2,552 $ 3,671
======= ======= =======
</TABLE>
F-30
<PAGE> 102
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income............................................. $ 2,720 $ 2,552 $ 4,217
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries....... (4,434) (4,426) (5,668)
Purchases of loans held for sale....................... -- -- (6,367)
Net (increase) in trading securities................... -- -- (14,011)
(Increase) decrease in other assets.................... 38 (686) (4,227)
Increase in accrued expenses and other liabilities..... 122 267 2,223
-------- --------- --------
Net cash provided by operating activities................... $ (1,554) $ (2,293) $(23,833)
-------- --------- --------
Cash flows from investing activities:
Net (increase) decrease in loan to Employee Stock
Ownership Plan....................................... $ 60 $ (65) $ --
Net increase in loans.................................. -- -- (261)
Net (increase) decrease in equity investments.......... 2,089 2,074 (19,178)
Purchases of available-for-sale securities............. (20,771) (100,574) (92,862)
Proceeds from sale of available-for-sale securities.... 5,170 11,103 80,159
Proceeds from maturities of and principal payment on
available-for-sale securities........................ 14,619 76,910 1,158
Net sales (purchases) of premises and equipment........ (21) (37) --
-------- --------- --------
Net cash (used in) provided by investing activities......... $ 1,146 $ (10,589) $(30,984)
-------- --------- --------
Cash flows from financing activities:
Net increase in securities sold under agreements to
repurchase........................................... $ -- $ 12,831 $ 20,724
Increase in subordinated debt.......................... -- -- 23,028
Increase in common stock and additional paid in
capital.............................................. -- -- 16,853
Dividends paid on common and preferred stock........... -- -- (546)
-------- --------- --------
Net cash provided by financing activities................... -- 12,831 60,059
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ (408) (51) 5,242
-------- --------- --------
Cash and cash equivalents at beginning of period............ 618 210 159
-------- --------- --------
Cash and cash equivalents at end of period.................. $ 210 $ 159 $ 5,401
======== ========= ========
</TABLE>
TeleBanc Financial Corporation commenced activities on January 27, 1994,
the effective date of its formation as a holding company of the Bank. The Bank
paid dividends of $2.2 million and $992,000 to TeleBanc for subordinated
interest expense payments for the years ended December 31, 1996 and 1997,
respectively.
F-31
<PAGE> 103
TELEBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Condensed quarterly financial data for the years ended December 31, 1997
and 1996 is shown as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- --------- ---------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income......................................... $11,131 $11,364 $11,871 $11,433
Interest expense........................................ 8,357 8,449 9,034 8,975
------- ------- ------- -------
Net interest income................................ 2,774 2,915 2,837 2,458
Provision for loan and lease losses..................... 419 200 125 175
Non-interest income..................................... 605 291 540 1,320
General and administrative expenses..................... 1,679 1,749 3,287 1,660
Other non-interest operating expenses................... 300 81 247 71
------- ------- ------- -------
Income before income taxes......................... 981 1,176 (282) 1,872
Income tax expense...................................... 332 417 (220) 667
------- ------- ------- -------
Net income......................................... $ 649 $ 759 $ (62) $ 1,205
======= ======= ======= =======
Basic earnings per share................................ $ 0.16 $ 0.19 $ (0.02) $ 0.30
Diluted earnings per share.............................. $ 0.16 $ 0.18 $ (0.02) $ 0.26
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
--------- --------- ---------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income......................................... $12,837 $15,275 $14,821 $16,368
Interest expense........................................ 9,878 11,865 11,548 12,772
------- ------- ------- -------
Net interest income................................ 2,959 3,410 3,273 3,596
Provision for loan and lease losses..................... 243 308 120 250
Non-interest income..................................... 607 1,244 1,084 1,158
General and administrative expenses..................... 1,897 2,251 2,078 2,816
Other non-interest operating expenses................... 208 202 260 430
------- ------- ------- -------
Income before income taxes and minority interest... 1,218 1,893 1,899 1,258
Income tax expense...................................... 355 618 709 (25)
Minority interest in subsidiary......................... -- 67 285 42
Net income.............................................. 863 1,208 905 1,241
Preferred stock dividends............................... 60 162 162 162
------- ------- ------- -------
Net income after preferred stock dividends......... $ 803 $ 1,046 $ 743 $ 1,079
======= ======= ======= =======
Basic earnings per share................................ $ 0.19 $ 0.24 $ 0.17 $ 0.24
Diluted earnings per share.............................. $ 0.15 $ 0.15 $ 0.11 $ 0.15
</TABLE>
F-32
<PAGE> 104
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Financial Condition -- For the
Three Months Ended March 31, 1998......................... F-34
Consolidated Statements of Operations -- For the Three
Months Ended March 31, 1998............................... F-35
Consolidated Statements of Changes in Stockholders'
Equity -- For the Three Months Ended March 31, 1998....... F-36
Consolidated Statements of Cash Flows -- For the Three
Months Ended March 31, 1998............................... F-37
Notes to Consolidated Financial Statements -- For the Three
Months Ended March 31, 1998............................... F-38
</TABLE>
F-33
<PAGE> 105
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
(In thousands, except per share data) ------------ ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 92,156 $ 31,559
Trading securities.......................................... 21,110 42,129
Investment securities available for sale.................... 91,237 123,963
Mortgage-backed securities available for sale............... 319,203 260,152
Loans receivable, net....................................... 391,618 418,676
Loans receivable held for sale.............................. 149,086 138,381
Other assets................................................ 35,942 33,293
---------- ----------
Total assets........................................... $1,100,352 $1,048,153
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Retail deposits............................................. $ 522,221 $ 560,554
Brokered callable certificates of deposit................... -- 42,286
Advances from the Federal Home Loan Bank of Atlanta......... 200,000 190,000
Securities sold under agreements to repurchase.............. 279,909 153,970
Subordinated debt, net...................................... 29,614 29,672
Other liabilities........................................... 13,212 15,605
---------- ----------
Total liabilities...................................... 1,044,956 992,087
---------- ----------
Corporation-Obligated Mandatorily Redeemable Capital
Securities of
Subsidiary Trust Holding Soley Junior Subordinated
Debentures of the
Corporation............................................... 9,572 9,526
Stockholders' Equity:
4% Cumulative preferred stock, $0.01 par value, 500,000
shares authorized
Series A, 18,850 issued and outstanding................ 9,634 9,634
Series B, 4,050 issued and outstanding................. 2,070 2,070
Series C, 7,000 issued and outstanding................. 3,577 3,577
Common stock, $0.01 par value, 8,500,000 shares authorized;
2,242,494 and 2,229,161 issued and outstanding at March
31, 1998 and December 31, 1997............................ 22 22
Additional paid-in capital.................................. 16,207 16,387
Retained earnings........................................... 11,576 11,850
Accumulated other comprehensive income, net of tax.......... 2,738 3,000
---------- ----------
Total stockholders' equity............................. 45,824 46,540
---------- ----------
Total liabilities and stockholders' equity............. $1,100,352 $1,048,153
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 106
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1998
(In thousands, except per share data) ------- -------
<S> <C> <C>
Interest income:
Loans................................................... $ 7,557 $10,365
Mortgage-backed and related securities.................. 3,805 5,074
Investment securities................................... 1,444 1,786
Trading securities...................................... -- 636
Other................................................... 31 210
------- -------
Total interest income.............................. 12,837 18,071
------- -------
Interest expense:
Retail deposits......................................... 5,705 8,055
Brokered callable certificates of deposit............... -- 374
Advances from the Federal Home Loan Bank of Atlanta..... 2,073 2,718
Repurchase agreements................................... 1,457 2,451
Subordinated debt....................................... 643 879
------- -------
Total interest expense............................. 9,878 14,477
------- -------
Net interest income................................ 2,959 3,594
Provision for loan losses............................... 243 250
------- -------
Net interest income after provision for loan
losses............................................ 2,716 3,344
------- -------
Non-interest income:
Gain on sale of securities.............................. 238 891
Gain on sale of loans................................... 127 121
Gain on trading securities.............................. 23 62
Gain (loss) on equity investment........................ (109) 526
Fees, service charges, and other........................ 339 347
------- -------
Total non-interest income.......................... 618 1,947
------- -------
Non-interest expenses:
Selling, general and administrative expenses:
Compensation and employee benefits................. 1,176 1,950
Other.............................................. 721 1,939
------- -------
Total selling, general and administrative
expenses.......................................... 1,897 3,889
------- -------
Other non-interest expenses:
Net operating costs of real estate acquired through
foreclosure............................................ 74 82
Amortization of goodwill and other intangibles.......... 134 233
------- -------
Total other non-interest expenses....................... 208 315
------- -------
Total non-interest expenses............................. 2,105 4,204
------- -------
Income before income tax expense................... 1,229 1,087
Income tax expense................................. 355 475
Minority interest in subsidiary.................... -- 176
------- -------
Net income......................................... $ 874 $ 436
======= =======
Preferred stock dividends.......................... 60 162
------- -------
Net income available to common stockholders........ $ 814 $ 274
======= =======
Other comprehensive income, before tax:
Unrealized holding gain (loss) on securities arising
during the period...................................... (1,017) 814
Less: reclassification adjustment for gains included in
net income............................................. (238) (891)
------- -------
Other comprehensive income, before tax...................... (1,255) (77)
Income tax expense related to reclassification adjustment
for gains on sale of securities........................... 90 339
------- -------
Other comprehensive income, net of tax...................... (1,165) 262
------- -------
Comprehensive income........................................ $ (351) $ 536
======= =======
Earnings per share:
Basic................................................... $ 0.19 $ 0.06
Diluted................................................. $ 0.15 $ 0.05
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE> 107
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended March 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED COMMON PAID-IN RETAINED INCOME (LOSS),
STOCK STOCK CAPITAL EARNINGS NET OF TAX TOTAL
(In thousands, except per share data) --------- ------ ---------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996...... $ -- $20 $14,637 $ 7,905 $ 2,096 $24,658
Net income for the three months ended
March 31, 1997................... -- -- -- 874 -- 874
Stock issued....................... -- 2 1,272 -- -- 1,274
Issuance of 4% Cumulative Preferred
Stock, Series A.................. 9,634 -- -- -- -- 9,634
Issuance of 4% Cumulative Preferred
Stock, Series B.................. 2,070 -- -- -- -- 2,070
Issuance of 4% Cumulative Preferred
Stock, Series C.................. 3,577 -- -- -- -- 3,577
Dividends on 4% Cumulative Preferred
Stock............................ -- -- -- (60) -- (60)
Unrealized loss on available for sale
securities, net of tax effect.... -- -- -- -- (1,165) (1,165)
------- --- ------- ------- ------- -------
Balances at March 31, 1997......... $15,281 $22 $15,909 $ 8,719 $ 931 $40,862
======= === ======= ======= ======= =======
Balances at December 31, 1997...... $15,281 $22 $16,207 $11,576 $ 2,738 $45,824
Net income for the three months ended
March 31, 1998................... -- -- -- 436 -- 436
Stock issued....................... -- -- 180 -- -- 180
Dividends on 4% Cumulative Preferred
Stock............................ -- -- -- (162) -- (162)
Unrealized gain on available for sale
securities, net of tax effect.... -- -- -- -- 262 262
------- --- ------- ------- ------- -------
Balances at March 31, 1998......... $15,281 $22 $16,387 $11,850 $ 3,000 $46,540
======= === ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 108
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1998
(Dollars in thousands) --------- ---------
<S> <C> <C>
Net cash (used by) provided by operating activities......... $ 4,650 $ (4,776)
--------- ---------
Cash flows from investing activities:
Net increase in loans.................................. (84,134) (26,002)
Purchases of available for sale securities............. (124,251) (143,899)
Proceeds from sale of available for sale securities.... 10,640 151,543
Proceeds from maturities of and principal payments on
available for sale securities......................... 70,321 18,419
Proceeds from sale of foreclosed real estate........... 259 494
Equity investment in subsidiaries...................... (700) (724)
Net purchases of premises and equipment................ (277) (226)
--------- ---------
Net cash used in investing activities....................... $(128,142) $ (395)
--------- ---------
Cash flows from financing activities:
Net increase in deposits............................... 4,517 80,619
Net increase in subordinated debt...................... 12,858 --
Increase in advances from Federal Home Loan Bank of
Atlanta............................................... 107,000 87,500
Payment on advances from Federal Home Loan Bank of
Atlanta............................................... (86,800) (97,500)
Net increase in borrowed funds......................... -- 52
Net (decrease) increase in securities sold under
agreements to repurchase.............................. 74,685 (125,939)
Increase in common stock, preferred stock, and
additional paid in capital............................ 16,555 180
Interest paid to minority interest in subsidiary....... -- (176)
Dividends paid on common and preferred stock........... (60) (162)
--------- ---------
Net cash (used in) provided by financing activities......... $ 128,755 $ (55,426)
--------- ---------
Net (decrease) increase in cash and cash equivalents........ 5,263 (60,597)
Cash and cash equivalents at beginning of period............ 3,259 92,156
--------- ---------
Cash and cash equivalents at end of period.................. $ 8,522 $ 31,559
========= =========
Supplemental information:
Interest paid on deposits and borrowed funds................ $ 8,647 $ 13,692
Income taxes paid........................................... 260 242
Gross unrealized gain (loss) on securities available for
sale...................................................... (1,638) 465
Tax effect of gain (loss) on available-for-sale
securities................................................ $ (473) $ 203
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The Company operates its business principally through two wholly owned
subsidiaries, TeleBank, a federally chartered savings bank ("TeleBank"), and
TeleBanc Capital Markets, Inc. ("TCM"). TeleBank offers savings and investment
products insured up to applicable limits by the Federal Deposit Insurance
Corporation (the "FDIC"), and TCM is a registered broker-dealer and investment
advisor specializing in one-to-four family mortgage loans and mortgage-backed
securities. TCM manages the portfolios of TeleBanc Financial and TeleBank. The
Company also owns all of the beneficial interests represented by common
securities in a Delaware trust, TeleBanc Capital Trust I ("TCT I"), which was
formed solely for the purpose of issuing capital securities. In 1997, TCT I
issued $10.0 million 11.0% Capital Securities, Series A and invested the net
proceeds in the Company's 11.0% Junior Subordinated Deferrable Interest
Debentures, Series A (the "TCT I Junior Subordinated Debentures"). TeleBank,
through its wholly owned subsidiary TeleBanc Servicing Corporation ("TSC"), owns
50% of AGT PRA, LLC ("AGT PRA"). The primary business of AGT PRA is its
investment in Portfolio Recovery Associates, LLC ("PRA"). PRA acquires and
collects delinquent consumer debt obligations for its own portfolio. The
accompanying consolidated financial statements include the accounts of TeleBank,
TCM, TCT, and TSC, a wholly owned subsidiary of the bank. All significant
intercompany transactions and balances are eliminated in consolidation. The
investment, $2.9 million, in AGT PRA is accounted for under the equity method.
The financial statements as of March 31, 1998 and for the three months
ended March 31, 1998 and 1997 are unaudited, but in the opinion of management,
contain all adjustments, consisting solely of normal recurring entries,
necessary to present fairly the consolidated financial condition as of March 31,
1998 and the results of consolidated operations for the three months ended March
31, 1998 and 1997. The results of consolidated operations for the three months
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the entire year. The Notes to Consolidated Financial Statements for
the year ended December 31, 1997, included in the Company's Annual Report to
Stockholders for 1997, should be read in conjunction with these statements.
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
Effective January 1, 1998, PRA changed its method of accounting from the
cost recovery method to the installment method, resulting in income of $547,000.
This change is not expected to have a material effect on the full year's results
of operations.
