COMMUNITY FINANCIAL
CORPORATION
June 30, 1998
Dear Fellow Stockholders:
On behalf of the Board of Directors and management of Community
Financial Corporation, I cordially invite you to attend the 1998 Annual Meeting
of Stockholders. The meeting will be held at 7:00 p.m. on July 29, 1998, at the
Corporation's executive offices located at 38 North Central Avenue, Staunton,
Virginia.
The matters expected to be acted upon at the meeting are described in
the attached Proxy Statement. In addition, we will report on Community's
progress during the past year, and entertain questions and comments about the
Corporation.
I encourage you to attend the meeting in person. Whether or not you do,
I urge you to read the enclosed proxy statement and then complete, sign and date
the proxy card and return it in the postage-paid envelope provided. This will
save Community additional expense in soliciting proxies and will ensure that
your shares are represented at the meeting. Please note that you may vote in
person at the meeting even if you have previously returned the proxy.
Thank you for your attention to this important matter.
Sincerely,
/s/ Thomas W. Winfree
Thomas W. Winfree
President and Chief
Executive Officer
COMMUNITY FINANCIAL CORPORATION
38 North Central Avenue
Staunton, Virginia 24401
(540) 886-0796
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held on July 29, 1998
Notice is hereby given that the Annual Meeting of Stockholders (the
"Meeting") of Community Financial Corporation ("Community" or the "Corporation")
will be held at the Corporation's executive offices located at 38 North Central
Avenue, Staunton, Virginia on July 29, 1998 at 7:00 p.m., local time.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon the:
1. Election of two directors of the Corporation;
2. Approval and adoption of an amendment to the Company's 1996
Incentive Plan ("Incentive Plan") to increase by 120,000 the
number of shares reserved for issuance thereunder (which is
less than 5.0% of the issued and outstanding shares of the
Corporation's common stock);
3. Ratification of the appointment of BDO Seidman as independent
accountants for the Corporation for the fiscal year ending
March 31, 1999; and
such other matters as may properly come before the Meeting, or any adjournments
thereof. The Board of Directors is not aware of any other business to come
before the Meeting.
Any action may be taken on any of the foregoing proposals at the
Meeting on the date specified above, or on any date or dates to which the
Meeting may be adjourned. Stockholders of record at the close of business on May
29, 1998 are the stockholders entitled to vote at the Meeting, and any
adjournments thereof.
You are requested to complete and sign the enclosed form of Proxy which
is solicited on behalf of the Board of Directors, and to mail it promptly in the
enclosed envelope. The Proxy will not be used if you attend and vote at the
Meeting in person.
By Order of the Board of Directors
/s/ Sarah A. Ralston
Sarah A. Ralston, Corporate Secretary
Staunton, Virginia
June 30, 1998
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE CORPORATION THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED
WITHIN THE UNITED STATES.
PROXY STATEMENT
COMMUNITY FINANCIAL CORPORATION
38 North Central Avenue
Staunton, Virginia 24401
(540) 886-0796
ANNUAL MEETING OF STOCKHOLDERS
To be held on July 29, 1998
This Proxy Statement is furnished in connection with the solicitation
on behalf of the Board of Directors of Community Financial Corporation
("Community" or the "Corporation") of proxies to be used at the Annual Meeting
of Stockholders (the "Meeting") which will be held at the Corporation's
executive offices located at 38 North Central Avenue, Staunton, Virginia, on
Wednesday, July 29, 1998 at 7:00 p.m. (local time), and all adjournments of the
Meeting. The accompanying Notice of Meeting and this Proxy Statement are first
being mailed to stockholders on or about June 30, 1998. Certain of the
information provided herein relates to Community Bank (the "Bank"), a wholly
owned subsidiary of the Corporation.
At the Meeting, the stockholders of the Corporation are being asked to
consider and vote upon: (i) the election of two directors of the Corporation;
(ii) approval and adoption of an amendment to the 1996 Incentive Plan
("Incentive Plan") to increase by 120,000 the number of shares reserved for
issuance thereunder (which is less than 5.0% of the issued and outstanding
shares of the Corporation's common stock); and (iii) ratification of the
appointment of BDO Seidman as the Corporation's independent accountants for the
fiscal year ending March 31, 1999.
