SCHEDULE 14A
(RULE 14A -- 101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
----------------
TELEBANC FINANCIAL CORPORATION
----------------
(Name of Registrant as Specified in its Charter)
----------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14-a6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
Not Applicable
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
Not Applicable
-----------------------------------------------------------------------
5) Total Fee paid:
None
-----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
--------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------
(3) Filing Party:
--------------------------------------------------------------------------
(4) Date Filed:
--------------------------------------------------------------------------
<PAGE>
[TELEBANC FINANCIAL CORPORATION LOGO OMITTED]
May 3, 1999
Dear Stockholder:
You are cordially invited to attend the 1999 Annual Meeting of Stockholders
of TeleBanc Financial Corporation. The meeting will be held on Thursday, May 27,
1999 at 11:00 a.m. at the Tower Club, 8000 Towers Crescent Drive, Suite 1700,
Vienna, Virginia 22812. I hope that you will be able to join us.
At this meeting you will be asked to vote, in person or by proxy, on the
following proposals:
o to elect three directors;
o to amend the certificate of incorporation to increase the authorized
shares of common stock;
o to amend the certificate of incorporation to change the Company's
name;
o to approve an amendment to the Company's 1998 Stock Incentive Plan to
increase the maximum number of shares of common stock reserved for
issuance under the plan by 2,000,000 shares;
o to ratify the appointment of the Company's independent accountants;
and
o 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,
David A. Smilow
Chairman of the Board
<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 27, 1999
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders (the
"Annual Meeting") of TeleBanc Financial Corporation (the "Company") will be held
on Thursday, May 27, 1999 at 11:00 a.m., at the Tower Club, 8000 Towers Crescent
Drive, Suite 1700, Vienna, Virginia 22812, for the following purposes:
1. To elect three directors of the Company for terms of three years
each;
2. To amend the Certificate of Incorporation of the Company to
increase to 110,000,000 the number of shares of common stock, par
value $.01 per share, authorized to be issued by the Company;
3. To amend the Certificate of Incorporation of the Company to
change the Company's name from TeleBanc Financial Corporation to
Telebanc Financial Corporation;
4. To approve an amendment to the Company's 1998 Stock Incentive
Plan to increase the maximum number of shares of common stock
reserved for issuance under the plan by 2,000,000 shares;
5. 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, 1999; and
6. 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 31, 1999 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Annual Meeting. Only holders of record of common stock, par value
$.01 per share, of the Company 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,
David A. Smilow
Chairman of the Board
Arlington, Virginia
May 3, 1999
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
TELEBANC FINANCIAL CORPORATION
1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MAY 27, 1999
GENERAL INFORMATION
PROXY SOLICITATION
TeleBanc Financial Corporation, a Delaware corporation, is furnishing this
Proxy Statement and the accompanying Notice of Annual Meeting and proxy card to
the holders of its common stock, in connection with the solicitation of proxies
by Telebanc's board of directors for use at Telebanc's 1999 Annual Meeting of
Stockholders, and any adjournment or postponement of the meeting. The annual
meeting will be held at the Tower Club, 8000 Towers Crescent Drive, Suite 1700,
Vienna, Virginia 22812, on Thursday, May 27, 1999, at 11:00 a.m. The board of
directors has called the annual meeting for the purposes described in the Notice
of Annual Meeting.
Telebanc is mailing its Annual Report to Stockholders for the year ended
December 31, 1998 together with this proxy statement, and the enclosed proxy, to
holders of its common stock entitled to vote at the annual meeting. The Annual
Report to Stockholders does not form any part of the material for the
solicitation of proxies.
Telebanc will bear the cost of soliciting proxies. In addition to the
solicitation of proxies by mail, Telebanc's directors, officers and regular
employees, without extra remuneration, may solicit proxies personally, by
telephone, telegram, or otherwise. Telebanc will also utilize the services of
its transfer agent, Fifth Third Bank, to provide broker search and proxy
distribution services at an estimated cost of $5,000. 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.
This proxy statement and the enclosed proxy are first being mailed to
Telebanc's stockholders on or about May 3, 1999.
VOTING AND REVOCABILITY OF PROXIES
If you properly sign and return the enclosed proxy to Telebanc and do not
revoke it prior to its use, your shares will be voted at the annual meeting in
accordance with your instructions on the proxy. EXECUTED BUT UNMARKED PROXIES
THAT ARE TIMELY RECEIVED AND NOT SUBSEQUENTLY REVOKED 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 TELEBANC'S CERTIFICATE OF INCORPORATION (THE
"CERTIFICATE OF INCORPORATION") TO INCREASE TO 110,000,000 THE SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE, AUTHORIZED TO BE ISSUED BY TELEBANC; (3) FOR
THE AMENDMENT OF THE CERTIFICATE OF INCORPORATION TO CHANGE TELEBANC'S CORPORATE
NAME FROM TELEBANC FINANCIAL CORPORATION TO TELEBANC FINANCIAL CORPORATION; (4)
FOR AN AMENDMENT TO TELEBANC'S 1998 STOCK INCENTIVE PLAN TO INCREASE THE MAXIMUM
NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER THE PLAN BY
2,000,000 SHARES; AND (5) FOR THE RATIFICATION OF ARTHUR ANDERSEN LLP AS
TELEBANC'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 board of directors has fixed the close of business on March 31, 1999 as
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
3,360 holders of common stock. The number of shares of common stock outstanding
on the record date was 12,732,525. Each outstanding share of common stock
entitles its holder to one vote on each matter presented to the stockholders.
<PAGE>
The presence, in person or by proxy, of holders of at least a majority of
the common stock 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 Telebanc's bylaws (the
"Bylaws"), directors are elected by a plurality of votes cast by the shares
entitled to vote in the election of directors. The proposals to amend the
Certificate of Incorporation require the affirmative vote of the holders of a
majority of the outstanding common stock entitled to vote at the annual meeting.
Unless otherwise required by the General Corporation Law of the State of
Delaware, the Certificate of Incorporation or the Bylaws, the Bylaws provide
that any other matter put to a stockholder vote, including the amendment to
Telebanc's 1998 Stock Incentive Plan and appointment of Telebanc's independent
auditors, shall be decided by the affirmative vote of the holders of a majority
of the votes cast on the matter.
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. A broker "non-vote" occurs when a
nominee holding shares for a beneficial holder does not have discretionary
voting power and does not receive voting instructions from the beneficial owner.
Abstentions are counted in tabulations of the votes cast on proposals presented
to stockholders, whereas broker non-votes are not counted for purposes of
determining whether a proposal has been approved. The approval of the proposals
to amend Telebanc's Certificate of Incorporation to increase the authorized
common stock and change Telebanc's name each require the affirmative vote of the
holders of a majority of Telebanc's outstanding common stock entitled to vote at
the meeting. Abstentions and broker "non-votes" on the proposals to amend the
Certificate of Incorporation will have the effect of a vote against that
proposal.
A stockholder who has given a proxy may revoke it at any time prior to its
exercise at the annual meeting by (1) giving written notice of revocation to the
Secretary of Telebanc, (2) properly submitting to Telebanc a duly executed proxy
bearing a later date, or (3) voting in person at the annual meeting. All written
notices of revocation or other communications with respect to the revocation of
proxies should be addressed as follows: TeleBanc Financial Corporation, 1111
North Highland Street, Arlington, Virginia 22201, Attention: Corporate
Secretary.
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, KEY EMPLOYEES AND CERTAIN
BENEFICIAL OWNERS
The following table shows information regarding the beneficial ownership of
the Telebanc's common stock as of March 31, 1999 by (1) any person known to
Telebanc to be the beneficial owner of more than 5% of Telebanc common stock,
(2) each director and person nominated to be a director, (3) the executive
officers named in the Summary Compensation Table under "Executive Compensation"
(the "Named Executive Officers") and (4) all directors and executive officers as
a group.
The information shown below regarding beneficial ownership of the common
stock has been presented in accordance with the rules of the Securities and
Exchange Commission and is not necessarily indicative of beneficial ownership
for any other purpose. Under such rules, beneficial ownership of common stock
includes any shares as to which a person has the sole or shared voting power or
investment power and also any shares of which a person has the right to acquire
beneficial ownership within 60 days as of the date shown below through the
exercise of any stock option, warrant, or conversion or other right.
2
<PAGE>
<TABLE>
<CAPTION>
AMOUNTAND
NATURE OF PERCENTAGE
BENEFICIAL OF CLASS
NAME OF BENEFICIAL OWNER(1) OWNERSHIP OUTSTANDING
- ------------------------------------------------------ ------------ ------------
<S> <C> <C>
David A. Smilow(2) ............................ 1,655,350 12.59%
Mitchell H. Caplan(3) ......................... 879,277 6.68
Aileen Lopez Pugh(4) .......................... 116,961 *
Laurence P. Greenberg(5) ...................... 87,907 *
Stephen G. Dervenis(6) ........................ 5,700 *
David R. DeCamp(7) ............................ 19,000 *
Dean C. Kehler(8) ............................. 686,590 5.35
Marcia Myerberg ............................... -- --
Steven F. Piaker(9) ........................... 4,000 *
Mark Rollinson(10) ............................ 20,500 *
CIBC WG Argosy Merchant Fund 2 LLC(8) ......... 682,590 5.32
Conning & Company(11) ......................... 772,589 6.02
General American Mutual Holding Company(12) 967,614 7.53
Directors and Executive Officers as a group (10
individuals)(13) ............................. 3,475,285 25.02
TeleBanc Financial Corporation Employee Stock
Ownership Plan(14) ........................... 495,445 3.88
</TABLE>
- ----------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner listed
above is c/o TeleBanc Financial Corporation, 1111 North Highland Street,
Arlington, Virginia 22201.
(2) 1,153,954 of Mr. Smilow's shares are held by D. Aron LLC, a limited
liability company of which Mr. Smilow is the managing member, and 50,036
shares are held directly by Mr. Smilow. Includes 354,064 shares of common
stock issuable upon exercise of options and 64,200 shares issuable upon
exercise of warrants exercisable within 60 days of this filing and 33,096
shares of common stock held by the ESOP and allocated to Mr. Smilow's
account. Excludes 288,944 shares held by D. Aron LLC over which Mr. Smilow
does not have voting or dispositive power and 401,849 shares of common
stock and warrants to acquire 50,000 shares of common stock held by the
ESOP (excluding the shares allocated to his account), of which Mr. Smilow
is a trustee.
(3) Includes 380,730 shares of common stock issuable upon exercise of options
and 46,000 shares issuable upon exercise of warrants exercisable within 60
days of this filing and 15,809 shares of common stock held by the ESOP and
allocated to Mr. Caplan's account. Excludes 419,136 shares of common stock
and warrants to acquire 50,000 shares of common stock held by the ESOP
(excluding the shares allocated to his account), of which Mr. Caplan is a
trustee. Mr. Caplan disclaims beneficial ownership of warrants to acquire
23,000 shares of common stock listed above.
(4) Includes 88,000 shares of common stock issuable upon exercise of options
and 12,200 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of this filing and 7,481 shares of common stock
held by the ESOP and allocated to Ms. Pugh's account.
(5) Includes 80,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of this filing and 7,507 shares of common stock
held by the ESOP and allocated to Mr. Greenberg's account.
(6) Includes 5,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of the date of this filing.
(7) Includes 17,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of this filing. Mr. DeCamp's address is Grubb &
Ellis, 1717 Pennsylvania Avenue, N.W., Suite 250, Washington, D.C. 20006.
(8) Mr. Kehler is the designated director for CIBC WG Argosy Merchant Fund 2
LLC ("CIBC Merchant Fund"), which, according to a Schedule 13G filed on
February 16, 1999, directly holds 589,840 shares of common stock and 92,750
shares of common stock issuable upon exercise of warrants exercisable
within 60 days of this filing. Mr. Kehler is a partner of CIBC Merchant
Fund and disclaims beneficial ownership of such shares. Mr. Kehler's
beneficial ownership interest includes 4,000 shares of common stock
issuable upon exercise of options exercisable within 60 days of December
31, 1998, which are not part of CIBC's holdings. Mr. Kehler's address is
c/o CIBC Oppenheimer, 425 Lexington Avenue, 3rd Floor, New York, New York
10017.
(9) Includes 4,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of this filing. Mr. Piaker is the designated
director for Conning & Company and serves as its Senior Vice President. Mr.
Piaker does not exercise voting or investment control over the shares held
by Conning & Company. Mr. Piaker's address is c/o Conning & Company, City
Place II, 185 Asylum Street, Hartford, Connecticut 06103.
3
<PAGE>
(10) Includes 12,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of this filing. Mr. Rollinson's address is P.O.
Box 826, Leesburg, Virginia 22075.
(11) According to a Schedule 13G filed on February 16, 1999, Conning Insurance
Capital Limited Partnership III ("CICLP III") beneficially owns 671,975
shares of common stock. Conning Insurance Capital International Partners
III, L.P. ("CICIP III") beneficially owns 100,614 shares of common stock.
Telebanc understands that CICLP III and CICIP III collectively own 92,750
shares of common stock issuable upon exercise of warrants exercisable
within 60 days of the date of this filing. Conning & Company controls the
general partner of each of CICLP III and CICIP III. The address of Conning
& Company is City Place II, 185 Asylum Street, Hartford, Connecticut 06103.
(12) According to a Schedule 13G filed on February 16, 1999, General American
Life Insurance Company ("General American"), an indirect subsidiary of
General American Mutual Holding Company directly holds 168,525 shares of
common stock and 26,500 shares of common stock issuable upon exercise of
warrants exercisable within 60 days of this filing. General American Mutual
Holding Company indirectly controls Conning & Company and may be deemed to
beneficially own all of the shares held by CICLP III and CICIP III.