2. EARNINGS PER SHARE
Basic earnings per common share, as required by Statement of Financial
Accounting Standards No. 128, is computed by dividing adjusted net income by the
total of the weighted average number of common shares outstanding during the
respective periods. Diluted earnings per common share for the quarters ended
March 31, 1998 and 1997 were determined on the assumptions that the dilutive
options and warrants were exercised upon issuance. The options and warrants are
deemed to be dilutive if (a) the average market price of the related common
stock for a period exceeds the exercise price or (b) the security to be tendered
is selling at a price below that at which it may be tendered under the option or
warrant agreement and the resulting discount is sufficient to establish an
effective exercise price below the market price of the common stock obtainable
upon exercise. The Company's quarter to date weighted average number of common
shares outstanding was 4,467,610 at March 31, 1998 and 4,212,176 at March 31,
1997. For diluted earnings per share computation, weighted average shares
outstanding also include potentially dilutive securities.
F-38
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
EPS CALCULATION
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
FOR THE QUARTER ENDED MARCH 31,
1997
---------------------------------
<CAPTION>
<S> <C> <C> <C>
Basic earnings per share
Net income.................................................. $ 813,755 4,212,176 $0.19
=====
Options issued to management................................ -- 380,102
Warrants.................................................... -- 362,016
Convertible preferred stock................................. 60,287 835,776
--------- ---------
Diluted earnings per share.................................. $ 874,042 5,790,070 $0.15
========= ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31, 1998
------------------------------------
<S> <C> <C> <C>
Net income.................................................. $ 436,408
Less: preferred stock dividends............................. (161,965)
---------
Basic earnings per share
Income available to common shareholders..................... $ 274,443 4,467,610 $0.06
=====
Options issued to management................................ -- 666,360
Warrants.................................................... -- 623,012
Convertible preferred stock................................. -- --
--------- ---------
Diluted earnings per share.................................. $ 274,443 5,756,982 $0.05
========= ========= =====
</TABLE>
3. RECENT EVENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"), effective for fiscal years beginning after December 15, 1997. This
statement requires that certain financial activity typically disclosed in
stockholders' equity be reported in the financial statements as an adjustment to
net income in determining comprehensive income. The Company adopted SFAS 130
effective January 1, 1998. As a result, comprehensive income for the periods
ending March 31, 1998 and 1997 are reported in the Consolidated Statement of
Operations.
Consistent with its operating strategy, the Company has signed an agreement
to acquire DFC, a thrift holding company and its federally chartered savings
bank subsidiary, Premium Bank, in a transaction expected to be consummated in
the third quarter of 1998, subject to regulatory approval. TeleBanc Financial is
acquiring DFC because DFC has employed a direct marketing strategy similar to
that of the Company, and thus presents the opportunity for the Company to
acquire the deposits and customers of a financial institution without acquiring
significant infrastructure. DFC currently operates from a single branch in New
Jersey located outside of Philadelphia, Pennsylvania, and its customer and
deposit base is concentrated in the Mid-Atlantic region of the United States.
The Company does intend to retain a significantly scaled down portion of DFC's
employees and intends to close DFC's single branch location. The Company may
open a regional business development office in the location of the former DFC
branch. DFC also originates residential mortgage loans, although the Company
intends to discontinue mortgage loan origination upon its acquisition of DFC.
DFC also offers credit cards to its customers through a relationship with First
Data Resources and Card Management Services. In 1998, in reliance upon DFC's
existing credit card relationships, the Company also intends to offer its
customers co-branded credit cards.
F-39
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
At March 31, 1998, DFC reported total assets of $320.3 million, loans
receivable, net of $181.2 million, total deposits of $288.7 million and total
stockholders' equity of $12.3 million. TeleBanc will pay approximately $21.4
million in the transaction, and will assume approximately $6 million in
liabilities which the Company intends to repay at the time the transaction is
consummated.
In April 1998, the shareholders of TeleBanc and MET Holdings ("MET") voted
to approve and adopt the Amended and Restated Acquisition Agreement, dated as of
March 17, 1998. Subsequently, TeleBanc completed the acquisition of MET whereby
MET sold substantially all of its assets, including 2,866,162 shares of TeleBanc
common stock owned by MET, and assigned substantially all of its liabilities to
TeleBanc in exchange for 2,876,162 shares of TeleBanc common stock.
F-40
<PAGE> 112
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be incurred by the
Registrant in connection with the issuance and distribution of the securities
registered hereby, all of which expenses, except for the registration fee and
the Nasdaq National Market filing fee, are estimates:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $11,800
Nasdaq National Market application and listing fees......... *
NASD filing fee............................................. *
Printing expenses........................................... *
Legal fees and expenses (other than Blue Sky)............... *
Accounting fees and expenses................................ *
Blue Sky legal fees and filing expenses (including fees of
counsel).................................................. *
Transfer agent fees and expenses............................ *
Miscellaneous expenses...................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ------------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may limit the liability of each director to the corporation
or its stockholders for monetary damages, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders;
(ii) for acts of omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) in respect of certain unlawful
dividend payments or stock redemption or repurchases; and (iv) for any
transaction from which the director derived and improper benefit. The
Certificate of Incorporation of the Registrant provides for the elimination and
limitation of the personal liability of directors of the Registrant for monetary
damages to the fullest extent permitted by the DGCL. Article Eight of the
Company's Bylaws, entitled "Indemnification," provides for indemnification of
the Company's directors, officers, employees and agents under certain
circumstances.
In addition, the Certificate of Incorporation provides that if the DGCL is
amended to authorized the further elimination or limitation of a director, then
the liability of the directors of the Registrant shall be eliminated or limited
to the fullest extent permitted by the DGCL, as so amended. The effect of this
provision is to eliminate the right of the Registrant and its stockholders
(through stockholders' derivative suits on behalf of the Registrant" to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (iv) above.
The provision does not limit or eliminate the rights of the Registrant or any
stockholder to seek non-monetary relief such as an injunction or recission in
the event of a breach of a director's duty of care. In addition, the Certificate
of Incorporation provides that the Registrant shall, to the fullest extent
permitted by the DGCL, as amended from time to time, indemnify each or its
currently actin and former directors, officers, employees and agents.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.1* Form of Underwriting Agreement
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference herein to Exhibit 3.1
to the Registrant's Registration Statement on Form S-4,
dated December 8, 1997, File No. 333-40399)
</TABLE>
II-1
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
3.1(b) Certificate of Designations (incorporated by reference
herein to Exhibit 3 to the Registrant's Current Report on
Form 8-K, dated March 17, 1997)
3.2 Bylaws of the Registrant (incorporated by reference herein
to Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, dated March 31,
1997)
4.1 Specimen certificate evidencing shares of Common Stock of
the Registrant (incorporated by reference herein to Exhibit
4.1 to the Registrant's Registration Statement on Form S-1,
dated March 25, 1994, File No. 33-76930)
4.2 Form of Warrant for the purchase of shares of Common Stock,
issued in connection with the Unit Purchase Agreement, dated
February 19, 1997, among the Registrant and the Purchasers
identified therein (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K,
dated March 17, 1997)
4.3 Form of warrant for the purchase of shares of Common Stock,
issued in connection with the units of warrants and
subordinated debt sold in the Registrant's initial public
offering (incorporated by reference herein to Exhibit 4.5 to
the Registrant's Registration Statement on Form S-1, dated
March 25, 1994, File No. 33-76930)
4.4* Certificate of Trust of TeleBanc Capital Trust II, dated
, 1998
4.5 Form of Certificate of Exchange Junior Subordinated
Debentures (incorporated by reference herein to Exhibit 4.3
to the Registrant's Form 10-K/A for the year ended December
31, 1997, dated April 2, 1998)
4.6 Amended and Restated Declaration of Trust of TeleBanc
Capital Trust I, dated June 9, 1997 (incorporated by
reference herein to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.7 Form of Exchange Capital Security Certificate (incorporated
by reference herein to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.8 Exchange Guarantee Agreement by the Registrant for the
benefit of the holders of Exchange Capital Securities
(incorporated herein by reference to Exhibit 4.7 to the
Registrant's Registration Statement on Form S-4, dated
December 8, 1997, File No. 333-40399)
5* Form of opinion of Shaw Pittman Potts & Trowbridge as to the
legality of the securities being registered
10.1 1994 Stock Option Plan (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
10.2 1997 Stock Option Plan (incorporated by reference herein to
Exhibit D to the Registrant's definitive proxy materials
which were filed as Exhibit 99.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996,
dated March 31, 1997)
10.3* Employee Stock Ownership Plan of the Registrant
10.4 Agreement and Plan of Merger by and between the Registrant
and Direct Financial Corporation, dated January 14, 1998
10.5 Registration Rights Agreement, dated June 5, 1997, among the
Registrant, TeleBanc Capital Trust I and the Initial
Purchaser (incorporated by reference herein to Exhibit 4.8
to the Registrant's Registration Statement on Form S-4,
dated December 8, 1997, File No. 333-40399)
10.6 Unit Purchase Agreement, dated February 19, 1997, among the
Registrant and the Purchasers identified therein
(incorporated by reference herein to Exhibit 10.1 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
</TABLE>
II-2
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
10.7 Amended and Restated Acquisition Agreement, dated February
19, 1997, among the Registrant, Arbor Capital Partners,
Inc., MET Holdings, Inc., and William M. Daugherty
(incorporated by reference herein to Exhibit 10.2 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
10.8 Liquidated Damages Agreement, dated June 9, 1997, by and
among the Registrant, TeleBanc Capital Trust I, and the
Initial Purchaser (incorporated by reference herein to
Exhibit 4.9 to the Registrant's Registration Statement on
Form S-4, dated December 8, 1997, File No. 333-40399)
10.9 Tax Allocation Agreement, dated April 7, 1994, between
TeleBank and Registrant (incorporated by reference herein to
Exhibit 10.3 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1, dated May 3, 1994, File
No. 33-76930)
10.10 Indenture dated June 9, 1997, between the Registrant and
Wilmington Trust Registrant, as debenture trustee
(incorporated by reference herein to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
10.11 Form of Indenture between the Registrant and Wilmington
Trust Company as Trustee (incorporated by reference herein
to Exhibit 4.3 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
10.12* Conversion Agreement dated May 15, 1998 by and among the
Registrant and certain investors named therein
11 Statement regarding calculation of net income per share
21* Subsidiaries of the Registrant
23.1 Consent of Shaw Pittman Potts & Trowbridge (included as part
of Exhibit 5)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page to the
Registration Statement)
27.1 Financial Data Schedule for 1997
27.2 Financial Data Schedule for 1996
27.3 Financial Data Schedule for 1995
</TABLE>
- ---------------
* To be filed by Amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE> 115
(3) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE> 116
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE COUNTY OF ARLINGTON, STATE OF VIRGINIA, ON THIS 15 DAY OF
MAY, 1998.
TELEBANC FINANCIAL CORPORATION
By: /s/ MITCHELL H. CAPLAN
------------------------------------
MITCHELL H. CAPLAN
PRESIDENT, VICE CHAIRMAN AND
DIRECTOR
POWER OF ATTORNEY
Know all Persons by These Presents, that each individual whose signature
appears below constitutes and appoints David A. Smilow, Mitchell H. Caplan and
Aileen Lopez Pugh, and each of them, his true and lawful attorney-in-fact and
agent, with power of substitution and resubstitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their, his or her substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dated indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<S> <C> <C>
/s/ DAVID A. SMILOW Chairman of the Board
- ------------------------------------------
DAVID A. SMILOW May 15, 1998
/s/ MITCHELL H. CAPLAN Vice Chairman of the Board Chief
- ------------------------------------------ Executive Officer and President
MITCHELL H. CAPLAN (principal executive officer) May 15, 1998
/s/ AILEEN LOPEZ PUGH Executive Vice President and Chief
- ------------------------------------------ Financial Officer (principal
AILEEN LOPEZ PUGH financial and accounting officer) May 15, 1998
/s/ DAVID DECAMP Director
- ------------------------------------------
DAVID DECAMP May 15, 1998
/s/ DEAN C. KEHLER Director
- ------------------------------------------
DEAN C. KEHLER May 15, 1998
</TABLE>
II-5
<PAGE> 117
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<S> <C> <C>
/s/ STEVEN F. PIAKER Director
- ------------------------------------------
STEVEN F. PIAKER May 15, 1998
/s/ MARK ROLLINSON Director
- ------------------------------------------
MARK ROLLINSON May 15, 1998
/s/ ARLEN W. GELBARD Director
- ------------------------------------------
ARLEN W. GELBARD May 15, 1998
</TABLE>
II-6
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.1* Form of Underwriting Agreement
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference herein to Exhibit 3.1
to the Registrant's Registration Statement on Form S-4,
dated December 8, 1997, File No. 333-40399
3.1(b) Certificate of Designations (incorporated by reference
herein to Exhibit 3 the Registrant's Current Report on Form
8-K, dated March 17, 1997)
3.2 Bylaws of the Registrant (incorporated by reference herein
to Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, dated March 31,
1997)
4.1 Specimen certificate evidencing shares of Common Stock of
the Registrant (incorporated by reference herein to Exhibit
4.1 to the Registrant's Registration Statement on Form S-1,
dated March 25, 1994, File No. 33-76930)
4.2 Form of Warrant for the purchase of shares of Common Stock,
issued in connection with the Unit Purchase Agreement, dated
February 19, 1997, among the Registrant and the Purchasers
identified therein (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K,
dated March 17, 1997)
4.3 Form of warrant for the purchase of shares of Common Stock,
issued in connection with the units of warrants and
subordinated debt sold in the Registrant's initial public
offering (incorporated by reference herein to Exhibit 4.5 to
the Registrant's Registration Statement on Form S-1, dated
March 25, 1994, File No. 33-76930)
4.4* Certificate of Trust of TeleBanc Capital Trust II, dated
, 1998
4.5 Form of Certificate of Exchange Junior Subordinated
Debentures (incorporated by reference herein to Exhibit 4.3
to the Registrant's Form 10-K/A for the year ended December
31, 1997, dated April 2, 1998)
4.6 Amended and Restated Declaration of Trust of TeleBanc
Capital Trust I, dated June 9, 1997 (incorporated by
reference herein to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.7 Form of Exchange Capital Security Certificate (incorporated
by reference herein to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.8 Exchange Guarantee Agreement by the Registrant for the
benefit of the holders of Exchange Capital Securities
(incorporated herein by reference to Exhibit 4.7 to the
Registrant's Registration Statement on Form S-4, dated
December 8, 1997, File No. 333-40399)
5* Form of opinion of Shaw Pittman Potts & Trowbridge as to the
legality of the securities being registered
10.1 1994 Stock Option Plan (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
10.2 1997 Stock Option Plan (incorporated by reference herein to
Exhibit D to the Registrant's definitive proxy materials
which were filed as Exhibit 99.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996,
dated March 31, 1997)
10.3* Employee Stock Ownership Plan of the Registrant
10.4 Agreement and Plan of Merger by and between the Registrant
and Direct Financial Corporation, dated January 4, 1998
</TABLE>
II-7
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
10.5 Registration Rights Agreement, dated June 5, 1997, among the
Registrant, TeleBanc Capital Trust I and the Initial
Purchaser (incorporated by reference herein to Exhibit 4.8
to the Registrant's Registration Statement on Form S-4,
dated December 8, 1997, File No. 333-40399)
10.6 Unit Purchase Agreement, dated February 19, 1997, among the
Registrant and the Purchasers identified therein
(incorporated by reference herein to Exhibit 10.1 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
10.7 Amended and Restated Acquisition Agreement, dated February
19, 1997, among the Registrant, Arbor Capital Partners,
Inc., MET Holdings, Inc., and William M. Daugherty
(incorporated by reference herein to Exhibit 10.2 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
10.8 Liquidated Damages Agreement, dated June 9, 1997, by and
among the Registrant, TeleBanc Capital Trust I, and the
Initial Purchaser (incorporated by reference herein to
Exhibit 4.9 to the Registrant's Registration Statement on
Form S-4, dated December 8, 1997, File No. 333-40399)
10.9 Tax Allocation Agreement, dated April 7, 1994, between
TeleBank and Registrant (incorporated by reference herein to
Exhibit 10.3 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1, dated May 3, 1994, File
No. 33-76930)
10.10 Indenture dated June 9, 1997, between the Registrant and
Wilmington Trust Company, as debenture trustee (incorporated
by reference herein to the Registrant's Registration
Statement on Form S-4, dated December 8, 1997, File No.