Voting Rights and Proxy Information
All shares of common stock, par value $.01 per share, of the
Corporation ("Common Stock") represented at the Meeting by properly executed
proxies received prior to or at the Meeting, and not revoked, will be voted at
the Meeting in accordance with the instructions thereon. If no instructions are
indicated, properly executed proxies will be voted "For" the nominees and each
of the other proposals as set forth in this Proxy Statement. With regard to the
election of directors, votes may be cast in favor of or withheld from each
nominee; votes that are withheld will be excluded entirely from the vote and
will have no effect. Abstentions may be specified on all proposals except the
election of directors and will be counted as present for purposes of the item on
which the abstention is noted. Abstentions on the proposals to amend the
Incentive Plan and to ratify BDO Seidman, LLP as the Corporation's auditors will
have the effect of a negative vote. Under applicable Virginia law, a broker
non-vote will have no effect on the outcome of the election of directors, the
amendment of the Incentive Plan or the ratification of auditors. The persons
named in the enclosed proxy will have the discretion to vote in accordance with
their best judgement on any other matters properly presented at the Meeting for
action.
Stockholders who execute proxies retain the right to revoke them at any
time. Proxies may be revoked by: (i) duly executing and delivering to the
Secretary of the Corporation a later dated proxy relating to the same shares
prior to the exercise of such proxy, (ii) filing with the Secretary of the
Corporation at or before the Meeting a written notice of revocation bearing a
later date than the proxy, or (iii) attending the Meeting and voting in person
(although attendance at the Meeting will not in and of itself constitute
revocation of a proxy). Any written notice revoking a proxy should be delivered
to Sarah A. Ralston, Secretary of the Corporation, at the address above.
The cost of solicitation of proxies will be borne by the Corporation.
The Corporation will reimburse brokerage firms and other custodians, nominees
and fiduciaries for reasonable expenses incurred by them in sending proxy
materials to the beneficial owners of Common Stock. In addition to solicitation
by mail, directors, officers and regular employees of the Corporation may
solicit proxies personally or by telegraph or telephone without additional
compensation.
Vote Required for Approval
Directors shall be elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present. Approval and adoption of the amendment to the Incentive Plan and the
ratification of BDO Seidman as the Corporation's independent accountants for the
fiscal year ending March 31, 1999 require the affirmative vote of a majority of
the shares present in person or by proxy and entitled to vote on such proposal.
Voting Securities and Principal Holders Thereof
Stockholders of record as of the close of business on May 29, 1998 (the
"Voting Record Date") will be entitled to one vote for each share then held. As
of the Voting Record Date, the Corporation had 2,568,446 shares of Common Stock
issued and outstanding. No persons or entities were known by management to
beneficially own more than five percent of the outstanding shares of the
Corporation's common stock as of the Voting Record Date.
As of the Voting Record Date, directors, nominees for director, and
executive officers of the Corporation and the Bank, as a group (15 persons),
beneficially owned 606,231 shares, or 22.86% of the Common Stock, which includes
shares held directly, held in retirement accounts, held by certain of the group
members' families, held by corporations for which a group member is an officer
or director, or held by trusts of which a group member is a trustee or a
substantial beneficiary with respect to which shares the group member may be
deemed to have sole or shared voting and/or investment power. The foregoing
amount also includes presently exercisable options and options exercisable
within 60 days of the Voting Record Date to purchase 83,000 shares of Common
Stock. All shares have been adjusted to reflect the two for one stock split paid
in the form of a 100% stock dividend by the Corporation on March 25, 1998. See
"Proposal I - Election of Directors" for information on the individual
beneficial share ownership of the Corporation's Directors and Chief Executive
Officer.
2
PROPOSAL I - ELECTION OF DIRECTORS
The Corporation's Board of Directors is currently composed of seven
members. Approximately one-third of the directors are elected annually.
Directors of the Corporation are generally elected to serve for a three-year
period or until their respective successors shall have been elected and shall
qualify.
The table below sets forth certain information, as of the Voting Record
Date, regarding the composition of the Corporation's Board of Directors,
including their terms of office. It is intended that the proxies solicited on
behalf of the Board of Directors (other than proxies in which the vote is
withheld as to one or more nominees) will be voted at the Meeting for the
election of the nominees identified below for terms of three years. If any
nominee is unable to serve, the shares represented by all such proxies will be
voted for the election of such substitute as the Board of Directors may
recommend. At this time, the Board of Directors knows of no reason why any of
the nominees might be unable to serve, if elected. There are no arrangements or
understandings between any nominee and any other person pursuant to which such
nominee was selected.
