SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 33-76930
TELEBANC FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3759196
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 NORTH HIGHLAND STREET, ARLINGTON, VIRGINIA 22201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 247-3700.
Securities registered pursuant to Section 12(b) of the Act:
(Not applicable)
Securities registered pursuant to Section 12(g) of the Act:
(Not applicable)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
Based upon the closing price of the registrant's common stock as of
March 20, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $10.4 million.*
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share.
Outstanding at March 20, 1997: 2,211,961 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement for the 1997 Annual Meeting
of Stockholders are incorporated by reference into Part III, Items 10 - 13.
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* Solely for purposes of this calculation, all executive officers and
directors of the registrant, Employee Stock Ownership Plan and all
shareholders reporting beneficial ownership of more than 5% of the
registrant's common stock are considered to be affiliates. This reference
to affiliate status is not necessarily a conclusive determination for other
purposes.
<PAGE>
EXPLANATORY NOTE
This Form 10-K/A is being filed to provide the information required in
Part III of Form 10-K and to file Exhibit 99.1.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information set forth under the caption
"Election of Directors" in the definitive proxy statement for the 1997 Annual
Meeting of Stockholders, and such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the captions
"Executive Compensation and Other Information" and "Election of Directors --
Compensation of Directors" in the definitive proxy statement for the 1997 Annual
Meeting of Stockholders, and such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information set forth under the captions
"Stock Owned by Management and Certain Beneficial Owners" and "Executive
Compensation and Other Information -- Security Ownership of the Company's Parent
by Management" in the definitive proxy statement for the 1997 Annual Meeting of
Stockholders, and such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information set forth under the captions
"Election of Directors" and "Executive Compensation and Other Information" in
the definitive proxy statement for the 1997 Annual Meeting of Stockholders, and
such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following exhibit is filed with this report:
99.1 Definitive proxy statement for the 1997 Annual Meeting of
Stockholders.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of the 23rd day of
April, 1997.
TELEBANC FINANCIAL CORPORATION
-------------------------------
Registrant
By: /s/ Mitchell H. Caplan
--------------------------
Mitchell H. Caplan
Vice Chairman of the Board
and President
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<PAGE>
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Exhibit Page
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99.1 Definitive proxy statement for the 1997 Annual Meeting of
Stockholders.
-4-
Exhibit 99.1
TELEBANC
FINANCIAL CORPORATION
April 7, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of
Stockholders of TeleBanc Financial Corporation. The meeting will be held on
Wednesday, May 7, 1997 at 11:00 a.m. at the Company's headquarters, 1111 North
Highland Street, Arlington, Virginia 22201. I hope that you will be able to join
us.
At this meeting you will be asked to vote, in person or by proxy, to
elect three directors, amend certain provisions of the Company's certificate of
incorporation, adopt the 1997 Stock Option Plan, ratify the appointment of the
Company's independent accountants and act on such other business as may properly
come before the meeting. The Notice of Annual Meeting and Proxy Statement
accompanying this letter describe the business to be transacted at the meeting
It is important that your shares be represented at the meeting,
regardless of the number you may hold. Whether or not you plan to attend the
meeting in person, please sign, date and return the enclosed proxy card as soon
as possible. If you attend the meeting and desire to vote in person, you may do
so even though you have previously returned a proxy to the Company.
Thank you. We look forward to seeing you at the meeting.
Sincerely,
/s/ David A. Smilow
David A. Smilow
Chairman of the Board and
Chief Executive Officer
1111 North Highland Street, Arlington, Virginia 22201
<PAGE>
TELEBANC FINANCIAL CORPORATION
1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
(703) 247-3700
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 7, 1997
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Stockholders of
TeleBanc Financial Corporation (the "Company") will be held on Wednesday, May 7,
1997, at 11:00 a.m., at the Company's headquarters, 1111 North Highland Street,
Arlington, Virginia 22201, for the following purposes:
1. To elect three directors for terms of three years each;
2. To amend Article 4 of the Company's certificate of
incorporation to increase the number of authorized shares of
the Company's common stock from 3,500,000 to 8,500,000 and to
authorize the issuance of nonvoting common stock;
3. To amend Article 8 of the Company's certificate of
incorporation to reduce the effect of certain anti-takeover
provisions by increasing from 10% to 25% the percentage of the
Company's voting stock which is considered "Control" for
purposes of such Article;
4. To amend Article 11 of the Company's Certificate of
Incorporation to reduce the effect of certain anti-takeover
provisions by making it easier for the Board of Directors to
approve certain business combination transactions with the
approval of the stockholders required by law rather than a
supermajority;
5. To adopt the 1997 Stock Option Plan;
6. To ratify the appointment by the Board of Directors of Arthur
Andersen LLP as the Company's independent accountants for the
fiscal year ending December 31, 1997; and
7. To transact such other business as may properly come before
the Annual Meeting or any adjournments or postponements
thereof.
The Board of Directors has fixed the close of business on March 20,
1997 as the record date for the determination of stockholders entitled to notice
of and to vote at the Annual Meeting. Only stockholders of record at the close
of business on that date will be entitled to notice of and to vote at the Annual
Meeting or any adjournments or postponements thereof.
By order of the Board of Directors,
/s/ David A. Smilow
David A. Smilow
Chairman of the Board and
Chief Executive Officer
Arlington, Virginia
April 7, 1997
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YOUR VOTE IS IMPORTANT. PLEASE RETURN YOUR PROXY PROMPTLY. WHETHER OR NOT YOU
PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE SIGN, DATE AND COMPLETE THE
ENCLOSED PROXY AND RETURN IT IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING
AND DESIRE TO VOTE IN PERSON, YOU MAY DO SO EVEN THOUGH YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY.
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<PAGE>
TELEBANC FINANCIAL CORPORATION
1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MAY 7, 1997
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This Proxy Statement and the accompanying Notice of Annual Meeting and
proxy card are being furnished to the stockholders of TeleBanc Financial
Corporation, a Delaware corporation (the "Company" or "TeleBanc"), in connection
with the solicitation of proxies by the Board of Directors of the Company for
use at the 1997 Annual Meeting of Stockholders of the Company (the "Annual
Meeting"). The Annual Meeting will be held at the headquarters of TeleBanc
located at 1111 North Highland Street, Arlington, Virginia 22201, on Wednesday,
May 7, 1997, at 11:00 a.m., and at any adjournment or postponement thereof. The
Annual Meeting has been called for the purposes set forth in the Notice of
Annual Meeting.
If the enclosed proxy is properly signed and returned to TeleBanc and
not revoked prior to its use, the shares represented thereby will be voted at
the Annual Meeting in accordance with the instructions thereon. EXECUTED BUT
UNMARKED PROXIES WILL BE VOTED: (1) FOR THE ELECTION OF THE THREE NOMINEES OF
THE BOARD OF DIRECTORS TO SERVE AS DIRECTORS; (2) FOR THE AMENDMENT OF ARTICLE 4
OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION (THE
"CERTIFICATE OF INCORPORATION") TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
THE COMPANY'S COMMON STOCK (THE "COMMON STOCK") FROM 3,500,000 TO 8,500,000 AND
TO AUTHORIZE THE ISSUANCE OF NONVOTING COMMON STOCK (THE "NONVOTING COMMON
STOCK"); (3) FOR THE AMENDMENT OF ARTICLE 8 OF THE CERTIFICATE OF INCORPORATION
TO INCREASE FROM 10% TO 25% THE PERCENTAGE OF THE COMPANY'S VOTING STOCK WHICH
IS CONSIDERED "CONTROL" FOR PURPOSES OF SUCH ARTICLE; (4) FOR THE AMENDMENT OF
ARTICLE 11 OF THE CERTIFICATE OF INCORPORATION TO MAKE IT EASIER FOR THE BOARD
OF DIRECTORS TO APPROVE CERTAIN BUSINESS COMBINATION TRANSACTIONS WITH THE
APPROVAL OF THE STOCKHOLDERS REQUIRED BY LAW RATHER THAN A SUPERMAJORITY; (5)
FOR THE ADOPTION OF THE 1997 STOCK OPTION PLAN; AND (6) FOR THE RATIFICATION OF
ARTHUR ANDERSEN LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS. If any other
matters are properly brought before the Annual Meeting, proxies will be voted in
the discretion of the proxy holders. TeleBanc is not aware of any such matters
that are proposed to be presented at the Annual Meeting.
The cost of soliciting proxies in the form enclosed herewith will be
borne by the Company. In addition to the solicitation of proxies by mail,
directors, officers and regular employees of TeleBanc, without extra
remuneration, may solicit proxies personally, by telephone, telegram, or
otherwise. TeleBanc will also utilize the services of its transfer agent, Fifth
Third Trust, to provide broker search and proxy distribution services at an
estimated cost of $3,000. TeleBanc will request persons, firms and corporations
holding shares in their name or in the names of their nominees, which are
beneficially owned by others, to send proxy materials to and obtain proxies from
the beneficial owners and will reimburse the holders for their reasonable
expenses in doing so. It is anticipated that this Proxy Statement and the
enclosed proxy will be mailed to stockholders on or about April 7, 1997.
In February 1997, the Company entered into a $29,900,000 Unit Purchase
Agreement with two investment partnerships managed by Conning & Company and with
General American Life Insurance Company, CIBC WG Argosy Merchant Fund 2, LLC, PC
Investment Company and The Northwestern Mutual Life Insurance Company (the "Unit
Purchase Agreement"). Pursuant to the Unit Purchase Agreement, the Company
issued and sold 29,900 Units, which in the aggregate
<PAGE>
consist of (i) $13,703,469 in aggregate principal amount of the Company's Senior
Subordinated Notes due March 31, 2004, (ii) 29,900 shares of serial preferred
stock, (iii) warrants to purchase 198,088 shares of Common Stock (the
"Warrants"), and (iv) contingent warrants to purchase up to 205,563 shares of
Common Stock (the "Contingent Warrants"). The serial preferred stock issued in
connection with this transaction consists of 18,850 shares of Series A Voting
Convertible Preferred Stock ("Series A Preferred Stock"), 4,050 shares of Series
B Nonvoting Convertible Preferred Stock ("Series B Preferred Stock"), and 7,000
shares of Series C Nonvoting Convertible Preferred Stock ("Series C Preferred
Stock," and collectively with the Series A Preferred Stock and the Series B
Preferred Stock, the "Preferred Stock").
In connection with the Unit Purchase Agreement, certain holders of the
Series A Preferred Stock are entitled to designate two persons to serve as
directors of the Company, who shall be nominated for election by the Company
(subject to certain exceptions). Such nominees to the Board of Directors, Dean
C. Kehler and Steven F. Piaker, were elected to the Board of Directors effective
upon the closing of the sale of the Units by the Company on February 28, 1997.
The Unit Purchase Agreement also contains an affirmative covenant by the Company
that it will obtain stockholder approval of the proposed amendments to the
Certificate of Incorporation that are presented as Proposals Two and Three in
this Proxy Statement.
In connection with the Unit Purchase Agreement, certain amendments were
made to the Company's Bylaws so that the number of directors on the Board of
Directors may not exceed nine members, any two directors have the right to call
a meeting of the Board of Directors and the affirmative vote of 66-2/3% of the
total number of votes of the then outstanding shares of capital stock of the
Company entitled generally to vote in the election of directors, voting together
as a single class, is required to amend the Bylaw provisions regarding the
number and selection process of the Board of Directors.
Also as part of the sale of Units pursuant to the Unit Purchase
Agreement, the Company entered into an agreement with Arbor Capital Partners,
Inc. ("Arbor"), a registered investment advisor, funds manager and
broker-dealer, MET Holdings Corporation ("MET Holdings") and William M.
Daugherty (the "Acquisition Agreement"), pursuant to which the Company purchased
substantially all of the assets and liabilities of Arbor. MET Holdings,
TeleBanc's largest stockholder, also owns a majority of the capital stock of
Arbor. This acquisition involved the tax-free issuance of 162,461 shares of the
Company's Common Stock and a $500,000 cash payment for the Arbor assets. Since
consummation of the Acquisition Agreement, Arbor has distributed the 162,461
shares of TeleBanc Common Stock that it received in the acquisition to its two
stockholders, MET Holdings and William M. Daugherty. As a result of this
distribution, Arbor no longer beneficially owns any of the capital stock of the
Company.
The securities that can be voted at the Annual Meeting consist of the
outstanding shares of Common Stock as well as the shares of Series A Preferred
Stock of the Company sold pursuant to the Unit Purchase Agreement. Each share of
Common Stock entitles its holder to one vote on each matter presented to the
stockholders. Each share of Series A Preferred Stock entitles its holder to that
number of votes equal to the largest number of whole shares of Common Stock into
which such holder's shares of Series A Preferred Stock could be converted on the
Record Date (as defined below) pursuant to the provisions of the Company's
Certificate of Incorporation.
The close of business on March 20, 1997 has been fixed by the Board of
Directors as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting. On the
Record Date, there were approximately 220 holders of Common Stock and five
holders of Series A Preferred Stock. The number of shares of Common Stock
outstanding on the Record Date was 2,211,961, and the total number of shares of
Common Stock into which the Series A Preferred Stock would convert on that date
was 756,360. The Common Stock and the Series A Preferred Stock, which will vote
together as one class with respect to the proposals presented for stockholder
approval in this Proxy Statement, are collectively referred to as the
2
<PAGE>
"Company's Voting Securities," and references to percentages of the Company's
Voting Securities are calculated on the basis of 2,968,321 shares of Common
Stock, the sum of the 2,211,961 outstanding shares of Common Stock and the
756,360 shares of Common Stock into which the outstanding Series A Preferred
Stock could be converted on the Record Date. On the Record Date, the Company's
largest stockholder, MET Holdings, held 1,433,081 shares of Common Stock, or
64.8% of the outstanding shares of Common Stock and 48.75% of the Company's
Voting Securities outstanding on that date.
The presence, in person or by proxy, of at least a majority of the
stock of the Company issued and outstanding and entitled to vote at the meeting
is necessary to constitute a quorum at the Annual Meeting. Stockholders' votes
will be tabulated by the person appointed by the Board of Directors to act as
inspector of election for the Annual Meeting. Under the Company's Bylaws,
directors are elected by a plurality of votes cast by the shares entitled to
vote in the election of directors. Unless otherwise required by the General
Corporation Law of the State of Delaware, the Certificate of Incorporation or
the Bylaws, the Company's Bylaws provide that any other matter put to a
stockholder vote shall be decided by the affirmative vote of a majority of the
votes cast on the matter. As discussed below, certain proposals to be voted upon
by the Company's stockholders that are presented in this Proxy Statement require
a higher vote for stockholder approval.