333-40399)
10.11 Form of Indenture between the Registrant and Wilmington
Trust Company as Trustee (incorporated by reference herein
to Exhibit 4.3 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
10.12* Conversion Agreement, dated May 15, 1998, by and among the
Registrant and certain investors named therein
11 Statement regarding calculation of net income per share
21* Subsidiaries of the Registrant
23.1 Consent of Shaw Pittman Potts & Trowbridge (included as part
of Exhibit 5)
23.2 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page to the
Registration Statement)
27.1 Financial Data Schedule for 1997
27.2 Financial Data Schedule for 1996
27.3 Financial Data Schedule for 1995
</TABLE>
- ---------------
* To be filed by Amendment.
II-8
<PAGE> 1
EXHIBIT 10.4
AGREEMENT AND PLAN OF MERGER
by and between
TELEBANC FINANCIAL CORPORATION
("Acquiror")
and
DIRECT FINANCIAL CORPORATION
(the "Company")
January 14, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Structure of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. Effect of the Merger on Outstanding Shares of Company Stock . . . . . . . . . . . . . . . . . . . . . 2
1.3. Exchange Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4. Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5. Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.6. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.7. Stockholder Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1. Organization and Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2. Authorization and Validity of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3. No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.4. Rights, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.5. Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.7. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.8. Reports; Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.9. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.10. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.11. Absence of Regulatory Agreements and Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.12. Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.13. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.14. Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.15. Properties and Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.16. Knowledge as to Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.17. Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.18. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.19. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.20. Antitakeover Provisions Inapplicable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.21. Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.22. Reserves for Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.23. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.24. Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.25. No Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.26. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF ACQUIROR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.1. Organization and Capitalization of Acquiror . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.2. Authorization and Validity of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.3. No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.4. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.5. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.6. Absence of Regulatory Agreements and Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.7. Knowledge as to Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.8. Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.9. Access to Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.10. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE IV - CONDUCT PRIOR TO CLOSING AND CERTAIN OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 19
4.1. Access to Information; Notice of Changes; Confidentiality . . . . . . . . . . . . . . . . . . . . . 19
4.2. Conduct of the Business of the Company Pending the Closing Date . . . . . . . . . . . . . . . . . . 21
4.3. Conduct of the Business of Acquiror Pending the Closing Date . . . . . . . . . . . . . . . . . . . . 24
4.4. No Solicitation of Other Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.5. Certain Filings, Consents and Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.6. Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.7. Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.8. Shareholder Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.9. Bank Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.10. Additional Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.11. Current Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.12. Transaction Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.13. Change in Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.14. Sale of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE V - CONDITIONS PRECEDENT TO MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.1. Conditions Precedent to Obligations of All Parties . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.2. Conditions Precedent to Obligations of Acquiror . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.3. Conditions Precedent to Obligation of the Company . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE VI - COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.1. Employees; Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.2. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.3. Certain Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE VII - TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.1. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.2. Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VIII - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.1. Certain Definitions; Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.2. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.3. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.4. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.5. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.6. Binding Effect; Benefit; Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.7. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.8. Further Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.9. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.10. Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.11. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.12. Enforcement of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
EXHIBITS
Exhibit A - Articles of Combination and Bank Merger Agreement
Exhibit B - Stockholder Agreement
Exhibit C - Form of Opinion of the Company's Counsel
Exhibit D - Employment and Other Agreements and Certain Payments
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<PAGE> 5
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is made this
14th day of January, 1998, by and among TELEBANC FINANCIAL CORPORATION, a
Delaware corporation ("Acquiror"), and DIRECT FINANCIAL CORPORATION, a New
Jersey corporation (the "Company").
WHEREAS, the respective Boards of Directors of Acquiror and
the Company have approved the acquisition of the Company by Acquiror, subject
to the terms and conditions of this Agreement; and
WHEREAS, prior to the consummation of the Merger (as defined
in Section 1.1), Acquiror and the Company will respectively cause TeleBank, a
federal savings bank and wholly-owned subsidiary of Acquiror ("TeleBank"), and
Premium Bank ("Premium"), a federal savings bank and wholly-owned subsidiary of
the Company, to enter into a merger agreement, in the form attached hereto as
Exhibit A (the "Bank Merger Agreement"), providing for the merger (the "Bank
Merger") of Premium with and into TeleBank, with TeleBank being the "Surviving
Bank" of the Bank Merger, and it is intended that the Bank Merger be
consummated immediately upon consummation of the Merger;
NOW THEREFORE, in consideration of the foregoing premises and
of the mutual covenants, representations, warranties and agreements herein
contained, the parties, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
1.1. Structure of the Merger. Subject to the terms and
conditions of this Agreement, at the Effective Time (as defined in Section 1.6
hereof), the Company will merge with and into Acquiror (the "Merger"), with
Acquiror being the surviving institution (the "Surviving Institution") pursuant
to the provisions of, and with the effects provided in, the Delaware General
Corporation Law ("DGCL") and the New Jersey Business Corporation Act ("NJBCA").
At the Effective Time, the separate corporate existence of the Company shall
cease, and Acquiror shall continue as the Surviving Institution. The
certificate of incorporation and by-laws of Acquiror, as in effect immediately
prior to the Effective Time, shall be the certificate of incorporation and
by-laws of the Surviving Institution until thereafter amended as provided by
law. The directors and officers of Acquiror, immediately prior to the
Effective Time, shall be the directors and officers of the Surviving
Institution until thereafter such directors and officers resign or are removed
or their term of office expires.
<PAGE> 6
1.2. Effect of the Merger on Outstanding Shares of Company
Stock. Subject to the terms and conditions of this Agreement, to effectuate,
and automatically by virtue of, the Merger:
(a) Common Stock. At the Effective Time, each
share of common stock of the Company, par value $1.00 per share ("Company
Common Stock") issued and outstanding immediately prior to the Effective Time
(other than shares ("Excluded Shares") held directly or indirectly by Acquiror
or the Company or any of their respective Subsidiaries, excluding shares held
in a fiduciary capacity that are beneficially owned by third parties or in
satisfaction of a debt previously contracted) ("Outstanding Common Shares")
shall become and be converted into the right to receive cash in the amount of
$12.00 per share without interest (the "Per Share Merger Consideration").
(b) Preferred Stock. At the Effective Time,
each share of Series B 8.75% Cumulative Convertible Preferred Stock of the
Company, par value $1.00 per share ("Company Preferred Stock") issued and
outstanding immediately prior to the Effective Time (other than Excluded
Shares) ("Outstanding Preferred Shares") shall become and be converted into the
right to receive cash in the amount of the Per Share Merger Consideration
multiplied by 2.1739.
(c) Excluded Shares. Each Excluded Share shall
by virtue of the Merger be canceled and retired and shall cease to exist, and
no exchange or payment shall be made therefor.
1.3. Exchange Procedures.
(a) On and after the Effective Date, each holder
of certificates representing shares of Company Common Stock or Company
Preferred Stock prior to the Effective Time ("Old Certificates") may surrender
such Old Certificates to Acquiror or its agent for cancellation and exchange in
accordance with the provisions of this Agreement. Old Certificates shall be
exchanged for cash issued in consideration therefor upon the surrender of such
Old Certificates in accordance with this Section 1.3 without any interest
thereon.
(b) From and after the Effective Time, there
shall be no transfers on the stock transfer records of the Company of any
shares of the Company Common Stock or Company Preferred Stock that were
outstanding immediately prior to the Effective Time.
(c) Neither Company nor Acquiror nor any other
person shall be liable to any former holder of Company Common Stock or Company
Preferred Stock for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
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<PAGE> 7
(d) In the event any Old Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such Old Certificate to be lost, stolen or destroyed and,
if required by Acquiror, the posting by such person of a bond in such amount as
Acquiror may direct as indemnity against any claim that may be made against it
with respect to such Old Certificate, the Acquiror will issue in exchange for
such lost, stolen or destroyed Old Certificate the cash in respect thereof
pursuant to this Agreement.
1.4. Options. At the Effective Time, each option to purchase
shares of Company Common Stock which is outstanding and unexercised immediately
prior thereto (each, an "Outstanding Option"), shall be converted into cash
(the "Cash Out") in an amount equal to the Per Share Merger Consideration
multiplied by the number of shares subject to such Outstanding Option, less the
amount which would have been required to exercise such Outstanding Options.
1.5. Convertible Notes.
(a) On a date which shall be agreed between the
Company and the Acquiror, but which shall be not less than 30 nor more than 60
days prior to the date fixed for redemption (the "1993 Note Redemption Date")
in accordance with the terms of the Company's 9% Convertible Subordinated Notes
Due July 1, 1998 (the "1993 Notes"), the Company shall give notice of
redemption of the 1993 Notes for cash in the amount of 102% of the outstanding
principal amount of each 1993 Note plus unpaid accrued interest thereon to the
1993 Note Redemption Date in accordance with the terms thereof. The 1993 Note
Redemption Date shall be set to immediately precede the Effective Time and
shall be conditioned on satisfaction of all other conditions to the Merger.
Each 1993 Note which shall not have been converted into shares of Common Stock
at the election of the holder thereof in accordance with the terms of the 1993
Notes prior to the 1993 Note Redemption Date shall be so redeemed by the
Company as of the 1993 Note Redemption Date.
(b) On a date which shall be agreed between the
Company and the Acquiror, but which shall be not less than 30 nor more than 60
days prior to the date fixed for redemption (the "1994 Note Redemption Date")
in accordance with the terms of the Company's 9% Convertible Subordinated Notes
Due April 1, 1999 (the "1994 Notes"), the Company shall give notice of
redemption of the 1994 Notes for cash in the amount of 102% of the outstanding
principal amount of each 1994 Note plus unpaid accrued interest thereon to the
1994 Note Redemption Date in accordance with the terms thereof. The 1994 Note
Redemption Date shall be set to immediately precede the Effective Time and
shall be conditioned on satisfaction of all other conditions to the Merger.
Each 1994 Note which shall not have been converted into shares of Common Stock
at the election of the holder thereof in accordance with the terms of the 1994
Notes prior to the 1994 Note Redemption Date shall be so redeemed by the
Company as of the 1994 Note Redemption Date.
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<PAGE> 8
1.6. Closing. On the first Business Day to occur which is at
least three (3) Business Days after the expiration of all applicable waiting
periods in connection with approvals of governmental authorities occurs and all
conditions to the consummation of this Agreement are satisfied or waived and
which is the last Business Day of a month, or on such earlier or later date as
may be agreed by the parties (the "Closing Date"), articles of merger shall be
executed in accordance with all appropriate legal requirements and shall be
filed as required by law, and the Merger provided for herein shall become
effective upon such filing or on such date and at such time as may be specified
in such articles of merger by agreement of the parties hereto. The date and
time of such filing or such later effective date and time are herein called the
"Effective Time." The date on which the Effective Time occurs is herein
referred to as the "Effective Date".
1.7. Stockholder Agreement. Prior to the close of business
on the Business Day following the date of execution and delivery of this
Agreement, the Company shall and shall cause each director, executive officer,
or other affiliate of the Company to execute and deliver to Acquiror the
Stockholder Agreement in the form of Exhibit B attached hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby makes the following representations and
warranties to Acquiror as set forth in this Article II, each of which is being
relied upon by Acquiror as a material inducement to enter into and perform this
Agreement. All of the disclosure schedules of the Company referenced below and
thereby required of the Company pursuant to this Agreement are referred to
herein as the "Company Disclosure Schedule".
2.1. Organization and Capitalization.
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of New
Jersey. The Company is duly registered as a savings and loan holding company
under the Home Owners' Loan Act ("HOLA"). The certificate of incorporation and
by-laws of the Company, copies of which are attached to the Company Disclosure
Schedule, are true, correct and complete copies of such documents as in effect
as of the date of this Agreement. As of the date hereof, the Company has
10,000,000 authorized shares of Company Common Stock, of which as of the date
hereof (i) 1,211,745 shares are issued and outstanding, (ii) 401,300 shares of
which are reserved for issuance to holders of the 1993 Notes upon exercise of
their conversion rights, (iii) 72,000 shares of which are reserved for issuance
to holders of the 1994 Notes upon exercise of their conversion rights, (iv)
359,826 shares of which are reserved for issuance to holders of the Company
Preferred Stock upon exercise of their conversion rights, and (v) 389,750
shares of which are reserved for
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<PAGE> 9
issuance upon the exercise of outstanding stock options as set forth on the
Company Disclosure Schedule; and 5,000,000 authorized shares of serial
preferred stock, of which 500,000 shares have been designated as Company
Preferred Stock, of which 165,520 shares are issued and outstanding.
(b) Premium is a federal savings association duly
organized, validly existing and in good standing under the laws of the United
States. The deposit accounts of Premium are insured by the Federal Deposit
Insurance Corporation ("FDIC") through the Savings Association Insurance Fund
to the fullest extent permitted by law, and all premiums and assessments
required in connection therewith have been paid by Premium. No subsidiary of
the Company other than Premium and Direct Investment Management Company
("DIMCO") is a "Significant Subsidiary" as such term is defined in Regulation
S-X promulgated by the Securities and Exchange Commission. The charter and
by-laws of Premium, DIMCO and Premium Investment Services, Inc., copies of
which are attached to the Company Disclosure Schedule, are true, correct and
complete copies of such documents as in effect as of the date of this
Agreement.
2.2. Authorization and Validity of Agreement. The Company
has full power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. Subject to the receipt of the required shareholder approval for the
Company referred to in Section 5.1(a), this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly approved by the
Board of Directors of the Company and have been authorized by all other
necessary corporate action of it. This Agreement is a valid and binding
agreement of the Company enforceable against it in accordance with its terms,
subject as to enforcement to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles.
2.3. No Violations. Neither the execution and delivery of
this Agreement by the Company, nor the consummation by the Company of the
transactions contemplated hereby, nor compliance by the Company with any of the
terms or provisions hereof, will (i) violate any provision of the certificate
of incorporation or by-laws of the Company or its Subsidiaries, or (ii) violate
any Laws (as defined in Section 8.1) applicable to the Company or its
Subsidiaries, or any of their respective properties or assets, or (iii)
assuming receipt of all required consents, approvals and waivers set forth in
the Company Disclosure Schedule, and except for such consents, approvals and
waivers as will not, individually or in the aggregate, have a material adverse
effect on the ability of Acquiror or the Company to consummate the transactions
contemplated hereby, violate, conflict with, result in a breach of any
provision of or the loss of any benefit under, constitute a default (or an
event which, with notice or lapse of time, or both, would constitute a default)
under, result in the termination of or a right of termination or cancellation
under, accelerate the performance required by, or result in the creation of any
lien, pledge, security interest, charge or other encumbrance upon any of the
respective properties or assets of the Company or its Subsidiaries under, any
of the terms, conditions or provisions of any
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<PAGE> 10
note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which the Company or its Subsidiaries is a
party, or by which they or any of their respective properties or assets may be
bound or affected. The execution and delivery by the Company of this Agreement
and the consummation of the transactions contemplated hereby do not require any
approval, consent or waiver under any Law or filings or registrations with any
court, administrative agency or commission or other governmental authority or
instrumentality or the approval, consent or waiver of any other party to any
such note, bond, mortgage, indenture, deed of trust, license, lease, agreement,
or other instrument or obligation to which the Company or its Subsidiaries is a
party or by which they or any of their respective properties may be bound or
affected, other than (x) the required approvals, consents, waivers, filings and
registrations as set forth in the Company Disclosure Schedule, (y) the approval
of the shareholders of the Company referred to in Section 5.1(a), and (z) any
other approvals, consents, waivers, filings or registrations the absence of
which, individually or in the aggregate, will not have a material adverse
effect on the ability of Acquiror or the Company to consummate the transactions
contemplated hereby.