Accordingly, the shares held by Conning & Company are also included in the
table above. The address of General American is 700 Market Street, St.
Louis, Missouri 63101.
(13) Includes 944,794 shares of common stock issuable upon exercise of options
and 215,150 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of this filing. Excludes 371,052 shares of
common stock (except for any shares allocable to the accounts of Messrs.
Smilow, Caplan, Greenberg and Dervenis and Ms. Pugh) and warrants to
acquire 50,000 shares of common stock exercisable within 60 days of
December 31, 1998, held by the ESOP, of which Messrs. Smilow and Caplan act
as trustees.
(14) Includes 50,000 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of December 31, 1998.
4
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL 1)
The Bylaws provide that the board of directors shall consist of not fewer
than six nor more than nine members and is currently fixed at 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. Telebanc's board of directors currently consists of
nine members.
The board of directors consists of three classes of directors with
overlapping three-year terms. One class of directors is elected each year with
terms expiring at the third succeeding annual meeting of stockholders after that
election. At the annual meeting, Telebanc's stockholders will elect three
directors to hold office for three-year terms which will expire at the annual
meeting of stockholders in 2002 and at the time that their successors are
elected.
Unless otherwise instructed on the proxy, the persons named in the proxy
intend 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. If any
person nominated by the board of directors fails to stand for election or is
unable to accept election, the proxy holders will vote proxies 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
shares of common stock cast.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ELECTION
OF ITS NOMINEES AS DIRECTORS OF TELEBANC.
The following table shows (1) the names of the persons nominated by the
board of directors for election as directors at the annual meeting; (2)
executive officers of Telebanc who do not also serve as a director; (3) four
other key employees, and (4) the current directors whose terms do not expire
until subsequent annual meetings. Biographical information concerning each of
the director nominees, the current directors, the executive officer and the key
employees is shown on the following pages.
<TABLE>
<CAPTION>
TERM EXPIRES AT
ANNUAL MEETING
POSITION(S) HELD WITH DIRECTOR OF STOCKHOLDERS
NAME AGE TELEBANC (1) SINCE TO BE HELD IN
- ------------------------- ----- -------------------------------------- ---------- ----------------
<S> <C> <C> <C> <C>
THE NOMINEES:
Dean C. Kehler (3)(4) 42 Director of Telebanc 1997 2002
Steven F. Piaker (3)(4) 36 Director of Telebanc 1997 2002
Michael M. Lynton (5) 39 Director of Telebanc 1999 2002
EXECUTIVE OFFICERS:
David A. Smilow 37 Chairman of the Board of Telebanc; 1989 (2) 2001
Chairman of the Board and Chief Risk
Management Officer of TeleBank
Mitchell H. Caplan 41 Vice Chairman of the Board, Chief 1994 2001
Executive Officer and President of
Telebanc
Aileen Lopez Pugh 31 Executive Vice President, Chief
Financial Officer of Telebanc
Laurence P. Greenberg 37 Executive Vice President, Chief
Marketing Officer
Stephen G. Dervenis 34 Executive Vice President of Telebanc,
Chief Executive Officer of TeleBanc
Capital Markets, Inc.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
TERM EXPIRES AT
ANNUAL MEETING
POSITION(S) HELD WITH DIRECTOR OF STOCKHOLDERS
NAME AGE TELEBANC (1) SINCE TO BE HELD IN
- ----------------------- ----- ----------------------------------------------- ------------- ----------------
<S> <C> <C> <C> <C>
KEY EMPLOYEES:
Ross C. Atkinson 31 Executive Vice President, Chief Information
Officer
Arlen W. Gelbard 41 Executive Vice President, General Counsel
Michael R. Opshal 36 Executive Vice President, Chief Credit Officer
Sang-Hee Yi 35 Executive Vice President, Chief Compliance
Officer
CONTINUING DIRECTORS:
David R. DeCamp(3)(4) 40 Director of Telebanc 1993(2) 2000
Marcia Myerberg 53 Director of Telebanc 1998 2000
Mark Rollinson (4) 63 Director of Telebanc 1992(2) 2000
</TABLE>
- ----------
(1) Unless otherwise specified, the position held with Telebanc is also held at
Telebanc's subsidiary, TeleBank, a federally chartered savings bank
("TeleBank").
(2) For the years prior to 1994, includes service as a director of TeleBank.
(3) Member of the compensation committees of Telebanc and TeleBank.
(4) Member of the audit/compliance committees of Telebanc and TeleBank.
(5) Mr. Lynton is a director of Telebanc only.
David A. Smilow has served as the Chairman of the Board of Directors since
March 1994 and as Chief Executive Officer of Telebanc from March 1994 to April
1998. He has also served as the Chairman of the Board of Directors of TeleBank
since January 1994 and as Chief Risk Management Officer of TeleBank since
February 1996. Prior to January 1994, Mr. Smilow served as President of
TeleBank. Mr. Smilow also serves as President of TeleBanc Capital Markets, Inc.,
a subsidiary of Telebanc. Mr. Smilow is the brother-in-law of Mr. Opsahl and Mr.
Lynton.
Mitchell H. Caplan has served as the Vice Chairman of the Board of
Directors and President of Telebanc since January 1994 and has served as Chief
Executive Officer of Telebanc since April 1998. Mr. Caplan has also serves as
Vice Chairman, President and Chief Executive Officer of TeleBank since January
1994. Mr. Caplan also serves as Vice President of TeleBanc Capital Markets,
Inc., a subsidiary of Telebanc. 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.
Stephen G. Dervenis has served as Executive Vice President of Telebanc and
Chief Executive Officer of TeleBanc Capital Markets, Inc., a subsidiary of
Telebanc, since June 1998. From October 1997 to June 1998, Mr. Dervenis served
as Director of Amortizing and Emerging Assets Securitization at Barclays Capital
in New York. From April 1994 to September 1997, Mr. Dervenis served as a
Managing Director of Furman Selz, and From January 1993 to March 1994, as Vice
President at J.P. Morgan, both in New York.
Laurence P. Greenberg has served as Executive Vice President and Chief
Marketing Officer of Telebanc and TeleBank since 1995 where he is responsible
for developing and implementing Telebanc's marketing strategy and overseeing the
call center and deposit operations functions. From October 1994 to 1995, Mr.
Greenberg served as Senior Vice President of Marketing. Prior to joining
management of Telebanc and TeleBank, Mr. Greenberg served as consultant to
TeleBank between April and September
6
<PAGE>
1994. From 1993 to April 1994, Mr. Greenberg was a Senior Associate at T.H. Land
Research Group, Inc., a marketing research company serving direct marketing
companies. From 1989 to 1993, Mr. Greenberg was a Marketing Manager for
specialty publications with Capital Cities/ABC, Inc.
Aileen Lopez Pugh has served as Executive Vice President, Chief Financial
Officer and Treasurer of Telebanc and TeleBank since August 1994. Prior to
joining management of Telebanc and TeleBank, Ms. Pugh served as a director from
April 1993 to August 1994. From December 1993 to May 1994, she served as a
consultant to MET Holdings, Inc. in connection with the organization of Telebanc
and its initial public offering.
Ross C. Atkinson has served as Executive Vice President and Chief
Information Officer of Telebanc and TeleBank since June 1998. He is responsible
for the strategic direction of all information processing, communication systems
and operations. From 1997 until June 1998, Mr. Atkinson served as a principal
consultant with Platinum Technology, Inc., a database systems and information
management software provider. From 1991 through 1996, Mr. Atkinson served as a
systems engineer for Electronic Data Systems.
Arlen W. Gelbard has served as Executive Vice President and General Counsel
of Telebanc and TeleBank since June 1998. From 1982 to June 1998, Mr. Gelbard
was a member of the law firm of Hofheimer Garlir & Gross, LLP, New York, New
York where he specialized in transactional real estate, lending, leasing,
foreclosures and workouts. Prior to joining management of Telebanc, from 1996 to
June 1998, Mr. Gelbard served as a director, as well as Chairman of the
compensation committees of TeleBanc and TeleBank.
Michael R. Opsahl has served as Executive Vice President and Chief Credit
Officer since 1990, responsible for the development of the loan acquisition
process, including the acquisition and pricing of loans and the swapping of
purchased loan pools for mortgage-backed securities. Prior to joining Telebanc,
Mr. Opsahl served as a trading assistant at the Federal Home Loan Mortgage
Corporation. Mr. Opsahl is the brother-in-law of Mr. Smilow.
Sang-Hee Yi has served as Executive Vice President and Chief Compliance
Officer since April 1996, responsible for operations and regulatory compliance.
Prior to serving in her current position, Ms. Yi served as the compliance
officer of Telebanc. From 1986 to April 1994, she was a federal thrift regulator
at the Office of Thrift Supervision.
David R. DeCamp has served as a director of Telebanc since its formation in
March 1994 and as a director of TeleBank since July 1992. Mr. DeCamp is a Senior
Vice President of Grubb & Ellis, a commercial real estate broker. From 1988 to
1996, Mr. DeCamp was a commercial real estate broker with Cassidy and Pinkard,
Inc. Mr. DeCamp is the Chairman of the audit/compliance committees of Telebanc
and TeleBank.
Dean C. Kehler has served as a director of Telebanc and TeleBank since
March 1997. Mr. Kehler has been a Managing Director of CIBC Wood Gundy
Securities, a subsidiary of CIBC World Markets, and co-head of the High Yield
Group since August 1995. From February 1990 to August 1995, Mr. Kehler was a
founding partner and Managing Director of The Argosy Group, L.P., which was
acquired by CIBC Wood Gundy Securities in August 1995.
Michael M. Lynton has served as a director of Telebanc since April 1999.
Mr. Lynton has been the Chairman and Chief Executive Officer of The Penguin
Group since 1996. From 1987 to 1996, Mr. Lynton was the President of Disney
Publishing - Magazines and Books and President of Hollywood Pictures. From 1982
to 1985, Mr. Lynton was with The First Boston Corporation/Credit Suisse First
Boston. He is the brother-in-law of Mr. Smilow.
Marcia Myerberg has served as a director of TeleBanc and TeleBank since May
1998. Ms. Myerberg has been Chief Executive Officer of Myerberg & Company, L.P.,
an investment banking firm specializing in the mortgage-backed securities
markets, since February 1994. Prior to her current position, from March 1989 to
February 1994, Ms. Myerberg was a Senior Managing Director of The Bear Stearns
7
<PAGE>
Companies, Inc. From July 1985 to February 1989, she was Director of Salomon
Brothers, Inc., and from November 1979 to June 1985, she was the Senior Vice
President-Corporate Finance and Treasurer of Federal Home Loan Mortgage
Corporation.
Steven F. Piaker has served as a director of Telebanc and TeleBank since
March 1997. Since January 1997, Mr. Piaker has been a Senior Vice President of
Conning & Company, a provider of asset management, private equity capital,
corporate finance services and research to the insurance and financial services
industries, which he joined in 1994. From September 1992 to June 1994, Mr.
Piaker served as a Senior Vice President of Conseco, Inc. where here was
involved in company-sponsored leveraged buyouts and private placements in the
insurance industry. Mr. Piaker is the Chairman of the compensation committees of
Telebanc and TeleBank.
Mark Rollinson has served as a director of Telebanc since its formation in
March 1994 and as a director of TeleBank since 1992. He has been a self-employed
attorney in Leesburg, Virginia for the past ten years.
Under the Certificate of Designation of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock (the "Certificate of
Designation"), the former holders of the preferred stock had the right to
designate not more than two individuals for election to the board of directors
and Telebanc was obligated to nominate these designated individuals for election
to the board. This right to elect directors expired in 1998. Messrs. Kehler and
Piaker were initially elected to the board of directors pursuant to the
Certificate of Designation provision.
COMMITTEES OF THE BOARD OF DIRECTORS
During the year ended December 31, 1998, the board of directors of Telebanc
held 10 meetings. No director attended fewer than 75% of the aggregate of the
total number of meetings of the board 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.
Each of the board of directors of Telebanc and TeleBank has a compensation
committee and an audit/compliance committee. The respective committees of the
board of Telebanc and TeleBank are comprised of the same members and meet
simultaneously. The members of the compensation committee are Messrs. DeCamp,
Kehler and Piaker and the members of the audit/compliance committee are Messrs.
DeCamp, Kehler, Piaker and Rollinson.
The compensation committee establishes compensation for directors, reviews
compensation for all executive officers on an annual basis and reviews the
overall bonus plan offered to all employees of Telebanc and TeleBank. The
audit/compliance committee reviews TeleBank's compliance with regulatory matters
and the scope of the internal auditors and the independent annual audit. It also
reviews the independent accountants' letter to management concerning the
effectiveness of Telebanc's internal financial and accounting controls and
management's response to the letter. In addition, the audit/compliance committee
reviews and recommends to Telebanc's board of directors the firm to be engaged
as Telebanc's independent accountants. The audit/compliance committee may also
examine and consider other matters relating to the financial affairs of Telebanc
and TeleBank as it deems appropriate. In 1998, the compensation committee and
the audit/compliance committee each met two times.
In addition, Telebanc's board of directors acts as a nominating committee
for selecting nominees for election as directors, and the 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 written notice to Telebanc's corporate secretary.
DIRECTOR COMPENSATION
Non-employee directors of Telebanc receive $3,000 per director annually.
Non-employee directors of TeleBank receive $12,000 per director annually. In
addition, non-employee directors are reimbursed for travel costs and other
out-of-pocket expenses incurred in attending such meetings.