Pursuant to the Company's Certificate of Incorporation, amendment of
Article 4 of the Certificate of Incorporation requires the affirmative vote of
the holders of at least a majority of the outstanding shares of stock of the
Company entitled to vote thereon at the Annual Meeting. MET Holdings has advised
the Company that it intends to vote all shares of Common Stock beneficially
owned by it in favor of the proposal amending Article 4 of the Certificate of
Incorporation. Each of the holders of the Series A Preferred Stock is obligated
by the terms of the Unit Purchase Agreement to vote in favor of this proposal.
MET Holdings and the holders of the Series A Preferred Stock collectively
beneficially own 73.8% of the Company's Voting Securities entitled to vote at
the Annual Meeting. Consequently, approval of this amendment of the Certificate
of Incorporation is assured.
Pursuant to the Company's Certificate of Incorporation, amendment of
Article 8 of the Certificate of Incorporation requires the affirmative vote of
the holders of at least 66-2/3 percent of the outstanding shares of stock of the
Company entitled to vote thereon at the Annual Meeting. MET Holdings has advised
the Company that it intends to vote all shares of Common Stock beneficially
owned by it in favor of the proposal amending Article 8 of the Certificate of
Incorporation. Each of the holders of the Series A Preferred Stock is obligated
by the terms of the Unit Purchase Agreement to vote in favor of this proposal.
MET Holdings and the holders of the Series A Preferred Stock collectively
beneficially own 73.8% of the Company's Voting Securities entitled to vote at
the Annual Meeting. Consequently, approval of this amendment of the Certificate
of Incorporation is assured.
Pursuant to the Company's Certificate of Incorporation, amendment of
Article 11 of the Certificate of Incorporation requires the affirmative vote of
the holders of at least 80 percent of the outstanding shares of stock of the
Company entitled to vote thereon at the Annual Meeting. MET Holdings has advised
the Company that it intends to vote all shares of Common Stock beneficially
owned by it in favor of the proposal amending Article 11 of the Certificate of
Incorporation. The holders of the Series A Preferred Stock are not obligated by
the terms of the Unit Purchase Agreement to vote in favor of this proposal. MET
Holdings beneficially owns 48.75% of the Company's Voting Securities entitled to
vote at the Annual Meeting.
Abstentions and broker non-votes will be treated as shares that are
present, or represented, and entitled to vote for purposes of determining the
presence of a quorum at the Annual Meeting. Broker non-votes and abstentions
will not be counted in determining the number of votes cast in connection with
any matter presented at the Annual Meeting.
3
<PAGE>
The presence of a stockholder at the Annual Meeting will not
automatically revoke the stockholder's proxy. However, any stockholder may
revoke a proxy at any time prior to its exercise by filing with the Secretary of
TeleBanc a written notice of revocation, by delivering to TeleBanc a duly
executed proxy bearing a later date, or by attending the Annual Meeting and
giving the Secretary notice of his or her intention to vote in person.
A copy of the Annual Report to Stockholders for the fiscal year ended
December 31, 1996 accompanies this Proxy Statement, and is incorporated by
reference herein. TeleBanc has filed an Annual Report on Form 10-K for its
fiscal year ended December 31, 1996 with the Securities and Exchange Commission
(the "Commission"). Stockholders may obtain, free of charge, a copy of the
Annual Report on Form 10-K by writing to TeleBanc Financial Corporation, 1111
North Highland Street, Arlington, Virginia 22201, Attention: Investor Relations.
STOCK OWNED BY MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following tables set forth certain information regarding the
beneficial ownership of the Company's Common Stock and Series A Preferred Stock
as of the Record Date by (i) any person known to the Company to be the
beneficial owner of more than 5% of any class of the Company's voting
securities, (ii) each director and person nominated to be a director, (iii) the
Chief Executive Officer and each of the other executive officers whose total
annual salary and bonus exceeded $100,000 during the year ended December 31,
1996 (the "Named Executive Officers"), and (iv) all directors and executive
officers as a group. The tables also reflect the options that have been
previously granted, including those granted under the Company's 1997 Stock
Option Plan, which is subject to stockholder approval at the Annual Meeting.
The information in the tables is based on information from the named
persons regarding ownership of Common Stock and Series A Preferred Stock. Unless
otherwise indicated, each stockholder has sole voting and investment power as to
all shares listed as beneficially owned by such person.
Under the rules of the Commission, a person is deemed a "beneficial
owner" of a security if such person has or shares the power to vote or direct
the voting of such security or the power to dispose or direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
securities of which that person has the right to acquire beneficial ownership
within 60 days. More than one person may be deemed to be a beneficial owner of
the same securities.
4
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SECURITY OWNERSHIP OF THE COMPANY'S SECURITIES
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE OF: CLASS
NATURE OF OUTSTANDING/
TITLE BENEFICIAL COMPANY'S
OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP VOTING SECURITIES (a)
- -------- ------------------------ --------- ---------------------
<S> <C> <C> <C>
Series A Conning Insurance Capital Limited 4,719 25.03% / 6.38%
Preferred Partnership III
Stock c/o Conning & Company
CityPlace II, 185 Asylum Street
Hartford, CT 06103
Conning Insurance Capital International 667 3.54% / 0.90%
Partners III, L.P.
c/o Conning & Company
CityPlace II, 185 Asylum Street
Hartford, CT 06103
General American Life Insurance Company 1,539 8.16% / 2.08%
700 Market Street
St. Louis, MO 63101
PC Investment Company 6,925 36.74% / 9.36%
401 Theodore Fremd Avenue
Rye, NY 10580
The Northwestern Mutual Life Insurance 5,000 26.53% / 6.76%
Company
720 East Wisconsin Avenue
Milwaukee, WI 53202
</TABLE>
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(a) For purposes of voting at the Annual Meeting, each share of Series A
Preferred Stock has 40.12519 votes, based on its conversion into an
equivalent number of shares of Common Stock. Accordingly, the percentages
reflected include (i) the percentage of Series A Preferred Stock
outstanding and (ii) the percentage of the Company's Voting Securities
beneficially owned, giving effect to the voting rights held by the owners
of Series A Preferred Stock for purposes of voting at the Annual Meeting.
5
<PAGE>
<TABLE>
<CAPTION>
Amount and Percentage of: Class
Nature of Outstanding/
Title Beneficial Company's
of Class Name of Beneficial Owner Ownership Voting Securities (a)
- -------- ------------------------ --------- ---------------------
<S> <C> <C> <C> <C>
Common MET Holdings Corporation 1,433,081 64.78% / 48.28%
Stock 405 Park Avenue, Suite 1104
New York, NY 10022 (b)
David A. Smilow 205,365 (c) 8.50% / 6.48%
Mitchell H. Caplan 205,365 (c) 8.50% / 6.48%
David R. DeCamp 16,000 (d) * / *
Arlen W. Gelbard 10,000 (d) * / *
Dean C. Kehler -- (e) n/a / n/a
Steven F. Piaker -- (f) n/a / 7.28%
Mark Rollinson 18,000 (d) * / *
Michael A. Smilow -- (g) * / *
Aileen Lopez Pugh 42,100 (h) 1.87% / 1.40%
Directors and Executive Officers as a group
(9 individuals) 496,830 (i) 18.42% / 20.64% (j)
TeleBanc Employee Stock Ownership Plan 67,600 3.06% / 2.28%
</TABLE>
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* Less than 1%.
(a) For purposes of voting at the Annual Meeting, each share of Series A
Preferred Stock has 40.12529 votes, based on its conversion into an
equivalent number of shares of Common Stock. Accordingly, the percentages
reflected include (i) the percentage of Common Stock outstanding and (ii)
the percentage of the Company's Voting Securities beneficially owned,
giving effect to the voting rights held by the owners of Series A Preferred
Stock for purposes of voting at the Annual Meeting.
(b) MET Holdings is the predecessor savings and loan holding company of
Metropolitan Bank for Savings, F.S.B. ("Metropolitan Bank"). MET Holdings
organized the Company so that it could become, in March 1994, the holding
company for Metropolitan Bank as part of the Company's initial public
offering of debt and equity securities in 1994. Metropolitan Bank was
renamed "TeleBank" in March 1996, and is a wholly owned subsidiary of the
Company.
(c) Consists solely of options to acquire Common Stock, of which 63,219 are
exercisable within 60 days of March 20, 1996. Messrs. D. Smilow and Caplan,
including their affiliates, also hold significant ownership positions in
the outstanding securities of MET Holdings. See "Security Ownership of the
Company's Parent by Management."
(d) For each of Messrs. DeCamp and Rollinson, includes options to acquire
15,000 shares of Common Stock, 7,000 of which are exercisable within 60
days of March 20, 1997, and for Mr. Gelbard, includes options to acquire
10,000 shares of Common Stock, 2,000 of which are exercisable within 60
days of March 20, 1997.
(e) Dean C. Kehler is the designated director for CIBC WG Argosy Merchant Fund
2, LLC.
(f) Steven F. Piaker is the designated director for Conning Insurance Capital
Limited Partnership III and Conning Insurance Capital International
Partners III, L.P., which collectively own 5,386 shares of Series A
Preferred Stock.
(g) Michael A. Smilow owns 110 shares, or 1.1%, of the Class A Common Stock of
MET Holdings and 117 shares, or 1.4%, of the Class B Common Stock of MET
Holdings.
(h) Includes options to acquire 35,000 shares of Common Stock.
(i) Includes options to acquire 485,730 shares of Common Stock.
(j) Includes an additional 216,114 of the Company's Voting Securities, based on
the 5,386 shares of Series A Preferred Stock collectively owned by Conning
Insurance Capital Limited Partnership III and Conning Insurance Capital
International Partners III, L.P., for which Steven A. Piaker is the
designated director.
6
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL ONE)
The Company's Bylaws provide that the Board of Directors shall consist
of not fewer than six nor more than nine members. Pursuant to the Certificate of
Incorporation and the Bylaws, a majority of the directors then in office may
vote to fill any vacancies on the Board or any newly-created directorships. In
April 1996, the Board of Directors elected Arlen W. Gelbard to fill one of the
two vacancies on the Board of Directors. As discussed above, pursuant to the
Unit Purchase Agreement certain holders of Series A Preferred Stock have the
right to designate for nomination two members of the Board of Directors.
Effective February 28, 1997, the date of the closing of the sale of Units by the
Company, Dean C. Kehler and Steven F. Piaker, the designees of the holders of
the Series A Preferred Stock, were appointed to fill the remaining vacancy and
one newly-created directorship. Messrs. Gelbard, Kehler and Piaker are members
of the class of directors whose terms expire at the 1999 annual meeting of
stockholders. In March 1997, the Board of Directors created a directorship with
a term expiring at this Annual Meeting, and appointed Michael A. Smilow to fill
this newly-created directorship. Michael A. Smilow is the father of David A.
Smilow. The Company's Board of Directors currently consists of eight members.
The Board of Directors consists of three classes of directors with
overlapping three-year terms. One class of directors is to be elected each year
with terms expiring at the third succeeding annual meeting of stockholders after
such election. At the Annual Meeting, three directors will be elected to hold
office for three-year terms which will expire at the 2000 annual meeting of
stockholders.
Unless otherwise instructed on the proxy, it is the intention of the
persons named in the proxy to vote the shares represented by each properly
executed proxy for the election of the nominee directors listed below. The Board
of Directors believes that the nominees will stand for election and will serve
if elected. However, if any person nominated by the Board of Directors fails to
stand for election or is unable to accept election, proxies will be voted by the
proxy holders for the election of such other person or persons as the Board of
Directors may recommend. There is no cumulative voting for the election of
directors. Assuming the presence of a quorum at the Annual Meeting, directors
will be elected by a plurality of the votes cast by the shares entitled to vote
in the election of directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
ELECTION OF ITS NOMINEES AS DIRECTORS OF THE COMPANY.
The following table sets forth the names of the persons nominated by
the Board of Directors for election as directors and the current directors whose
terms do not expire until subsequent annual meetings. Also set forth is certain
information with respect to each person's age at the Record Date, the periods
during which such person has served as a director of the Company and its wholly
owned subsidiary, TeleBank, and positions currently held with the Company and
TeleBank. The table also sets forth certain information with respect to the
Company's sole executive officer who does not also serve as a director.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH DIRECTOR FOR TERM
NAME AGE THE COMPANY AND TELEBANK SINCE TO EXPIRE
- ---- --- ------------------------ ----- ---------
THE NOMINEES:
<S> <C> <C> <C> <C>
David R. DeCamp (1)(2) 37 Director of the Company and TeleBank 1993 (3) 2000
Mark Rollinson (1) 60 Director of the Company and TeleBank 1992 (3) 2000
Michael A. Smilow 59 Director of the Company and TeleBank 1997 2000
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD WITH DIRECTOR FOR TERM
NAME AGE THE COMPANY AND TELEBANK SINCE TO EXPIRE
- ---- --- ------------------------ ----- ---------
CONTINUING DIRECTORS:
<S> <C> <C> <C>
David A. Smilow 35 Chairman of the Board and Chief Executive 1989 (3) 1998
Officer of the Company; Chairman of the Board
and Chief Risk Management Officer of TeleBank
Mitchell H. Caplan 39 Vice Chairman of the Board and President of 1994 1998
the Company; Vice Chairman, President and
Chief Executive Officer of TeleBank
Arlen W. Gelbard (1)(2) 39 Director of the Company and TeleBank 1996 1999
Dean C. Kehler (1)(2)(4) 40 Director of the Company and TeleBank 1997 1999
Steven F. Piaker (1)(2)(4) 34 Director of the Company and TeleBank 1997 1999
EXECUTIVE OFFICER:
Aileen Lopez Pugh 29 Executive Vice President - Chief Financial
Officer/Treasurer of the Company and TeleBank
</TABLE>
- ----------
(1) Member of the compensation committees of the Company and TeleBank
(together, the "Compensation Committee") and the stock option committee of
the Company (the "Stock Option Committee").
(2) Member of the audit and compliance committees of the Company and TeleBank
(together, the "Audit and Compliance Committee").
(3) For the years prior to 1994, includes service as a director of TeleBank.
(4) Nominated as a director pursuant to the Unit Purchase Agreement, as
described above.
Director Nominees
David R. DeCamp has been a director of the Company since its formation
in 1994, and a director of TeleBank since 1992. Mr. DeCamp, a Senior Vice
President of Grubb & Ellis, is currently employed as a commercial real estate
broker. From 1988 to 1996, Mr. DeCamp was employed as a commercial real estate
broker by Cassidy & Pinkard, Inc. Mr. DeCamp is the Chairman of the audit and
compliance committees of the Company and TeleBank.
Mark Rollinson has been a director of the Company since its formation
in 1994, and a director of TeleBank since 1992. He is a self-employed attorney,
and has been practicing law in the Leesburg, Virginia area since 1982.