Shares of
Common Stock Percent
Positions Held Director Term to Beneficially of
Name Age in the Corporation Since Expire Owned(1) Class
---- --- ------------------ ----- ------ -------- -----
NOMINEES
--------
Jane C. Hickok 61 Vice Chairman of the Board 1983 2001 93,821(2) 3.65%
Dale C. Smith 59 Director 1980 2001 42,400(3) 1.65
DIRECTORS CONTINUING IN OFFICE
------------------------------
Charles F. Andersen, MD 56 Director 1990 1999 41,240 1.60
Charles W. Fairchilds 50 Director 1996 1999 5,910(4) .23
Thomas W. Winfree 53 President, Chief Executive 1995 1999 66,778(5) 2.60
Officer and Director
James R. Cooke, Jr., DDS 60 Chairman of the Board 1984 2000 90,800(6) 3.53
Kenneth L. Elmore 62 Director 1988 2000 43,590 1.69
- ------------------
(1) The nature of beneficial ownership for shares reported in this column is
sole voting and investment power, except as otherwise set forth in these
footnotes. All amounts reported under this column have been adjusted for
the two for one stock split paid in the form of a 100% stock dividend by
the Corporation on March 25, 1998. Included in the shares beneficially
owned by the named individuals are options (either currently exercisable or
exercisable within 60 days of the Voting Record Date) to purchase shares of
Common Stock as follows: Mrs. Hickok - 5,000; Mr. Smith - 5,000; Mr.
Anderson - 5,000; Mr. Fairchilds - 5,000; Mr. Winfree - 32,500; Mr. Cooke -
5,000; and Mr. Elmore - 5,000.
(2) Includes 56,628 shares in which Mrs. Hickok has reported shared ownership.
(3) Includes 11,252 shares in which Mr. Smith has reported shared ownership.
(4) Includes 200 shares in which Mr. Fairchilds has reported shared ownership.
(5) Includes 500 shares in which Mr. Winfree has reported shared ownership.
(6) Includes 62,300 shares in which Mr. Cooke has reported shared ownership.
3
The business experience during the last five years of each of the
directors is as follows:
Jane C. Hickok. Mrs. Hickok was elected as Vice Chairman of the Board
in October 1994. She had previously retired as President and Chief Executive
Officer of the Bank in October 1994 after serving since 1984. Mrs. Hickok had
also retired as President and Chief Executive Officer of the Corporation in
January 1995, but continues to serve as a director of the Corporation and the
Bank. Mrs. Hickok was elected as a director of the Bank in 1983 and as a
director of the Corporation in 1990 when it became the holding company of the
Bank.
Dale C. Smith. Mr. Smith is the General Manager and Chief Executive
Officer of Augusta Cooperative Farm Bureau, a farm supply and retail store.
Charles F. Andersen, M.D. Dr. Andersen is an orthopedic surgeon in
private practice in Waynesboro, Virginia.
Charles W. Fairchilds. Mr. Fairchilds is the President of Allied Ready
Mix Co., a concrete company located in Waynesboro, Virginia.
Thomas W. Winfree. Mr. Winfree is President and Chief Executive Officer
of the Corporation and the Bank, positions he has held since November 1995. From
1984 to 1995, he was President and Chief Executive Officer of Jefferson Savings
and Loan Association.
James R. Cooke, Jr., D.D.S. Dr. Cooke has been a practicing dentist in
Staunton, Virginia since 1965.
Kenneth L. Elmore. Mr. Elmore has been partner of Elmore, Hupp & Co., a
certified public accounting firm, since 1991. Mr. Elmore has been a certified
public accountant for over 30 years.
Board of Directors Meetings and Committees; Director Compensation
Meetings of the Corporation. During the Corporation's fiscal year ended
March 31, 1998, the Board of Directors of the Corporation held 15 meetings. No
director attended fewer than 75% of the meetings that the Board of Directors of
the Corporation held.
The Board of Directors of the Corporation does not have a standing
Compensation, Audit or Nominating Committee. The Corporation has not paid any
compensation to its executive officers since its formation and does not
presently anticipate paying any compensation to such persons until it becomes
actively involved in the operation or acquisition of businesses other than the
Bank and its subsidiaries. See "Meetings of the Bank" below for information in
the Bank's Compensation Committee. The principal standing committees of the
Corporation are the Executive and Long- Range Planning Committee and the Stock
Option Committee.
The Corporation's Executive and Long-Range Planning Committee is
responsible for formulating future plans and discussing objectives and corporate
goals. The current committee members are Directors Anderson, Cooke, Elmore,
Fairchilds, and Hickok. This committee did not meet during fiscal 1998.
4
The Corporation's Stock Option Committee is responsible for
administering the Corporation's Incentive Plan. The current committee members
are directors Cooke, Elmore, and Smith. This committee met once during fiscal
1998.
Meetings of the Bank. During the year ended March 31, 1998, the Board
of Directors of the Bank held 17 meetings. No director attended fewer than 75%
of the total meetings of such Board of Directors and committees on which such
Board member served during this period.