8
<PAGE>
As additional compensation for services provided to Telebanc, in May 1994,
Telebanc granted to each of Messrs. DeCamp and Rollinson options to acquire
10,000 shares of common stock, at an exercise price of $3.063 per share. As of
April 16, 1999, these options are fully vested. Mr. Rollinson has exercised
options to acquire all of such shares of common stock. In August 1996, Telebanc
granted to each of Messrs. DeCamp, Gelbard, and Rollinson options to acquire
20,000 shares of common stock, of which options to acquire 36,000 in the
aggregate are vested. Mr. DeCamp has exercised options to acquire 5,000 shares
and Mr. Rollinson has exercised options to acquire 2,500 shares of such common
stock. In October 1998, Telebanc granted to each of Messrs. Kehler and Piaker
options to acquire 20,000 shares of common stock, and Ms. Myerberg options to
acquire 10,000 shares of common stock, at an exercise price of $14.50 per share.
As of April 16, 1999, options to acquire 8,000 in the aggregate are vested. As
of April 16, 1999, options to acquire 112,500 shares of common stock held in the
aggregate by such directors are outstanding.
9
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table shows the compensation paid by Telebanc and TeleBank to
the Named Executive Officers for services rendered to Telebanc in all capacities
earned during the periods indicated. Telebanc has not granted any stock
appreciation rights ("SARs").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ALL OTHER
ANNUAL COMPENSATION SECURITIES COMPENSATION
--------------------------------- UNDERLYING -------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
- ------------------------------- ------ ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
David A. Smilow ............... 1998 $229,000 $250,000 200,000 $16,000
Chairman of the Board 1997 205,000 200,000 200,000 15,000
1996 205,000 188,000 -- 15,000
Mitchell H. Caplan ............ 1998 229,000 250,000 200,000 16,000
Vice Chairman, Chief Executive 1997 205,000 200,000 200,000 15,000
Officer and President 1996 205,000 188,000 -- 15,000
Aileen Lopez Pugh ............. 1998 100,000 130,000 60,000 16,000
Executive Vice President and 1997 79,500 100,000 20,000 15,000
Chief Financial Officer 1996 75,000 60,000 30,000 13,500
Laurence P. Greenberg ......... 1998 100,000 130,000 60,000 16,000
Executive Vice President and 1997 79,500 100,000 50,000 15,000
Chief Marketing Officer 1996 75,000 85,000 10,000 15,000
Stephen G. Dervenis ........... 1998 87,500 245,000 25,000 16,000
Executive Vice President
</TABLE>
- ----------
(1) The total amounts shown for each of the years presented represent dollar
value of contributions made by Telebanc to its Employee Stock Ownership
Plan for the account of the Named Executive Officer.
10
<PAGE>
STOCK OPTIONS GRANTS IN 1998
The following table contains information with respect to options to
purchase common stock granted to the Named Executive Officers in 1998. All
options were granted under Telebanc's 1994, 1997 or 1998 Stock Option Plans.
Telebanc has not granted any SARs.
<TABLE>
<CAPTION>
OPTION TERM(1)
-----------------------------
INDIVIDUAL GRANTS
---------------------------------------------
POTENTIAL REALIZABLE
PERCENT
OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION --------------------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
- ------------------------------- ---------------- ------------ ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Smilow ............... 200,000(2) 20.8% $ 14.50 10/23/08 $1,823,794 $4,621,853
Mitchell H. Caplan ............ 200,000(2) 20.8 14.50 10/23/08 1,823,794 4,621,853
Aileen Lopez Pugh ............. 60,000(3) 6.3 9.75 1/27/08 367,903 932,339
Laurence P. Greenberg ......... 60,000(3) 6.3 9.75 1/27/08 367,903 932,339
Stephen G. Dervenis ........... 25,000(2) 2.6 14.50 10/23/08 227,974 577,732
</TABLE>
- ----------
(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% assumed annual growth rates mandated by the rules and
regulations promulgated by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the common stock price.
(2) The options vested 20% upon grant on October 23, 1998, and 20% vests
ratably on each of the next four anniversaries of the grant.
(3) The options vested 20% upon grant on January 27, 1998 and 20% vests ratably
on each of the next four anniversaries of the grant.
11
<PAGE>
The following table shows information with respect to outstanding options
held by the Named Executive Officers at December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED-
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT TY-END AT FY-END($)(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- ------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
David A. Smilow(2) ......... 26,666 $74,998 304,064 280,000 $8,690,072 $6,390,000
Mitchell H. Caplan(2) ...... -- -- 330,730 280,000 9,416,721 6,390,000
Aileen Lopez Pugh(3) ....... -- -- 56,000 74,000 1,610,625 1,915,000
Laurence P. Greenberg(4) . -- -- 46,000 84,000 1,266,750 2,164,500
Stephen G. Dervenis(5) ..... -- -- 5,000 20,000 97,500 390,000
</TABLE>
- ----------
(1) Based on last reported sale price of the common stock on December 31, 1998
of $34.00 per share and applicable per share exercise price for the
options.
(2) On April 28, 1994, Messrs. Smilow and Caplan were each granted options to
purchase 85,234 shares of common stock with an exercise price of $3.0625
and options to purchase 125,496 shares of common stock with an exercise
price equal to $3.5625. The options expire in April 2004. Also Messrs.
Smilow and Caplan were each granted options to purchase 200,000 shares of
common stock on February 28, 1997 with an exercise price of $6.75 and an
expiration date of February 28, 2007. On October 23, 1998, Messrs. Smilow
and Caplan were each granted options to purchase 200,000 shares of common
stock, with an exercise price of $14.50 and an expiration date of October
23, 2008. For each of these grants, the options vested 20% upon grant, and
20% vest ratably on each of the next four anniversaries of the grant.
(3) Telebanc has granted a total of 130,000 options to Ms. Pugh: 10,000 options
granted on April 28, 1994 with an exercise price of $3.0625, 10,000 options
granted on February 15, 1995 with an exercise price of $2.75, 30,000
options granted on February 15, 1996 with an exercise price of $3.875,
20,000 options granted on February 15, 1997 with an exercise price of $6.75
and 60,000 options granted on January 27, 1998 with an exercise price of
$9.75. The options expire in April 2004, February 2005, February 2006,
February 2007 and January 2008, respectively. The options vested 20% upon
grant, and 20% vest ratably on each of the next four anniversaries of the
grant.
(4) Telebanc has granted a total of 130,000 options to Mr. Greenberg: 10,000
options granted on February 15, 1995 with an exercise price of $2.75,
10,000 options granted on February 15, 1996 with an exercise price of
$3.875, 50,000 options granted on February 15, 1997 with an exercise price
of $6.75 and 60,000 options granted on January 27, 1998 with an exercise
price of $9.75. The options expire in February 2005, February 2006,
February 2007 and January 2008, respectively. The options vested 20% upon
grant, and 20% vest ratably on each of the next four anniversaries of the
grant.
(5) Telebanc granted 25,000 options to Mr. Dervenis on October 23, 1998 with an
exercise price of $14.50 and an expiration date of October 23, 2008. The
options vested 20% upon grant, and 20% vest ratably on each of the next
four anniversaries of the grant.
12
<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN
Telebanc has adopted and is the sponsor of a combined stock bonus and money
purchase pension plan that constitutes an "employee stock ownership plan" under
applicable law. Employees who have completed six months of service are eligible
to participate in the ESOP. Total contributions to the ESOP by Telebanc and
TeleBank, which are reflected in compensation expense, were $391,000, $247,000
and $224,000 for the years ending December 31, 1998, 1997 and 1996,
respectively.
Under the ESOP, each employer is obligated 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 contributions to the
extent necessary to pay debt service on any funds borrowed by ESOP to finance
the purchase of the common stock. Otherwise, additional contributions are at the
discretion of Telebanc's board of directors.
Contributions may be paid either in cash or in common stock. From time to
time, the ESOP may purchase additional shares of common stock through the
purchase of shares in the market or from individual stockholders, upon the
original issuance of additional shares, or upon the sale of treasury shares by
Telebanc. Under its terms, the ESOP may borrow funds to finance purchases of
common stock. As of December 31, 1998 and 1997, Telebanc had loaned $2,577,750
and $280,000, respectively, to the ESOP to finance the purchase of common stock.
Telebanc's board of directors has appointed a committee to administer the
ESOP. Common stock has been allocated to participants' accounts and is voted by
the trustees in accordance with the directions of participants on all matters
except for specified major corporate issues. Unallocated shares will be voted by
the trustees in their sole discretion. Messrs. Smilow and Caplan and Ms. Jane
Gelman, Senior Vice President of Telebanc, 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.
13
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
Telebanc's compensation program is administered by the compensation
committee comprised of three non-employee members of the board of directors of
Telebanc and TeleBank. Unless otherwise specified herein, the references to
"Telebanc" in this report are deemed to include TeleBank. All decisions by the
compensation committee in relation to the compensation of executive officers are
reviewed by the full board of directors. Telebanc's executive compensation
program provides competitive levels of compensation designed to correlate pay
with Telebanc's annual and long term performance goals. Underlying this
objective are the following concepts: supporting an individual
pay-for-performance policy that differentiates compensation levels based on
corporate, business unit, and individual performance; motivating key senior
officers to achieve strategic business objects and rewarding them for that
achievement; providing compensation opportunities which are competitive to those
offered in the marketplace, thus allowing Telebanc to compete for and retain
talented executives who are critical to Telebanc's long term success; and
aligning the interest of executives with the long term interests of Telebanc's
stockholders.
Executive compensation consists of three components: base salary; annual
incentive bonus; and stock options. It is Telebanc's compensation policy to pay
a combination of salary and incentive-based bonuses based on Telebanc's overall
performance and individual performances.
During the fourth quarter of 1998, the compensation committee reviewed in
detail the base salaries for executive officers for 1999. In light of Telebanc's
performance and the salary levels of institutions with similar operations, the
committee recommended that Telebanc continue its policy of compensation based on
a combination of salary and highly incentivized additional compensation
consisting of bonuses based on Telebanc's overall performance and individual
performance.
The committee awards bonuses annually, based on overall corporate goals,
including financial results and regulatory compliance. All Telebanc employees
are eligible for bonus awards under this plan. The committee sets the
compensation of Messrs. Smilow and Caplan and reviews the compensation of all
executive and senior officers.
Base salaries for executive officers were reviewed in detail by the
compensation committee at its January 1999 meeting. In determining the base
salaries, the compensation committee considered various industry sources such as
Sheshunoff Bank Executive and Director Compensation Survey, SNL Executive
Compensation Reviews for Thrift Institutions, Don Richards Associates'
Washington Area Accounting Compensation Survey and Robert Half International
Salary Guide.
Telebanc maintains stock option plans 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. Telebanc believes
that the grant of stock options can be used to encourage performance that can
result in enhanced shareholder 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 Telebanc pursuant to the ESOP and group term life
insurance on the same terms as other employees, as well as certain other
perquisites.
CEO Compensation. In 1998, Mr. Caplan earned a salary of $229,000. The
committee increased Mr. Caplan's 1999 salary to $250,000 and 1998 bonus to
$250,000, based on Telebanc's performance, equally paid by Telebanc and
TeleBank. The allocation reflects Mr. Caplan's duties on behalf of Telebanc,
including all oversight of operations, capital raising and implementation of
Telebanc's strategy.
14
<PAGE>
Internal Revenue Code Section 162(m). In 1993, the Internal Revenue Code of
1986, as amended (the "Code") was amended to disallow publicly traded companies
from receiving a tax deduction on compensation paid to executive officers in
excess of $1 million (section 162(m) of the Code), unless, among other things,
the compensation meets the requirements for performance-based compensation. In
structuring Telebanc's compensation programs and in determining executive
compensation, the Committee takes into consideration the deductibility limit for
compensation. Respectfully submitted,
Compensation Committee
----------------------
Steven F. Piaker, Chairman
David R. DeCamp
Dean C. Kehler
STOCKHOLDER RETURN PERFORMANCE GRAPH
The following graph and table show the cumulative stockholder return on
Telebanc's common stock compared with the Goldman Sachs Internet Index, the S&P
500 Index and Telebanc's previously reported peer group, the Nasdaq Bank Index,
since Telebanc's initial public offering in May 1994. The graph and table assume
$100 was invested on May 27, 1994 (and, in the case of the Goldman Sachs
Internet Index, July 15, 1994) in (1) Telebanc's common stock, (2) the Goldman
Sachs Internet Index, (3) the S&P 500 Index, and (4) Telebanc's previously
reported peer group, the Nasdaq Bank Index, and assumes reinvestment of
dividends.
[GRAPHIC OMITTED]
15
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
INITIAL PUBLIC
OFFERING LAST TRADING DATE IN
--------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/27/94 1994 1995 1996 1997 1998
------- ---- ---- ---- ---- ----
TELEBANC FINANCIAL CORPORATION $ 100.00 $ 91.30 $ 121.74 $ 226.09 $ 304.35 $ 1,169.57
GOLDMAN SACHS INTERNET INDEX $ 100.00(1) $ 190.92 $ 567.89 $ 787.03 $ 790.62 $ 2,491.61
S&P 500 INDEX $ 100.00 $ 100.96 $ 134.52 $ 166.36 $ 205.85 $ 269.56
PREVIOUSLY REPORTED PEER GROUP $ 100.00 $ 97.57 $ 141.30 $ 177.41 $ 282.45 $ 250.75
</TABLE>
- ----------
(1) The Goldman Sachs Internet Index was initiated in June 1994 and cumulative
total return information is given starting as of July 15, 1994.