Michael A. Smilow has been a director of the Company and TeleBank since
March 1997. Mr. Smilow served as the Executive Vice President of Fannie Mae from
1984 to 1993, and also served as Chief Credit Officer and Chief Operating
Officer. He was responsible for establishing and monitoring credit policies for
Fannie Mae's product and customer relationships. He also served as a member of
Fannie Mae's policy and management committees. Mr. Smilow currently serves as a
mortgage consultant.
Continuing Directors and Executive Officer
David A. Smilow is the Chairman of the Board and Chief Executive
Officer of the Company and MET Holdings and the Chairman of the Board and Chief
Risk Management Officer of TeleBank. Prior to January 1994, Mr. Smilow served as
President of TeleBank. Since 1992, Mr. Smilow has been a director and the
Treasurer of Arbor. Between 1987 and 1989, Mr. Smilow was an associate in
8
<PAGE>
Goldman Sachs' Mortgage Capital Markets Group. From 1984 to 1987, Mr. Smilow
worked as a bond trader with Drexel Burnham Lambert.
Mitchell H. Caplan is the Vice Chairman of the Board and President of
the Company and MET Holdings and Vice Chairman, President and Chief Executive
Officer of TeleBank. He is also a co-founder of Arbor, where he has served as
Vice President and director since Arbor's inception in 1992. 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, including MET Holdings. From 1985-1990, he practiced law with
Shearman & Sterling in New York City.
Arlen W. Gelbard is a member of the law firm of Hofheimer Gartlir &
Gross, LLP, New York, New York where he has specialized in transactional real
estate, lending, leasing, foreclosures and workouts since 1982. Mr. Gelbard is a
member of the New York State Bar Association and American Bar Association. Mr.
Gelbard has been a director of the Company since April 1996, when he was elected
by the Company's Board of Directors to fill one of the vacancies on the Board of
Directors of the Company and TeleBank. Mr. Gelbard is the Chairman of the
compensation committees of the Company and TeleBank.
Dean C. Kehler has been a Managing Director of CIBC Wood Gundy
Securities and co-head of the High Yield Group since August 1995. From February
1990, Mr. Kehler was a founding partner and Managing Director of The Argosy
Group, L.P., which was acquired by CIBC Wood Gundy in August 1995. Mr. Kehler
has extensive experience in all areas of high yield finance, mergers and
acquisitions and corporate restructuring.
Steven F. Piaker is a Senior Vice President and Partner of Conning &
Company, a provider of asset management, private equity capital, corporate
finance services and research to the insurance and financial services industry.
Prior to joining Conning & Company, he was a Senior Vice President of Conseco
where he was involved in the formation of Conseco, the raising of funds,
leveraged buyouts and private placement investments.
Aileen Lopez Pugh serves as Executive Vice President - Chief Financial
Officer/Treasurer of the Company and TeleBank. Prior to joining management, Ms.
Pugh served as a director from 1993 to 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. From 1989 through 1992, Ms. Pugh, a
certified public accountant, was an auditor with KPMG Peat Marwick.
BOARD OF DIRECTORS' COMMITTEES AND NOMINATIONS BY SHAREHOLDERS
Each of the Board of Directors of the Company and TeleBank has a
compensation committee and an audit and compliance committee. The committees of
the Boards of the Company and TeleBank are comprised of the same members and
meet simultaneously. In 1996, the members of the Compensation Committee of the
Company and TeleBank were David R. DeCamp and Mark Rollinson and as of April
1996, Arlen W. Gelbard. In 1996, the members of the Audit and Compliance
Committee of the Company and TeleBank were David R. DeCamp and Arlen W. Gelbard.
Effective February 28, 1997, Dean C. Kehler and Steven F. Piaker were elected as
members of the Compensation Committee and Audit and Compliance Committee of the
Company and TeleBank. In addition, the Company has a Stock Option Committee,
which consists of the same members as the Compensation Committee, to administer
the 1997 Stock Option Plan. 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 the Company
and TeleBank. The Audit and Compliance Committee reviews TeleBank's compliance
with regulatory matters and reviews the scope of the internal auditors and the
independent annual audit. It also reviews the independent accountants' letter to
management concerning the effectiveness of the Company's internal financial and
accounting controls and management's
9
<PAGE>
response to the letter. In addition, the Audit and Compliance Committee reviews
and recommends to the 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 the Company and
TeleBank as it determines appropriate. In 1996, the Compensation Committee and
the Audit and Compliance Committee met five and four times, respectively.
During the year ended December 31, 1996 the Board of Directors of the
Company held 11 meetings. No director attended fewer than 75 percent of the
aggregate of the total number of meetings of the Board of Directors held during
the period for which he was a director and the total number of meetings held by
all committees of the Board of Directors on which he served during the periods
that he served.
The Board of Directors acts as a nominating committee for selecting
nominees for election as directors. TeleBanc'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 Secretary of the Company. To be timely, notice must be
delivered to, or mailed to and received at, the principal executive offices of
the Company no later than the date designated for receipt of stockholder
proposals in a prior public disclosure by the Company. If there has been no such
prior public disclosure, notice must be delivered or mailed to and received at
the Company's principal executive offices not less than 60 days nor more than 90
days prior to the date of the meeting, provided that at least 70 days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders. If less than 70 days' notice or prior public disclosure of the
date of the Annual Meeting is given or made to stockholders, notice by the
stockholder to be timely must be received by the Company not later than the
close of business on the 10th day following the day on which such notice of the
date of the Annual Meeting was mailed or such public disclosure was made. A
stockholder's notice of nomination must also set forth certain information
specified in Section 3.5 of TeleBanc's Bylaws concerning each person the
stockholder proposes to nominate for election and the nominating stockholder.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company receive $750 for each Company
board and committee meeting attended, and non-employee directors of TeleBank
receive $750 for each TeleBank board or committee meeting attended. In addition,
non-employee directors are reimbursed for travel costs and other out-of-pocket
expenses incurred in attending such meeting. Annual directors' fees are capped
at $3,000 per board member of the Company, and $12,000 per board member of
TeleBank.
10
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned during the
periods indicated for the Named Executive Officers. The Company does not have
any stock appreciation rights ("SARs").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($)(a) BONUS ($) OPTIONS (#) COMPENSATION ($)(b)
- ------------------ ---- ------------- --------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
David A. Smilow, Chairman and
Chief Executive Officer of the
Company and Chairman and 1996 $ 205,000 $ 188,000 --- $ 15,000
Chief Risk Management Officer 1995 205,000 150,000 --- 15,000
of TeleBank 1994 180,000 75,000(c) 105,365 15,000
Mitchell H. Caplan, Vice Chairman
and President of the Company and 1996 205,000 188,000 --- 15,000
Vice Chairman, President and 1995 205,000 150,000 --- 15,000
Chief Executive Officer of TeleBank 1994 180,000 125,000(c) 105,365 15,000
Aileen Lopez Pugh, Executive Vice 1996 75,000 60,000 15,000 13,500
President - Chief Financial Officer/ 1995 75,000 60,000 5,000 13,500
Treasurer of the Company 1994 18,735(d) 10,000 5,000 ---
and TeleBank
</TABLE>
- ----------
(a) Salary earned from the Company and TeleBank.
(b) Dollar value of contributions by TeleBank to each officer's account in the
Company's ESOP (defined below).
(c) Mr. D. Smilow's and Mr. Caplan's 1994 bonuses reflects $75,000 for bonuses
not paid until the first quarter of 1995 as they were contingent upon the
successful completion of the restructuring of an asset. Mr. Caplan also
received a $50,000 bonus from TeleBank in 1994 upon becoming President.
(d) Ms. Pugh joined the Company and TeleBank in August 1994.
11
<PAGE>
STOCK OPTIONS
Option Grants. The following table contains information with respect to
grants of stock options for Common Stock to the sole Named Executive Officer who
received options during 1996. All such grants were made under the Company's 1994
Stock Option Plan. The Company does not have any SARs.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1996
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants (a) Option Term (b)
- --------------------------------------------------------------------------------------------------------------------
% of Total Options
Number of Granted
Securities Underlying to Employees Exercise or Base Expiration
Name Options Granted (#) in Fiscal Year Price ($/Sh) Date 5% ($) 10% ($)
- ---- ------------------- ------------------------------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Aileen Lopez Pugh 15,000 29.7% $7.75 2/15/06 $73,109 $185,273
</TABLE>
- ----------
(a) Option grants were made on February 15, 1996, with 20% immediately
exercisable and 20% becoming exercisable in each subsequent year through
2000.
(b) The dollar amounts under these columns are the result of calculations at
the 5% and 10% assumed annual growth rates mandated by the Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the Company's Common Stock price.
Option Exercises and Holdings. The Named Executive Officers did not
exercise any stock options during 1996. The following table presents information
with respect to outstanding options held by the Named Executive Officers at
year-end 1996. There are no outstanding SARs.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Options Value of Unexercised
at In-the-Money Options
FY-End (#) at FY-End ($) (1)
---------- -----------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Smilow --- --- 63,219 42,146 $ 412,787 $ 275,191
Mitchell H. Caplan --- --- 63,219 42,146 412,787 275,191
Aileen Lopez Pugh --- --- 9,000 16,000 60,500 96,375
</TABLE>
- ----------
(1) Based on last reported sale price of the Company's Common Stock on December
31, 1996 of $13.25 per share and applicable per share exercise price for
the options. The option grants with respect to the Named Executive Officers
were granted with 20% immediately exercisable and 20% becoming exercisable
in each subsequent year for five years. For each of Messrs. D. Smilow and
Caplan, 42,617 options were granted on April 28, 1994 with an exercise
price of $6.125, with the remainder having an exercise price equal to
$7.125. The options expire in April 2004. As for Ms. Pugh, the Company has
granted a total of 25,000 options with 5,000 options granted on April 28,
1994 with an exercise price of $6.125, 5,000 options granted on February
15, 1995 with an exercise price of $5.50 and 15,000 options granted on
February 15, 1996 with an exercise price of $7.75. The options expire in
April 2004, February 2005 and February 2006, respectively.
12
<PAGE>
PENSION PLAN AND 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 (the "ESOP"), that was originally established by MET
Holdings. Employees of TeleBank who have completed six months of service are
eligible to participate in the ESOP. The Company's and TeleBank's total
contributions to the ESOP, which are reflected in compensation expense, were
$224,000, $210,000 and $104,000 for the years ending December 31, 1996, 1995 and
1994, respectively.
Under the ESOP, each Employer (defined to include the Company,
TeleBank, and MET Holdings) 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 Employer stock. Otherwise, additional contributions are
at the discretion of the Board of Directors.
Contributions may be paid either in cash or in common stock of the
Company or MET Holdings. From time to time, the ESOP may purchase additional
shares of common stock of the Company or MET Holdings through the purchase of
outstanding 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 or MET Holdings. Under its terms, the ESOP may borrow funds to
finance purchases of common stock. As of December 31, 1996, the Company had
notes receivable of $305,000 to the ESOP to finance the purchase of
approximately 60,000 shares of TeleBanc common stock and 310 preferred shares of
MET Holdings.
The Board of Directors of the Company appointed a committee to
administer the ESOP. On major corporate issues, participants in the ESOP are
permitted to direct the trustees as to the voting of shares of MET Holdings
common stock allocated to their accounts; otherwise the trustees of the Plan
have sole discretion as to the voting of such stock held by the ESOP, so long as
such stock is not required to be registered under section 12 of the Securities
Exchange Act of 1934. Shares of TeleBanc Common Stock have been allocated to
participants' accounts and are voted by the trustees in accordance with the
directions of participants on all matters. Unallocated shares will be voted by
the trustees in their sole discretion. Messrs. D. Smilow, Caplan and Emidio
Morizio, an employee of TeleBanc Capital Markets, Inc., a wholly-owned
subsidiary 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. The Company,
MET Holdings or the ESOP may have a right of first refusal as to MET Holdings
common stock distributed to participants, and participants will have the right
to "put" to MET Holdings shares of MET Holdings stock that are distributed to
them under the ESOP, so long as such stock is not publicly traded on an
established securities market.
REPORT OF THE COMPENSATION COMMITTEE
The Company's and TeleBank's compensation program is administered by
the Compensation Committee comprised of five non-employee members of the
Company's and TeleBank's Board of Directors. Two members of the Compensation
Committee, Messrs. Kehler and Piaker, were elected to that committee effective
February 28, 1997. All decisions by the Compensation Committee in relation to
the compensation of executive officers are reviewed by the full Board. The
Company's and TeleBank's executive compensation program provides competitive
levels of compensation designed to correlate pay with the Company's and
TeleBank's annual and long term performance goals. Underlying this objective are
the following concepts: supporting an individual pay-for-performance
13
<PAGE>
policy that differentiates compensation levels based on corporate, business
unit, and individual performance; motivating key senior officers to achieve
strategic business objectives and rewarding them for that achievement; providing
compensation opportunities which are competitive to those offered in the
marketplace, thus allowing the Company to compete for and retain talented
executives who are critical to the Company's and TeleBank's long term success;
and aligning the interest of executives with the long term interests of the
Company's stockholders.
Executive compensation consists of three components: base salary;
annual incentive bonus; and stock options. It is the Company's compensation
policy to pay a combination of salary and highly incentive-based compensation
consisting of bonuses based on overall Company performance and individual
performances.
During the fourth quarter of 1996, the Compensation Committee reviewed
in detail the base salaries for executive officers for fiscal 1997. In light of
TeleBank's performance and the salary levels of institutions with similar
operations, the Compensation Committee recommended that TeleBank should continue
its policy of compensation based on a combination of salary and highly
incentivized additional compensation consisting of bonuses based on overall
Company and individual performance.
The Compensation Committee awards bonuses, which bonuses are awarded
annually based on overall corporate performance and include financial results
and regulatory compliance. All Company and TeleBank employees are eligible for
bonus awards under this plan except for Messrs. D. Smilow and Caplan, whose
bonuses, if any, are determined according to the discretion of the Compensation
Committee. In addition, the Compensation Committee reviews the compensation of
all executive and senior officers.
Base salaries and bonuses for executive officers were reviewed in
detail by the Compensation Committee at its January 1997 meeting. In determining
the base salaries, the Compensation Committee considered various industry
sources such as Don Richards Associates' Washington Area Accounting Compensation
Survey and SNL Executive Compensation Reviews for Thrift Institutions and for
Commercial Banks. In addition, the Compensation Committee considered the
improved financial performance in 1996 and expectations for 1997 in setting 1997
base salaries.
The Company maintains a stock option plan to provide long-term
incentives to key employees, including executive officers, through the grant of
stock options. The grant of stock options is intended to foster management team
cohesion and align management and stockholder interests. Stock option grants
provide an additional means to provide incentives for executive officers. The
Company believes that the grant of stock options can be used to encourage
performance that can result in enhanced stockholder value.