2.4. Rights, etc. Except as set forth in the Company
Disclosure Schedule, there are not any shares of capital stock of the Company
reserved for issuance, or any outstanding or authorized options, warrants,
calls, rights, subscriptions, claims of any character, agreements, obligations,
convertible or exchangeable securities, or other commitments, contingent or
otherwise, relating to its capital stock, pursuant to which it is or may become
obligated to issue shares of capital stock or any securities convertible into,
exchangeable for, or evidencing the right to subscribe for, purchase or
otherwise receive, any shares of its capital stock (collectively, "Rights").
The Company Disclosure Schedule sets forth a list of all of the holders of
outstanding options as of the date hereof. All outstanding options of the
Company may be converted into cash as provided in Section 1.4 hereof.
2.5. Capital Stock. All issued and outstanding shares of
capital stock of the Company and its Subsidiaries, are duly authorized, validly
issued and outstanding, fully paid and nonassessable, and subject to no
preemptive rights, with no personal liability attaching to the ownership
thereof; and all outstanding shares of capital stock of its Subsidiaries are
owned by it or Premium, as the case may be, free and clear of all liens,
claims, encumbrances, charges, security interests and restrictions on transfer
whatsoever and there are no Rights with respect to such capital stock.
2.6. Authority. Each of the Company and its Subsidiaries has
the power and authority to carry on its business as it is now being conducted
and to own all its properties and assets, and is duly licensed or qualified to
do business in each jurisdiction in which the nature of any material business
conducted by it or the character or location of any material properties or
assets owned or leased by it makes such licensing or qualification necessary,
and it has all federal, state, local, and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on its
business as it is now being conducted.
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<PAGE> 11
2.7. Subsidiaries. A true, correct and complete list of the
Company's Subsidiaries is set forth in the Company Disclosure Schedule.
2.8. Reports; Books and Records.
(a) The Company has previously delivered to
Acquiror and included in the Company Disclosure Schedule true, correct and
complete copies of the following financial statements of the Company and its
Subsidiaries, together with the related notes and schedules thereto
(collectively, the "Company Financial Statements"):
(i) audited Consolidated Statements of
Condition of the Company and its Subsidiaries as of December 31, 1994, 1995 and
1996 (the "1996 Statement of Condition"), and the related audited Statements of
Operations, Statements of Changes in Equity Capital and Statements of Cash
Flows of the Company for the years then ended in each case accompanied by the
audit report of the independent public accountants with respect to the Company;
(ii) unaudited Consolidated Statements of
Condition of the Company and its Subsidiaries as of September 30, 1997 and
1996, and the related unaudited Statements of Operations and other financial
schedules of the Company for the nine-month period then ended.
The Company Financial Statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the period involved except as otherwise specifically
disclosed in such statement or the notes thereto, subject in the case of
unaudited statements to the absence of footnotes and to recurring audit
adjustments normal in nature and amount. The Company Financial Statements
present fairly the financial position of the Company and its Subsidiaries as of
the dates shown and the results of their operations and changes in their
financial position for the periods then ended. As of the date of the 1996
Statement of Condition, neither the Company nor its Subsidiaries had, and since
such date neither the Company nor its Subsidiaries has, incurred or suffered
any liabilities or obligations, whether accrued, absolute, contingent or
otherwise, arising out of any transactions entered into, or state of facts
existing, on or prior to the date hereof except as and to the extent disclosed,
reflected or reserved against in the Company Financial Statements, nor has
there been any change, or any event involving a prospective change, in the
financial condition, properties, business or results of operations of it or its
Subsidiaries or otherwise, which, individually or in the aggregate, has had or
is reasonably likely to have, a Material Adverse Effect on the Company. The
books and records of the Company and its Subsidiaries have been, and are being,
maintained in all material respects in accordance with generally accepted
accounting principles and any other applicable legal and accounting
requirements, subject in the case of unaudited statements to the absence of
footnotes and to recurring audit adjustments normal in nature and amount.
Since
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<PAGE> 12
December 31, 1996, the Company and its Subsidiaries have carried on their
respective businesses in the ordinary and usual course consistent with their
past practices.
(b) The Company and its Subsidiaries have timely
filed all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
December 31, 1992 with (A) the Office of Thrift Supervision ("OTS"), (B) the
FDIC, and (C) the Banking Commissioner of the State of New Jersey (or any other
state banking commission or other regulatory authority with which the Company
or any of its Subsidiaries is required to file reports, registrations,
statements or amendments thereto (collectively, the "State Regulator")
(collectively, with the OTS, the FDIC and the Board of Governors of the Federal
Reserve System, the "Regulatory Agencies") and all other material reports and
statements required to be filed by them since December 31, 1992, including,
without limitation, any report or statement required to be filed pursuant to
the laws, rules or regulations of the United States, the OTS, the FDIC, or any
State Regulator, and have paid all fees and assessments due and payable to any
Regulatory Agency. Except for normal examinations conducted by a Regulatory
Agency in the regular course of business of the Company and its Subsidiaries,
no governmental entity is conducting, or has conducted, any proceeding or
investigation into the business or operations of the Company or any of its
Subsidiaries since December 31, 1992.
(c) Neither the Company nor any of its
Subsidiaries has filed any Suspicious Activity Reports under Subpart G of Part
563 of OTS regulations since December 31, 1992.
2.9. Taxes. All federal, state, local and foreign tax
returns required to be filed by or on behalf of the Company or any of its
Subsidiaries have been timely filed or requests for extensions have been timely
filed and any such extensions have been granted and not expired. All taxes
required to be shown on returns filed by or on behalf of the Company or any of
its Subsidiaries have been paid in full or adequate provision has been made for
any such taxes on its balance sheet (in accordance with generally accepted
accounting principles). As of the date of this Agreement, there are no
assessments or notices of deficiency or proposed assessments with respect to
any taxes of the Company or any of its Subsidiaries. The Company has not
executed an extension or waiver of any statute of limitations on the assessment
or collection of any tax due that is currently in effect.
2.10. Legal Proceedings. Except as set forth in the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party
to any, and there are no pending or to the best of the Company's and its
Subsidiaries' knowledge threatened, legal, administrative, arbitration or other
proceedings, claims, actions or governmental or regulatory investigations of
any nature against the Company or any of its Subsidiaries or which challenge
the validity or propriety of the transactions contemplated by this Agreement.
There is no
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<PAGE> 13
injunction, order, judgment, decree, or regulatory restriction imposed upon the
Company, any of its Subsidiaries or the assets of the Company or any of its
Subsidiaries.
2.11. Absence of Regulatory Agreements and Actions. Neither
the Company nor any of its Subsidiaries is a party to any cease and desist
order, written agreement, consent agreement or memorandum of understanding
with, or a party to any commitment letter or similar undertaking to, or is
subject to any order or directive by, or is a recipient of any extraordinary
supervisory letter from, or has adopted any board resolutions at the request
of, any Regulatory Agency or any other governmental authority or
instrumentality, nor has it been advised by any Regulatory Agency or any other
governmental authority or instrumentality that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, directive, written agreement, memorandum of understanding,
extraordinary supervisory letter, commitment letter, board resolutions or
similar undertaking.
2.12. Labor Matters. Neither the Company nor any of its
Subsidiaries is a party to, or is bound by, any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization, nor is it or any of its Subsidiaries the subject of any
proceeding asserting that it or any such Subsidiary has committed an unfair
labor practice or seeking to compel it or such Subsidiary to bargain with any
labor organization as to wages and conditions of employment, nor is there any
strike or other labor dispute or employee organizational activities involving
it or any of its Subsidiaries pending or threatened.
2.13. Employee Benefit Plans. All benefit plans, contracts,
agreements, arrangements, including, but not limited to, "employee benefit
plans", as defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and employment contracts and deferred
compensation plans and agreements, that cover any of the current or former
employees of the Company or any of its Subsidiaries (hereinafter referred to
collectively as the "Employee Plans"), comply in all material respects with all
applicable requirements of ERISA, the Internal Revenue Code of 1986, as amended
(the "Code") and other applicable laws; neither the Company nor any of its
Subsidiaries has engaged in a "prohibited transaction" (as defined in Section
406 of ERISA or Section 4975 of the Code) with respect to any Employee Plan;
neither the Company nor any of its Subsidiaries nor any entity which is
considered one employer with the Company under Section 4001 of ERISA or Section
414 of the Code (an "ERISA Affiliate") maintains or ever has maintained any
Employee Plan which is subject to Title IV of ERISA or Section 302 of ERISA
("Pension Plan"), or any "single-employer plan" (as defined in Section
4001(a)(15) of ERISA); and the Company and its Subsidiaries and ERISA
Affiliates have not contributed to any "multiemployer plan", as defined in
Section 3(37) of ERISA, on or after September 26, 1980. Each Employee Plan
which is an "employee pension benefit plan" (as defined in Section 3(2) of
ERISA) and which is intended to be qualified under Section 401(a) of the Code
(a "Qualified Plan") has received a favorable determination letter for "TRA"
(as defined in Rev. Proc. 93-39) from the Internal Revenue Service and the
Company and its Subsidiaries are not aware of any circumstances that could
result in revocation of any such
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<PAGE> 14
favorable determination letter; neither the Company nor any of its Subsidiaries
maintains or ever has maintained a Qualified Plan which is an "employee stock
ownership plan" (as defined in Section 4975(e)(7) of the Code); there is no
pending or threatened litigation, administrative action or proceeding relating
to any Employee Plan; except as set forth in Exhibit D, there has been no
announcement or legally binding commitment by the Company or its Subsidiaries
to create an additional Employee Plan, or to amend an Employee Plan except for
amendments required by applicable law which do not materially increase the cost
of such Employee Plan; and the Company and its Subsidiaries do not have any
obligations for retiree health and life benefits under any Employee Plan, that
cannot be amended or terminated without incurring any liability thereunder.
With respect to each Employee Plan, the Company has provided to the Acquiror a
true and correct copy of (i) for the last three years the annual report on the
applicable form of the Form 5500 series filed with the Internal Revenue Service
(the "IRS"), (ii) such Employee Plan, including amendments thereto, (iii) each
trust agreement and insurance contract relating to such Plan, including
amendments thereto, (iv) the most recent summary plan description for such
Employee Plan, including amendments thereto, if the Employee Plan is subject to
Title I of ERISA, (v) the most recent actuarial report or valuation if such
Employee Plan is a Pension Plan and (vi) the most recent determination letter
issued by the IRS if such Employee Plan is a Qualified Plan. A complete list
of the Employee Plans is set forth in the Company Disclosure Schedule, true,
correct and complete copies of which have been provided by the Company to
Acquiror. No payment of or in the nature of compensation that is owed or may
become due to any director, officer, employee or agent of the Company or any
Subsidiary, including any such payment that may become vested or accelerated as
a result of the transactions contemplated hereby, will be nondeductible under
Section 162(m) or Section 280G of the Code or subject to tax under Section 4999
of the Code. Neither the Company nor any Subsidiary is obligated to "gross up"
or otherwise compensate any such person because of the imposition of any tax on
a payment to such person. Except as set forth on the Company Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not result in any increase in, vesting of or acceleration of payment of
any compensation or benefit under any Employee Plan.
2.14. Contracts. All Material agreements, contracts or
commitments of the Company and its Subsidiaries are set forth in the Company
Disclosure Schedule (and true, correct and complete copies thereof have been
provided by the Company to Acquiror), including: (i) all Material written
employment or consulting agreements, contracts or commitments with, between or
among the Company or any of its Subsidiaries and any Person; (ii) all Material
agreements of guaranty or indemnification, other than by-laws provisions and
bank items presented for collection in the ordinary course of business, running
from the Company or any Subsidiary to any Person; (iii) all Material
agreements, contracts or commitments relating to the acquisition or disposition
of assets or capital stock of any Person; (iv) notwithstanding the lead-in to
this Section 2.14 and regardless of whether such agreements are Material or
not, all agreements, except for employment agreements and other agreements
listed pursuant to clause (i) above, for loans or the provision, purchase or
sale of goods, services or property between the
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Company or any of its Subsidiaries and any director, officer, employee, agent
or representative of the Company or any Subsidiary, or any relative or
affiliate of any of the foregoing; (v) all Material agreements, contracts or
commitments to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound and which require consent
by any other Person in connection with the consummation of the transactions
contemplated hereby, either to prevent a breach or to continue the
effectiveness thereof, or which in any way restrict the ability of the Company
or any Subsidiary to engage in a line of business; (vi) all Material agreements
relating to indebtedness of the Company and its Subsidiaries; and (vii) all
other Material agreements (other than this Agreement, agreements to be executed
with respect to this Agreement and agreements with respect to deposits received
and loans granted) of or binding upon the Company or any of its Subsidiaries.
Neither the Company nor any of its Subsidiaries is in Material default under
any of the contracts, agreements or other instruments described above. No
event or condition exists or has occurred which, with notice or lapse of time
or both, would constitute a Material default by the Company or any of its
Subsidiaries or, to the best of the Company's knowledge, by any other Person
under any of such contracts, agreements or instruments, and all such contracts,
agreements and instruments are valid and binding and in full force and effect.
For purposes of this Section 2.14, a Material agreement, contract or commitment
shall have the meaning set forth in Item 601(b)(10) of Regulation S-K
promulgated by the Securities and Exchange Commission.
2.15. Properties and Assets. The Company Disclosure Schedule
lists (i) all real property owned by the Company and each of its Subsidiaries;
(ii) each real property lease, sublease or installment purchase arrangement to
which the Company or any of its Subsidiaries is a party; (iii) a description of
each contract for the purchase, sale, or development of real estate to which
the Company or any of its Subsidiaries is a party; and (iv) all items of the
Company's or any of its Subsidiaries' tangible personal property and equipment
with a book value of $25,000 or more or having any annual lease payment of
$10,000 or more. Except for (a) items reflected in the consolidated financial
statements of the Company as of December 31, 1996, (b) exceptions to title that
do not interfere materially with the Company's or any of its Subsidiaries' use
and enjoyment of owned or leased real property (other than OREO, as defined in
Section 2.22), (c) liens for current real estate taxes not yet delinquent, or
being contested in good faith, properly reserved against (and reflected in the
consolidated financial statements of the Company as of December 31, 1996), and
(d) properties and assets sold or transferred in the ordinary course of
business consistent with past practices since December 31, 1996, the Company
and each of its Subsidiaries has good and, as to owned real property,
marketable and insurable title to all their properties and assets, reflected in
the consolidated financial statements of the Company as of December 31, 1996,
free and clear of all liens, claims, charges and other encumbrances. The
Company and each of its Subsidiaries, as lessees, have the right under valid
and subsisting leases to occupy, use and possess all property leased by them,
and there has not occurred under any such lease any material breach, violation
or default by the Company or any of its Subsidiaries, and neither the Company
nor any of its Subsidiaries has experienced any material uninsured damage or
destruction with respect to such properties since December 31, 1996. All
properties and assets
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used by the Company and its Subsidiaries are in good operating condition and
repair suitable for the purposes for which they are currently utilized and
comply in all material respects with all statutes, laws, ordinances, rules,
regulations, orders, permits, decrees, case law and other rules of law relating
thereto now in effect or scheduled to come into effect. The Company and each
of its Subsidiaries enjoy peaceful and undisturbed possession under all leases
for the use of all property under which they are the lessees, and all leases to
which the Company or any of its Subsidiaries is a party are valid and binding
obligations in accordance with the terms thereof.
2.16. Knowledge as to Conditions. The Company knows of no
reason why the approvals, consents, waivers, filings and registrations referred
to in Section 5.1(b) should not be made, obtained or granted on a timely basis
without the imposition of any condition of the type referred to in the provisos
to such Section.