Beginning April 1999, Telebanc elected to use the Goldman Sachs Internet
Index as its basis for comparison of cumulative total return. Telebanc chose to
use the Goldman Sachs Internet Index because Telebanc's recent market
performance more closely resembles that of the companies which comprise the
Goldman Sachs Internet Index. The Goldman Sachs Internet Index is comprised of
companies which are focused principally on the Internet industry. Telebanc
believes the Goldman Sachs Internet Index is a better basis of comparison than
the prior peer group used by Telebanc.
TRANSACTIONS WITH RELATED PARTIES
Telebanc's policy is to enter into transactions with officers, directors,
or 5% stockholders or other affiliates of Telebanc only if the terms are as
favorable to Telebanc as those generally available from unaffiliated third
parties. Transactions between Telebanc and its affiliates require approval by a
majority of disinterested directors.
CIBC Oppenheimer, an affiliate of CIBC WG Argosy Merchant Fund 2, LLC, of
which Mr. Kehler is a managing director, served as an underwriter for Telebanc's
Equity Offering and Trust Preferred Offering in July and August 1998. CIBC
Oppenheimer earned underwriters' fees totaling $2.3 million in connection with
the offerings.
Prior to resigning from the board of directors and joining Telebanc as
general counsel, Mr. Gelbard served as a partner of Hofheimer, Gartlir & Gross,
LLP, which firm received approximately $106,000 in legal fees and expenses for
work performed through June 30, 1998.
Telebanc paid $204,000 in consulting fees to Myerberg & Company, of which
Ms. Myerberg is the Chief Executive Officer, in connection with the
establishment of an agreement to purchase funding notes collateralized by
consumer loans.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Telebanc's directors, officers and beneficial owners
of more than 10% of the common stock to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership of Telebanc's equity
securities and to file subsequent reports when there are changes in such
ownership. Officers, directors and beneficial owners of more than 10% of the
common stock are required by SEC regulations to furnish Telebanc with copies of
all Section 16(a) reports they file.
Based on its review of these reports and on written representations from
the reporting persons that no other reports were required, Telebanc believes
that during the fiscal year ended December 31, 1998 all Section 16(a) filing
requirements applicable to Telebanc's officers, directors and greater than ten
percent beneficial owners were complied with.
16
<PAGE>
AMENDMENT OF CERTIFICATE OF INCORPORATION
TO CHANGE CORPORATE NAME
(PROPOSAL 2)
On April 22, 1999, the board of directors adopted resolutions approving,
declaring advisable and recommending adoption by the stockholders of an
amendment to Telebanc's Certificate of Incorporation to change the name of
Telebanc from Telebanc Financial Corporation to Telebanc Financial Corporation.
The board of directors proposes that Article 1 of the Certificate of
Incorporation be amended to change the name of Telebanc from TeleBanc Financial
Corporation to Telebanc Financial Corporation.
The name change is being proposed to assist in marketing Telebanc's
products and services.
The affirmative vote of the holders of a majority of the common stock
outstanding on the record date is required to adopt the proposed amendment to
the Certificate of Incorporation. If the proposal is approved, Telebanc intends
to file an amendment to the Certificate of Incorporation shortly after the
meeting. The amendment to the Certificate of Incorporation will be effective
immediately upon acceptance of filing by the Secretary of State of the State of
Delaware. Unless otherwise instructed, properly executed proxies that are timely
received and not subsequently revoked, but not marked, will be voted in favor of
the proposed amendment to the Certificate of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE PROPOSED
AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
AMENDMENT OF CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED SHARES OF TELEBANC'S COMMON STOCK
(PROPOSAL 3)
The board of directors proposes that Article 4.1 of the Certificate of
Incorporation be amended to increase the number of authorized shares of
Telebanc's common stock to 110,000,000 from 29,500,000. If the proposal is
approved, the total authorized capital stock of Telebanc would consist of
110,500,000 shares of capital stock of which 110,000,000 shares would be common
stock and 500,000 shares would be preferred stock. As of April 16, 1999,
16,755,231 shares of common stock were issued and outstanding, and Telebanc had
reserved an additional 623,750 shares for issuance upon the exercise of
outstanding warrants to purchase common stock, and 2,543,749 shares for issuance
upon the exercise of outstanding options to acquire common stock.
Telebanc issued 3.97 million shares of additional common stock on April 16,
1999 in a public offering. The board of directors believes that the increase in
the shares of common stock authorized for issuance is desirable for corporate
purposes such as the issuance of stock options under Telebanc's 1998 Stock
Incentive Plan or any other stock incentive plan that may be adopted by
Telebanc, as well as future financings, acquisitions, mergers and other
transactions.
Other than the issuance of stock under the 1994 Stock Option Plan, the 1997
Stock Option Plan and the 1998 Stock Incentive Plan, and issuance of stock upon
the exercise of warrants, Telebanc has no specific plans or commitments for the
issuance of the additional shares of common stock proposed to be authorized.
The lack of authorized common stock available for issuance would
unnecessarily limit Telebanc's ability to pursue opportunities for future
financings, acquisitions, mergers and other transactions. Telebanc would also be
limited in its ability to effectuate future stock splits or stock dividends. The
board of directors believes that the increase in the authorized shares of common
stock is necessary to provide Telebanc with the flexibility to pursue the types
of opportunities described above without added delay and expense.
17
<PAGE>
The availability of authorized but unissued shares of common stock might be
deemed to have the effect of preventing or discouraging an attempt by another
person to obtain control of Telebanc, because the additional shares could be
issued by the board of directors, which could dilute the stock ownership of such
person. Telebanc has no plans for such issuances and this proposal is not being
proposed in response to a known effort to acquire control of Telebanc.
The additional shares of common stock to be authorized by adoption of the
amendment to the Certificate of Incorporation would have rights identical to the
currently outstanding shares of common stock of Telebanc. Adoption of the
proposed amendment to the Certificate of Incorporation would not affect the
rights of the holders of currently outstanding shares of common stock.
The authorization of additional shares of common stock pursuant to this
proposal will have no dilutive effect upon the proportionate voting power of the
present stockholders of Telebanc. However, to the extent that shares are
subsequently issued to persons other than the present stockholders and/or in
proportions other than the proportion that presently exists, such issuance could
have a substantial dilutive effect on present stockholders.
Adoption of the proposed amendment to the Certificate of Incorporation to
increase Telebanc's authorized common stock requires the vote of the holders of
a majority of the outstanding shares of Telebanc's common stock. If the proposal
is approved, Telebanc intends to file an amendment to the Certificate of
Incorporation shortly after the annual meeting. The amendment to the Certificate
of Incorporation will be effective immediately upon acceptance of filing by the
Secretary of State of the State of Delaware. The board of directors would be
free to issue common stock without further action on the part of the
stockholders.
The affirmative vote of the holders of a majority of the common stock
outstanding on the record date is required to adopt the proposed amendment to
the Certificate of Incorporation. Unless otherwise instructed, properly executed
proxies that are timely received and not subsequently revoked, but not marked,
will be voted in favor of the proposed amendment to the Certificate of
Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE PROPOSED
AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
APPROVAL OF AN AMENDMENT TO THE 1998 STOCK INCENTIVE PLAN
(PROPOSAL 4)
The board of directors proposes that the stockholders of Telebanc approve
an amendment to the 1998 Stock Incentive Plan (the "Plan") to increase the
maximum number of shares of common stock reserved for issuance under the Plan by
2,000,000. The Plan became effective on May 27, 1998 upon adoption by the board
of directors. Following is a summary description of the 1998 Plan. Any
stockholder who wishes to obtain a copy of the Plan may do so upon written
request to Telebanc's Corporate Secretary at Telebanc's principal executive
offices in Arlington, Virginia.
In approving the proposed Plan, amendment to the board of directors
reviewed the number of shares remaining for issuance under Telebanc's
equity-based compensation plans. As of April 16, 1999, an aggregate of options
to purchase 2,516,237 shares of common stock under its 1994 Stock Option Plan,
1997 Stock Option Plan and the Plan were outstanding. The board concluded that
the remaining number of shares under all of the existing plans would not permit
Telebanc to issue an appropriate level of equity-based compensation to new and
existing directors, officers, employees and consultants for the foreseeable
future, given Telebanc's expected business operations. The board believes that
equity-based compensation is an important element of overall compensation for
Telebanc. Such compensation advances the interest of Telebanc by encouraging,
and providing for, the acquisition of equity interests in Telebanc by
participants, thereby aligning participants' interests with stockholders and
providing participants with a substantial motivation to enhance stockholder
value.
18
<PAGE>
DESCRIPTION OF THE PLAN
The Plan currently authorizes the issuance of up to 1,000,000 shares of
common stock upon the exercise of stock options, stock appreciation rights and
the award of restricted stock. The Plan became effective on May 27, 1998, and
terminates on May 27, 2008. The Plan is administered by the compensation
committee of the board of directors or by any other committee duly appointed by
the board (as applicable, the "Committee"), or if no Committee is appointed, by
the board of directors. The Plan is intended to satisfy the requirements of
Section 162(m) of the Code with respect to the deduction of qualified
performance-based compensation.
Key employees, officers, directors and persons performing consulting or
advisory services for Telebanc or its affiliates, who are designated by the
Committee, are eligible to receive awards under the Plan. Awards may be made in
the form of stock options, awards of restricted stock ("Restricted Stock"), or
stock appreciation rights ("SARs"). Stock options granted under the Plan may be
either incentive stock options or non-qualified stock options. Incentive stock
options may be granted only to employees of Telebanc or any of its affiliates.
Participants may also be granted Restricted Stock, which are shares of common
stock of Telebanc granted subject to the satisfaction of certain specified
conditions. Participants may also be granted a SAR that entitles the holder to
receive the difference between the fair market value of the shares on the date
of grant and the date of exercise of the shares of common stock subject to the
award. SARs may be granted in relation to a particular option awarded under the
Plan and exercisable only upon surrender to Telebanc, unexercised, of that
portion of the option to which the SAR relates. As of April 16, 1999,
approximately 105 employees, 10 directors and executive officers, and no
consultants were eligible to receive awards under the Plan.
Options granted under the Plan are exercisable only to the extent vested on
the date of exercise, and no options may be exercised more than ten years from
the date the option is granted (five years in the case of an incentive stock
option granted to a person who owns more than 10% of the total combined voting
power of all classes of Telebanc's stock (a "Ten Percent Shareholder")). The
exercise price per share of each option granted under the Plan may not be less
than 100% (110% in the case of a Ten Percent Shareholder) of the fair market
value of the common stock on the date of grant. Fair market value is the last
sale price of the common stock as reported on the over-the-counter market or the
closing price of the common stock as quoted on the Nasdaq National Market System
on that date or, if there are no sales of shares reported on that date, the last
sale price or the closing price as reported on the over the counter market or
quoted on the Nasdaq National Market System, respectively, on the next preceding
date on which sales of common stock were reported. In the case of incentive
stock options, the aggregate fair market value (determined on the option grant
date) of the shares of common stock with respect to which such options are
exercisable may not exceed $100,000.
An option may be exercised, in full or in part, provided that the option is
vested. Unless provided otherwise in the related option agreement, an option may
not be exercised earlier than six months after the grant date. Options may be
exercised by written notice delivered to Telebanc accompanied by payment of the
option exercise price payable (i) in cash, (ii) with common stock owned by the
participant, (iii) by delivery to Telebanc of (x) irrevocable instructions to
deliver directly to a broker the stock certificates representing the shares for
which the option is being exercised and (y) irrevocable instructions to such
broker to sell the stock and to promptly deliver to Telebanc the portion of the
proceeds equal to the option exercise price and any amount necessary to satisfy
Telebanc's obligation for withholding taxes, or (iv) any combination thereof.
The common stock used to pay the option exercise price or any portion thereof
will be valued at the fair market value of such common stock on the date of
exercise and must have been held for at least six months.
The Committee has the authority to determine the circumstances under which
options vest upon termination of the employment or service of the participant
for any reason. Unless otherwise provided by the Committee, except in the case
of death or disability, vesting of an option generally ceases on the date that
an option holder terminates employment or service with Telebanc or an affiliate.
If the option holder terminates employment as a result of death or disability,
however, the option will become fully vested. Except in cases of death or
disability or termination for cause, options granted under the Plan
19
<PAGE>
terminate on the date three months after the date on which the participant
terminates employment, or ten years after the option grant date (five years in
the case of a Ten Percent Shareholder) whichever period is shorter. In the event
a participant terminates employment by reason of death or disability, or the
participant's death occurs within three months of termination of employment or
service, the option held by such participant may be exercised, to the extent
exercisable, for a period of one year from the date of death or disability or
until the expiration of the stated term of such option, whichever period is
shorter. In the event of termination "for cause," any unexercised option held by
such participant shall expire immediately upon the giving of notice of such
termination of employment or service for cause to the participant.
Options, whether or not vested, may be forfeited if the Committee
determines that the participant has engaged in specified activities that are
deemed to constitute misconduct.
Restricted Stock awarded by the Committee will be subject to such
restrictions as the Committee may impose thereon (the "Restrictions"), including
but not limited to continuous employment or service with Telebanc or any of its
affiliates for a specified term or the attainment of specific corporate,
divisional or individual performance standards or goals. For each award of
Restricted Stock, the Committee shall determine: (i) the terms and conditions of
the Restricted Stock Agreement between Telebanc and the participant evidencing
the award; (ii) the period of time for which all or a portion of the award is
restricted, as such restrictions are determined by the Committee (the
"Restricted Period"); (iii) the Restrictions applicable to the award; (iv)
whether the participant shall receive the dividends and other distributions paid
with respect to an award of Restricted Stock as declared and paid to the holders
of shares of common stock during the Restricted Period or whether such dividends
and other distributions shall be withheld by Telebanc for the account of the
participant until the Restricted Periods have expired or the Restrictions have
been satisfied, and whether interest shall be paid on such dividends and other
distributions withheld, and if so, the rate of interest to be paid, or whether
such dividends may be reinvested in the common stock; (v) the percentage of the
award which shall vest in the participant in the event of such participant's
death or disability prior to the expiration of the Restricted Period or the
satisfaction of the Restrictions applicable to an award of Restricted Stock; and
(vi) notwithstanding the Restricted Period and the Restrictions imposed on the
Restricted Stock, as set forth in a Restricted Stock Agreement, whether to
shorten the Restricted Period or waive any restrictions, if the Committee
concludes that it is in the best interests of Telebanc to do so. The
Restrictions and the Restricted Period may differ with respect to each
participant.