In addition to the compensation paid to executive officers as described
above, executive officers receive, along with and on the same terms as other
employees, contributions by the Company and TeleBank pursuant to the ESOP and
group term life insurance on the same terms as other employees, as well as
certain other perquisites.
CEO Compensation. David A. Smilow's 1995 and 1996 salary remained
stable at $205,000, equally paid by the Company and TeleBank. The allocation
reflects Mr. D. Smilow's duties on behalf of the Company including capital
market strategies and maintaining the Company's investments of the funds raised
thereby. The Compensation Committee increased Mr. D. Smilow's 1996 bonus
14
<PAGE>
$38,000 over 1995 levels based on Company performance as measured by the 1995
and 1996 increases in net income, return on assets and return on stockholders'
equity, excluding the government mandated insurance assessment. No options were
granted to David A. Smilow in 1996.
Respectfully submitted,
Compensation Committee
----------------------
Arlen W. Gelbard, Chairman
David R. DeCamp
Mark Rollinson
COMPARATIVE COMPANY PERFORMANCE
The following chart compares the yearly percentage change in the
cumulative total stockholder return on the Company's Common Stock since the
initial public offering completed in May 1994 with the cumulative total return
on the NASDAQ Bank Index and all NASDAQ US Stocks. The comparison assumes $100
was invested on May 27, 1994 in the Company's Common Stock and in each of the
foregoing indices and assumes reinvestment of dividends.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
PERIOD ENDING
----------------------------------------------------------
INDEX 5/27/94 12/31/94 6/30/95 12/31/95 6/30/96 12/31/96
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TELEBANC FINANCIAL CORPORATION 100.00 91.84 93.84 126.53 159.18 216.33
NASDAQ TOTAL RETURN INDEX 100.00 103.43 128.97 146.27 165.60 179.92
NASDAC BANKS INDEX 100.00 93.82 113.41 139.73 147.70 184.71
</TABLE>
15
<PAGE>
INTERESTS OF CERTAIN PERSONS
Subject to stockholder approval of the 1997 Stock Option Plan, David A.
Smilow, Mitchell H. Caplan and William M. Daugherty, a Vice President of
TeleBanc Capital Markets, Inc., each have been granted an option to purchase
40,000 shares of the Company's Common Stock at $13.50 per share, which options
will become exercisable in three installments, each consisting of one-third of
the shares covered by the option, with the first installment becoming
exercisable for 30 days on February 28, 1998, and the second and third
installments becoming exercisable for 30 days on February 28, 1999 and February
28, 2000, respectively so long as the optionee continues to be an employee of
TeleBanc or a subsidiary on each such date. The options granted to Messrs.
Caplan and Daugherty were intended to constitute incentive stock options to the
extent permissible under the Internal Revenue Code. The option granted to Mr. D.
Smilow was a nonqualified option. Subject to stockholder approval of the 1997
Stock Option Plan, each of Messrs. D. Smilow and Caplan have also been granted
an option to purchase 60,000 shares of Common Stock at $13.50 per share, with
the option exercisable immediately as to 20% of such shares and as to an
additional 20% of such shares on each of the next four anniversaries of February
25, 1997, so long as the optionee continues to be an employee of TeleBanc or a
subsidiary on each such anniversary.
CERTAIN TRANSACTIONS
The Company's policy is not to enter into any transactions with
officers, directors, or 5% stockholders or other affiliates of the Company
unless the terms are as favorable to the Company as those generally available
from unaffiliated third parties. Transactions between the Company and its
affiliates will require approval by a majority of disinterested directors.
In connection with the sale of Units pursuant to the Unit Purchase
Agreement, the Company entered into the Acquisition Agreement with Arbor, MET
Holdings and William M. Daugherty. MET Holdings, the Company's largest
stockholder, also owns a majority of the capital stock of Arbor. Pursuant to the
Acquisition Agreement, the Company acquired substantially all of the assets and
liabilities of Arbor and the Company issued 162,641 shares of Common Stock to
Arbor and paid Arbor $500,000. The purchase price paid by the Company was based
on an independent appraisal by Corporate Finance of Washington, Inc. that valued
the Arbor assets at $3.1 million. Mr. Daugherty, the other stockholder of Arbor,
is the President of Arbor. Upon the acquisition of the Arbor assets, the Company
issued to Mr. Daugherty an option for 24,201 shares of Common Stock (the
"Daugherty Option"), which has an exercise price of $64,407.69 and is
exercisable for a period of 10 years from February 28, 1997. In addition, Arbor
has distributed the 162,461 shares of TeleBanc Common Stock that it received in
the acquisition to its two stockholders, MET Holdings and Mr. Daugherty. Since
consummation of the Arbor transaction, Mr. Daugherty has served as a Vice
President of TeleBanc Capital Markets, Inc., a wholly-owned subsidiary of the
Company.
As discussed above, in February 1997, the Company completed the sale of
Units pursuant to the Unit Purchase Agreement with two investment partnerships
managed by Conning & Company and with General American Life Insurance Company,
CIBC WG Argosy Merchant Fund 2, LLC, PC Investment Company and The Northwestern
Mutual Life Insurance Company. In connection with the Unit Purchase Agreement,
certain holders of the Series A Preferred Stock are entitled to designate two
persons to serve as directors of the Company, who shall be nominated for
election by the Company (subject to certain exceptions). Such nominees to the
Board of Directors, Dean C. Kehler and Steven F. Piaker, were elected to the
Board of Directors effective upon the closing of the sale of the Units by the
Company on February 28, 1997.
16
<PAGE>
SECURITY OWNERSHIP OF THE COMPANY'S PARENT BY MANAGEMENT
The following table sets forth certain information as of the Record
Date with respect to the beneficial ownership by the management of the Company
of equity securities of the Company's parent, MET Holdings. MET Holdings has
four classes of equity securities, Class A Common Stock, Class B Common Stock,
6% Class A Serial Preferred Stock ("Class A Serial Preferred Stock") and 6%
Class B Serial Preferred Stock ("Class B Serial Preferred Stock"). No shares of
Class A Serial Preferred Stock have been issued. The Class A Serial Preferred
Stock and Class B Serial Preferred Stock have certain limited voting rights.
Unless otherwise required by law, the Class B Common Stock is non-voting.
<TABLE>
<CAPTION>
NAME EQUITY SECURITY OWNED PERCENT OF CLASS
- ---- --------------------- ----------------
<S> <C> <C>
and Chief Executive Officer of the
Company and MET Holdings and 4,091 (Class A Common Stock) (a) 40.7 %
Chairman of the Board and Chief Risk 1,641 (Class B Common Stock) (a) 26.3
Management Officer of TeleBank 2,091 (Class B Serial Preferred Stock) (a) 41.8
Mitchell H. Caplan, Vice Chairman and
President of the Company and MET 987 (Class A Common Stock) (b) 9.8
Holdings and Vice Chairman, President 1,051 (Class B Common Stock) (b) 16.8
and Chief Executive Officer of TeleBank 1,079 (Class B Serial Preferred Stock) (b) 21.6
Michael A. Smilow, Director of the 110 (Class A Common Stock) 1.1
Company and TeleBank 117 (Class B Common Stock) 1.4
Directors and Executive Officers 5,188 (Class A Common Stock) 51.6
of TeleBanc as a group 2,809 (Class B Common Stock) 44.9
(9 individuals) 3,170 (Class B Serial Preferred Stock) 63.4
</TABLE>
- ----------
(a) Includes 1,586 shares of Class A Common Stock, 980 shares of Class B Common
Stock and 893 shares of Class B Serial Preferred Stock owned by Mr. D.
Smilow's wife.
(b) Includes 645 shares of Class A Common Stock, 655 shares of Class B Common
Stock and 1,079 shares of Class B Serial Preferred Stock, with respect to
which Mr. Caplan shares beneficial ownership.
AMENDMENT OF CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
AND TO AUTHORIZE THE ISSUANCE OF NONVOTING COMMON STOCK
(PROPOSAL TWO)
Section 4.1 of the Certificate of Incorporation currently provides that
the total number of shares of all classes of stock that the Company shall have
the authority to issue is 4,000,000 shares, consisting of 3,500,000 shares of
Common Stock and 500,000 shares of serial preferred stock. Section 4.2(a) of the
Certificate of Incorporation provides that each share of Common Stock shall be
identical in all respects to all the other shares of Common Stock. The proposed
amendment to Article 4 of the Certificate of Incorporation is to increase the
authorized number of shares of Common Stock from 3,500,000 to 8,500,000 and to
authorize the issuance of Nonvoting Common Stock. The text of the proposed
amendment is set forth at Exhibit A to this Proxy Statement, and the following
discussion of the proposed amendment is qualified in its entirety by reference
to Exhibit A.
Increase in the Number of Shares of Authorized Common Stock
17
<PAGE>
Of the 3,500,000 presently authorized shares of Common Stock, 2,211,961
were issued and outstanding on the Record Date, and a total of 2,385,624 shares
were required to be reserved for issuance for the following purposes: 437,230
for stock options, 345,000 for warrants issued in connection with the Company's
initial public offering in 1994 ("Initial Warrants"), 198,088 for the Warrants,
205,563 the Contingent Warrants and 1,199,743 for the potential conversion of
the Preferred Stock. Accordingly, the Company does not have sufficient Common
Stock to meet all of its existing obligations. Also, subject to the approval by
stockholders of Proposal Five, the Company will be required to reserve an
additional 440,000 shares for options. Of the 500,000 presently authorized
shares of serial preferred stock, on the Record Date, 18,850 shares of Series A
Preferred Stock, 4,050 shares of Series B Preferred Stock and 7,000 shares of
Series C Preferred Stock were issued and outstanding, and 11,050 shares of
Series A Preferred Stock and 25,850 shares of Series B Preferred Stock were
reserved for issuance with respect to the potential conversion of Preferred
Stock. On the Record Date, 470,100 shares of authorized but not outstanding and
unreserved shares of serial preferred stock remained available for future
issuance.
The Company has made an affirmative covenant in the Unit Purchase
Agreement to obtain stockholder approval of this amendment. As discussed above,
the current number of authorized but unissued shares of Common Stock is
insufficient to permit the issuance of all of the shares of Common Stock
(whether voting or nonvoting) called for in connection with stock options, the
exercise of the Initial Warrants, the Warrants and the Contingent Warrants and
the conversion of the Preferred Stock. Additionally, the Board of Directors
believes that the proposed increase in the authorized shares of Common Stock in
excess of the number of shares necessary for a Preferred Stock conversion and
the exercise of the Initial Warrants, the Warrants and the Contingent Warrants
is desirable to enhance the Company's flexibility in connection with possible
future actions, such as use in employee benefit plans, stock splits, stock
dividends, financings, the raising of additional capital through a potential
public offering or private placement, possible future mergers or acquisitions,
and other general corporate purposes. The unissued and unreserved shares of
Common Stock and serial preferred stock will be available for issuance for any
proper corporate purpose, as authorized from time to time by the Board of
Directors, without further approval of stockholders of the Company, except as
otherwise required by law. Elimination of the delay occasioned by the necessity
of obtaining stockholder approval will better enable the Company to engage in
financing transactions and acquisitions which take full advantage of changing
market conditions. The Company is not presently engaged in any negotiations
concerning the issuance of any shares of the additional authorized Common Stock,
nor are there any present arrangements, understandings or plans concerning the
issuance of such shares, apart from the transactions described in this Proxy
Statement.
As a Delaware corporation, the Company is taxed on its authorized
capital stock. In general, the annual franchise tax is $90 on the first 10,000
shares and the further sum of $50 on each 10,000 shares or part thereof.
Currently, the Company's annual franchise tax is $17,540. Increasing the number
of authorized shares of Common Stock to 8,500,000 will result in an annual
franchise tax of $42,540. TeleBanc stockholders do not have any preemptive or
stock purchase rights to purchase additional shares of TeleBanc stock, whether
now or hereafter authorized. Further issuances of additional shares of Common
Stock or serial preferred stock or securities convertible into such stock may
have a dilutive effect on existing stockholders.
In the event of a proposed merger, tender offer or other attempt to
gain control of the Company of which management does not approve, it might be
possible for the Board of Directors to authorize the issuance of shares of
Common Stock or serial preferred stock in a transaction that could have the
effect of frustrating or impeding such takeover attempt. The Board of Directors
has no current intention to issue authorized but unissued shares for such
purpose. The Board of Directors is not aware of any specific effort to
accumulate the Company's capital stock in order to obtain control of the Company
by means of a merger, tender offer or otherwise.
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<PAGE>
If the proposed amendment is approved, after reservation for stock
options, the exercise of the Initial Warrants, the Warrants and the Contingent
Warrants, and the potential future conversion of the Preferred Stock, 748,651
shares of Common Stock would be available for issuance.
Authorization of Issuance of Nonvoting Common Stock
Pursuant to the Unit Purchase Agreement, the Company has agreed to
obtain stockholder approval of the issuance of authorized shares of the
Company's Common Stock as Nonvoting Common Stock. The Unit Purchase Agreement
and the Certificate of Incorporation provide that Nonvoting Common Stock must be
available for issuance in certain instances in connection with the Preferred
Stock. The purpose of the Nonvoting Common Stock is to permit one of the
purchasers in the Unit Purchase Agreement to convert its shares of Series C
Preferred Stock into a form of Common Stock. That purchaser, CIBC WG Argosy
Merchant Fund 2, LLC, is subject to regulatory limitations as to the ownership
of voting stock. The Company's Certificate of Incorporation provides that shares
of the Company's Series C Preferred Stock may be converted into shares of
Nonvoting Common Stock at any time. The number of shares of Nonvoting Common
Stock into which shares of the Series C Preferred Stock shall be converted is
the product obtained by multiplying the Applicable Conversion Rate (as defined)
by the number of shares being converted at any time. Also, the Certificate of
Incorporation provides that if a dividend is payable in voting Common Stock or
other securities of the Company that are voting securities, the Company must
make available to each holder of Preferred Stock, at such holder's request,
dividends consisting of nonvoting securities of the Company that are otherwise
identical to the voting securities. On the Record Date, there were 18,850 shares
of Series A Preferred Stock, 4,050 shares of Series B Preferred Stock and 7,000
shares of Series C Preferred Stock issued and outstanding. Although the Company
has no specific plans at this time, the Board of Directors could issue Nonvoting
Common Stock in connection with possible acquisitions, dividends, convertible
debt issuances, employee incentive programs and public and private offerings
that are not related to the Unit Purchase Agreement.