2.17. Compliance With Laws. The Company and each of its
Subsidiaries has all material permits, licenses, certificates of authority,
orders and approvals of, and has made all filings, applications and
registrations with, federal, state, local and foreign governmental or
regulatory bodies that are required in order to permit it to carry on its
business as it is presently conducted. The Company and each of its
Subsidiaries has complied in all material respects with all Laws applicable to
it or to the operation of its business. Neither the Company nor any of its
Subsidiaries has received any notice of any material alleged or threatened
claim, violation or liability under any such Laws that has not heretofore been
cured and for which there is no remaining liability.
2.18. Fees. Other than financial advisory services performed
for the Company by Berwind Financial, L.P. pursuant to an agreement between the
Company and Berwind Financial, L.P. dated as of May 9, 1997, and addendums
thereto dated as of October 28, 1997 and January __, 1998, true, complete and
correct copies of which have been delivered by the Company to Acquiror, neither
the Company nor any of its Subsidiaries, nor any of their respective officers,
directors, employees or agents has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commissions or
finder's fees, and no broker or finder has acted directly or indirectly for it
or any of its Subsidiaries, in connection with this Agreement or the
transactions contemplated hereby.
2.19. Environmental Matters.
(a) Each of the Company and its Subsidiaries is
in compliance in all material respects with all applicable federal and state
laws and regulations relating to pollution or protection of the environment
(including without limitation, laws and regulations relating to emissions,
discharges, releases and threatened releases of Hazardous Material (as
hereinafter defined), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials;
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<PAGE> 17
(b) There is no suit, claim, action, proceeding,
investigation or notice pending or to the best knowledge of the Company and its
Subsidiaries threatened (or past or present actions or events that could form
the basis of any such suit, claim, action, proceeding, investigation or
notice), in which the Company or any of its Subsidiaries has been or, with
respect to threatened suits, claims, actions, proceedings, investigations or
notices may be, named as a defendant (x) for alleged material noncompliance
(including by any predecessor ), with any environmental law, rule or regulation
or (y) relating to any material release or threatened release into the
environment of any Hazardous Material, whether or not occurring at or on a site
owned, leased or operated by the Company or any of its Subsidiaries.
(c) To the best knowledge of the Company and its
Subsidiaries, during the period of the Company's or any of its Subsidiaries'
ownership or operation of any of its properties, there has not been any
material release of Hazardous Materials in, on, under or affecting any such
property.
(d) To the best knowledge of the Company and its
Subsidiaries, neither the Company nor any of its Subsidiaries has made or
participated in any loan to any person who is subject to any suit, claim,
action, proceeding, investigation or notice, pending or threatened, with
respect to (i) any alleged material noncompliance as to any property securing
such loan with any environmental law, rule or regulation, or (ii) the release
or the threatened release into the environment of any Hazardous Material at a
site owned, leased or operated by such person on any property securing such
loan.
(e) For purposes of this Section 2.19, the term
"Hazardous Material" means any hazardous waste, petroleum product,
polychlorinated biphenyl, chemical, pollutant, contaminant, pesticide,
radioactive substance, or other toxic material, or other material or substance
(in each such case, other than small quantities of such substance in retail
containers) regulated under any applicable environmental or public health
statute, law, ordinance, rule or regulation.
2.20. Antitakeover Provisions Inapplicable. Assuming that
neither Acquiror nor any affiliate of Acquiror owns, nor during the past five
years has owned, any shares of the capital stock of the Company, the provisions
of (i) Part A of Article XIII of the Company's certificate of incorporation and
(ii) the New Jersey Shareholders Protection Act (New Jersey Revised Statutes,
Title 14A, Chapter 10A, as from time to time amended) (the "SPA") do not and
will not apply to this Agreement, the Merger and the transactions contemplated
hereby. The Company has taken all such actions required to exempt the
Agreement and the Merger from (i) such Part A of Article XIII and any other
applicable anti-takeover provision that may be in the Company's certificate of
incorporation or by-laws and (ii) the SPA and any other applicable state
anti-takeover laws, and at the request of the Acquiror, will assist in any
challenge by the Acquiror to the applicability to the Merger of any such
provisions or state anti-takeover laws.
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<PAGE> 18
2.21. Vote Required. The affirmative vote of the holders of
a majority of the shares of Company Common Stock present and voting at the
meeting referred to in Section 4.8, and the affirmative vote of the holders of
two-thirds of the outstanding shares of Company Preferred Stock, are the only
votes of the holders of any class or series of its capital stock required or
necessary to approve this Agreement and the transactions contemplated hereby
consistent with the requirements of the NJBCA, the Company's certificate of
incorporation and by-laws, any other Law, or any agreement, contract or
understanding to which the Company may be a party or to which it may be
subject.
2.22. Reserves for Losses. All reserves or other allowances
for possible losses reflected in the Company's most recent financial statements
referred to in Section 2.8 complied with all Laws and are adequate under
generally accepted accounting principles. Neither the Company nor any of the
Company's Subsidiaries has been notified by any Regulatory Agency or the
Company's independent auditor, in writing or otherwise, that such reserves are
inadequate or that the practices and policies of the Company or any of its
Subsidiaries in establishing such reserves and in accounting for delinquent and
classified assets generally fail to comply with applicable accounting or
regulatory requirements, or that the Regulatory Agencies or the Company's
independent auditor believes such reserves to be inadequate or inconsistent
with the historical loss experience of the Company or any of its Subsidiaries.
The Company has provided to Acquiror in the Company Disclosure Schedule a
complete list of all extensions of credit and other real estate owned ("OREO")
that have been classified by any bank examiner (regulatory or internal) as
other loans specially mentioned, special mention, substandard, doubtful, loss,
classified or criticized, credit risk assets, concerned loans or words of
similar import. The Company agrees to update such list no less frequently than
monthly after the date of this Agreement until the earlier of the Closing Date
or the date that this Agreement is terminated in accordance with the terms
hereof. All OREO held by the Company or any of its Subsidiaries is being
carried net of reserves at the lower of cost or net realizable value.
2.23. Insurance. The Company Disclosure Schedule contains a
true, correct and complete list of all insurance policies and bonds maintained
by the Company and its Subsidiaries, including the name of the insurer, the
policy number, the type of policy and any applicable deductibles, and all such
insurance policies and bonds (or other insurance policies and bonds that have,
from time to time, in respect of the nature of the risks insured against and
amount of coverage provided, been substantially similar in kind and amount to
that customarily carried by parties similarly situated who own properties and
engage in businesses substantially similar to that of the Company and its
Subsidiaries) are in full force and effect and have been in full force and
effect. As of the date hereof, neither the Company nor any of its Subsidiaries
has received any notice of cancellation or amendment of any such policy or bond
or is in default under any such policy or bond, no coverage thereunder is being
disputed and all material claims thereunder have been filed in a timely
fashion. The existing insurance carried by the Company and its Subsidiaries is
and will continue to be, in respect of the nature of the risks insured against
and the amount of coverage provided, substantially similar in kind and amount
to that customarily carried
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<PAGE> 19
by parties similarly situated who own properties and engage in businesses
substantially similar to that of the Company and its Subsidiaries, and is
sufficient for compliance by the Company and its Subsidiaries with all
requirements of Law and agreements to which the Company or any of its
Subsidiaries is subject or is party. True, correct and complete copies of all
such policies and bonds set forth in the Company Disclosure Schedule, as in
effect on the date hereof, have been delivered to Acquiror.
2.24. Loans. As of the date hereof, to the best of the
Company's knowledge:
(a) Except as set forth in the Company Disclosure
Schedule, all loans owned by the Company or any of its Subsidiaries, or in
which the Company or any of its Subsidiaries has an interest, comply in all
material respects with all Laws, including, but not limited to, applicable
usury statutes, underwriting and record keeping requirements and the Truth in
Lending Act, the Equal Credit Opportunity Act, and the Real Estate Procedures
Act, and other applicable consumer protection statutes and the regulations
thereunder.
(b) All loans owned by the Company or any of its
Subsidiaries, or in which the Company or any of its Subsidiaries has an
interest, have been made or acquired by the Company in accordance with board of
director-approved loan policies and all of such loans are collectible, except
to the extent reserves have been made against such loans. Each of the Company
and each of its Subsidiaries holds mortgages contained in its loan portfolio
for its own benefit to the extent of its interest shown therein; such mortgages
evidence liens having the priority indicated by their terms, subject, as of the
date of recordation or filing of applicable security instruments, only to such
exceptions as are discussed in attorneys' opinions regarding title or in title
insurance policies in the mortgage files relating to the loans secured by real
property or are not material as to the collectibility of such loans; and all
loans owned by the Company and each of its Subsidiaries are with full recourse
to the borrowers, and each of the Company and each of its Subsidiaries has
taken no action which would result in a waiver or negotiation of any rights or
remedies available against the borrower or guarantor, if any, on any loan. All
loans purchased or originated by the Company or any of its Subsidiaries and
subsequently sold by the Company or any of it Subsidiaries have been sold
without any guaranty of payment by the Company or any of its Subsidiaries and
without any liability under any yield maintenance or similar obligation. True,
correct and complete copies of loan delinquency reports as of November 30, 1997
(on a loan by loan basis) prepared by the Company and each of its Subsidiaries,
which reports include all loans delinquent or otherwise in default, have been
provided to Acquiror in the Company Disclosure Schedule; the Company agrees to
update such reports no less frequently than monthly after the date of this
Agreement until the earlier of the Closing Date or the date that this Agreement
is terminated in accordance with the terms hereof. True, correct and complete
copies of the currently effective lending policies and practices of the Company
and each of its Subsidiaries also have been provided to Acquiror in the Company
Disclosure Schedule.
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<PAGE> 20
(c) Each outstanding loan participation sold by
the Company or any of its Subsidiaries was sold with the risk of non-payment of
all or any portion of that underlying loan to be shared by each participant
(including the Company or any of its Subsidiaries) proportionately to the share
of such loan represented by such participation without any recourse of such
other lender or participant to the Company or any of its Subsidiaries for
payment or repurchase of the amount of such loan represented by the
participation or liability under any yield maintenance or similar obligation.
The Company and each of its Subsidiaries have properly fulfilled in all
material respects their contractual responsibilities and duties in any loan in
which it acts as the lead lender or servicer and has complied in all material
respects with its duties as required under applicable regulatory requirements.
(d) Except as set forth in the Company Disclosure
Schedule, the Company and its Subsidiaries have properly perfected or caused to
be properly perfected all security interests, liens, or other interests in any
collateral securing any loans made by it.
(e) The Company Disclosure Schedule sets forth a
list of all loans or other extensions of credit to all directors, officers or
any other person covered by Regulation O of the Board of Governors of the
Federal Reserve System.
(f) The Company Disclosure Schedule sets forth a
list of the 20 largest loans of the Company based on total amounts outstanding
thereunder as of the date of this Agreement and includes with respect to each
such loan the Company's loan number, the identity of the borrower, the
outstanding principal amount, the stated maturity, the general character of the
loan (e.g. commercial, mortgage, etc.), interest rate/margin, due date and
appraised value of any collateral (as applicable); provided, that the Company
makes no representation or warranty as to the actual value of any such
collateral. The Company Disclosure Schedule sets forth a list of all loan
servicing agreements of the Company, true, correct and complete copies of which
have been provided to Acquiror.
2.25. No Dissenters' Rights. Shareholders of the Company
have no rights to dissent or otherwise seek rights of appraisal under New
Jersey law in connection with the Merger and the transactions contemplated by
this Agreement.
2.26. Disclosure. No representation or warranty contained in
Article II of this Agreement contains any untrue statement of a material fact
or omits to state a material fact necessary to make the statements herein not
misleading.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror hereby makes the following representations and
warranties to the Company as set forth in this Article III, each of which is
being relied upon by the Company as a material inducement to enter into and
perform this Agreement. All of the disclosure schedules of Acquiror referenced
below and thereby required of Acquiror pursuant to this Agreement are referred
to herein as the "Acquiror Disclosure Schedule".
3.1. Organization and Capitalization of Acquiror. Acquiror
is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware; it is a savings association holding company
as defined under HOLA, duly registered with the OTS; and it is not a bank
holding company as defined under the Bank Holding Company Act. The
certificate of incorporation and by-laws of Acquiror, copies of which are
attached to the Acquiror Disclosure Schedule, are true, correct and complete
copies of such documents as in effect as of the date of this Agreement.
3.2. Authorization and Validity of Agreement. Acquiror has
full corporate power and corporate authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. This Agreement has been authorized by all
necessary corporate action of Acquiror. This Agreement is a valid and binding
agreement of Acquiror enforceable against it in accordance with its terms,
subject as to enforcement to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles.
3.3. No Violations. Neither the execution and delivery of
this Agreement by Acquiror, nor the consummation by Acquiror of the
transactions contemplated hereby, nor compliance by Acquiror with any of the
terms or provisions hereof, will (i) violate any provision of the certificate
of incorporation or by-laws of Acquiror or its Subsidiaries, or (ii) violate
any Laws applicable to Acquiror or its Subsidiaries, or any of their respective
properties or assets, or (iii) assuming receipt of all required consents,
approvals and waivers set forth in the Acquiror Disclosure Schedule, and except
for such consents, approvals and waivers as will not, individually or in the
aggregate, have a material adverse effect on the ability of Acquiror or the
Company to consummate the transactions contemplated hereby, violate, conflict
with, result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of Acquiror or its
Subsidiaries under, any of the
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<PAGE> 22
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument or obligation to which
Acquiror or its Subsidiaries is a party, or by which they or any of their
respective properties or assets may be bound or affected. The execution and
delivery by Acquiror of this Agreement and the consummation of the transactions
contemplated hereby do not require any approval, consent or waiver under any
Law or filings or registrations with any court, administrative agency or
commission or other governmental authority or instrumentality or the approval,
consent or waiver of any other party to any such note, bond, mortgage,
indenture, deed of trust, license, lease, agreement, or other instrument or
obligation to which Acquiror or its Subsidiaries is a party or by which they or
any of their respective properties or assets may be bound or affected, other
than (x) the required approvals, consents, waivers, filings and registrations
as set forth in the Acquiror Disclosure Schedule, (y) the approval of the
shareholders of the Company referred to in Section 5.1(a), and (z) any other
approvals, consents, waivers, filings or registrations the absence of which,
individually or in the aggregate will not have a material adverse effect on the
ability of Acquiror or the Company to consummate the transactions contemplated
hereby.
3.4. Financial Statements. Each of the balance sheets or
statements of condition contained or incorporated by reference in Acquiror's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and
other reports of the Acquiror filed with the Securities and Exchange Commission
subsequent to December 31, 1996 under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, each in the form filed with the
Securities and Exchange Commission (collectively, the "Reports") (including any
related notes and schedules) fairly present the financial position of the
entity or entities to which it relates as of its date and each of the
statements of operations and retained earnings and of cash flows and changes in
financial position or equivalent statements contained or incorporated by
reference in its Reports (including any related notes and schedules) fairly
present the results of operations, retained earnings and cash flows of the
entity or entities to which it relates for the periods set forth therein, in
each case in accordance with generally accepted accounting principles
consistently applied during the periods involved, except as may be noted in the
Reports or, in the case of unaudited reports, as permitted by Form 10-Q.
3.5. Legal Proceedings. Neither Acquiror nor any of its
Subsidiaries is a party to any, and there are no pending or to the best of
Acquiror's and its Subsidiaries' knowledge threatened, legal, administrative,
arbitration or other proceedings, claims, actions or governmental or regulatory
investigations of any nature against Acquiror or any of its Subsidiaries or
which challenge the validity or propriety of the transactions contemplated by
this Agreement. There is no injunction, order, judgment, decree, or regulatory
restriction imposed upon Acquiror, any of its Subsidiaries or the assets of
Acquiror or any of its Subsidiaries.