Upon an award of Restricted Stock to a participant, the stock certificate
representing the Restricted Stock will be issued and transferred to and in the
name of the participant, whereupon the participant will become a stockholder of
Telebanc with respect to such Restricted Stock and will be entitled to vote such
shares. Telebanc will hold such stock certificate in custody, together with
stock powers executed by the participant in favor of Telebanc, until the
Restricted Period expires and the restrictions imposed on the Restricted Stock
are satisfied.
The Committee has authority to designate each individual to whom SARs are
to be granted and to specify the number of shares covered by such awards. No
participant may be granted corresponding SARs that are related to incentive
stock options which are first exercisable in any calendar year for stock having
an aggregate fair market value that exceeds $100,000. Corresponding SARs may be
granted either at the time of the grant of such option or at any subsequent time
prior to the expiration of such option; provided, however, that corresponding
SARs shall not be offered or granted in connection with a prior option without
the consent of the participant holding such option.
The maximum period in which a SAR may be exercised will be determined by
the Committee, except that no corresponding SAR that is related to an incentive
stock option shall be exercisable after the expiration of ten years from the
date such related option was granted. In the case of a SAR that is related to an
incentive stock option granted to a participant who is or is deemed to be a Ten
Percent Shareholder, such corresponding SAR shall not be exercisable after the
expiration of five years from the date such related option was granted. The
terms of any corresponding SAR that is related to an incentive stock option may
provide that it is exercisable for a period less than such maximum period.
20
<PAGE>
Subject to the provisions of the Plan and the applicable SAR agreement, a
SAR may be exercised in whole at any time or in part from time to time at such
times and in compliance with such requirements as the Committee shall determine;
provided, however, that a corresponding SAR that is related to an incentive
stock option may be exercised only to the extent that the related option is
exercisable and only when the fair market value exceeds the option exercise
price of the related option. A SAR granted under the Plan may be exercised with
respect to any number of whole shares less than the full number for which the
SAR could be exercised. A partial exercise of a SAR shall not affect the right
to exercise the SAR from time to time in accordance with the Plan and the
related agreement with respect to the remaining shares of common stock subject
to the SAR. The exercise of a corresponding SAR shall result in the termination
of the related option to the extent of the number of shares of common stock with
respect to which the SAR is exercised.
At the Committee's discretion, the amount payable as a result of the
exercise of a SAR may be settled in cash, shares of common stock, or a
combination of cash and common stock.
Incentive stock options are not transferable by a participant during the
participant's lifetime and may not be assigned, exchanged, pledged, transferred
or otherwise encumbered or disposed of except pursuant to a qualified domestic
relations order, by will or by the applicable laws of descent and distribution.
Under the Plan, an option that is not an incentive stock option may be
transferred to immediate family members of the option holder or to a trust or
partnership for such family members; provided, however, that the option holder
receives no consideration for such transfer. In the event of such transfer, the
option and any SAR that relates to such option must be transferred to the same
person or persons or entity or entities.
SARs granted under the Plan are not transferable except by will or by the
laws of descent and distribution. During the lifetime of the participant to whom
the SAR is granted, the SAR may be exercised only by the participant. No right
or interest of a participant in any SAR shall be liable for, or subject to, any
lien, obligation, or liability of such participant. The Committee may grant
transferable SARs to the extent and on such terms as may be permitted by Rule
16b-3 under the Securities Exchange Act of 1934, as amended. In the event of any
such transfer, a corresponding SAR and the related option must be transferred to
the same person or persons or entity or entities. The holder of a transferred
SAR will be bound by the same terms and conditions that governed the SAR during
the period that it was held by the participant.
Subject to any required stockholder action, the number of shares of common
stock subject to each outstanding award and the exercise price per each such
share of common stock subject to an option or SAR will be proportionately
adjusted for any increase or decrease in the number of issued shares of common
stock resulting from a subdivision or consolidation of shares of common stock or
the payment of a stock dividend (but only on the common stock) or any other
increase or decrease in the number of shares effected without receipt of
consideration by Telebanc. If Telebanc merges or is consolidated with another
company, whether or not Telebanc is a surviving company, or if Telebanc is
liquidated or sells or otherwise disposes of substantially all of its assets
while unexercised options remain outstanding under the Plan, (i) after the
effective date of the merger, consolidation, liquidation, sale or other
disposition, as the case may be, each holder of an outstanding option or SAR
shall be entitled, upon exercise of that option, to receive, in lieu of common
stock, the number and class or classes of shares of stock or other securities or
property to which the holder would have been entitled if, immediately prior to
the merger, consolidation, liquidation, sale or other disposition, the holder
had been the holder of record of a number of shares of common stock equal to the
number of shares of common stock as to which that option may be exercised; or
(ii) if options have not already become exercisable, the Committee may waive any
limitations set forth in or imposed pursuant to the Plan so that all options,
from and after a date prior to the effective date of that merger, consolidation,
liquidation, sale or other disposition, as the case may be, specified by the
Committee, shall be exercisable in full.
If Telebanc is merged into or consolidated with another corporation under
circumstances where Telebanc is not the surviving corporation (other than
circumstances involving a mere change in the identity, form or place of
organization of Telebanc), or if Telebanc is liquidated or dissolved, or sells
or
21
<PAGE>
otherwise disposes of substantially all of its assets to another entity while
unexercised options remain outstanding under the Plan, unless provisions are
made in connection with the transaction for the continuance of the Plan and/or
the assumption or substitution of options with new options covering the stock of
the successor corporation, or the parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and exercise prices, then all
outstanding options shall be canceled as of the effective date of such merger,
consolidation, liquidation, dissolution, or sale provided that (i) notice of
such cancellation shall be given to each option holder and (ii) each option
holder shall have the right to exercise such option in full (without regard to
any vesting or other limitations on exercise imposed on such option) during the
30-day period preceding the effective date of such merger, consolidation,
liquidation, or sale.
The board generally may amend the Plan from time to time, except that,
without the approval of the stockholders of Telebanc, no revision or amendment
may (1) change the number of shares of common stock that may be granted as
incentive stock options under the Plan, or (2) change the designation of the
classes of employees eligible to receive incentive stock options. The terms and
conditions applicable to any award may thereafter be amended or modified by
mutual agreement between Telebanc and the participant or such other persons as
may then have an interest therein.
Federal, state or local law may require the withholding of taxes applicable
to income resulting from an award. A participant shall be required to make
appropriate arrangements with Telebanc, as the case may be, for satisfaction of
any federal, state or local taxes Telebanc is required to withhold. The
Committee or board of directors administering the Plan may, in its discretion
and subject to such rules as it may adopt, permit the participant to pay all or
a portion of the federal, state or local withholding taxes arising in connection
with an award by electing to (i) have Telebanc withhold shares of common stock,
(ii) tender back shares of common stock received in connection with such award
or (iii) deliver other previously owned shares of common stock, under each
election such shares of common stock having a fair market value on the date
specified in the rules adopted by the Committee or board of directors
administering the Plan equal to the amount to be withheld. Telebanc shall be
under no obligation to issue shares of common stock to the participant unless
the participant has made the necessary arrangements for payment of the
applicable withholding taxes.
STOCK AWARDS
The following table shows, as to each of the Named Executive Officers in
the Summary Compensation Table and the various indicated individuals and groups,
the number of shares of common stock subject to options granted under the Plan
since the May 27, 1998 effective date through March 31, 1999, together with the
weighted average exercise price payable per share.
22
<PAGE>
1998 STOCK OPTION INCENTIVE PLAN
<TABLE>
<CAPTION>
OPTIONS GRANTED
WEIGHTED AVERAGE (NUMBER
NAME AND POSITION EXERCISE PRICE OF SHARES)
- ------------------------------------------------------------ ------------------ ----------------
<S> <C> <C>
David A. Smilow, Chairman of the Board of Telebanc;
Chairman of the Board and Chief Risk Management
Officer of TeleBank ....................................... $ 16.521 225,000
Mitchell H. Caplan, Vice Chairman of the Board, Chief
Executive Officer and President of Telebanc ............... $ 16.521 225,000
Aileen Lopez Pugh, Executive Vice President, Chief
Financial Officer of Telebanc ............................. $ 32.688 40,000
Laurence P. Greenberg, Executive Vice President,
Chief Marketing Officer ................................... $ 32.688 40,000
Stephen G. Dervenis, Executive Vice President of
Telebanc, Chief Executive Officer of TeleBanc
Capital Markets, Inc. ..................................... $ 14.500 25,000
All executive officers as a group (5 persons) .............. $ 18.760 555,000
David R. DeCamp, Director .................................. -- --
Marcia Myerberg, Director .................................. $ 14.500 10,000
Mark Rollinson, Director -- ................................ --
All non-associate directors as a group (3 persons) ......... $ 14.500 10,000
Dean C. Kehler, Director nominee ........................... $ 14.500 20,000
Stephen F. Piaker, Director nominee ........................ $ 14.500 20,000
Michael M. Lynton, Director nominee ........................ -- --
All director nominees as a group (3 persons) ............... $ 14.500 40,000
All associates, including current officers who are not
executive officers, as a group (29 persons) ............... $ 28.652 390,710
</TABLE>
23
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
Incentive Stock Options. With respect to "incentive stock options," an
optionee will not recognize taxable income upon grant or exercise of an
incentive stock option, and any gain realized upon a disposition of shares
received pursuant to the exercise of an incentive stock option will be taxed as
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. However, the excess
of the fair market value of the shares subject to an incentive stock 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 for
purposes of the alternative minimum tax. If the optionee is subject to certain
securities law restrictions, 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. This excess increases the optionee's basis in the shares for
purposes of the alternative minimum tax but not for purposes of the regular
income 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 stock options, for example for a year in which the shares are sold at
a gain. Telebanc and its subsidiaries will not be entitled to any business
expense deduction for the grant or exercise of an incentive stock option, except
as discussed below.
For the exercise of an incentive stock option to qualify for the foregoing
tax treatment, the optionee generally must be an employee of Telebanc or a
subsidiary from the date the option is granted through a date that is 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.
If all of the requirements for incentive stock 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 is
exercised over the option exercise price. However if the optionee is subject to
certain restrictions under the securities laws at the time the option is
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 capital gain. 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 is 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 reporting requirements, it will be allowed a business expense
deduction to the extent the optionee recognizes ordinary income, subject to
applicable limitations on the deduction of amounts becoming vested as a result
of a change in control and on the deduction of compensation paid to executive
officers if such options do not constitute "qualified performance based
compensation."
If an optionee exercises an incentive stock 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 will be treated as a nontaxable exchange,
except that this treatment would not apply if the optionee acquired the shares
being transferred pursuant to the exercise of an incentive stock option and has
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. These rules would not apply if
the optionee used shares received pursuant to the exercise of an incentive stock
option or another statutory option as to which the optionee has not satisfied
the applicable holding period requirement. In that case, 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.
Non-Qualified Options. The grant of an option is not a taxable event for
the optionee or Telebanc so long as the option exercise price is not
insubstantial in comparison to the value of the stock covered by the option at
the time of grant. Upon exercising a non-qualified option, an optionee will
recognize
24
<PAGE>
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 imposed by the
securities laws, 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, subject to applicable limitations on the deduction of amounts
becoming vested as a result of a change in control and on the deduction of
compensation paid to executive officers if such options do not constitute
"qualified performance based compensation." Upon a subsequent sale or exchange
of shares acquired pursuant to the exercise of a non-qualified 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-qualified options, no gain or loss will be
recognized with respect to the shares surrendered, regardless of whether the
shares were acquired pursuant to the exercise of an incentive stock option, and
the optionee will be treated as receiving an equivalent number of shares
pursuant to the exercise of the option in a nontaxable exchange. The basis of
the shares surrendered will be treated as the substituted tax basis for an
equivalent number of option shares received and the new shares will be treated
as having been held for the same holding period as had expired with respect to
the transferred shares. However, the fair market value of any shares received in
excess of the number of shares surrendered, which would be the difference
between the aggregate option exercise price and the aggregate fair market value
of the shares received pursuant to the exercise of the option, will be taxed as
ordinary income.
Restricted Stock. A participant who is awarded Restricted Stock will not
recognize any taxable income for federal income tax purposes in the year of the
award, provided that the shares are subject to restrictions (that is, the
Restricted Stock is nontransferable and subject to a substantial risk of
forfeiture). If a participant is subject to Section 16(b) of the Exchange Act
(by reason of such participant's status as a director, executive officer or
greater than 10% shareholder of the Company) on the date of the award, the
shares generally will be deemed to be subject to restrictions (in addition to
the restrictions imposed by the award) for at least six months following the
date of the award. However, the participant may elect under Section 83(b) of the
Code to recognize compensation income in the year of the award in an amount
equal to the fair market value of the shares on the date of the award,
determined without regard to the restrictions. If the participant does not make
such a Section 83(b) election, the fair market value of the shares on the date
the restrictions lapse will be treated as compensation income to the participant
and will be taxable in the year the restrictions lapse. Telebanc generally will
be entitled to a deduction for compensation paid in the same amount treated as
compensation income to the participant in the year the participant is taxed on
the income.