Holders of Nonvoting Common Stock will be entitled to receive notice of
meetings of the Company's stockholders, but will have no voting rights on any
matter or thing (including the election of directors) unless otherwise required
by law. Each share of Nonvoting Common Stock may be converted into one fully
paid and nonassessable share of voting Common Stock upon the occurrence of
certain events: (i) any sale to the public in a widely dispersed offering
(including a public offering of stock), (ii) any disposition of no more than 2%
of the Company's outstanding voting securities pursuant to Rule 144 or Rule 144A
promulgated under the Securities Act of 1933, as amended, (iii) certain
transfers pursuant to a right of first refusal set forth in transfer restriction
agreements executed in connection with the Unit Purchase Agreement, or (iv)
certain transfers in a single transaction to an independent third party who
acquires at least a majority of the Company's voting stock without regard to the
transfer of such securities. No stockholder approval would be necessary to
effect the conversion of Nonvoting Common Stock into Common Stock if a holder of
Nonvoting Common Stock were to exercise its conversion privilege.
If the proposed amendment is approved, the Board of Directors may issue
authorized shares of Nonvoting Common Stock without further approval of the
Company's stockholders unless such approval is required for a particular
transaction by applicable law or regulations. Stockholders of the Company do not
have any preemptive rights to subscribe for any shares of Nonvoting Common Stock
that may be issued.
The creation of Nonvoting Common Stock is not intended to have an
anti-takeover effect. The proposed amendment to the Certificate of Incorporation
is not part of a plan by the Board of Directors to adopt a series of
anti-takeover measures. The Company's Board of Directors does not presently
intend to propose any additional measures designed to discourage any unfair or
unnegotiated takeovers apart from the three amendments to the Certificate of
Incorporation proposed in this Proxy Statement and those measures that
previously have been adopted, but
19
<PAGE>
reserves the right to propose and adopt additional measures if the Board of
Directors determines that such measures are in the best interests of the Company
and its stockholders.
VOTE REQUIRED
Adoption of the proposed amendment of Article 4 of the Certificate of
Incorporation requires the affirmative vote of the holders of at least a
majority of the outstanding shares of stock of the Company entitled to vote
thereon at the Annual Meeting. MET Holdings has advised the Company that it
intends to vote all shares of Common Stock beneficially owned by it in favor of
this proposal. Each of the holders of Series A Preferred Stock is required by
the terms of the Unit Purchase Agreement to vote in favor of this proposed
amendment. MET Holdings and the holders of the Series A Preferred Stock
collectively beneficially own 73.8% of the Company's Voting Securities.
Consequently, approval of the amendment of Article 4 of the Certificate of
Incorporation is assured.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
PROPOSED AMENDMENT TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF THE COMPANY'S
COMMON STOCK AND TO AUTHORIZE THE ISSUANCE OF NONVOTING COMMON STOCK.
AMENDMENT OF CERTIFICATE OF INCORPORATION TO
REVISE TWO CURRENT ANTI-TAKEOVER PROVISIONS
(PROPOSALS THREE AND FOUR )
The Company's Certificate of Incorporation currently includes a number
of provisions, so-called "anti-takeover" provisions, intended to protect the
Company's stockholders in the event of a takeover attempt that, in the opinion
of the Board of Directors, may not be in the best interests of the Company's
stockholders. These proposals are intended to enhance management's bargaining
power against potential bidders. However, they were adopted in connection with
the Company's initial public offering in 1994, and in contemplation of the
Company's securities being widely held. That is not the case. Furthermore, in
the sale of Units pursuant to the Unit Purchase Agreement, the limitations on
the amount of "Voting Stock" which constitutes "Control" for purposes of Article
8 has the effect of limiting the amount of Voting Stock which can be held by a
purchaser thereunder. The Company agreed to amend this limitation in Article 8,
as well as to amend Article 11, because the Board of Directors believes that
these current provisions need to be revised in order to allow the Company a
greater measure of flexibility in corporate financing and business combination
transactions. The text of the proposed amendments of Article 8 and 11 are set
forth as Exhibit B and Exhibit C to this Proxy Statement, respectively, and the
following discussion of the terms of the proposed amendments is qualified in its
entirety by reference to Exhibit B and Exhibit C.
Proposed Amendment of Article 8 (Proposal Three)
Article 8 of the Certificate of Incorporation currently prohibits any
person from acquiring "Control" of the Company unless such acquisition has been
approved in advance by 66-2/3% of the outstanding shares of capital stock of the
Company entitled to vote generally in the election of directors (the "Voting
Stock"). In Section 8.3 of the Certificate of Incorporation, "Control" is
defined as the sole or shared power to vote or direct the voting of, or to
dispose or to direct the disposition of 10 percent or more of the Voting Stock,
subject to certain exceptions. Section 8.2 of the Certificate of Incorporation
provides that, in addition to other penalties, if any person acquires Control in
violation of Article 8, all shares of stock beneficially owned by that person in
excess of 10 percent of the Company's Voting Stock shall lose their voting
power.
The Board of Directors believes that the definition of Control is
unnecessarily restrictive, and should be modified by increasing the Voting Stock
ownership threshold in the definition of Control from 10% to 25%. Such approval
will have the immediate effect of permitting the holders of Series B
20
<PAGE>
Preferred Stock (which generally is nonvoting) to convert such stock to Series A
Preferred Stock (which generally votes with the Common Stock).
Proposed Amendment of Article 11 (Proposal Four)
Article 11 of the Certificate of Incorporation currently prohibits
business combinations with an "Interested Stockholder" or an affiliate or
associate of such person unless such business combination has been approved by
the affirmative vote of at least (i) the holders of 80% of the total number of
outstanding shares of Voting Stock and (ii) the holders of two-thirds of the
voting power of the outstanding shares of the Voting Stock, excluding for
purposes of calculating the affirmative vote and the total number of outstanding
shares under clause (ii) above all shares of Voting Stock owned by the
Interested Stockholder and its affiliates and associates. An "Interested
Stockholder" is defined as any person that is (i) the beneficial owner of 5
percent or more of the then outstanding Voting Stock or (ii) an affiliate of the
Company that, within the two years preceding the date in question, was the
beneficial owner of ten percent or more of the then outstanding Voting Stock.
The Certificate of Incorporation further provides that this higher vote
for a business combination is not required if two conditions are met: (i) that
at least two-thirds of the "Continuing Directors" then in office approve the
business combination and (ii) that certain price and procedure requirements are
met. A "Continuing Director" is defined as a director who is unaffiliated with
the Interested Stockholder and who was a director prior to the time that the
Interested Stockholder became an Interested Stockholder. If the two conditions
are met, the business combination need only be approved by the affirmative vote
required by law and any other provision of the Certificate of Corporation.
Generally, the Delaware General Corporation Law requires approval by a majority
of eligible shares to approve a business combination.
The Board of Directors believes that the higher vote for a business
combination involving an Interested Stockholder may be unnecessarily restrictive
if either one of the two conditions set forth in the paragraph above is met. The
proposed amendment of Article 11 would require the higher vote to approve a
business combination only if the business combination did not meet one or the
other of these conditions.
The proposed amendments to Articles 8 and 11 of the Certificate of
Incorporation are not part of a plan by the Board of Directors to adopt a series
of anti-takeover measures. The Company's Board of Directors does not presently
intend to propose any additional measures designed to discourage any unfair or
unnegotiated takeovers apart from the four amendments proposed in this Proxy
Statement and those measures that previously have been adopted, but reserves the
right to propose and adopt additional measures if the Board of Directors
determines that such measures are in the best interests of the Company and its
stockholders.
VOTE REQUIRED FOR AMENDMENT OF ARTICLE 8
Adoption of the proposed amendment of Article 8 of the Certificate of
Incorporation requires the affirmative vote of the holders of at least 66-2/3%
of the outstanding shares of stock of the Company entitled to vote thereon at
the Annual Meeting. MET Holdings has advised the Company that it intends to vote
all shares of Common Stock beneficially owned by it in favor of this proposal.
Each of the holders of Series A Preferred Stock is required by the terms of the
Unit Purchase Agreement to vote in favor of this proposed amendment. MET
Holdings and the holders of the Series A Preferred Stock collectively
beneficially own 73.8% of the Company's Voting Securities. Consequently,
approval of the amendment of Article 8 of the Certificate of Incorporation is
assured.
VOTE REQUIRED FOR AMENDMENT OF ARTICLE 11
Adoption of the proposed amendment of Article 11 of the Certificate of
Incorporation requires the affirmative vote of the holders of at least 80% of
the outstanding shares of stock of the Company
21
<PAGE>
entitled to vote thereon at the Annual Meeting. MET Holdings has advised the
Company that it intends to vote all shares of Common Stock beneficially owned by
it in favor of this proposal. The holders of Series A Preferred Stock are not
required by the terms of the Unit Purchase Agreement to vote in favor of this
proposed amendment.
MET Holdings beneficially owns 48.75% of the Company's Voting Securities.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
PROPOSED REVISIONS OF THESE TWO CURRENT ANTI-TAKEOVER PROVISIONS.
ADOPTION OF THE 1997 STOCK OPTION PLAN
(PROPOSAL FIVE)
The TeleBanc Financial Corporation 1997 Stock Option Plan (the "Plan")
was adopted by the Board of Directors of TeleBanc on February 25, 1997, subject
to stockholder approval at the Annual Meeting, to provide for the grant of
options to purchase shares of Common Stock to employees, nonemployee directors
and independent contractors of TeleBanc, its subsidiaries and affiliates. As of
March 20, 1997, there were approximately 51 employees, non-employee directors
and independent contractors of TeleBanc and its subsidiaries and affiliates who
were eligible to participate in the Plan.
The principal provisions of the Plan are summarized below. Such summary
does not, however, purport to be complete and is qualified in its entirety by
the terms of the Plan. A copy of the Plan is attached hereto as Exhibit D and is
incorporated herein by reference.
The Board of Directors of TeleBanc believes that stock options are
important to attract and to encourage the continued employment and service of
officers, other selected employees, non-employee directors and selected
independent contractors by facilitating their acquisition of a stock interest in
TeleBanc. The acquisition and holding of an equity interest in TeleBanc by such
individuals is in the best interest of TeleBanc because equity ownership will
even more closely align their interests with the interests of TeleBanc's
stockholders.
The adoption of the Plan is subject to stockholder approval at the
Annual Meeting. TeleBanc is submitting the Plan for stockholder approval at the
Annual Meeting to allow TeleBanc to obtain a tax deduction for the full amount
allowable with respect to the exercise of options granted under the Plan and to
provide flexibility to grant options qualifying as incentive stock options for
tax purposes ("incentive options"). See "--Federal Income Tax Consequences of
the Plan."
DESCRIPTION OF THE PLAN
The Plan provides for the grant of options to employees, non-employee
directors and independent contractors of TeleBanc and employees and independent
contractors of any subsidiary of TeleBanc. A total of 440,000 shares of Common
Stock will be reserved for issuance to employees, non-employee directors and
independent contractors under the Plan, representing approximately 19.9% of the
outstanding shares of Common Stock on March 20, 1997. Based on the $14.50 price
of a share of Common Stock on March 31, 1997, the aggregate value of the 440,000
shares reserved for issuance under the Plan is $6.4 million.
The Plan is administered by the Stock Option Committee, which consists
of not less than two outside directors appointed by the Board of Directors. The
Stock Option Committee selects the employees and independent contractors of
TeleBanc and its subsidiaries and affiliates to whom options will be granted.
Options covering not more than 200,000 shares of Common Stock may be granted to
any employee during any calendar year. Grants of stock options contingent upon
stockholder approval of the Plan have been made to certain executive officers as
set out in the table below.
22
<PAGE>
The option exercise price under the 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 TeleBanc (as
defined in the Plan). Generally, for this purpose, a change in control is deemed
to occur if any person (i) acquires direct or indirect beneficial ownership of
at least 50% of the issued and 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 the board of directors of
TeleBanc. 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 more than 10 years after
the effective date of the 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.
Payment for shares purchased under options granted pursuant to the Plan
may be made either in cash or by exchanging shares of Common Stock of TeleBanc
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 TeleBanc cash or cash equivalents equal to
the option exercise price plus the amount of any taxes that TeleBanc may be
required to withhold in connection with the exercise of the option.
If an employee's employment with TeleBanc or a subsidiary, affiliate or
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 three years 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 TeleBanc or a subsidiary, affiliate 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, by reason of merger, consolidation, reorganization,
recapitalization, reclassification, stock split-up, 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, an appropriate and proportionate adjustment will be
made in the number and kinds of shares subject to the 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, or upon a
reorganization, merger or consolidation in which TeleBanc is not the surviving
corporation, or upon the sale of substantially all of the assets of TeleBanc to
another corporation, or upon any transaction (including, without
23
<PAGE>
limitation, a merger or reorganization in which TeleBanc is the surviving
corporation) approved by the 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, the Plan and the options issued thereunder will terminate,
unless provision is made in connection with such transaction for the
continuation of the Plan, the assumption of the options or both the continuation
of the 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 the board of
directors in its discretion shall determine.
The Board of Directors may amend the Plan with respect to shares of 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 Plan to fail to satisfy the requirements of Section 162(m)
of the Internal Revenue Code relating to limitations on the deduction of amounts
not constituting qualified performance-related compensation.
The Board of Directors at any time may terminate or suspend the Plan.
Unless previously terminated, the Plan will terminate automatically on February
25, 2007, the tenth anniversary of the date of adoption of the Plan by the Board
of Directors. No termination, suspension or amendment of the 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.
NEW PLAN BENEFITS
The table below provides certain information as of the date of this
proxy statement regarding stock options granted under the Plan to (i) the Named
Executive Officers (which includes all executive officers of TeleBanc as a
group, and (iii) all employees of TeleBanc as a group (including all officers
who are not executive officers). No other grants under the 1997 Stock Option
Plan have been made. All such grants are subject to stockholder approval of the
Plan.
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
NUMBER OF
NAME AND POSITION(S) EXERCISE PRICE (A) OPTIONS GRANTED
-------------------- ------------------ ---------------
<S> <C> <C>
David A. Smilow, Chairman of the Board and $13.50 100,000
Chief Executive Officer of the Company and
Chairman of the Board and Chief Risk Management
Officer of TeleBank
Mitchell H. Caplan, Vice Chairman and $13.50 100,000
President of the Company and Vice Chairman,
President and Chief Executive Officer of TeleBank
Aileen Lopez Pugh, Executive Vice President -- --
- Chief Financial Officer/Treasurer of the
Company and TeleBank
All employees as a group (51 persons) $13.50 200,000
</TABLE>
- ----------
(a) All option grants were made at 100% of the fair market value of the Common
Stock on the date of grant. Grants covering 60,000 shares to each Messrs.