3.6. Absence of Regulatory Agreements and Actions. Neither
Acquiror nor any of its Subsidiaries is a party to any cease and desist order,
written agreement, consent agreement or memorandum of understanding with, or a
party to any commitment letter or similar
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undertaking to, or is subject to any order or directive by, or is a recipient
of any extraordinary supervisory letter from, or has adopted any board
resolutions at the request of, any Regulatory Agency or any other governmental
authority or instrumentality, nor has it been advised by any Regulatory Agency
or any other governmental authority or instrumentality that it is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
3.7. Knowledge as to Conditions. Acquiror knows of no reason
why the approvals, consents, waivers, filings and registrations referred to in
Section 5.1(b) should not be made, obtained or granted on a timely basis
without the imposition of any condition of the type referred to in the provisos
to such Section.
3.8. Vote Required. No vote of the holders of any class or
series of the Acquiror's capital stock is necessary or required to approve this
Agreement and the transactions contemplated hereby consistent with the
requirements of the DGCL, Acquiror's certificate of incorporation and by-laws,
any other Law, or any agreement, contract or understanding to which Acquiror
may be a party or to which it may be subject.
3.9. Access to Funds. Acquiror will have, at the time that
all other conditions to closing have been met, all funds necessary to
consummate the Merger and to pay the aggregate Per Share Merger Consideration.
3.10. Disclosure. No representation or warranty contained
in Article III of this Agreement contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
not misleading.
ARTICLE IV
CONDUCT PRIOR TO CLOSING AND CERTAIN OTHER AGREEMENTS
4.1. Access to Information; Notice of Changes;
Confidentiality.
(a) The Company shall accord to the officers,
employees, accountants, counsel and other representatives of Acquiror, access,
during normal business hours during the period prior to the Effective Time, to
all its and its Subsidiaries' properties, books, contracts, commitments and
records and, during such period, the Company shall make available to Acquiror
(i) a copy of each report, schedule, registration statement and other document
filed or received by it and its Subsidiaries during such period pursuant to the
requirements of federal or state banking laws and (ii) all other information
concerning its and its Subsidiaries' business, properties and personnel as
Acquiror may reasonably request. Acquiror shall receive notice of all
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<PAGE> 24
meetings of the Company's and its Subsidiaries' Boards of Directors and any
committees thereof, and of any management committees. Up to two
representatives of Acquiror shall be permitted to attend all meetings of the
Boards of Directors (except for the portion of such meetings which relate to
the Merger or an Acquisition Proposal (as defined in Section 4.4) or such other
matters deemed confidential) of the Company and its Subsidiaries and such
meetings of committees of the Boards of Directors and management of the Company
and its Subsidiaries which Acquiror desires.
(b) Upon reasonable notice and subject to
applicable Laws relating to the exchange of information, Acquiror shall afford
to the officers, employees, accountants, counsel and other representatives of
the Company, access, during normal business hours during the period prior to
the Effective Time, to such information regarding Acquiror and its Subsidiaries
as shall be reasonably necessary for the Company to fulfill its obligations
pursuant to this Agreement or which may be reasonably necessary for the Company
to confirm that the representations and warranties of Acquiror contained herein
are true and correct and that the covenants of Acquiror contained herein have
been performed in all material respects.
(c) No investigation by either of the parties or
their respective representative shall affect the representations and warranties
of the other set forth herein.
(d) The Company shall provide Acquiror with true,
correct and complete copies of all financial and other information provided to
directors of the Company and its Subsidiaries in connection with meetings of
their Boards of Directors or committees thereof.
(e) During the period commencing on the date
hereof and ending on the Closing Date, each party shall promptly notify the
other party hereto in writing of any and all occurrences which, if they had
occurred prior to execution of this Agreement, would have caused the
representations and warranties of such party contained in Article II or Article
III, as the case may be, and the disclosures delivered in conjunction therewith
to be incorrect in any material respect.
(f) Each party will not, and will cause its
representatives not to, use any information obtained pursuant to this Section
4.1 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement. Subject to the requirements of law, each party
will keep confidential, and will cause its representatives to keep
confidential, all information and documents obtained pursuant to this Section
4.1 unless such information (i) was already known to such party and not
otherwise subject to a confidentiality obligation, (ii) becomes available to
such party from other sources not known by such party to be bound by a
confidentiality obligation, (iii) is disclosed with the prior written approval
of the party to which such information pertains, or (iv) is or becomes readily
ascertainable from published information or trade sources through no fault of
the disclosing party. In the event that this Agreement is terminated or the
transactions contemplated by this Agreement shall otherwise fail to be
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<PAGE> 25
consummated each party shall promptly cause all copies of documents or extracts
thereof containing information and data as to another party hereto to be
returned to the party which furnished the same.
4.2. Conduct of the Business of the Company Pending the
Closing Date. The Company agrees that, except as expressly permitted by this
Agreement or otherwise consented to or approved in writing by Acquiror, during
the period from the date hereof to the Effective Time:
(a) The Company will and will cause each of its
Subsidiaries to conduct their respective operations only in the ordinary course
of business consistent with past practice and with prudent banking practices
(subject, in any event, to the provisions of paragraphs (b) and (c) below) and
will use its best efforts to preserve intact their respective business
organizations, keep available the services of their officers and employees and
maintain satisfactory relationships with licensors, suppliers, distributors,
customers, clients and others having business relationships with them.
(b) The Company shall not, and shall not permit
any of its Subsidiaries to, take any action, engage in any transactions or
enter into any agreement which would adversely affect or delay in any respect
the ability of Acquiror or the Company to obtain any necessary approvals,
consents or waivers of any governmental authority required for the transactions
contemplated hereby or to perform its covenants and agreements on a timely
basis under this Agreement.
(c) The Company will not and will not permit any
of its Subsidiaries to:
(i) other than in the ordinary course of
business consistent with past practice, incur any indebtedness for borrowed
money, assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other Person, or make any loan or
advance;
(ii) (A) adjust, split, combine or
reclassify any capital stock; (B) make, declare or pay any dividend other than
(I) one regular quarterly cash dividend on Company Common Stock not in excess
of $0.0625 per share (or an aggregate of $76,000) for the quarter ending
December 31, 1997 to be paid on or before January 31, 1998, (II) regular cash
dividends on the Company Preferred Stock as provided in the certificate of
incorporation of the Company through the Effective Date (with declaration,
record and payment dates corresponding to the dividends paid by the Company on
the Company Preferred Stock during its fiscal year ended December 31, 1996,
plus a final declaration of a pro rata dividend from the last such record date
through the Effective Time) and (III) dividends paid by any of the wholly-owned
Subsidiaries of the Company to the Company or any of its wholly-owned
Subsidiaries; or (C) except as expressly provided in this Agreement, make any
other distribution on, or directly or
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indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock, (D) grant any stock appreciation rights or grant
any Person any right to acquire or receive any shares of its capital stock; or
(E) issue or propose the issuance of any additional shares of capital stock
except pursuant to Rights outstanding as of the date hereof in accordance with
their present terms;
(iii) other than in the ordinary course of
business consistent with past practice, sell, transfer, mortgage encumber or
otherwise dispose of any of its properties or assets to any Person other than a
direct or indirect wholly-owned Subsidiary of the Company, or cancel, release
or assign any indebtedness of any such Person or any claims held by any such
person, except in the ordinary course of business consistent with past practice
or pursuant to contracts or agreements in force at the date of this Agreement
and set forth in the Company Disclosure Schedule;
(iv) other than in the ordinary course of
business consistent with past practice, make any investment either by purchase
of stock or securities, contributions to capital, property transfers, or
purchase of any property or assets of any other individual, corporation or
other entity other than a wholly-owned Subsidiary of the Company;
(v) other than in the ordinary course of
business consistent with past practice, or as otherwise expressly provided in
this Agreement, enter into or terminate any contract or agreement, or make any
change in any of its leases or contracts; it being further understood and
agreed that the Company will not renew (1) the Company's agreement with Charter
Oak Marketing & Financial Group, which has expired in accordance with its terms
on or before the date hereof, or (2) any other contract, agreement or lease of
the Company or its Subsidiaries;
(vi) increase in any manner the
compensation or fringe benefits of any of its employees or pay any pension or
retirement allowance or pay any compensation or benefit or any retention or
other bonus not required by any existing plan or agreement to any such
employees, or become a party to, amend or commit itself to any pension,
retirement, profit-sharing or welfare benefit plan or agreement or employment
agreement with or for the benefit of any employee, in each case other than in
the ordinary course of business consistent with past practice, or voluntarily
accelerate the vesting of any stock options or other stock-based compensation;
provided, however, that the extension of the employment contract with Michael
Devlin pursuant to the terms thereof, and normal annual salary increases and
bonuses as disclosed to and consented to by Acquiror, shall be deemed to be
made in the ordinary course of business;
(vii) other than in the ordinary course of
business consistent with past practice settle any claim, action or proceeding
involving any liability of the Company or any
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of its Subsidiaries for money damages or restrictions upon the operations of
the Company or any of its Subsidiaries;
(viii) modify the manner in which it and
its Subsidiaries conduct or account for their business;
(ix) amend its articles of incorporation
or its by-laws;
(x) make capital expenditures
aggregating in excess of $10,000;
(xi) enter into any new line of business;
(xii) hire any new employee or promote any
employee to a rank of vice president or more senior position;
(xiii) except as expressly provided in this
Agreement, sell, purchase, enter into a lease, relocate, open or close any
banking or other office, or file an application pertaining to such action with
any governmental authority or instrumentality;
(xiv) make any new loans to, modify the
terms of any existing loan to, or engage in any other transactions (other than
routine banking transactions) with, any affiliated Person of the Company or any
of its Subsidiaries, provided that the continuation of revolving credit
facilities shall not constitute the making of a new loan;
(xv) make any investment, or incur
deposit liabilities, other than in the ordinary course of business consistent
with past practices, including deposit pricing;
(xvi) sell, purchase or lease any real
property, except for the sale of real estate that is the subject of a casualty
loss or condemnation or the sale of OREO on a basis consistent with past
practices;
(xvii) purchase or originate any loans,
except (1) those loans set forth on the Company Disclosure Schedule, or (2)
one- to four- family residential mortgage loans in accordance with existing
Premium lending policies and in the ordinary course of business consistent with
past practice;
(xviii) make any investments in any equity
or derivative securities or engage in any forward commitment, futures
transaction, financial options transaction, hedging or arbitrage transaction or
covered assets trading activities or make any investments in any investment
security with a maturity of greater than one year;
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(xix) sell or purchase any mortgage loan
servicing rights; or
(xx) agree to, or make any commitment to,
take any of the actions prohibited by this Section 4.2 or that is intended or
may be reasonably be expected to result in any of its representations and
warranties set forth in this Agreement being or becoming untrue or in any of
the conditions to the Merger set forth in Article V not being satisfied, or in
violation of any provision of this Agreement, except, in every case, as may be
required by applicable law.
(d) As soon as reasonably available, (i) but in
no event more than 45 days after the end of each fiscal quarter, the Company
will deliver to Acquiror unaudited Consolidated Statements of Condition of the
Company and related unaudited Statements of Operations and other financial
schedules of the Company for the period then ended and (ii) but in no event
more than 90 days after the end of the fiscal year, the Company will deliver to
Acquiror audited Consolidated Statements of Condition of the Company and its
Subsidiaries and related audited Statements of Operations, Statements of
Changes in Equity Capital and Statements of Cash Flows of the Company for the
year then ended accompanied by the audit report of the independent public
accountants with respect to the Company. Such financial statements will be
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the period involved, except as otherwise specifically
disclosed in such statements or the notes thereto. Such financial statements
will present fairly the financial position of the Company and its Subsidiaries
as of the dates shown and the results of their operations and changes in their
financial position for the periods then ended.
4.3. Conduct of the Business of Acquiror Pending the Closing
Date. Acquiror agrees that, except as expressly permitted by this Agreement or
otherwise consented to or approved in writing by the Company, during the period
from the date of this Agreement to the Effective Time, Acquiror will not take
any action that would adversely affect or delay in any material respect the
ability of the Company or Acquiror to obtain any necessary approvals, consents
or waivers of any governmental authority required for the transactions
contemplated hereby or to perform its covenants and agreements on a timely
basis under this Agreement.
4.4. No Solicitation of Other Offers. The Company agrees
that neither it nor any of its Subsidiaries nor any of their respective
officers and directors shall, and the Company shall direct and use its best
efforts to cause its employees, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its Subsidiaries) not to, directly or indirectly, take any action to
solicit, initiate or encourage any inquiries relating to the making of any
offer or proposal from any person, entity or group (other than Acquiror) with
respect to any tender or exchange offer, merger, consolidation, business
combination, liquidation, reorganization, sale or other disposition of any
significant portion of assets, sale of shares of capital stock, or similar
transactions involving the Company or any Subsidiary of the Company (any such
inquiry, offer, expression of interest or proposal, an
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"Acquisition Proposal"), or, except as may be legally required for the
discharge by the Board of Directors of its fiduciary duties as reasonably
determined by the Board of Directors, after receiving and duly considering the
written opinion of outside counsel to such Board (a copy of which shall be
provided to Acquiror promptly following its delivery to the Company), under
applicable law, engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person
relating to an Acquisition Proposal. The Company will immediately cease and
cause to be terminated any existing activities, discussions or negotiations
with any other parties conducted heretofore with respect to any of the
foregoing. The Company will promptly notify Acquiror of its receipt or the
occurrence of any Acquisition Proposal (including the material terms of any
such proposal and the status thereof). The Company agrees to take all
reasonable steps necessary to enforce its rights under any confidentiality or
similar agreement entered into with any person (other than Acquiror) in
relation to such person's making or evaluating any potential or actual
Acquisition Proposal, whether entered into before or after the date hereof.
4.5. Certain Filings, Consents and Arrangements. Acquiror
and the Company shall (a) as soon as practicable make any filings and
applications required to be filed in order to obtain all approvals, consents
and waivers of governmental authorities necessary or appropriate for the
consummation of the transactions contemplated hereby (including without
limitation all applications for required approvals as set forth in Section
5.1(b) hereof), (b) cooperate with one another (i) in promptly determining what
filings are required to be made and what approvals, consents or waivers are
required to be obtained under any relevant federal, state or foreign law or
regulation and (ii) in promptly making any such filings, furnishing information
required in connection therewith and seeking on a timely basis to obtain any
such approvals, consents or waivers, and (c) deliver to the other copies of the
publicly available portions of all such filings and applications promptly after
they are filed.
4.6. Reasonable Efforts. Acquiror and the Company each will
(i) use its reasonable efforts to take all action necessary to render accurate
as of the Closing Date the representations and warranties of it contained
herein, and (ii) use its reasonable efforts to perform or cause to be satisfied
each covenant or condition to be performed or satisfied by it as contemplated
by this Agreement.
4.7. Publicity. The initial press release announcing this
Agreement shall be a joint press release and thereafter the Company and
Acquiror shall consult with each other in issuing any press releases or
otherwise making public statements with respect to the transactions
contemplated hereby and in making any filings with any governmental entity or
with any national securities exchange with respect thereto.
4.8. Shareholder Approvals. The Company shall take, in
accordance with applicable law, the rules of any applicable securities exchange
or quotation system, and its certificate of incorporation and by-laws, all
action necessary to convene an appropriate meeting
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of shareholders of the Company to consider and vote upon the approval of this
Agreement and the transactions contemplated hereby (the "Company Meeting"),
which Company Meeting shall occur not more than ninety (90) days after the date
hereof. The Board of Directors of the Company will recommend approval of such
matters, the Company will take all reasonable lawful action to solicit such
approval by its shareholders and shall oppose any third party proposal or other
action that is inconsistent with this Agreement or the transactions
contemplated hereby, except as may be legally required for the discharge by the
Board of Directors of its fiduciary duties as reasonably determined by the
Board of Directors, after receiving and duly considering the written opinion of
outside counsel to such Board (a copy of which shall be provided to Acquiror
promptly following its delivery to the Company), under applicable law.