The principal standing committees of the Bank are the Compensation and
Benefits Committee, the Executive and Long-Range Planning Committee and the Loan
Committee. The Bank also has other committees which meet as needed to review
various other functions of the Bank.
The Bank's Compensation and Benefits Committee is currently composed of
Directors Winfree, Cooke, Hickok, Fairchilds, and Smith. This committee is
responsible for determining compensation and benefits for all officers of the
Bank. This committee held three meetings during fiscal 1998.
The Bank's Executive and Long-Range Planning Committee is currently
composed of Directors Anderson, Cooke, Elmore, Hickok, and Winfree. The
Long-Range Planning Committee was formed in 1986 for the purpose of formulating
future plans for physical plant needs, branching possibilities, funding and
liquidity levels and discussions of objectives and corporate goals. This
committee did not meet during fiscal 1998.
The Bank's Loan Committee, composed of the Chairman of the Board of
Directors, the President, the Loan Department Manager of the Bank and the Chief
Financial Officer, meets as needed to approve mortgage loans in excess of
$259,000 and consumer loan applications in excess of $75,000. This committee
held two meetings during fiscal 1998.
Neither the Corporation nor the Bank have standing Audit or Nominating
Committees. The full Boards of Directors of the Corporation and the Bank act as
nominating committees for the annual selection of its respective nominees for
election as directors. While the Boards of Directors will consider nominees
recommended by others, they have neither actively solicited recommendations for
nominees nor established any procedures for this purpose.
Director Compensation. The members of the Board of Directors of the
Corporation currently are not paid for their service in such capacity. The
Corporation may, if it believes it is necessary to attract qualified directors
or is otherwise beneficial to the Corporation, adopt a policy of paying
directors' fees at the Corporation level.
Directors of the Bank who are not employees of the Bank receive a fee
of $750 per month whether or not they attend Board meetings. The Chairman of the
Board receives a fee of $1,500 per month. Directors also receive $100 for each
committee meeting they attend, except for the Chairman of the Board who does not
receive any fees for attending committee meetings. The Bank also paid $606 of
health insurance premiums on behalf of Director Hickok during fiscal 1998.
5
In addition, each non-employee director has been granted a ten year
option to acquire 3,000 shares of Common Stock, subject to stockholder approval
of the amendment to the Incentive Plan. See "Proposal II - Approval of Amendment
to the Corporation's 1996 Incentive Plan." Each such option will be granted at
the fair market value of the Common Stock on the date of the grant (i.e., the
date stockholders approve the amendment to the Incentive Plan).
Executive Compensation
The Corporation's officers do not receive any compensation for services
performed in their capacity as such. Accordingly, the following table sets forth
the compensation paid by the Bank during fiscal 1998 for services rendered by
the Chief Executive Officer of the Bank. No other executive officer earned
salary and bonus exceeding $100,000 in fiscal 1998.
SUMMARY COMPENSATION TABLE
===================================================================================================================================
Long Term
Annual Compensation(1) Compensation
Securities
Underlying All Other
Fiscal Salary Bonus Options Compensation
Name and Principal Position Year ($) ($) (#) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
THOMAS W. WINFREE 1998 $115,500 $12,000 8,000 $3,368(3)
President, Chief Executive
Officer and Director of the 1997 105,000 19,500 12,000(2) 2,217
Corporation and the Bank
1996 45,000 4,500 23,000(2) 96
====================================================================================================================================
(1) Mr. Winfree did not receive any additional benefits or perquisites which,
in the aggregate, exceeded the lesser of 10% of his salary and bonus, or
$50,000.
(2) Adjusted to reflect the two for one stock split paid in the form of a 100%
stock dividend on March 25, 1998.
(3) Represents the Corporation's contribution of $3,176 to the Corporation's
401(k) Plan on behalf of Mr. Winfree and $192 in premiums for a term life
insurance policy maintained on behalf of Mr. Winfree.
The following table sets forth certain information concerning grants of
stock options pursuant to the Corporation's Incentive Plan to the named
executive officer during fiscal 1998. No stock appreciation rights or limited
stock appreciation rights have been granted to date by the Corporation.
=======================================================================================================
OPTION GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------------------------------
Individual Grants
- -------------------------------------------------------------------------------------------------------
Number of
Securities % of Total Exercise
Underlying Options Granted or Base
Options to Employees Price Expiration
Name Granted (#)(1) in Fiscal Year ($/Sh) Date
- -------------------------------------------------------------------------------------------------------
Thomas W. Winfree 8,000 17.02% $15.00 03-14-08
=======================================================================================================
(1) The options set forth in this table shall vest as follows: 4,000 options on
January 1, 1999 and 4,000 options on January 1, 2000.