Stock Appreciation Rights (SARs). A participant who receives a distribution
of shares of common stock or cash in payment of a SAR will be taxed on the
distribution as ordinary income when he or she actually or constructively
received the distribution. The amount taxable as ordinary income is the
aggregate fair market value of the common stock determined as of the date that
the participant receives it. Telebanc will be entitled to deduct the amount of
such payments when such payments are taxable as compensation to the recipient.
Unless otherwise indicated, properly executed proxies will be voted in
favor of amending the Plan to increase the maximum number of shares of common
stock reserved for issuance.
Approval of the Plan requires the affirmative vote of the holders of a
majority of the common stock present and entitled to vote at the annual meeting.
Should stockholder approval not be obtained, no options will be granted on the
basis of the proposed 2,000,000 share increase.
25
<PAGE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE AMENDMENT TO THE PLAN.
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
(PROPOSAL 5)
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, 1999, subject to ratification by stockholders at the annual
meeting. Arthur Andersen LLP has been acting as independent public accountants
for Telebanc since 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.
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 Telebanc for the year ending December 31, 1999. No determination has
been made as to what action the board of directors would take if the
stockholders do not ratify the appointment.
Ratification of the selection of Arthur Andersen LLP as Telebanc's
independent public accountants requires the affirmative vote of the holders of a
majority of the common stock present and entitled to vote at the annual meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
THE RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS TELEBANC'S
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 1999.
STOCKHOLDER PROPOSALS
Any proposal that a stockholder wishes to have presented at the next annual
meeting of stockholders and included in the proxy materials of Telebanc must be
received at the main office of Telebanc, 1111 North Highland Street, Arlington,
Virginia 22201, no later than January 31, 2000. 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 2000 Annual Meeting of Stockholders.
By order of the board of directors,
David A. Smilow
Chairman of the Board
Dated: May 3, 1999
STOCKHOLDERS ARE REMINDED TO SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT
PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED.
26
<PAGE>
ANNEX A
<PAGE>
ANNEX A
TELEBANC FINANCIAL CORPORATION
1998 STOCK INCENTIVE PLAN
ARTICLE I
PURPOSES
The Plan is intended to assist TeleBanc Financial Corporation and its
Affiliates in recruiting and retaining individuals with ability and initiative
by enabling such persons to participate in the future success of the Company and
its Affiliates and to associate their interests with those of the Company and
its stockholders. The Plan is intended to permit the grant of both Options
qualifying under Section 422 of the Code ("incentive stock options") and Options
not so qualifying, and the grant of SARs and Stock Awards. No Option that is
intended to be an Incentive Stock Option shall be invalid for failure to qualify
as an Incentive Stock Option. The proceeds received by the Company from the sale
of Common Stock pursuant to this Plan shall be used for general corporate
purposes.
ARTICLE II
DEFINITIONS
2.1 Affiliate means (i) any entity that directly or indirectly, is
controlled by, or controls or is under common control with the Company, and (ii)
any entity in which the Company has a significant equity interest, in either
case as determined by the Committee.
2.2 Agreement means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying the terms
and conditions of a Stock Award, Option or SAR granted to such Participant.
2.3 Board means the Board of Directors of the Company.
2.4 Change of Control means:
(a) a "person" or "group" (which terms shall have the meaning they
have when used in Section 13(d) of the Exchange Act) (other than the Company,
any trustee or other fiduciary holding securities under an employee benefit plan
of the Company, any corporation owned directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of voting securities of the Company) becomes (other than solely by
reason of a repurchase of voting securities by the Company), the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of fifty percent (50%) or more of the combined voting power of the
Company's then total outstanding voting securities;
(b) the Company consolidates with or merges with or into another
corporation or partnership or conveys, transfers or leases, in any transaction
or series of transactions, all or substantially all of its assets to any
corporation or partnership, or any corporation or partnership consolidates with
or merges with or into the Company, in any event pursuant to a transaction in
which the outstanding voting stock of the Company is reclassified or changed
into or exchanged
<PAGE>
for cash, securities or other property, other than any such transaction where
(i) the outstanding voting securities of the Company are changed into or
exchanged for voting securities of the surviving corporation and (ii) the
persons who were the beneficial owners of the Company's voting securities
immediately prior to such transaction beneficially own immediately after such
transaction 50% or more of the total outstanding voting power of the surviving
corporation, or the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution.
2.5 Code means the Internal Revenue Code of 1986, and any amendments
thereto.
2.6 Committee means either (i) the Board or (ii) a committee of the Board
designated by the Board to administer the Plan and composed of not less than two
directors, each of whom is expected, but not required, to be a "Non-Employee
Director" (within the meaning of Rule 16b-3 of the Exchange Act) and an "outside
director" (within the meaning of Code section 162(m)) to the extent Rule 16b-3
of the Exchange Act and Code section 162(m), respectively, are at such time
applicable to the Company and the Plan. If at any time such a committee has not
been so designated, the Board shall constitute the Committee.
2.7 Common Stock means the common stock, $0.01 par value, of the Company.
2.8 Company means TeleBanc Financial Corporation, a Delaware corporation.
2.9 Consultant means any person performing consulting or advisory services
for the Company or any Affiliate, with or without compensation, to whom the
Committee chooses to grant a Stock Award, Option, or SAR in accordance with the
Plan.
2.10 Corresponding SAR means an SAR that is granted in relation to a
particular Option and that can be exercised only upon the surrender to the
Company, unexercised, of that portion of the Option to which the SAR relates.
2.11 Director means a member of the Company's Board of Directors.
2.12 Disability shall have the meaning provided for in Section 22(e)(3) of
the Code or any successor statute thereto.
2.13 Exchange Act means the Securities Exchange Act of 1934, as amended.
2.14 Fair Market Value means, on any given date, the current fair market
value of the shares of Common Stock as determined pursuant to subsection (a) or
(b) below.
(a) While the Company is a Public Company, Fair Market Value shall be
determined as follows: (i) if the Common Stock is traded on the Nasdaq SmallCap
or National Market or listed on a national securities exchange, the closing
price of the Common Stock on the determination date on the exchange on which the
Common Stock is principally traded, or, if there are no sales on such date, then
on the next preceding date on which there were sales of Common Stock, (ii) if
the Common Stock is not traded on the Nasdaq SmallCap or National Market or
listed on a national securities exchange, the closing price last reported by the
National Association of Securities Dealers, Inc. for the over-the-counter market
on the determination date,
2
<PAGE>
or, if no sales are reported on such date, then on the next preceding date on
which there where such quotations.
(b) Notwithstanding subsections (a) and (b) of this Section, in all
cases, Fair Market Value shall not be less than the par value of the Common
Stock.
(c) For purposes of this Section, the term "Public Company" means the
Company, subsequent to the effective date of the Plan, has sold securities
pursuant to an effective registration statement filed pursuant to the Securities
Act and is subject to the reporting and information requirements under the
Exchange Act, and the term "Non-Public Company" means the Company has not sold
securities pursuant to an effective registration statement filed pursuant to the
Securities Act and is not subject to the reporting and information requirements
under the Exchange Act.
2.15 Initial Value means, with respect to an SAR, the Fair Market Value of
one share of Common Stock on the date of grant.
2.16 Incentive Stock Option means an Option qualifying for special tax
treatment under Section 422 of the Code.
2.17 Nonqualified Stock Option means an option which is not an Incentive
Stock Option.
2.18 Option means a stock option that is either a Nonqualified Stock Option
or Incentive Stock Option that entitles the holder to purchase from the Company
a stated number of shares of Common Stock at the price set forth in an
Agreement.
2.19 Optionee means the employee, Director or Consultant to whom an Option
is granted.
2.20 Parent Corporation means a corporation which is with respect to the
Company a parent corporation as defined in Section 424 of the Code.
2.21 Participant means an employee of the Company or an Affiliate, a
Director or a Consultant who satisfies the requirements of Article IV and is
selected by the Committee to receive a Stock Award, Option, SAR or a combination
thereof.
2.22 Plan means this 1998 Stock Incentive Plan.
2.23 SAR means a stock appreciation right that in accordance with the terms
of an Agreement entitles the holder to receive, with respect to each share of
Common Stock encompassed by the exercise of such SAR, the amount determined by
the Committee and specified in an Agreement. In the absence of such a
determination, the holder shall be entitled to receive, with respect to such
share of Common Stock encompassed by the exercise of such SAR, the excess of its
Fair Market Value on the date of exercise over the Initial Value. References to
"SARs" include both Corresponding SARs and SARs granted independently of
Options, unless the context requires otherwise.
3
<PAGE>
2.24 Securities Act means the Securities Act of 1933, as amended.
2.25 Stock Award means Common Stock awarded to a Participant under Article
VIII.
2.26 Stockholder means the holder of Common Stock issued under the Plan as
a result of exercise of an Option or SAR or grant of a Stock Award.
2.27 Subsidiary Corporation means a corporation which is with respect to
the Company a subsidiary corporation as defined in Section 424 of the Code.
2.28 Termination of Employment means unless provided otherwise by the
Committee, an employee has ceased to be employed by the Company or an Affiliate,
a director has ceased to be a member of the Board of Directors of the Company or
an Affiliate, or a Consultant has ceased to have a consulting relationship with
the Company or an Affiliate.
2.29 Ten Percent Shareholder means any individual owning more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company, a Parent Corporation or a Subsidiary Corporation. An individual shall
be considered to own any voting stock owned (directly or indirectly) by or for
his brothers, sisters, spouse, ancestors or lineal descendants and shall be
considered to own proportionately any voting stock owned (directly or
indirectly) by or for a company, partnership, estate or trust of which such
individual is a shareholder, partner or beneficiary, all as required by Section
424(d) of the Code.
ARTICLE III
ADMINISTRATION
The Committee shall have authority to grant Stock Awards, Options and SARs
upon such terms (not inconsistent with the provisions of this Plan) as the
Committee may consider appropriate. Such terms may include conditions (in
addition to those contained in this Plan) on the exercisability of all or any
part of an Option or SAR or on the transferability or forfeitability of a Stock
Award. Notwithstanding any such conditions, the Committee may, in its
discretion, accelerate the time at which any Option or SAR may be exercised, or
the time at which a Stock Award may become transferable or nonforfeitable or the
time at which it may be settled. The Committee shall have complete authority to
interpret all provisions of this Plan; to prescribe the form of Agreements; to
adopt, amend, and rescind rules and regulations pertaining to the administration
of the Plan; and to make all other determinations necessary or advisable for the
administration of this Plan. The express grant in the Plan of any specific power
to the Committee shall not be construed as limiting any power or authority of
the Committee; provided that the Committee may not exercise any right or power
reserved to the Board. Any decision made, or action taken, by the Board or the
Committee or in connection with the administration of this Plan shall be final
and conclusive on all persons having an interest in the Plan. No member of the
Board or the Committee shall be liable for any act done in good faith with
respect to this Plan or any Agreement, Option, SAR or Stock Award. All expenses
of administering this Plan shall be borne by the Company. If no Committee is
appointed by the Board, the Board shall constitute the Committee.
The Committee, in its discretion, may delegate to one or more officers of
the Company, all or part of the Committee's authority and duties with respect to
grants and awards to
4
<PAGE>
individuals who are not subject to the reporting and other provisions of Section
16 of the Exchange Act. The Committee may revoke or amend the terms of a
delegation at any time but such action shall not invalidate any prior actions of
the Committee's delegates that were consistent with the terms of the Plan.
Furthermore, the mere fact that a Committee member shall fail to qualify as a
"non-employee Director" or "outside director" within the meaning of Rule 16b-3
under the Exchange Act and Section 162(m) of the Code, respectively, shall not
invalidate any award made by the Committee which award is otherwise validly made
under the Plan.
ARTICLE IV
ELIGIBILITY
Any employee of the Company or an Affiliate (including a company that
becomes an Affiliate after the adoption of this Plan), a Director or a
Consultant to the Company or an Affiliate (including a company that becomes an
Affiliate after the adoption of this Plan) is eligible to participate in this
Plan if the Committee, in its sole discretion, determines that such person has
contributed significantly or can be expected to contribute significantly to the
profits or growth of the Company or an Affiliate. Only employees of the Company,
a Subsidiary Corporation or a Parent Corporation are eligible to receive
Incentive Stock Options.
ARTICLE V
STOCK SUBJECT TO PLAN
5.1 Maximum Shares for Delivery. The maximum number of shares of Common
Stock that may be delivered to Participants under the Plan pursuant to Stock
Awards and exercise of options or SARs shall be 500,000 shares; and (ii) any
Common Stock that are represented by awards granted under the Plan of the
Company, which are forfeited, expired or are canceled without the delivery of
Common Stock or which result in the forfeiture of Common Stock back to the
Company.
5.2 The shares of Common Stock issued may be shares of authorized but
unissued Common Stock or shares of previously issued Common Stock that have been
reacquired by the Company. The maximum aggregate number of shares that may be
issued under this Plan shall be subject to adjustment as provided in Article X.
5.3 Individual Limit. The maximum number of shares of Common Stock with
respect to which Options, SARs, and Stock Awards may be granted to any one
Participant during any one calendar year shall be 100,000.
5.4 Reallocation of Shares. If an Option is terminated, in whole or in
part, for any reason other than its exercise or the exercise of a Corresponding
SAR that is settled with Common Stock, the number of shares of Common Stock
allocated to the Option or portion thereof may be reallocated to other Options,
SARs and Stock Awards to be granted under this Plan. If an SAR is terminated, in
whole or in part, for any reason other than its exercise or the exercise of a
related Option, the number of shares of Common Stock allocated to the SAR or
portion thereof may be reallocated to other Options, SARs and Stock Awards to be
granted under this Plan.