4.9. Bank Merger Agreement. Prior to the Effective Time, (a)
Acquiror shall (i) cause the Board of Directors of TeleBank to approve the Bank
Merger Agreement, (ii) approve the Bank Merger Agreement as the sole
shareholder of TeleBank, and (b) Premium shall execute and deliver the Bank
Merger Agreement.
4.10. Additional Agreements. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as promptly as
practicable, including using efforts to obtain all necessary actions or
non-actions, extensions, waivers, consents and approvals from all applicable
governmental entities, effecting all necessary registrations, applications and
filings (including, without limitation, filings under any applicable state
securities laws) and obtaining any required contractual consents and regulatory
approvals. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, or to vest
the Surviving Institution or its Subsidiaries with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, or the constituent banks to the Bank Merger, as the case
may be, the proper officers and directors of each party to this Agreement and
Acquiror's and the Company's Subsidiaries shall take all such necessary action
as may be reasonably requested by Acquiror.
4.11. Current Information. During the period from the date
of this Agreement to the Effective Time, the Company will cause one or more of
its designated representatives to confer on a regular and frequent basis (not
less than monthly) with representatives of Acquiror and to report the general
status of the ongoing operations of the Company. The Company will promptly
notify Acquiror of any material change in the normal course of business or in
the operation of the properties of the Company and of any governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), or the institution or the threat of litigation
involving the Company, and will keep Acquiror fully informed of such events.
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4.12. Transaction Expenses.
(a) For planning purposes, the Company shall,
within 15 days from the date hereof, provide Acquiror with its estimated budget
of transaction-related expenses reasonably anticipated to be payable by the
Company in connection with this transaction, including the fees and expenses of
counsel, accountants, investment bankers and other professionals. The Company
shall promptly notify Acquiror if or when it determines that it will expect to
exceed its budget.
(b) Promptly after the execution of this
Agreement, the Company shall ask all of its attorneys and other professionals
to render current and correct invoices for all unbilled time and disbursements.
The Company shall accrue and/or pay all of such amounts as soon as possible.
(c) The Company shall advise Acquiror monthly of
all out-of-pocket expenses which the Company has incurred in connection with
this transaction.
4.13. Change in Structure. Acquiror may elect to modify the
structure of the transactions contemplated by this Agreement as noted herein so
long as (a) there are no material adverse federal income tax consequences to
the Company's shareholders as a result of such modification, (b) the
consideration to be paid to the Company's shareholders under this Agreement is
not thereby changed or reduced in amount, and (c) such modification will not be
reasonably likely to delay materially or jeopardize receipt of any required
regulatory approvals. In the event that Acquiror elects to change the
structure of the Merger, the parties agree to modify this Agreement and the
various exhibits hereto to reflect such revised structure. In such event,
Acquiror shall prepare appropriate amendments to this Agreement and the
exhibits hereto for execution by the parties hereto. Acquiror and the Company
agree to cooperate fully with each other to effect such amendments.
4.14. Sale of Securities. At the option of Acquiror, the
Company shall create the Securities (as defined below) and sell the Securities
as determined by Acquiror, provided, that such transactions shall not (x) delay
or hinder the receipt of regulatory approvals or (y) delay or hinder
consummation of the Merger by more than 15 days after all other conditions to
closing are met other than those set forth in Section 5.2(g) and (h) and other
than the delivery of certificates and opinions to be delivered as of the
closing date. For purposes of this Section 4.14, "Securities" shall mean
securities of the Company in the aggregate face amount of $2.5 million,
representing a subordinated interest in certain assets of the Company
designated by Acquiror. Such securities shall be secured by not less than $25
million in asset collateral, which shall include, as determined by Acquiror in
its sole discretion, automobile and consumer loans, loans secured by
manufactured housing, second deeds of trust and certain first trusts with more
than normal credit risk.
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4.15. Compliance with Indenture, etc.. Acquiror shall take
all actions necessary in order to enable consummation of the Merger in
compliance with the terms of the Indenture dated as of May 27, 1994 between
Acquiror and Wilmington Trust Company (Trustee) and the terms of Acquiror's
Certificate of Incorporation.
ARTICLE V
CONDITIONS PRECEDENT TO MERGER
5.1. Conditions Precedent to Obligations of All Parties. The
respective obligations of Acquiror and the Company to effect the Merger are
subject to the satisfaction or waiver (subject to applicable law) at or prior
to the Effective Time of each of the following conditions:
(a) Company Shareholder Approval. This Agreement
and the transactions contemplated hereby shall have been approved by the
requisite vote of the shareholders of the Company in accordance with applicable
law.
(b) Regulatory Approval. Acquiror shall have
procured the required approval, consent, waiver or other administrative action
with respect to this Agreement and the transactions contemplated hereby by the
OTS, and all applicable statutory waiting periods shall have expired; and the
parties shall have procured all other regulatory approvals, consents, waivers
or administrative actions of governmental authorities or other person that are
necessary or appropriate to the consummation of the transactions contemplated
by this Agreement; provided, however, that no approval, consent, waiver or
administrative action referred to in this Section 5.1(b) shall be deemed to
have been received if it shall include any condition or requirement (other than
a condition or requirement requiring divestitures or other actions in order to
comply with or avoid challenge under the antitrust laws) that Acquiror
reasonably determines to be burdensome or otherwise alters the benefits for
which Acquiror bargained in this Agreement.
(c) Other Legal Requirements. All other
requirements prescribed by Law which are necessary to the consummation of the
transactions contemplated by this Agreement shall have been satisfied.
(d) Injunction. No party hereto shall be subject
to any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits the consummation of the Merger or any
other transaction contemplated by this Agreement, and no litigation or
proceeding shall be pending against the Acquiror or the Company or any of their
Subsidiaries brought by any governmental agency seeking to prevent consummation
of the transactions contemplated hereby.
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(e) Statutes. No statute, rule, regulation,
executive order, decree or order of any kind shall have been enacted, entered,
promulgated or enforced by any court or governmental authority which prohibits,
restricts or makes illegal the consummation of the Merger or any other
transaction contemplated by this Agreement.
5.2. Conditions Precedent to Obligations of Acquiror. The
obligations of Acquiror to effect the Merger are also subject to the
satisfaction or waiver, at or prior to the Effective Time, of each of the
following conditions unless waived by Acquiror:
(a) Accuracy of Representations and Warranties.
All representations and warranties of the Company contained herein and the
Stockholder Agreement at Exhibit B shall be true and correct as of the date
hereof and (except to the extent such representations and warranties speak as
of an earlier date) at and as of the Closing Date, with the same force and
effect as though made on and as of the Closing Date; provided, however, that
for purposes of this paragraph, such representations and warranties shall be
deemed to be true and correct, unless the failure or failures of such
representations and warranties to be so true and correct, individually or in
the aggregate, would have a Material Adverse Effect on the Company. Such
determination of aggregate Material Adverse Effect shall be made as if there
were no materiality qualifications in such representations and warranties.
(b) The Company's Performance. The Company shall
have performed in all material respects all obligations and agreements, and
complied in all material respects with all covenants and conditions, contained
in this Agreement to be performed or complied with by it prior to the Closing
Date.
(c) Officer's Certificate. Acquiror shall have
received a certificate signed by the Chief Executive Officer and the Chief
Financial Officer of the Company, dated the Closing Date, certifying as to the
matters set forth in subparagraphs 5.2(a) and (b).
(d) Consents Under Agreements. The consent,
approval or waiver of each person (other than the regulatory approvals,
consents, waivers or administrative actions of governmental authorities or
other person referred to in Section 5.1(b) hereof) whose consent or approval
shall be required in order to permit the succession by the Surviving
Institution to the Merger and the Surviving Bank to the Bank Merger to any
obligation, right or interest of the Company or any of its Subsidiaries under
any loan or credit agreement, note, mortgage, indenture, lease, license or
other agreement or instrument shall have been obtained except for those, the
failure of which to obtain, will not result in a Material Adverse Effect on the
Surviving Institution.
(e) Opinion. Acquiror shall have received from
Pepper, Hamilton & Scheetz LLP, counsel for the Company, an opinion addressed
to the Board of Directors of Acquiror and dated as of the Closing Date in
substantially the form set forth in Exhibit C hereto.
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(f) Formation of Securities. The Company shall
not have breached in any material respect its obligations under Section 4.14
hereof.
(g) Redemption of Notes. Each and every 1993
Note which shall not have been converted into shares of Common Stock at the
election of the holder thereof in accordance with the terms of the 1993 Notes
prior to the 1993 Note Redemption Date shall have been redeemed by the Company
as of the 1993 Note Redemption Date. Each and every 1994 Note which shall not
have been converted into shares of Common Stock at the election of the holder
thereof in accordance with the terms of the 1994 Notes prior to the 1994 Note
Redemption Date shall have been redeemed by the Company as of the 1994 Note
Redemption Date. It is understood and agreed that if the Company does not have
funds legally available for the redemption of such 1993 Notes and 1994 Notes,
then Acquiror, upon satisfaction of all other conditions to the Merger such
that the only remaining condition is redemption of such 1993 Notes and 1994
Notes, shall provide such funds. It is understood and agreed by the parties
that neither the unavailability of funds to redeem the 1993 Notes and the 1994
Notes, nor the use of funds by the Company for such purpose, shall constitute
or represent a Material Adverse Effect on the Company, or otherwise constitute
or represent a breach of any representation or warranty of the Company
hereunder.
(h) Termination of Florida Lease. The Company
shall have terminated the Office Services Agreement dated October 1, 1996
between Byron Financial & Management Corp. d/b/a Crown Suites & Message Center
("CSMC") and Premium Bank (and letter with respect thereto dated December 15,
1997) (the "Office Services Agreement") such that the Office Services Agreement
shall be of no further force or effect. The Company shall have further
discharged in full all of its obligations and liabilities arising thereunder
(including but not limited to the payment to CSMC of all amounts due and
payable thereunder) through the date of termination of the Office Services
Agreement or otherwise arising as a result of the termination of the Office
Services Agreement. The Company shall provide such documentation to Acquiror
as Acquiror shall reasonably request evidencing such termination of the Office
Services Agreement and the discharge of all obligations and liabilities arising
thereunder. It is understood and agreed that if the Company does not have
funds legally available for the payment of such amounts, then Acquiror, upon
satisfaction of all other conditions to the Merger such that the only remaining
condition is payment of such amounts (and redemption of the 1993 Notes and 1994
Notes, if funds therefore are required from Acquiror as provided in Section
5.2(g) above) shall provide such funds. It is understood and agreed by the
parties that neither the unavailability of funds to pay such amounts related to
termination of the Office Services Agreement, nor the use of funds by the
Company for such purpose, shall constitute or represent a Material Adverse
Effect on the Company, or otherwise constitute or represent a breach of any
representation or warranty of the Company hereunder.
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5.3. Conditions Precedent to Obligation of the Company. The
obligation of the Company to effect the Merger is also subject to the
satisfaction or waiver, at or prior to the Effective Time, of each of the
following conditions unless waived by the Company:
(a) Accuracy of Representations and Warranties.
All representations and warranties of Acquiror contained herein shall be true
and correct in all Material respects as of the date hereof and (except to the
extent such representations and warranties speak as of an earlier date) at and
as of the Closing, with the same force and effect as though made on and as of
the Closing Date; provided, however, that for purposes of this paragraph, such
representations and warranties shall be deemed to be true and correct, unless
the failure or failures of such representations and warranties to be so true
and correct, individually or in the aggregate, would have a Material Adverse
Effect on Acquiror. Such determination of aggregate Material Adverse Effect
shall be made as if there were no materiality qualifications in such
representations and warranties.
(b) Acquiror's Performance. Acquiror shall have
performed in all material respects all obligations and agreements, and complied
in all material respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by it prior to the Closing Date.
(c) Officer's Certificate. The Company shall
have received a certificate signed by the Chief Executive Officer and the Chief
Financial Officer of Acquiror, dated the Closing Date, certifying as to the
matters set forth in subparagraphs 5.3(a) and (b).
(d) Employment and Other Agreements. Acquiror
shall have entered into the agreements with Michael D. Devlin in the forms
attached hereto as Exhibit D (the "Devlin Agreements").
ARTICLE VI
COVENANTS
6.1. Employees; Benefits. Acquiror shall have the right (but
not the obligation) to offer employment, as officers and employees of the
Surviving Institution or other subsidiaries of Acquiror immediately following
the Effective Time, to any and all persons who are officers and employees of
the Company or any of its Subsidiaries immediately before the Effective Time.
As soon as administratively practicable after the Effective Time, employees of
the Company and its Subsidiaries who continue as employees of Acquiror or its
subsidiaries, shall be generally entitled to participate in the pension,
benefit, severance and similar plans of Acquiror on substantially the same
terms and conditions as employees of Acquiror and its subsidiaries,
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without duplication with respect to pension, benefit, severance and similar
plans provided by the Company that survive the Effective Time.
6.2. Indemnification.
(a) From and after the Effective Time, Acquiror
agrees to indemnify and hold harmless each present and former director and
officer of the Company or its Subsidiaries and each officer or employee of the
Company or its Subsidiaries that is serving or has served as a director or
trustee of another entity expressly at the Company's request or direction (the
"Indemnified Parties"), against any and all costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages or
liabilities (collectively, "Costs") incurred in connection with any and all
claims, actions, suits, proceedings or investigations, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters
arising out of or in connection with such party's position as, or actions taken
as, a director or officer of the Company or a Subsidiary or director or trustee
of another entity at the request or direction of the Company, at or prior to
the Effective Time, asserted or claimed not later than the sixth (6th)
anniversary of the Effective Time, to the fullest extent permitted by
applicable law and the certificate of incorporation and by-laws of Acquiror as
in effect on the date hereof and delivered to the Company as part of the
Acquiror Disclosure Schedule (the "Certificate of Incorporation and By-laws of
Acquiror") (and also advance expenses incurred to the fullest extent permitted
by applicable law and the Certificate of Incorporation and By-laws of Acquiror
upon receipt of any undertaking required by applicable law or the Certificate
of Incorporation and By-laws of Acquiror); provided, however, that Acquiror
shall not have any obligation hereunder to any Indemnified Party when and if a
court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and nonappealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. If such indemnity is determined not to be
available as a matter of law with respect to any Indemnified Party, then the
Acquiror and the Indemnified Party shall contribute to the amount payable in
such proportion as is appropriate to reflect relative faults and benefits and
other relevant equitable considerations.
(b) Any Indemnified Party wishing to claim
indemnification under Section 6.2(a), upon learning of any such claim, action,
suit, proceeding or investigation, shall promptly notify Acquiror thereof, but
the failure to so notify shall not relieve Acquiror of any liability it may
have to such Indemnified Party if such failure does not materially prejudice
Acquiror. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time): (i)
Acquiror shall have the right to assume the defense thereof and Acquiror shall
not be liable to such Indemnified Parties for any legal expenses of other
counsel or any other expenses subsequently incurred by such Indemnified Parties
in connection with the defense thereof, except that if Acquiror elects not to
assume such defense, or counsel for the Indemnified Parties advises that there
are issues which raise conflicts of interest between Acquiror and the
Indemnified Parties, the Indemnified Parties may retain
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counsel satisfactory to them or in the case of any such conflicts of interest,
satisfactory to them and Acquiror, and Acquiror shall pay the reasonable fees
and expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received; (ii) the Indemnified Parties will cooperate in the
defense of any such matter; and (iii) Acquiror shall not be liable for any
settlement effected without its prior written consent which shall not be
unreasonably withheld.
6.3. Certain Payments. Acquiror shall make the payments set
forth in the Devlin Agreements to Michael D. Devlin and as set forth on Exhibit
D to any other officers or employees of the Company as, if and when required
pursuant thereto.