Caplan and D. Smilow are ten-year,
24
<PAGE>
nonqualified options vesting 20% on the date of grant and 20% per year
thereafter. Grants covering 40,000 shares to Messrs. Caplan and D. Smilow
are nonqualified options vesting to the extent of 1/3 of such shares on
each of the first three anniversaries of the date of grant that expire if
not exercised within 30 days of first becoming exercisable.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The grant of an option is not a taxable event for the optionee or
TeleBanc.
Upon exercising a non-qualifying option, an optionee will recognize
ordinary income in an amount equal to the difference between the exercise price
and the fair market value of the Common Stock on the date of exercise (except
that, if the optionee is subject to certain restrictions on transfer of shares
of Common Stock, the measurement date may be delayed, unless the optionee makes
a special tax election within 30 days after exercise to have income determined
without regard to the restrictions). If TeleBanc complies with applicable
reporting requirements, it will be entitled to a business expense deduction in
the same amount. Non-qualifying options under the Plan are intended to satisfy
the requirements applicable to "qualified performance-related compensation"
under the Code, so that TeleBanc should be entitled to deduct the full amount of
such compensation income without regard to the $1,000,000 limitation imposed on
the deduction of annual compensation paid to each of the chief executive officer
and the four other most highly compensated officers of a publicly held
corporation. Upon a taxable disposition of shares acquired pursuant to the
exercise of a non-incentive option, the optionee will have taxable gain or loss,
measured by the difference between the amount realized on the disposition and
the tax basis of the shares (generally, the amount paid for the shares plus the
amount treated as ordinary income at the time the option was exercised).
If the optionee surrenders shares of Common Stock in payment of part or
all of the exercise price for non-qualifying options, no gain or loss will be
recognized with respect to the shares surrendered and the optionee will be
treated as receiving an equivalent number of shares pursuant to the exercise of
the option in a non-taxable exchange. The basis of the shares surrendered will
be treated as the substituted tax basis for an equivalent number of option
shares received. However, the fair market value of any shares received in excess
of the number of shares surrendered will be taxed as ordinary income.
With respect to "incentive options," an optionee will not recognize
taxable income upon exercise of an incentive option, and any gain realized upon
a disposition of shares received pursuant to the exercise of an incentive option
will be taxed as long-term capital gain if the optionee holds the shares for at
least two years after the date of grant and for one year after the date of
exercise of the option. However, the excess of the fair market value of the
shares subject to an incentive option on the exercise date over the option
exercise price will be included in the optionee's alternative minimum taxable
income in the year of exercise (except that, if the optionee is subject to
certain restrictions on transfer, the determination of the amount included in
alternative minimum taxable income may be delayed, unless the optionee elects
within 30 days following exercise to have income determined without regard to
such restrictions) for purposes of the alternative minimum tax. An optionee may
be entitled to a credit against regular tax liability in future years for
minimum taxes paid with respect to the exercise of incentive options. TeleBanc
and its subsidiaries and affiliates will not be entitled to any business expense
deduction with respect to the grant or exercise of an incentive option, except
as discussed below.
For the exercise of an incentive option to qualify for the foregoing
tax treatment, the optionee generally must be an employee of TeleBanc or its
subsidiaries from the date the option is granted through a date within three
months before the date of exercise. In the case of an optionee who is disabled,
this three-month period is extended to one year. In the case of an employee who
dies, the three-month period and the holding period for shares received pursuant
to the exercise of the option are waived.
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<PAGE>
If all of the foregoing requirements for incentive option treatment are
met except for the special holding period rules set forth above, the optionee
will recognize ordinary income upon the disposition of the shares in an amount
equal to the excess of the fair market value of the shares at the time the
option was exercised over the option exercise price. However, if the optionee
was subject to certain restrictions on transfer of Common Stock at the time the
option was exercised, the measurement date may be delayed, unless the optionee
has made a special tax election within 30 days after the date of exercise to
have taxable income determined without regard to such restrictions. The balance
of the realized gain, if any, will be long- or short-term capital gain,
depending upon whether or not the shares were sold more than one year after the
option was exercised. If the optionee sells the shares prior to the satisfaction
of the holding period rules but at a price below the fair market value of the
shares at the time the option was exercised (or other applicable measurement
date), the amount of ordinary income (and the amount included in alternative
minimum taxable income, if the sale occurs during the same year as the option
was exercised) will be limited to the excess of the amount realized on the sale
over the option exercise price. If TeleBanc complies with applicable (if any)
reporting requirements, it will be allowed a business expense deduction to the
extent the optionee recognizes ordinary income.
If an optionee exercises an incentive option by tendering shares of
Common Stock with a fair market value equal to part or all of the option
exercise price, the exchange of shares generally will be treated as a nontaxable
exchange (except that this treatment would not apply if the optionee had
acquired the shares being transferred pursuant to the exercise of an incentive
option and had not satisfied the special holding period requirements summarized
above). If the exercise is treated as a tax free exchange, the optionee would
have no taxable income from the exchange and exercise (other than minimum
taxable income as discussed above) and the tax basis of the shares exchanged
would be treated as the substituted basis for the shares received. If the
optionee used shares received pursuant to the exercise of an incentive option
(or another statutory option) as to which the optionee had not satisfied the
applicable holding period requirement, the exchange would be treated as a
taxable disqualifying disposition of the exchanged shares, with the result that
the excess of the fair market value of the shares tendered over the optionee's
basis in the shares would be taxable.
The foregoing is a brief summary of some of the principal federal
income tax consequences of stock option grants under the Plan and recipients of
grants under the Plan should consult with their personal tax advisors with
respect to such grants and transactions in stock acquired pursuant to the Plan.
REQUIRED VOTE
Assuming the presence of a quorum at the Annual Meeting, the
affirmative vote of the holders of a majority of the shares of voting stock
present in person or represented by proxy, and entitled to vote at the Annual
Meeting is required to approve the Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF
THE PLAN.
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
(PROPOSAL SIX)
The Board of Directors has approved the appointment of Arthur Andersen
LLP to continue as TeleBanc's independent public accountants for the year ending
December 31, 1997, subject to ratification by stockholders at the Annual
Meeting. Arthur Andersen LLP has been acting as independent public accountants
for the Company since fiscal 1995. Representatives of Arthur Andersen LLP will
be present at the Annual Meeting. They will be given an opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions.
26
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Unless otherwise indicated, properly executed proxies will be voted in
favor of ratifying the appointment of Arthur Andersen LLP to audit the books and
accounts of the Company for the year ending December 31, 1997. No determination
has been made as to what action the Board of Directors would take if the
stockholders do not ratify the appointment.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
FOR THE RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 1997.
STOCKHOLDER PROPOSALS
Any proposal that a stockholder wishes to have presented at the next
annual meeting and included in the proxy materials of the Company must be
received at the main office of the Company, 1111 North Highland Street,
Arlington, Virginia 22201, no later than December 8, 1997. If such proposal is
in compliance with all of the requirements of Rule 14a-8 of the Exchange Act of
1934, as amended, it will be included in the proxy statement and set forth on
the form of proxy issued for the next annual meeting of stockholders. Please
send any such proposal by certified mail, return receipt requested.
OTHER MATTERS
The Board of Directors is not aware of any matters that may come before
the Annual Meeting other than those specifically listed in the Notice of Annual
Meeting of Stockholders. If any other business is properly presented at the
Annual Meeting, it is the intention of the proxy holders to vote or act in
accordance with their best judgment with respect to such matters.
By order of the Board of Directors,
/s/ David A. Smilow
David A. Smilow
Chairman of the Board and
Chief Executive Officer
27
<PAGE>
EXHIBIT A
---------
TEXT OF PROPOSAL TWO
--------------------
Resolved, that Section 4.1 of the Company's Amended and Restated
Certificate of Incorporation shall be amended by deleting the text of Section
4.1 in its entirety and replacing it with the following:
The total number of shares of all classes of stock that the
Corporation shall have the authority to issue is 9,000,000
shares, of which 500,000 shares shall be serial preferred
stock, having a par value of $0.01 per share ("Preferred
Stock"), and 8,500,000 shall be classified as shares of common
stock, having a par value of $0.01 per share ("Common Stock").
The Board of Directors is expressly authorized to issue,
without stockholder approval, any unissued shares of the
Corporation's authorized Common Stock as nonvoting Common
Stock ("Nonvoting Common Stock").
Resolved, that the second sentence of Section 4.2(a) of the Company's
Amended and Restated Certificate of Incorporation shall be amended by deleting
the word "Each" at the beginning of that sentence and inserting in its place the
words "Except as provided in Section 4.2(e) hereof, each".
Resolved, that the first sentence of Section 4.2(b) of the Company's
Amended and Restated Certificate of Incorporation shall be amended by deleting
the word "Each" at the beginning of that sentence and inserting in its place the
words "Except as provided in Section 4.2(e) hereof, each".
Resolved, that Section 4.2 of the Company's Amended and Restated
Certificate of Incorporation shall be amended by inserting a new Section 4.2(e)
which shall provide as follows:
(e) NONVOTING COMMON STOCK.
The holders of Nonvoting Common Stock shall be
entitled to notice of meetings of the Corporation's
stockholders. Notwithstanding any other provision of this
Amended and Restated Certificate of Incorporation or the
Corporation's Bylaws, the Nonvoting Common Stock shall have no
voting rights upon any matter or thing (including, without
limitation, the election of directors) unless provided by
applicable law. Subject to and in compliance with the
following provisions of this Section 4.2(e), each share of
Nonvoting Common Stock held by any person or entity may be
converted into one fully-paid and non-assessable share of
voting Common Stock.
(i) In connection with the disposition of
shares upon the occurrence (or the expected
occurrence as described in Section 4.2(e)(iii)
below), of any Conversion Event (as defined below),
each holder of Nonvoting Common Stock shall be
entitled to convert such Nonvoting Common Stock into
an equal number of shares of voting Common Stock.
(ii) For purposes of this Section 4.2(e), a
"Conversion Event" shall mean, (A) any sale to the
public in a widely dispersed offering (including,
without limitation, a public offering registered
under the Securities Act of 1933, as amended), (B)
any disposition under Rule 144 or Rule 144A
promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended, or any
similar rule then in force of no more than two
percent (2%) of the outstanding voting securities of
the Corporation, (C) any transfer pursuant to a right
of first refusal set forth in the Transfer
Restriction Agreement, dated as of February 28, 1997,
by and among the Purchasers (as identified in the
$29,900,000 Unit Purchase
A-1
<PAGE>
Agreement, dated as of February 19, 1997, between the
Purchasers and the Corporation), David A. Smilow, MET
Holdings Corporation and the Corporation or the
Transfer Restriction Agreement, dated as of February
28, 1997, by and among the Purchasers, Mitchell H.
Caplan, MET Holdings Corporation and the Corporation
or (D) any transfer in a single transaction to an
independent third party who acquires at least a
majority of the voting stock of the Corporation
without regard to the transfer of such securities.
For purposes of this Section 4.2(e) "person" shall
include any natural person and any corporation,
partnership, joint venture, trust, unincorporated
organization and any other entity or organization.
(iii) Each holder of Nonvoting Common Stock
shall be entitled to convert shares of Nonvoting
Common Stock in connection with any Conversion Event
if such holder reasonably believes that such
Conversion Event shall be consummated, and a written
request for conversion from any holder of Nonvoting
Common Stock to the Corporation stating such holder's
reasonable belief that a Conversion Event shall occur
shall be conclusive and shall obligate the
Corporation to effect such conversion in a timely
manner so as to enable each such holder to
participate in such Conversion Event. The Corporation
shall not cancel the shares of Nonvoting Common Stock
so converted before the tenth day following such
Conversion Event and shall reserve such shares until
such tenth day for reissuance in compliance with the
next sentence. If any shares of Nonvoting Common
Stock are converted into shares of voting Common
Stock in connection with a Conversion Event and such
shares of voting Common Stock are not actually
distributed, disposed of or sold pursuant to such
Conversion Event, such shares of voting Common Stock
shall be promptly converted back into the same number
of shares of Nonvoting Common Stock, and during such
period prior to such distribution, disposal or sale,
the holder of such voting Common Stock shall not be
entitled to vote such shares notwithstanding
provisions of this Amended and Restated Certificate
of Incorporation.
(iv) To exercise its conversion privilege, a
holder of Nonvoting Common Stock shall surrender the
certificate or certificates representing the shares
being converted to the Corporation at its principal
office, and shall give written notice to the
Corporation at that office that such holder elects to
convert such shares. Such notice shall also state the
name or names (with address or addresses) in which
the certificate or certificates for shares of voting
Common Stock issuable upon such conversion shall be
issued. The certificate or certificates for shares of
Nonvoting Common Stock surrendered for conversion
shall be accompanied by proper assignment thereof to
the Corporation or in blank. The date when such
written notice is received by the Corporation,
together with the certificate or certificates
representing the shares of Nonvoting Common Stock
being converted, shall be the "Conversion Date". As
promptly as practicable after the Conversion Date,
the Corporation shall issue and shall deliver to the
holder of the shares of Nonvoting Common Stock being
converted, or on its written order, such certificate
or certificates as it may request for the number of
shares of voting Common Stock issuable upon the
conversion of such shares of Nonvoting Common Stock
in accordance with the provisions of this Section
4.2(e). Such conversion shall be deemed to have been
effected immediately prior to the closing of business
on the Conversion Date, and at such time the rights
of the holder as holder of the converted shares of
Nonvoting Common Stock shall cease and the person(s)
in whose name(s) any certificate(s) for shares of
voting Common Stock shall be issuable upon such
conversion shall be deemed to have become
A-2
<PAGE>
the holder or holders of record of the shares of
voting Common Stock represented thereby.
A-3
<PAGE>
EXHIBIT B
---------
TEXT OF PROPOSAL THREE
----------------------
Resolved, that the definition of "Control" in Section 8.3 of the
Company's Amended and Restated Certificate of Incorporation shall be amended by
deleting the word "10" and inserting in its place the word "25".
B-1
<PAGE>
EXHIBIT C
---------
TEXT OF PROPOSAL FOUR
---------------------
Resolved, that the first paragraph of Section 11.2 of the Company's
Amended and Restated Certificate of Incorporation shall be amended by deleting
the words "if the conditions specified in both paragraphs (a) and (b)" and
inserting in their place "if the condition or conditions specified in either
paragraph (a) or paragraph (b)."