5
<PAGE>
ARTICLE VI
OPTIONS
6.1 Award. In accordance with the provisions of Article IV, the Committee
will designate each individual to whom an Option is to be granted and will
specify the number of shares of Common Stock covered by such awards. The Option
Agreement shall specify whether the Option is an Incentive Stock Option or
Nonqualified Stock Option, the vesting schedule applicable to such Option and
any other terms of such Option. An individual must be an employee of the
Company, a Subsidiary Corporation or a Parent Corporation to be eligible to be
granted an Incentive Stock Option.
6.2 Option Price. The exercise price per share for Common Stock subject to
an Option shall be determined by the Board on the date of grant; provided,
however, that the exercise price per share shall not be less than one hundred
percent 100% of the Fair Market Value of a share of Common Stock on the date the
Option is granted and the exercise price per share of Common Stock for an Option
that is an Incentive Stock Option shall not be less than one hundred percent
(100%) of the Fair Market Value on the date the Option is granted.
Notwithstanding the preceding sentence, the exercise price per share of Common
Stock subject to an Option that is an Incentive Stock Option granted to an
individual who is or is deemed to be a Ten Percent Shareholder on the date such
option is granted, shall not be less than one hundred ten percent (110%) of the
Fair Market Value on the date the Option is granted.
6.3 Maximum Option Period. Unless provided otherwise in this Agreement, the
maximum period in which an Option may be exercised shall be ten years, except
that no Option that is an Incentive Stock Option shall be exercisable after the
expiration of ten years from the date such Option was granted. In the case of an
Incentive Stock Option that is granted to a Participant who is or is deemed to
be a Ten Percent Shareholder on the date of grant, such Option shall not be
exercisable after the expiration of five years from the date of grant. The terms
of any Option that is an Incentive Stock Option may provide that it is
exercisable for a period less than such maximum period.
6.4 Maximum Value of Options which are Incentive Stock Options. To the
extent that the aggregate Fair Market Value of the Common Stock with respect to
which Incentive Stock Options granted to any person are exercisable for the
first time during any calendar year (under all stock option plans of the
Company, a subsidiary Corporation or Parent Corporation) exceeds $100,000, the
Options are not Incentive Stock Options. For purposes of this section, the Fair
Market Value of the Common Stock will be determined as of the time the Incentive
Stock Option with respect to the Common Stock is granted. This paragraph will be
applied by taking Incentive Stock Options into account in the order in which
they are granted.
6.5 Nontransferability. Except as provided in Section 6.6, each Option
granted under this Plan shall be nontransferable except by will or by the laws
of descent and distribution. In the event of any such transfer, the Option and
any Corresponding SAR that relates to such Option must be transferred to the
same person or persons or entity or entities. Except to the extent an Option is
transferred in accordance with Section 6.6, during the lifetime of the
Participant to whom the Option is granted, the Option may be exercised only by
the Participant.
6
<PAGE>
No right or interest of a Participant in any Option shall be liable for, or
subject to, any lien, obligation, or liability of such Participant.
6.6 Transferable Options. Section 6.5 to the contrary notwithstanding, if
the Agreement so provides, an Option that is not an Incentive Stock Option may
be transferred by a Participant to the Participant's children, grandchildren,
spouse, one or more trusts for the benefit of such family members or a
partnership in which such family members are the only partners; provided,
however, that Participant may not receive any consideration for the transfer.
The holder of an Option transferred pursuant to this section shall be bound by
the same terms and conditions that governed the Option during the period that it
was held by the Participant. In the event of any such transfer, the Option and
any Corresponding SAR that relates to such Option must be transferred to the
same person or persons or entity or entities.
6.7 Vesting and Termination of Employment. Except as provided in an Option
Agreement, the following rules shall apply:
(a) Options will vest as provided in the Option Agreement. An Option
will be fully vested upon the occurrence of a Change of Control prior to the
Participant's Termination of Employment. An Option will be exercisable only to
the extent that it is vested on the date of exercise. Vesting of an Option will
cease on the date of the Optionee's Termination of Employment and the Option
will be exercisable only to the extent the Option is vested on the date of
Termination of Employment.
(b) If the Optionee's Termination of Employment is for reason of death
or Disability, the right to exercise the Option (to the extent vested) will
expire on the earlier of (i) one (1) year after the date of the Optionee's
Termination of Employment, or (ii) the expiration date under the terms of the
Agreement. Until the expiration date, the Optionee's heirs, legatees or legal
representative may exercise the Option, except to the extent the Option was
previously transferred pursuant to Section 6.6.
(c) If the Optionee's Termination of Employment is by reason of the
Optionee's retirement from service of the Company and its Affiliates on or after
the attainment of age sixty-two (62), the right to exercise the Option (to the
extent that it is vested) will expire on the earlier of (i) three (3) years
after the date of the Optionee's Termination of Employment, or (ii) the
expiration date under the terms of the Agreement.
(d) If the Optionee's Termination of Employment is for any reason
other than death, Disability or retirement, the right to exercise the Option (to
the extent that it is vested) will expire on the earlier of (i) three (3) months
after the date of the Optionee's Termination of Employment, or (ii) the
expiration date under the terms of the Agreement. However, if the Option would
then expire during the Pooling Period and the Common Stock received upon the
exercise of the Option would be subject to the Pooling Period transfer
restrictions, then the right to exercise the Option will expire ten (10)
calendar days after the end of the Pooling Period. "Pooling Period" means the
period in which property is subject to restrictions on transfer in compliance
with the "Pooling of Interests Accounting" rules set forth in the Securities and
Exchange Commission Accounting Series Releases 130 and 135. If Termination of
Employment
7
<PAGE>
is for a reason other than the Optionee's death, disability or retirement and
the Option holder dies after his or her Termination of Employment but before the
right to exercise the Option has expired, the right to exercise the Option shall
expire on the earlier of (i) one (1) year after the date of the Optionee's
Termination of Employment, or (ii) the date the Option expires under the terms
of the Agreement, and, until expiration, the Optionee's heirs, legatees or legal
representative may exercise the Option, except to the extent the Option was
previously transferred pursuant to Section 6.6.
6.8 Forfeiture for Cause. Notwithstanding any provision of the Plan to the
contrary, unless provided otherwise in an Option Agreement, all unexercised
Options granted to an Optionee whose Termination of Employment is for "cause"
shall terminate and be forfeited by the Optionee. A termination of Employment
shall be for cause if it is by reason of (i) conduct related to the Optionee's
service to the Company or an Affiliate for which either criminal or civil
penalties against the Optionee may be sought, (ii) material violation of Company
policies, or (iii) disclosing or misusing any confidential information or
material concerning the Company or Affiliate. An Optionee may be released from
the forfeiture provisions of this section if the Committee (or its duly
appointed agent) determines in its sole discretion that such action is in the
best interests of the Company.
6.9 Exercise. The Option holder must provide written notice to the
Secretary of the Company of the exercise of Options and the number of Options
exercised. Subject to the provisions of this Plan and the applicable Agreement,
an Option may be exercised to the extent vested in whole at any time or in part
from time to time at such times and in compliance with such requirements as the
Committee shall determine. An Option granted under this Plan may be exercised
with respect to any number of whole shares less than the full number for which
the Option could be exercised. An Option may not be exercised with respect to
fractional shares of Common Stock. A partial exercise of an Option shall not
affect the right to exercise the Option from time to time in accordance with
this Plan and the applicable Agreement with respect to the remaining shares
subject to the Option. The exercise of an Option shall result in the termination
of any Corresponding SAR to the extent of the number of shares with respect to
which the Option is exercised.
6.10 Payment. Unless otherwise provided by the Agreement, payment of the
Option price shall be made in cash or a cash equivalent acceptable to the
Committee. Unless otherwise provided by the Agreement, payment of all or part of
the Option price may also be made by surrendering shares of Common Stock to the
Company that have been held for at least six (6) months prior to the date of
exercise. If Common Stock is used to pay all or part of the Option price, the
sum of the cash or cash equivalent and the Fair Market Value (determined as of
the day preceding the date of exercise) of the shares surrendered must not be
less than the Option price of the shares for which the Option is being
exercised. In accordance with such procedures as the Committee may determine,
the Committee may approve payment of the exercise price by a broker-dealer or by
the Option holder with cash advanced by the broker-dealer if the exercise notice
is accompanied by the Option holder's written irrevocable instructions to
deliver the Common Stock acquired upon exercise of the Option to the
broker-dealer.
Wherever in this Plan or any Agreement a Participant is permitted to pay the
exercise price of an Option or SAR or taxes relating to the exercise of an
Option or SAR by delivering Common
8
<PAGE>
Stock, the Participant may, subject to procedures satisfactory to the Committee,
satisfy such delivery requirement by presenting proof of beneficial ownership of
such Common Stock, in which case the Company shall treat the Option or SAR as
exercised without further payment and shall withhold such number of Common Stock
from the Common Stock acquired by the exercise of the Option or SAR.
6.11 Stockholder Rights. No Participant shall have any rights as a
stockholder with respect to shares subject to his or her Option until the date
of exercise of such Option.
6.12 Stock Certificate Legends. The Company may require that certificates
evidencing shares of Common Stock purchased upon the exercise of Incentive Stock
Option issued under the Plan be endorsed with a legend in substantially the
following form:
The shares evidenced by this certificate may not be sold or
transferred prior to ________, 19__, in the absence of a
written statement from the Company to the effect that the
Company is aware of the facts of such sale or transfer.
The blank contained in this legend shall be filled in with the date that is the
later of (i) one year and one day after the date of the exercise of such
Incentive Stock Option or (ii) two years and one day after the grant of such
Incentive Stock Option. Upon delivery to the Company, at its principal executive
office, of a written statement to the effect that such shares have been sold or
transferred prior to such date, the Company does hereby agree to promptly
deliver to the transfer agent for such shares a written statement to the effect
that the Company is aware of the fact of such sale or transfer.
6.13 Disposition of Stock. A Participant shall notify the Company of any
sale or other disposition of Common Stock acquired pursuant to an Incentive
Stock Option if such sale or disposition occurs (i) within two years of the
grant of an Option or (ii) within one year of the issuance of the Common Stock
to the Participant. Such notice shall be in writing and directed to the
Secretary of the Company.
ARTICLE VII
SAR
7.1 Award. In accordance with the provisions of Article IV, the Board will
designate each individual to whom SARs are to be granted and will specify the
number of shares covered by such awards. In addition no Participant may be
granted Corresponding SARs (under all Incentive Stock Option plans of the
Company and its Affiliates) that are related to Incentive Stock Options which
are first exercisable in any calendar year for stock having an aggregate Fair
Market Value (determined as of the date the related Option is granted) that
exceeds $100,000.
7.2 Maximum SAR Period. The maximum period in which an SAR may be exercised
shall be determined by the Board on the date of grant, except that no
Corresponding SAR that is related to an Incentive Stock Option shall be
exercisable after the expiration of ten years from the date such related Option
was granted. In the case of a Corresponding SAR that is related to an Incentive
Stock Option granted to a Participant who is or is deemed to be a Ten Percent
Shareholder, such Corresponding SAR shall not be exercisable after the
expiration of five years
9
<PAGE>
from the date such related Option was granted. The terms of any Corresponding
SAR that is related to an Incentive Stock Option may provide that it is
exercisable for a period less than such maximum period.
7.3 Nontransferability. Except as provided in Section 7.4, each SAR granted
under this Plan shall be nontransferable except by will or by the laws of
descent and distribution. In the event of any such transfer, a Corresponding SAR
and the related Option must be transferred to the same person or persons or
entity or entities. During the lifetime of the Participant to whom the SAR is
granted, the SAR may be exercised only by the Participant. No right or interest
of a Participant in any SAR shall be liable for, or subject to, any lien,
obligation, or liability of such Participant.
7.4 Transferable SARs. Section 7.3 to the contrary notwithstanding, if the
Agreement so provides, a SAR may be transferred by a Participant to the
children, grandchildren, spouse, one or more trusts for the benefit of such
family members or a partnership in which such family members are the only
partners; provided, however, that a Participant may not receive any
consideration for the transfer. In the event of any such transfer, a
Corresponding SAR and the related Option must be transferred to the same person
or persons or entity or entities. The holder of an SAR transferred pursuant to
this section shall be bound by the same terms and conditions that governed the
SAR during the period that it was held by the Participant.
7.5 Exercise. Subject to the provisions of this Plan and the applicable
Agreement, an SAR may be exercised in whole at any time or in part from time to
time at such times and in compliance with such requirements as the Committee
shall determine; provided, however, that a Corresponding SAR that is related to
an Incentive Stock Option may be exercised only to the extent that the related
Option is exercisable and only when the Fair Market Value exceeds the option
price of the related Option. An SAR granted under this Plan may be exercised
with respect to any number of whole shares less than the full number for which
the SAR could be exercised. A partial exercise of an SAR shall not affect the
right to exercise the SAR from time to time in accordance with this Plan and the
applicable Agreement with respect to the remaining shares subject to the SAR.
The exercise of a Corresponding SAR shall result in the termination of the
related Option to the extent of the number of shares with respect to which the
SAR is exercised.
7.6 Employee Status. If the terms of any SAR provide that it may be
exercised only during employment or within a specified period of time after
Termination of Employment, the Committee may decide to what extent leaves of
absence for governmental or military service, illness, temporary disability or
other reasons shall not be deemed interruptions of continuous employment.