ARTICLE VII
TERMINATION
7.1. Termination. This Agreement may be terminated, and the
Merger abandoned, prior to the Effective Time, either before or after its
approval by the shareholders of the Company:
(a) by the mutual consent of Acquiror and the
Company, if the Board of Directors of each so determines by vote of a majority
of the members of its entire Board;
(b) (i) by Acquiror or the Company (provided
that if the Company is a terminating party that it is not in breach of its
obligations under Section 4.8), if its Board of Directors so determines by vote
of a majority of the members of its entire Board, in the event of the failure
of the shareholders of the Company to approve this Agreement; or (ii) at any
time prior to the Company Meeting, by Acquiror, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, if the
Board of Directors of the Company or the Company shall have failed to make its
recommendation referred to in Section 4.8, withdrawn such recommendation or
modified or changed such recommendation in a manner adverse to the interests of
Acquiror or the Company shall have failed to oppose any third party proposal
that is inconsistent with the transactions contemplated by this Agreement or
otherwise breaches Section 4.4 or 4.8;
(c) by Acquiror or the Company (provided that the
terminating party is not then in Material breach of any representation,
warranty, covenant or agreement which would give the other party the right to
terminate this Agreement), if its Board of Directors so determines by vote of a
majority of the members of its entire Board, in the event of a Material breach
by the other party hereto of any representation, warranty, covenant or
agreement contained herein which is not cured or not curable within 30 days
after written notice of such breach is given to the party committing such
breach by the other party. For purposes of this paragraph, the representations
and warranties of the parties shall be deemed to be true and correct, unless
the failure or failures
-33-
<PAGE> 38
of such representations and warranties to be so true and correct, individually
or in the aggregate, would have a Material Adverse Effect on the Company or
Acquiror, as the case may be. Such determination of aggregate Material Adverse
Effect shall be made as if there were no materiality qualifications in such
representations and warranties;
(d) by Acquiror or the Company by written notice
to the other party if either (i) any approval, consent or waiver of a
governmental authority required to permit consummation of the transactions
contemplated hereby shall have been denied (provided that no party shall have
the right to terminate this Agreement pursuant to this Section 7.1(d) if such
denial shall be due to the failure of such party to perform or observe the
covenants and agreements of such party set forth herein) or (ii) any
governmental authority of competent jurisdiction shall have issued a final,
unappealable order enjoining or otherwise prohibiting consummation of the
transactions contemplated by this Agreement;
(e) by Acquiror or the Company, if its Board of
Directors so determines by vote of a majority of the members of its entire
Board, in the event that the Merger is not consummated by July 31, 1998, unless
the failure to so consummate by such time is due to the breach of any
representation, warranty or covenant contained in this Agreement by the party
seeking to terminate; or
(f) by the Acquiror by written notice to the
Company if the Stockholder Agreement shall not yet have been executed and
delivered as required by Section 1.7 prior to the close of business on the
Business Day following the date of execution and delivery of this Agreement.
7.2. Effect of Termination.
(a) In the event of the termination of this
Agreement by either Acquiror or the Company, as provided above, except as
otherwise provided in Section 8.3 hereof, this Agreement shall thereafter
become void and there shall be no liability on the part of any party hereto or
their respective officers or directors, except that any such termination shall
be without prejudice to the rights of any party hereto arising out of the
willful breach of any covenant or willful misrepresentation by any other party
under this Agreement.
(b) Acquiror and the Company hereby agree that:
(i) in the event that this Agreement has
been terminated by the Company or Acquiror pursuant to Section 7.1(b) hereof or
by Acquiror pursuant to Section 7.1(c) hereof then the Company shall pay to
Acquiror immediately upon demand the sum of One Million Dollars ($1,000,000);
and
-34-
<PAGE> 39
(ii) in the event that this Agreement has
been terminated by the Company pursuant to Section 7.1(c) hereof then Acquiror
shall pay to the Company immediately upon demand the sum of One Million Dollars
($1,000,000);
(either such fee, the "Break Up Fee"), which the parties agree is a reasonable
estimate of certain costs and expenses paid or incurred or to be paid or
incurred by the parties, respectively, in connection with the Merger Agreement
and the transactions contemplated hereby, and the loss of the economic value of
this Agreement to the applicable party. In the event that a party shall
demand, and the other party shall have paid, the Break Up Fee as provided in
this Section 7.2(b), then the party paying such Break Up Fee shall have no
further liability to the other party on account of any breach or
misrepresentation forming the basis of a termination described in this Section
7.2(b).
ARTICLE VIII
MISCELLANEOUS
8.1. Certain Definitions; Interpretation. As used in this
Agreement, the following terms shall have the meanings indicated:
"Business Day" means any day other than a Saturday, a Sunday,
or a public holiday in the State of New Jersey or the State of Virginia.
"Laws" means any and all statutes, laws, ordinances, rules,
regulations, orders, permits, judgments, injunctions, decrees, case law and
other rules of law enacted, promulgated or issued by any government authority
or instrumentality.
"Material" means material to Acquiror or the Company (as the
case may be) and its respective Subsidiaries, taken as a whole.
"Material Adverse Effect," with respect to Acquiror or the
Company, as applicable, means any condition, event, change or occurrence that,
individually or in the aggregate with other conditions, events, changes or
occurrences, is reasonably likely to have a material adverse effect upon (A)
the financial condition, business, properties or results of operations of
Acquiror or the Company, as applicable, and its Subsidiaries, taken as a whole,
or (B) the ability of Acquiror or the Company, as applicable to perform its
obligations under, and to consummate the transactions contemplated by, this
Agreement.
"Person" includes an individual, corporation, partnership,
association, trust, limited liability company, unincorporated organization or
other legal entity.
-35-
<PAGE> 40
"Subsidiary," with respect to a Person, means any other Person
controlled by such person, as determined in accordance with regulations of the
OTS.
When a reference is made in this Agreement to Articles, Sections, or Exhibits,
such reference shall be to a Section or Article of, or Exhibit to, this
Agreement unless otherwise indicated. The table of contents, tie sheet and
headings contained in this Agreement are for ease of reference only and shall
not affect the meaning or interpretation of this Agreement. Whenever the words
"include," "includes," or "including" are used in this Agreement, they shall be
deemed followed by the words "without limitation." Any singular term in this
Agreement shall be deemed to include the plural, and any plural term the
singular.
8.2. Fees and Expenses. All costs and expenses incurred in
connection with this Agreement and the consummation of the transactions
contemplated hereby shall, if incurred by Acquiror, be paid by Acquiror and
shall, if incurred by the Company, be paid by the Company.
8.3. Survival. Only those agreements and covenants of the
parties that are applicable in whole or in part after the Effective Time shall
survive the Effective Time. All other representations, warranties, agreements
and covenants shall be deemed to be conditions of this Agreement and shall not
survive the Effective Time. If this Agreement shall be terminated, the
agreements of the parties in Sections 4.1(f), 7.2, 8.2 and this Section 8.3
shall survive such termination.
8.4. Notices. All notices, requests, demands, waivers and
other communications required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given if delivered in
person or mailed, certified or registered mail or by courier, with postage
prepaid, as follows:
(a) if to the Company, to it at:
Direct Financial Corporation
The Paint Works, Suite E1
6 East Clementon Road
P.O. Box 159
Gibbsboro, New Jersey 08026-0159
Attention: Michael D. Devlin
-36-
<PAGE> 41
with a copy (which shall not be deemed
notice) to:
Pepper Hamilton LLP
Suite 400
1235 Westlakes Drive
Berwyn, PA 19312-2401
Attention: James D. Rosener, Esquire
(b) if to Acquiror, to it at:
TeleBanc Financial Corporation
1111 N. Highland Street
Arlington, VA 22201
Attention: Mitchell H. Caplan
with a copy (which shall not be deemed
notice) to:
Hogan & Hartson L.L.P.
Columbia Square
555 13th Street
Washington, D.C. 20004-1109
Attention: Stuart G. Stein, Esquire
or to such other Person or address as any party shall specify by notice in
writing to each of the other parties. All such notices, requests, demands,
waivers and communications shall be deemed to have been received on the date of
delivery unless if mailed in which case on the third Business Day after the
mailing thereof except for a notice of a change of address, which shall be
effective only upon receipt thereof.
8.5. Entire Agreement. This Agreement and the Exhibits and
other documents (including the disclosure schedules) referred to herein or
delivered pursuant hereto collectively contain the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersede all prior and contemporaneous agreements and understandings, oral and
written, with respect thereto.
8.6. Binding Effect; Benefit; Assignment. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors, heirs and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
either of the parties hereto without the prior written consent of the other
party. Nothing in this Agreement, expressed or implied, is intended to confer
on any person, other than the parties hereto or their respective successors and
permitted assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement.
-37-
<PAGE> 42
8.7. Waiver. Prior to the Effective Time, any provision of
this Agreement may be (i) waived by the party benefitted by the provision or by
both parties, by a writing executed by an executive officer or officers, or
(ii) amended or modified at any time (including the structure of the
transaction) by an agreement in writing between the parties hereto approved by
their respective boards of directors, except that, after the vote by the
shareholders of the Company, no such amendment or modification may be made
which reduces or changes the form and amount of consideration payable pursuant
to this Agreement without further shareholder approval.
8.8. Further Actions. Each of the parties hereto agrees
that, subject to its legal obligations, it will use its reasonable efforts to
fulfill all conditions precedent specified herein, to the extent that such
conditions are within its control, and to do all things reasonably necessary to
consummate the transactions contemplated hereby.
8.9. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
8.10. Applicable Law. This Agreement and the legal relations
between the parties hereto shall be governed by and construed in accordance
with the laws of the State of Delaware, without regard to the conflict of laws
rules thereof.
8.11. Severability. If any term, provision, covenant or
restriction contained in this Agreement is held by a court of competent
jurisdiction or other authority to be invalid, void, unenforceable or violative
of its regulatory policy, then such term, provision, covenant or restriction
shall be ineffective to the extent of such invalidity, voidness,
unenforceability or violation and the remainder of the terms, provisions,
covenants and restrictions contained in this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
8.12. Enforcement of Agreement. The parties hereto agree
that irreparable damage would occur in the event that the provisions of this
Agreement were not performed in accordance with its specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions thereof in any court of
the United States or any state having jurisdiction, this being in addition to
any other remedy to which they are entitled at law or in equity.
-38-
<PAGE> 43
IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement as of the date first above written.
TELEBANC FINANCIAL CORPORATION
By: \s\ Mitchell H. Caplan
----------------------
Name: Mitchell H. Caplan
Title: Vice Chairman of the Board
and President
DIRECT FINANCIAL CORPORATION
By: \s\ Michael D. Devlin
---------------------
Name: Michael D. Devlin
Title: President
-39-
<PAGE> 1
TELEBANC FINANCIAL CORPORATION
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
March 31, ------------------------
1998 1997 1996 1995
-------- ---- ---- ----
BASIC
-----
<S> <C> <C> <C> <C>
Net income for basic earnings per common
share 274 $ 3,671 $ 2,552 $ 2,720
Weighted average number of common shares
outstanding during the year 4,468 4,383 4,099 4,099
Basic earnings per common share 0.06 $ 0.84 $ 0.62 0.66
DILUTED
-------
Net income for diluted earnings per share 274 $ 4,217 $ 2,552 $ 2,720
Weighted average number of shares used in
calculating diluted earnings per share 5,757 7,411 4,406 4,104
Diluted earnings per common share 0.05 $ 0.57 $ 0.58 0.66
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Washington, DC
May 15, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000920986
<NAME> TELEBANC FINANCIAL CORP
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,165
<INT-BEARING-DEPOSITS> 44,241
<FED-FUNDS-SOLD> 45,750
<TRADING-ASSETS> 21,110
<INVESTMENTS-HELD-FOR-SALE> 410,440
<INVESTMENTS-CARRYING> 406,735
<INVESTMENTS-MARKET> 3,705
<LOANS> 544,298
<ALLOWANCE> 3,594
<TOTAL-ASSETS> 1,100,352
<DEPOSITS> 522,221
<SHORT-TERM> 479,909
<LIABILITIES-OTHER> 13,212
<LONG-TERM> 29,614
9,572
15,281
<COMMON> 22
<OTHER-SE> 30,521
<TOTAL-LIABILITIES-AND-EQUITY> 1,000,352
<INTEREST-LOAN> 34,729
<INTEREST-INVEST> 0
<INTEREST-OTHER> 24,572
<INTEREST-TOTAL> 59,301
<INTEREST-DEPOSIT> 25,958
<INTEREST-EXPENSE> 20,105
<INTEREST-INCOME-NET> 13,238
<LOAN-LOSSES> 921
<SECURITIES-GAINS> 4,093
<EXPENSE-OTHER> 10,142
<INCOME-PRETAX> 6,268
<INCOME-PRE-EXTRAORDINARY> 6,268
<EXTRAORDINARY> 0
<CHANGES> 2,597
<NET-INCOME> 3,671
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 1.73
<LOANS-NON> 11,437
<LOANS-PAST> 5,273
<LOANS-TROUBLED> 425
<LOANS-PROBLEM> 11,437
<ALLOWANCE-OPEN> 3,310
<CHARGE-OFFS> 304
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 3,594
<ALLOWANCE-DOMESTIC> 3,084
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,084
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000920986
<NAME> TELEBANC FINANCIAL CORP
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,413
<INT-BEARING-DEPOSITS> 1,096
<FED-FUNDS-SOLD> 750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 260,049
<INVESTMENTS-MARKET> 3,520
<LOANS> 354,779
<ALLOWANCE> 2,957
<TOTAL-ASSETS> 647,965
<DEPOSITS> 390,486
<SHORT-TERM> 202,381
<LIABILITIES-OTHER> 13,854
<LONG-TERM> 16,586
0
0
<COMMON> 20
<OTHER-SE> 14,637
<TOTAL-LIABILITIES-AND-EQUITY> 647,965
<INTEREST-LOAN> 17,726
<INTEREST-INVEST> 22,552
<INTEREST-OTHER> 233
<INTEREST-TOTAL> 40,511
<INTEREST-DEPOSIT> 17,033
<INTEREST-EXPENSE> 31,946
<INTEREST-INCOME-NET> 8,565
<LOAN-LOSSES> 919
<SECURITIES-GAINS> 3,412
<EXPENSE-OTHER> 6,240
<INCOME-PRETAX> 4,380
<INCOME-PRE-EXTRAORDINARY> 4,380
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,720
<EPS-PRIMARY> .62
<EPS-DILUTED> .58
<YIELD-ACTUAL> 1.94
<LOANS-NON> 10,250
<LOANS-PAST> 4,414
<LOANS-TROUBLED> 418
<LOANS-PROBLEM> 11,485
<ALLOWANCE-OPEN> 2,311
<CHARGE-OFFS> 393
<RECOVERIES> 120
<ALLOWANCE-CLOSE> 2,957
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,131
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000920986
<NAME> TELEBANC FINANCIAL CORP
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,817
<INT-BEARING-DEPOSITS> 5,243
<FED-FUNDS-SOLD> 905
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,058
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 250,978
<ALLOWANCE> 2,311
<TOTAL-ASSETS> 553,943
<DEPOSITS> 306,500
<SHORT-TERM> 199,405
<LIABILITIES-OTHER> 9,977
<LONG-TERM> 16,496
0
0
<COMMON> 20
<OTHER-SE> 14,637
<TOTAL-LIABILITIES-AND-EQUITY> 21,565
<INTEREST-LOAN> 17,726
<INTEREST-INVEST> 27,552
<INTEREST-OTHER> 233
<INTEREST-TOTAL> 40,511
<INTEREST-DEPOSIT> 17,033
<INTEREST-EXPENSE> 14,913
<INTEREST-INCOME-NET> 8,565
<LOAN-LOSSES> 1,722
<SECURITIES-GAINS> 3,412
<EXPENSE-OTHER> 6,240
<INCOME-PRETAX> 4,380
<INCOME-PRE-EXTRAORDINARY> 4,380
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,720
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
<YIELD-ACTUAL> 1.87
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 989
<CHARGE-OFFS> 400
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,311
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