C-1
<PAGE>
EXHIBIT D
---------
TELEBANC FINANCIAL CORPORATION
1997 STOCK OPTION PLAN
TELEBANC FINANCIAL CORPORATION ("TeleBanc") hereby adopts this
TeleBanc Financial Corporation 1997 Stock Option Plan (the "Plan") the terms of
which shall be as follows:
1. PURPOSE
The Plan is intended to advance the interests of TeleBanc by
providing eligible individuals (as designated pursuant to Section 4 below) with
an opportunity to acquire or increase a proprietary interest in TeleBanc, which
thereby will create a stronger incentive to expend maximum effort for the growth
and success of TeleBanc and its subsidiaries, and will encourage such eligible
individuals to remain in the employ of TeleBanc or one or more of its
subsidiaries. Each stock option granted under the Plan (an "Option") is intended
to be an "incentive stock option" ("Incentive Stock Option") within the meaning
of Section 422 of the Internal Revenue Code of 1986, or the corresponding
provision of any subsequently-enacted tax statute, as amended from time to time
(the "Code"), except to the extent that any such Option (i) would exceed the
limitations set forth in Section 7 below; (ii) is specifically designated at the
time of grant as not being an Incentive Stock Options; or (iii) is granted to
someone who is not an employee of TeleBanc or any subsidiary or affiliate of
TeleBanc.
2. ADMINISTRATION
(a) Board. The Plan shall be administered by the
Board of Directors of TeleBanc (the "Board"), which shall have the full power
and authority to take all actions, and to make all determinations required or
provided for under the Plan or any Option granted or Option Agreement (as
defined in Section 8 below) entered into under the Plan and all such other
actions and determinations not inconsistent with the specific terms and
provisions of the Plan deemed by the Board to be necessary or appropriate to the
administration of the Plan or any Option granted or Option Agreement entered
into hereunder. All such actions and determinations shall be by the affirmative
vote of a majority of the members of the Board present at a meeting at which any
issue relating to the Plan is properly raised for consideration or without a
meeting by written consent of the Board executed in accordance with TeleBanc's
Articles of Incorporation and By-Laws, and with applicable law. The
interpretation and construction by the Board of any provision of the Plan or of
any Option granted or Option Agreement entered into hereunder shall be final and
conclusive.
(b) Committee. The Board may from time to time
appoint a Stock Option Committee (the "Committee") consisting of not less than
two members of the Board, none of whom shall be an officer or other salaried
employee of TeleBanc or any of its subsidiaries, and each of whom shall qualify
in all respects as a "non-employee director" as defined in Rule 16b-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934
(the "Exchange Act") and an "outside director" for purposes of Section 162(m) of
the Code. The Board, in its sole discretion, may provide that the role of the
Committee shall be limited to making recommendations to the Board concerning any
determinations to be made and actions to be taken by the Board pursuant to or
with respect to the Plan, or the Board may delegate to the Committee such powers
and authorities related to the administration of the Plan, as set forth in
Section 2(a) above, as the Board shall determine, consistent with the Articles
of Incorporation and By-Laws of TeleBanc and applicable law. The Board may
remove members, add members, and fill vacancies on the Committee from time to
time, all in accordance with TeleBanc's Articles of Incorporation and By-Laws,
and with applicable law. The majority vote of the Committee, or acts reduced to
or approved in writing by a majority of the members of the Committee, shall be
the valid acts of the Committee.
D-1
<PAGE>
(c) No Liability. No member of the Board or of the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option granted or Option Agreement entered into
hereunder.
(d) Delegation to the Committee. In the event that
the Plan or any Option granted or Option Agreement entered into hereunder
provides for any action to be taken by or determination to be made by the Board,
such action may be taken by or such determination may be made by the Committee
if the power and authority to do so has been delegated to the Committee by the
Board as provided for in Section 2(b) above. Unless otherwise expressly
determined by the Board, any such action or determination by the Committee shall
be final and conclusive.
3. STOCK
The stock that may be issued pursuant to Options
granted under the Plan shall be shares of common stock, $.01 par value, of
TeleBanc (the "Stock"), which shares may be treasury shares or authorized but
unissued shares. The number of shares of Stock that may be issued pursuant to
Options granted under the Plan shall not exceed in the aggregate 440,000 shares,
subject to adjustment as provided in Section 17 below. If any Option expires,
terminates, or is terminated or canceled for any reason prior to exercise in
full, the shares of Stock that were subject to the unexercised portion of such
Option shall be available for future Options granted under the Plan.
4. ELIGIBILITY
(a) Employees. Options may be granted under the Plan
to any employee of TeleBanc or any "subsidiary corporation" (a "Subsidiary")
thereof within the meaning of Section 424(f) of the Code (including any such
employee who is an officer or director of TeleBanc or any Subsidiary) as the
Board shall determine and designate from time to time prior to expiration or
termination of the Plan. The maximum number of shares of Stock subject to
Options that may be granted under the Plan during any calendar year to any
executive officer or other employee of TeleBanc or any Subsidiary whose
compensation is or may be subject to Code ss. 162(m) is 200,000 shares (subject
to adjustment as provided in Section 17 hereof).
(b) Directors and Independent Contractors. Options
not intended to constitute Incentive Stock Options may be granted to members of
the Board who are not employees of TeleBanc or any Subsidiary and to independent
contractors performing services for TeleBanc or a Subsidiary as determined by
the Board from time to time on the basis of their importance to the business of
TeleBanc or such Subsidiary.
(c) Multiple Grants. An individual may hold more than
one Option, subject to such restrictions as are provided herein.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) Effective Date. The Plan shall be effective as of
the date of adoption by the Board, which date is set forth below, subject to
approval of the Plan, within one year of such effective date, by the
shareholders of TeleBanc by a majority of the votes present and entitled to vote
at a duly held meeting of the shareholders at which a quorum representing a
majority of all outstanding voting stock is present, either in person or by
proxy or by written consent in accordance with TeleBanc's Articles of
Incorporation and By-Laws; provided, however, that upon approval of the Plan by
the shareholders of TeleBanc as set forth above, all Options granted under the
Plan on or after the effective date shall be fully effective as if the
shareholders of TeleBanc had approved the Plan on the effective date. If the
shareholders fail to approve the Plan within one year of such effective date,
any options granted hereunder shall be null and void and of no effect.
D-2
<PAGE>
(b) Term. The Plan shall terminate on the date 10
years from the effective date.
6. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Board
may, at any time and from time to time, prior to the date of termination of the
Plan, grant to such eligible individuals as the Board may determine
("Optionees"), Options to purchase such number of shares of the Stock on such
terms and conditions as the Board may determine, including any terms or
conditions which may be necessary to qualify such Options as Incentive Stock
Options. The date on which the Board approves the grant of an Option (or such
later date as is specified by the Board) shall be considered the date on which
such Option is granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option (other than an Option described in exception (ii) of
Section 1) shall constitute an Incentive Stock Option to the extent that the
aggregate fair market value (determined at the time the Option is granted) of
the stock with respect to which Incentive Stock Options are exercisable for the
first time by any Optionee during any calendar year (under the Plan and all
other plans of the Optionee's employer corporation and its parent and subsidiary
corporations within the meaning of Section 422(d) of the Code) does not exceed
$100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
written agreements ("Option Agreements"), to be executed by TeleBanc and by the
Optionee, in such form or forms as the Board shall from time to time determine.
Option Agreements covering Options granted from time to time or at the same time
need not contain similar provisions; provided, however, that all such Option
Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an
Option (the "Option Price") shall be fixed by the Board and stated in each
Option Agreement, except that the Option Price of a share of Stock subject to an
Option that is intended to constitute an Incentive Stock Option shall be not
less than 100 percent of the fair market value of a share of the Stock on the
date the Option is granted (as determined in good faith by the Board); provided,
however, that in the event the Optionee would otherwise be ineligible to receive
an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and
424(d) of the Code (relating to stock ownership of more than 10 percent), the
Option Price of an Option that is intended to be an Incentive Stock Option shall
be not less than 110 percent of the fair market value of a share of Stock at the
time such Option is granted. In the event that the Stock is listed on an
established national or regional stock exchange, is admitted to quotation on the
National Association of Securities Dealers Automated Quotation System, or is
publicly traded on an established securities market, in determining the fair
market value of the Stock, the Board shall use the closing price of the Stock on
such exchange or System or in such market (the highest such closing price if
there is more that one such exchange or market) on the trading date immediately
before the Option is granted (or, if there is no such closing price, then the
Board shall use the mean between the high and low prices on such date), or, if
no sale of the Stock had been made on such day, on the next preceding day on
which any such sale shall have been made.
10. TERM AND EXERCISE OF OPTIONS
(a) Term. Each Option granted under the Plan shall
terminate and all rights to purchase shares thereunder shall cease upon the
expiration of ten years from the date such
D-3
<PAGE>
Option is granted, or on such date prior thereto as may be fixed by the Board
and stated in the Option Agreement relating to such Option; provided, however,
that in the event the Optionee would otherwise be ineligible to receive an
Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and
424(d) of the Code (relating to stock ownership of more than 10 percent), an
Option granted to such Optionee that is intended to be an Incentive Stock Option
shall in no event be exercisable after the expiration of five years from the
date it is granted.
(b) Option Period and Limitations on Exercise. Each
Option shall be exercisable, in whole or in part, at any time and from time to
time, over a period commencing on or after the date of grant and ending upon the
expiration or termination of the Option, as the Board shall determine and set
forth in the Option Agreement relating to such Option. Without limiting the
foregoing, the Board, subject to the terms and conditions of the Plan, may in
its sole discretion provide that an Option may not be exercised in whole or in
part for any period or periods of time during which such Option is outstanding;
provided, however, that any such limitation on the exercise of an Option
contained in any Option Agreement may be rescinded, modified or waived by the
Board, in its sole discretion, at any time and from time to time after the date
of grant of such Option, so as to accelerate the time at which the Option may be
exercised. Each Option shall be exercisable, in whole or in part, at any time
and from time to time, over a period commencing on the date of grant and ending
upon the expiration of the Option. Notwithstanding any other provision of the
Plan, no Option granted to an Optionee under the Plan shall be exercisable in
whole or in part prior to the date the Plan is approved by the shareholders of
TeleBanc as provided in Section 5 above.
(c) Method of Exercise. An Option that is exercisable
hereunder may be exercised by delivery to TeleBanc on any business day, at its
principal office, addressed to the attention of the Committee, of written notice
of exercise, which notice shall specify the number of shares with respect to
which the Option is being exercised, and shall be accompanied by payment in full
of the Option Price of the shares for which the Option is being exercised,
except as provided below. The minimum number of shares of Stock with respect to
which an Option may be exercised, in whole or in part, at any time shall be the
lesser of 100 shares or the maximum number of shares available for purchase
under the Option at the time of exercise. Payment of the Option Price for the
shares of Stock purchased pursuant to the exercise of an Option shall be made
(i) in cash or in cash equivalents; (ii) through the tender to TeleBanc of
shares of Stock, which shares shall be valued, for purposes of determining the
extent to which the Option Price has been paid thereby, at their fair market
value (determined in the manner described in Section 9 above) on the date of
exercise; (iii) by delivering a written direction to TeleBanc that the Option be
exercised pursuant to a "cashless" exercise/sale procedure (pursuant to which
funds to pay for exercise of the Option are delivered to TeleBanc by a broker
upon receipt of stock certificates from TeleBanc) or a cashless exercise/loan
procedure (pursuant to which the optionees would obtain a margin loan from a
broker to fund the exercise) through a licensed broker acceptable to TeleBanc
whereby the stock certificate or certificates for the shares of Stock for which
the Option is exercised will be delivered to such broker as the agent for the
individual exercising the Option and the broker will deliver to TeleBanc cash
(or cash equivalents acceptable to TeleBanc) equal to the Option Price for the
shares of Stock purchased pursuant to the exercise of the Option plus the amount
(if any) of federal and other taxes that TeleBanc, may, in its judgment, be
required to withhold with respect to the exercise of the Option; (iv) to the
extent permitted by applicable law and under the terms of the Option Agreement
with respect to such Option, by the delivery of a promissory note of the
Optionee to TeleBanc on such terms as shall be set out in such Option Agreement;
(v) by a combination of the methods described in (i), (ii), (iii) and (iv).
Payment in full of the Option Price need not accompany the written notice of
exercise if the Option is exercised pursuant to the cashless exercise/sale
procedure described above. An attempt to exercise any Option granted hereunder
other than as set forth above shall be invalid and of no force and effect.
Promptly after the exercise of an Option, the individual exercising the Option
shall be entitled to the issuance of a Stock certificate or certificates
evidencing his ownership of such shares. A separate Stock certificate or
certificates shall be issued for any shares purchased pursuant to the exercise
of an Option that is intended to be an Incentive Stock Option, which certificate
or certificates shall not include any shares that were purchased pursuant to the
exercise of an Option that is not an Incentive Stock Option. An individual
holding or exercising an Option shall
D-4
<PAGE>
have none of the rights of a shareholder until the shares of Stock covered
thereby are fully paid and issued to him and, except as provided in Section 18
below, no adjustment shall be made for dividends or other rights for which the
record date is prior to the date of such issuance.
(d) Restrictions on Transfer of Stock. If an Option
is exercised before the date that is six months from the later of (i) the date
of grant of the Option or (ii) the date of shareholder approval of the Plan and
the sale of stock acquired pursuant to such exercise would subject the
individual exercising the Option to liability under Section 16 of the Exchange
Act, then such certificate or certificates shall bear a legend restricting the
transfer of the Stock covered thereby until the expiration of six months from
the later of the date specified in clause (i) above or the date specified in
clause (ii) above.
(e) Change in Control. In the event of a Change in
Control (as defined below), subject to the limitations set out in Section 17(f)
hereof and except as the Board shall otherwise provide in an Option Agreement
with respect to an Option granted under the Plan, all outstanding Options shall
become immediately exercisable in full, without regard to any limitation on
exercise imposed pursuant to Section 10(b) above. For purposes of the Plan, a
"Change in Control" shall be deemed to occur if any person shall (a) acquire
direct or indirect beneficial ownership of more than 50% of the total combined
voting power with respect to the election of directors of the issued and
outstanding stock of TeleBanc (except that no Change in Control shall be deemed
to have occurred if the persons who were stockholders of TeleBanc immediately
before such acquisition own all or substantially all of the voting stock or
other interests of such person immediately after such transaction), or (b) have
the power (whether as a result of stock ownership, revocable or irrevocable
proxies, contract or otherwise) or ability to elect or cause the election of
directors consisting at the time of such election of a majority of the Board. A
"person" for this purpose shall mean any person, corporation, partnership, joint
venture or other entity or any group (as such term is defined for purposes of
Section 13(d) of the Exchange Act), other than those persons who beneficially
own, or have outstanding options or warrants to acquire, more than five percent
of the voting stock of TeleBanc as of February 25, 1997. For purposes of this
Section 10(e), "fair market value" shall be determined in accordance with
Section 9 hereof and a person shall be deemed to be a beneficial owner as that
term is used in Rule 13d-3 under the Exchange Act.
11. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee to whom an Incentive Stock
Option is granted, only such Optionee (or, in the event of legal incapacity or
incompetence, the Optionee's guardian or legal representative) may exercise the
Incentive Stock Option. No Option shall be assignable or transferable by the
Optionee to whom it is granted, other than by will or the laws of descent and
distribution, except that the Optionee may transfer an Option that is not
intended to constitute an Incentive Stock Option (a) pursuant to a qualified
domestic relations order as defined for purposes of the Employee Retirement
Income Security Act of 1974, as amended, or (b) by gift: to a member of the
"Family" (as defined below) of the Optionee, to or for the benefit of one or
more organizations qualifying under Code ss.ss. 501(c)(3) and 170(c)(2) (a
"Charitable Organization") or to a trust for the exclusive benefit of the
Optionee, one or more members of the Optionee's Family, one or more Charitable
Organizations, or any combination of the foregoing, provided that any such
transferee shall enter into a written agreement to be bound by the terms of this
Agreement. For this purpose, "Family" shall mean the spouse, siblings, and
lineal ancestors and descendants of the Optionee.
12. TERMINATION OF EMPLOYMENT OR SERVICE
Upon the termination of the employment or other
service of an Optionee with TeleBanc or a Subsidiary, other than by reason of
the death or "permanent and total disability" (within the meaning of Section
22(e)(3) of the Code) of such Optionee, any Option granted to an Optionee
pursuant to the Plan shall terminate three months after the date of such
termination of employment or service and thereafter such Optionee shall have no
further right to purchase shares of Stock pursuant to such Option; provided,
however, that the Board may provide, by inclusion of
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appropriate language in any Option Agreement, that the Optionee may (subject to
the general limitations on exercise set forth in Section 10(b) above), in the
event of termination of employment or service of the Optionee with TeleBanc or a
Subsidiary, exercise an Option, in whole or in part, at any time subsequent to
such termination of employment or service and prior to termination of the Option
pursuant to Section 10(a) above, either subject to or without regard to any
installment or other limitation on exercise imposed pursuant to Section 10(b)
above. Whether a leave of absence or leave on military or government service
shall constitute a termination of employment or service for purposes of the Plan
shall be determined by the Board, which determination shall be final and
conclusive. For purposes of the Plan, a termination of employment or service
with TeleBanc or a Subsidiary shall not be deemed to occur if the Optionee is
immediately thereafter employed by or otherwise providing services to TeleBanc
or any Subsidiary.
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
(a) Death. If an Optionee dies while in the employ or
service of TeleBanc or a Subsidiary or within the period following the
termination of employment or service during which the Option is exercisable
under Section 12 above or Section 13(b) below, the executors or administrators
or legatees or distributees of such Optionee's estate shall have the right
(subject to the general limitations on exercise set forth in Section 10(b)
above), at any time within one year after the date of such Optionee's death and
prior to termination of the Option pursuant to Section 10(a) above, to exercise
any Option held by such Optionee at the date of such Optionee's death, whether
or not such Option was exercisable immediately prior to such Optionee's death;
provided, however, that the Board may provide by inclusion of appropriate
language in any Option Agreement that, in the event of the death of the
Optionee, the executors or administrators or legatees or distributees of such
Optionee's estate may exercise an Option (subject to the general limitations on
exercise set forth in Section 10(b) above), in whole or in part, at any time
subsequent to such Optionee's death and prior to termination of the Option
pursuant to Section 10(a) above, either subject to or without regard to any
installment or other limitation on exercise imposed pursuant to Section 10(b)
above.
(b) Disability. If an Optionee terminates employment
or service with TeleBanc or a Subsidiary by reason of the "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code) of such
Optionee, then such Optionee shall have the right (subject to the general
limitations on exercise set forth in Section 10(b) above), at any time within
one year after such termination of employment or service and prior to
termination of the Option pursuant to Section 10(a) above, to exercise, in whole
or in part, any Option held by such Optionee at the date of such termination of
employment or service, whether or not such Option was exercisable immediately
prior to such termination of employment or service; provided, however, that the
Board may provide, by inclusion of appropriate language in any Option Agreement,
that the Optionee may (subject to the general limitations on exercise set forth
in Section 10(b) above), in the event of the termination of employment or
service of the Optionee with TeleBanc or a Subsidiary by reason of the
"permanent and total disability" (within the meaning of Section 22(e)(3) of the
Code) of such Optionee, exercise an Option in whole or in part, at any time
subsequent to such termination of employment or service and prior to termination
of the Option pursuant to Section 10(a) above, either subject to or without
regard to any installment limitation on exercise imposed pursuant to Section
10(b) above. Whether a termination of employment or service is to be considered
by reason of "permanent and total disability" for purposes of this Plan shall be
determined by the Board, which determination shall be final and conclusive.
14. USE OF PROCEEDS
The proceeds received by TeleBanc from the sale of Stock
pursuant to Options granted under the Plan shall constitute general funds of
TeleBanc.
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15. REQUIREMENTS OF LAW
(a) Violations of Law. TeleBanc shall not be required
to sell or issue any shares of Stock under any Option if the sale or issuance of
such shares would constitute a violation by the individual exercising the Option
or TeleBanc of any provisions of any law or regulation of any governmental
authority, including without limitation any federal or state securities laws or
regulations. Any determination in this connection by the Board shall be final,
binding, and conclusive. TeleBanc shall not be obligated to take any affirmative
action in order to cause the exercise of an Option or the issuance of shares
pursuant thereto to comply with any law or regulation of any governmental
authority. As to any jurisdiction that expressly imposes the requirement that an
Option shall not be exercisable unless and until the shares of Stock covered by
such Option are registered or are subject to an available exemption from
registration, the exercise of such Option (under circumstances in which the laws
of such jurisdiction apply) shall be deemed conditioned upon the effectiveness
of such registration or the availability of such an exemption.
(b) Compliance with Rule 16b-3. The intent of this
Plan is to qualify for the exemption provided by Rule 16b-3 under the Exchange
Act. To the extent any provision of the Plan does not comply with the
requirements of Rule 16b-3, it shall be deemed inoperative to the extent
permitted by law and deemed advisable by the Board and shall not affect the
validity of the Plan. In the event Rule 16b-3 is revised or replaced, the Board,
or the Committee acting on behalf of the Board, may exercise discretion to
modify this Plan in any respect necessary to satisfy the requirements of the
revised exemption or its replacement.
16. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend,
suspend or terminate the Plan as to any shares of Stock as to which Options have
not been granted; provided, however, that no amendment by the Board shall,
without approval by a majority of the votes present and entitled to vote at a
duly held meeting of the shareholders of TeleBanc at which a quorum representing
a majority of all outstanding voting stock is, either in person or by proxy,
present and voting on the amendment, or by written consent in accordance with
applicable state law and the Articles of Incorporation and By-Laws of TeleBanc,
change the requirements as to eligibility to receive Incentive Stock Options,
increase the maximum number of shares of Stock in the aggregate that may be sold
pursuant to Incentive Stock Options granted under the Plan (except as permitted
under Section 17 hereof) or modify the Plan so that Options granted under the
Plan could not satisfy the applicable requirements of Code ss. 162(m). Except as
permitted under Section 17 hereof, no amendment, suspension or termination of
the Plan shall, without the consent of the holder of the Option, alter or impair
rights or obligations under any Option theretofore granted under the Plan.
17. EFFECT OF CHANGES IN CAPITALIZATION
(a) Changes in Stock. If the outstanding shares of
Stock are increased or decreased or changed into or exchanged for a different
number or kind of shares or other securities of TeleBanc by reason of any
recapitalization, reclassification, stock split, reverse split, combination of
shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or other increase or decrease in such shares effected without
receipt of consideration by TeleBanc, occurring after the effective date of the
Plan, the number and kinds of shares for the purchase of which Options may be
granted under the Plan shall be adjusted proportionately and accordingly by
TeleBanc. In addition, the number and kind of shares for which Options are
outstanding shall be adjusted proportionately and accordingly so that the
proportionate interest of the holder of the Option immediately following such
event shall, to the extent practicable, be the same as immediately prior to such
event. Any such adjustment in outstanding Options shall not change the aggregate
Option Price payable with respect to shares subject to the unexercised portion
of the Option outstanding but shall include a corresponding proportionate
adjustment in the Option Price per share. If there is a distribution payable in
the capital stock of a subsidiary corporation of TeleBanc ("Spin-off Shares"),
to the extent consistent with Treasury Regulation Section 1.425-1(a)(6) or the
corresponding
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provision of any subsequent regulation, each outstanding Option shall thereafter
additionally pertain to the number of Spin-off Shares that would have been
received in such distribution by a shareholder of TeleBanc who owned a number of
shares of Common Stock equal to the number of shares that are subject to the
Option at the time of such distribution, and the aggregate Option Price of the
Option shall be allocated between the Spin-off Shares and the Common Stock in
proportion to the relative fair market values of a Spin-off Share and a share of
Common Stock immediately after the distribution of Spin-off Shares.
(b) Reorganization in Which TeleBanc Is the Surviving
Corporation. Subject to Subsection (c) hereof, if TeleBanc shall be the
surviving corporation in any reorganization, merger, or consolidation of
TeleBanc with one or more other corporation s, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger, or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger, or consolidation.
(c) Reorganization in Which TeleBanc Is Not the
Surviving Corporation or Sale of Assets or Stock. Upon the dissolution or
liquidation of TeleBanc, or upon a merger, consolidation, reorganization or
other business combination of TeleBanc with one or more other entities in which
TeleBanc is not the surviving entity, or upon a sale of all or substantially all
of the assets of TeleBanc to another entity, or upon any transaction (including,
without limitation, a merger or reorganization in which TeleBanc is the
surviving corporation) approved by the Board which results in any person or
entity (or persons or entities acting as a group or otherwise in concert) owning
80 percent or more of the combined voting power of all classes of stock of
TeleBanc, the Plan and all Options outstanding hereunder shall terminate, except
to the extent provision is made in writing in connection with such transaction
for the continuation of the Plan and/or the assumption of the Options
theretofore granted, or for the substitution for such Options of new options
covering the stock of a successor entity, or a parent or subsidiary thereof,
with appropriate adjustments as to the number and kinds of shares and exercise
prices, in which event the Plan and Options theretofore granted shall continue
in the manner and under the terms so provided. In the event of any such
termination of the Plan, each individual holding an Option shall have the right
(subject to Section 17(f) below and to the general limitations on exercise set
forth in Section 10(b) above, and except as otherwise specifically provided in
the Option Agreement relating to such Option), immediately prior to the
occurrence of such termination and during such period occurring prior to such
termination as the Board in its sole discretion shall determine and designate,
to exercise such Option in whole or in part, whether or not such Option was
otherwise exercisable at the time such termination occurs and without regard to
any installment limitation on exercise imposed pursuant to Section 10(b) above.
The Board shall send written notice of an event that will result in such a
termination to all individuals who hold Options not later than the time at which
TeleBanc gives notice thereof to its shareholders.
(d) Adjustments. Adjustments under this Section 17
related to stock or securities of TeleBanc shall be made by the Board, whose
determination in that respect shall be final, binding, and conclusive. No
fractional shares of Stock or units of other securities shall be issued pursuant
to any such adjustment, and any fractions resulting from any such adjustment
shall be eliminated in each case by rounding downward to the nearest whole share
or unit.
(e) No Limitations on Corporation. The grant of an
Option pursuant to the Plan shall not affect or limit in any way the right or
power of TeleBanc to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
(f) Parachute Limitation. If the acceleration of the
exercisability or vesting of any Option or any other benefit to an Optionee
under this Plan would be considered a
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"parachute payment" within the meaning of Section 280G(b)(2) of the Code and if,
after reduction for any applicable federal excise tax imposed by Section 4999 of
the Code (the "Excise Tax") and federal income tax imposed by the Code, the
Optionee's net proceeds from the exercise of such Options and from other amounts
that would be so considered would be less than the amount of the Optionee's net
proceeds resulting from the payment of the Reduced Amount described below, after
reduction for federal income taxes, then the exercisability and vesting of
Options and other benefits provided under the Plan shall be limited to the
Reduced Amount. The "Reduced Amount" shall be the largest amount that could be
received by the Optionee under the Plan and each Option Agreement such that no
payment or other benefit received by the Optionee under the Plan and Option
Agreements and any other agreement, contract, or understanding heretofore or
hereafter entered into between the Optionee and TeleBanc or any Subsidiary (the
"Other Agreements") and any formal or informal plan or other arrangement (other
than the Plan) heretofore or hereafter adopted by TeleBanc or any Subsidiary for
the direct or indirect provision of compensation to the Optionee (including
groups or classes of participants or beneficiaries of which the Optionee is a
member), whether or not such compensation is deferred, is in cash, or is in the
form of a benefit to or for the Optionee (a "Benefit Plan") would be subject to
the Excise Tax. In the event that the Optionee shall be limited to the Reduced
Amount under the preceding sentence, then the Optionee shall have the right, in
the Optionee's sole discretion, to designate those payments or benefits under
the Plan and Option Agreements, any Other Agreements, and any Benefit Plans,
that should be reduced or eliminated so as to avoid having the benefits to the
Optionee under the Plan and Option Agreements be subject to the Excise Tax. In
the event that the Optionee would otherwise be deemed to have received an amount
that would constitute a parachute payment, the amount received by him that
exceeds the maximum amount permissible under this Section 17(f) shall be treated
as a loan to him and shall be repaid, with interest, to the extent necessary to
reduce the amount paid to the maximum permissible amount. The interest rate of
any such loan shall be at the minimum rate necessary to avoid characterization
of the loan as an excess parachute payment and the other terms of any such loan
shall conform to customary and reasonable terms that would be applicable to
loans of a similar unsecured type made by a bank or other financial institution
to an unrelated third party. Any such loan shall be repaid in full not later
than six months after the date on which TeleBanc notifies the Optionee that a
loan relationship exists, and may be repaid by the Optionee without prepayment
penalty at any time during such six month period.
18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the employ of TeleBanc or any Subsidiary,
or to interfere in any way with the right and authority of TeleBanc or any
Subsidiary either to increase or decrease the compensation of any individual at
any time, or to terminate any employment or other relationship between any
individual and TeleBanc or any Subsidiary.
19. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the
Plan to the shareholders of TeleBanc for approval shall be construed as creating
any limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options or stock
appreciation rights otherwise than under the Plan.
* * *
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This Plan was duly adopted and approved by the Board of
Directors of TeleBanc by resolution at a meeting held on the 25th day of
February, 1997.
/s/ Sang-Hee Yi
--------------------------------
Assistant Secretary of TeleBanc
This Plan was duly approved by the shareholders of TeleBanc at
a meeting held the ______ day of ________________, 1997.
--------------------------------
Secretary of TeleBanc
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