7.7 Settlement. At the Committee's discretion, the amount payable as a
result of the exercise of an SAR may be settled in cash, Common Stock, or a
combination of cash and Common Stock. No fractional shares will be deliverable
upon the exercise of an SAR but a cash payment will be made in lieu thereof.
10
<PAGE>
7.8 Shareholder Rights. No Participant shall, as a result of receiving an
SAR award, have any rights as a stockholder of the Company or any Affiliate
until the date that the SAR is exercised and then only to the extent that the
SAR is settled by the issuance of Common Stock.
ARTICLE VIII
STOCK AWARDS
8.1 Award. In accordance with the provisions of Article IV, the Board will
designate each individual to whom a Stock Award is to be made and will specify
the number of shares of Common Stock covered by such awards.
8.2 Vesting. The Board, on the date of the award, may prescribe that a
Participant's rights in the Stock Award shall be forfeitable or otherwise
restricted for a period of time or subject to such conditions as may be set
forth in the Agreement.
8.3 Performance Objectives. In accordance with Section 8.2, the Board may
prescribe that Stock Awards will become vested or transferable or both based on
objectives such as, but not limited to, the Company's, an Affiliate's or an
operating unit's return on equity, earnings per share, total earnings, earnings
growth, return on capital, return on assets, or Fair Market Value. If the Board,
on the date of award, prescribes that a Stock Award shall become nonforfeitable
and transferable only upon the attainment of performance objectives, the shares
subject to such Stock Award shall become nonforfeitable and transferable only to
the extent that the Committee certifies that such objectives have been achieved.
8.4 Stock Legends and Related Matters.
(a) The Committee, on behalf of the Company, may endorse such legend
or legends upon the certificates representing the shares of Common Stock, and
may issue such "stop transfer" instructions as it determines to be necessary or
appropriate to (i) prevent a violation of, or to perfect an exemption from, the
registration requirements of the Securities Act, or (ii) implement the
provisions of any agreement between the Company or an Affiliate and the
Participant with respect to such shares.
(b) The Committee may require that a Participant, as a condition to
receipt of a particular award, execute and deliver to the Company a written
statement, in form satisfactory to the Committee, in which the Participant
represents and warrants that the shares are being acquired for such person's own
account, for investment only and not with a view to the resale or distribution
thereof. The Participant shall, at the request of the Committee, be required to
represent and warrant in writing that, to the extent permitted by the terms of
the award, any subsequent resale or distribution of Shares by the Participant
shall be made only pursuant to either (i) a Registration Statement on an
appropriate form under the Securities Act, which Registration Statement has
become effective and is current with regard to the shares being sold, or (ii) a
specific exemption from the registration requirements of the Securities Act, but
in claiming such exemption the Participant shall, prior to any offer of sale or
sale of such shares, obtain a prior favorable written opinion of counsel, in
form and substance satisfactory to counsel for the Company, as to the
application of such exemption thereto.
11
<PAGE>
The Committee may delay any award, issuance or delivery of shares of Common
Stock if it determines that listing, registration or qualification of the shares
or the consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the sale or purchase of
shares under the Plan, until such listing, registration, qualification, consent
or approval shall have been effected or obtained, or otherwise provided for,
free of any conditions not acceptable to the Committee.
8.5 Employee Status. In the event that the terms of any Stock Award provide
that shares may become transferable and nonforfeitable thereunder only after
completion of a specified period of employment, the Committee may decide in each
case to what extent leaves of absence for governmental or military service,
illness, temporary disability, or other reasons shall not be deemed
interruptions of continuous employment.
8.6 Nontransferability. Except as provided in Section 8.7, Stock Awards
granted under this Plan shall be nontransferable except by will or by the laws
of descent and distribution. No right or interest of a Participant in a Stock
Award shall be liable for, or subject to, any lien, obligation, or liability of
such Participant.
8.7 Transferable Stock Awards. Section 8.6 to the contrary notwithstanding
if the Award so provides, a Stock Award may be transferred by a Participant to
the children, grandchildren, spouse, one or more trusts for the benefit of such
family members or a partnership in which such family members are the only
partners; provided, however, that Participant may not receive any consideration
for the transfer. The holder of a Stock Award transferred pursuant to this
section shall be bound by the same terms and conditions that governed the
Incentive Award during the period that it was held by the Participant.
8.8 Stockholder Rights. Prior to their forfeiture (in accordance with the
applicable Agreement) and while the shares of Common Stock granted pursuant to
the Stock Award may be forfeited or are nontransferable, a Participant will have
all rights of a stockholder with respect to a Stock Award, including the right
to receive dividends and vote the shares; provided, however, that during such
period (i) a Participant may not sell, transfer, pledge, exchange, hypothecate,
or otherwise dispose of shares of Common Stock granted pursuant to a Stock
Award, (ii) the Company shall retain custody of the certificates evidencing
shares of Common Stock granted pursuant to a Stock Award, and (iii) the
Participant will deliver to the Company a stock power, endorsed in blank, with
respect to each Stock Award. The limitations set forth in the preceding sentence
shall not apply after the shares of Common Stock granted under the Stock Award
are transferable and are no longer forfeitable.
ARTICLE IX
CHANGE IN CAPITAL STRUCTURE
The existence of outstanding Options shall not affect in any way the right
or power of the Company or its stockholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issuance of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Common Stock or the rights thereof, or the
dissolution
12
<PAGE>
or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment, the payment of a stock dividend, or other increase
or reduction of the number of shares of the Common Stock outstanding, without
receiving compensation therefore in money, services or property, then (i) the
number, class, and per share price of shares of Common Stock subject to
outstanding Options, SARs and Stock Awards hereunder shall be appropriately
adjusted in such a manner as to entitle an Optionee to receive upon exercise of
an Option or an SAR or the receipt of a Stock Award, for the same aggregate cash
consideration, the same total number and class of shares as he would have
received had the Optionee exercised his or her Option or SAR or received his or
her Stock Award in full immediately prior to the event requiring the adjustment;
and (ii) the number and class of shares then reserved for issuance under the
Plan shall be adjusted by substituting for the total number and class of shares
of Common Stock then reserved that number and class of shares of Common Stock
that would have been received by the owner of an equal number of outstanding
shares of each class of Common Stock as the result of the event requiring the
adjustment.
After a merger of one or more corporations into the Company or after a
consolidation of the Company and one or more corporations in which the Company
shall be the surviving company, each holder of an Option or an SAR shall, at no
additional cost, be entitled upon exercise of such Option or SAR to receive
(subject to any required action by stockholders) in lieu of the number and class
of shares as to which such Option or SAR shall then be so exercisable, the
number and class of shares of stock or other securities to which such Option
holder would have been entitled pursuant to the terms of the agreement of merger
or consolidation if, immediately prior to such merger or consolidation, such
Option holder had been the holder of record of the number and class of shares of
Common Stock equal to the number and class of shares as to which such Option or
SAR shall be so exercised.
If the Company is merged into or consolidated with another company under
circumstances where the Company is not the surviving company, or if the Company
is liquidated, or sells or otherwise disposes of substantially all of its assets
to another company while unexercised Options or SARs or unvested Stock Awards
remain outstanding under the Plan, unless provisions are made in connection with
such transaction for the continuance of the Plan and/or the assumption or
substitution of such Options or SARs with new options, stock appreciation rights
covering the stock of the successor company, or parent or subsidiary thereof,
with appropriate adjustments as to the number and kind of shares and prices,
then all outstanding Options, SARs and Stock Awards shall be vested as of the
effective date of any such merger, consolidation, liquidation, or sale (the
"corporate event").
Except as previously expressly provided, neither the issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, for cash or property, or for labor or services either
upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company convertible
into such shares or other securities, nor the increase or decrease of the number
of authorized shares of stock, nor the addition or deletion of classes of stock,
shall affect, and no adjustment by
13
<PAGE>
reason thereof shall be made with respect to, the number, class or price of
shares of Common Stock then subject to outstanding Options.
Adjustment under the preceding provisions of this section will be made by
the Committee, whose determination as to what adjustments will be made and the
extent thereof will be final, binding, and conclusive. No fractional interests
will be issued under the Plan on account of any such adjustment. No adjustment
will be made in a manner that causes an Incentive Stock Option to fail to
continue to qualify as an Incentive Stock Option under the Code.
The Board may make Stock Awards and may grant Options and SARs in
substitution for performance shares, phantom shares, stock awards, stock
options, stock appreciation rights, or similar awards held by an individual who
becomes an employee of the Company or an Affiliate in connection with a
transaction described in this Article IX. Notwithstanding any provision of the
Plan (other than the limitation of Section 5.1), the terms of such substituted
Stock Awards or Option or SAR grants shall be as the Board, in its discretion,
determines is appropriate.
ARTICLE X
COMPLIANCE WITH LAW AND
APPROVAL OF REGULATORY BODIES
No Option or SAR shall be exercisable, no Common Stock shall be issued, no
certificates for shares of Common Stock shall be delivered, and no payment shall
be made under this Plan except in compliance with all applicable federal and
state laws and regulations (including, without limitation, withholding tax
requirements), any listing agreement to which the Company is a party, and the
rules of all domestic stock exchanges on which the Company's Common Stock may
then be listed. The Company shall have the right to rely on an opinion of its
counsel as to such compliance. Any share certificate issued to evidence Common
Stock when a Stock Award is granted or for which an Option or SAR is exercised
may bear such legends and statements as the Committee may deem advisable to
assure compliance with federal and state laws and regulations. No Option or SAR
shall be exercisable, no Stock Award shall be granted, no Common Stock shall be
issued, no certificate for shares shall be delivered, and no payment shall be
made under this Plan until the Company has obtained such consent or approval as
the Committee may deem advisable from regulatory bodies having jurisdiction over
such matters.
ARTICLE XI
GENERAL PROVISIONS
11.1 Tax Withholding. Whenever the Company proposes or is required to
distribute Common Stock under the Plan, the Company may require the recipient to
remit to the Company an amount sufficient to satisfy any federal, state and
local tax withholding requirements prior to the delivery of any certificate for
such shares or, in the discretion of the Committee, the Company may withhold
from the Common Stock to be delivered shares sufficient to satisfy all or a
portion of such tax withholding requirements. Whenever under the Plan payments
are to be made in cash, such payments may be net of an amount sufficient to
satisfy any Federal, state and local tax withholding requirements.
14
<PAGE>
11.2 Employee Status. For purposes of determining the applicability of
Section 422 of the Code (relating to incentive stock options), or in the event
that the terms of any Option, SAR or Stock Award provide that an option or SAR
may be exercised only during employment or within a specified period of time
after Termination of Employment or that a Stock Award shall become transferable
and nonforfeitable only after completion of a specified period of employment,
the Committee may decide to what extent leaves of absence for governmental or
military service, illness, temporary disability, or other reasons shall not be
deemed interruptions of continuous employment.
11.3 Effect on Employment and Service. Neither the adoption of this Plan,
its operation, nor any documents describing or referring to this Plan (or any
part thereof) shall confer upon any individual any right to continue in the
employ or service of the Company or an Affiliate or in any way affect any right
and power of the Company or an Affiliate or in any way affect any right and
power of the Company or an Affiliate to terminate the employment or service of
any individual at any time with or without assigning a reason therefor.
11.4 Holding Period. Notwithstanding anything to the contrary in the Plan,
Common Stock acquired through the exercise of an Option, SAR or Stock Award
granted to a Committee member may not be disposed of by such member during the
six-month period beginning on the date the Option, SAR or Stock Award is granted
to such Committee member.
11.5 Unfunded Plan. The Plan, insofar as it provides for grants, shall be
unfunded, and the Company shall not be required to segregate any assets that may
at any time be represented by grants under this Plan. Any liability of the
Company to any person with respect to any grant under this Plan shall be based
solely upon any contractual obligations that may be created pursuant to this
Plan. No such obligation of the Company shall be deemed to be secured by any
pledge of, or other encumbrance on, any property of the Company.
11.6 Rules of Construction. Headings are given to the articles and sections
of this Plan solely as a convenience to facilitate reference. The reference to
any statute, regulation, or other provision of law shall be construed to refer
to any amendment to or successor of such provision of law.
11.7 Choice of Law. The Plan and all Agreements entered into under the Plan
shall be interpreted under the laws of the State of Delaware, without regard to
its conflict of laws provisions.
ARTICLE XII
AMENDMENT
The Board may amend or terminate this Plan from time to time; provided,
however, that no amendment may become effective until shareholder approval is
obtained if the amendment increases the aggregate number of shares of Common
Stock that may be issued under the Plan. No amendment shall, without a
Participant's consent, adversely affect any rights of such Participant under any
outstanding Stock Award, Option or SAR outstanding at the time such amendment is
made.
15
<PAGE>
ARTICLE XIII
EFFECTIVE DATE OF PLAN, DURATION OF PLAN
13.1 The Plan became effective as of May 27, 1998 upon adoption by the
Board, subject to approval within one (1) year by the holders of a majority of
the shares of Common Stock.
13.2 Unless previously terminated, the Plan will terminate ten (10) years
after the earlier of (i) the date the Plan is adopted by the Board, or (ii) the
date the Plan is approved by the shareholders, except that Options, SARs and
Stock Awards that are granted under the Plan prior to its termination will
continue to be administered under the terms of the Plan until the Options
terminate or are exercised.
Date: May 27, 1998 TELEBANC FINANCIAL CORPORATION
-----------------
By: /s/ Mitchell H. Caplan
----------------------------------
Name: Mitchell H. Caplan
--------------------------------
Title: Vice Chairman, Chief Executive
-------------------------------
Officer and President
-------------------------------
16