6
The following table sets forth certain information concerning the
number and value of stock options at March 31, 1998, held by the named executive
officer.
===========================================================================================================================
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at FY-End (#) at FY-End ($)
- ---------------------------------------------------------------------------------------------------------------------------
Shares Value
Acquired on Realized
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------------
Thomas W. Winfree -- $ -- 32,000 11,000 $219,610(1) $20,485(2)
===========================================================================================================================
(1) The value is based upon $15.875, the average of the closing bid and asked
price per share of the Corporation's Common Stock as reported on the Nasdaq
SmallCap Market on March 31, 1998, less the exercise price of $8.25 per
share with respect 23,000 shares, $10.75 per share with respect to 6,000
shares and $11.38 per share with respect to the remaining 3,000 shares.
(2) The value is based upon $15.875, the average of the closing bid and asked
price per share of the Corporation's Common Stock as reported on the Nasdaq
SmallCap Market on March 31, 1998, less the exercise price of $11.38 per
share with respect to 3,000 shares and $15.00 per share with respect to the
remaining 8,000 shares.
Employment Agreement
The Bank entered into an employment agreement with President Winfree
effective April 1, 1997 for a minimum annual base salary of $115,500 and an
initial term of three years. The agreement provides for one year extensions, in
addition to the then-remaining term under the agreement, on each anniversary of
the effective date of the contract, subject to a review of Mr. Winfree's
performance by the Board of Directors of the Bank. Mr. Winfree's salary may be
increased, but not decreased, at the sole and absolute discretion of the Bank's
Board of Directors (or an authorized committee thereof). The agreement further
provides for termination upon such employee's death, for cause or in certain
events specified by OTS regulations.
Under the terms of the employment agreement, if Mr. Winfree's
employment with the Bank is terminated for any reason following a "change in
control" (as defined in the agreement), other than for cause, then the Bank will
pay to Mr. Winfree (in addition to all other payments and benefits to which he
is entitled under any other contract) an amount equal to 299% of his salary and
bonus received during the 12 months ending with the termination of his
employment. Accordingly, if Mr. Winfree was terminated as of March 31, 1998, he
would have been entitled to receive approximately $381,000 pursuant to this
provision.
PROPOSAL II - APPROVAL OF AMENDMENT TO THE CORPORATION'S
1996 INCENTIVE PLAN
In 1996, the Board of Directors of the Corporation adopted the 1996
Incentive Plan which was approved by stockholders at the 1996 Annual Meeting of
Stockholders. The Incentive Plan provides for the grant of long-term incentive
7
awards to directors and employees as a means of enhancing and encouraging the
recruitment and retention of those individuals on whom the continued success of
the Corporation most depends.
The Amendment to the 1996 Incentive Plan
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Incentive Plan which will increase by 120,000 (i.e., an amount
equal to approximately 4.68% of the current issued and outstanding Common Stock)
the number of shares available for issuance under the Incentive Plan.
Reservation of the additional 120,000 shares under the Incentive Plan
is being requested for current grants (See "-- Awards Under the 1996 Incentive
Plan"), future grants and possibly for use as an additional incentive in
negotiating potential mergers and acquisitions. However, no acquisition or
merger is presently contemplated. As of June 12, 1998 (the latest date available
prior to the mailing of this proxy statement), all 120,000 shares of Common
Stock reserved for issuance under the Incentive Plan have been awarded, with
previously granted options to purchase 114,000 shares of Common Stock currently
remaining unexercised. If the amendment to the Stock Option Plan is approved,
the total number of shares of Common Stock reserved for issuance under the Stock
Option Plan will be increased to 240,000. The exercise of stock options may
decrease certain per share financial measures for a period of time and may
diminish a stockholder's percentage voting power in the Corporation, although
the Corporation may consider repurchasing its shares in the future in order to
minimize or avoid any such effects. The principal features of the Incentive Plan
are summarized below.
Approval of the proposal to amend the Corporation's Incentive Plan
requires the affirmative vote of the holders of at least a majority of the
shares of Common Stock present in person or by proxy and entitled to vote on the
proposal. Your Board of Directors recommends you vote "FOR" adoption of the
proposal to amend the Incentive Plan.
Principal Features of the 1996 Incentive Plan
The Incentive Plan provides for awards in the form of stock options.
Each award shall be on such terms and conditions, consistent with the Incentive
Plan, as the committee administering the Incentive Plan may determine.
Shares may be either authorized but unissued shares or reacquired
shares held by the Corporation in its treasury. Any shares subject to an award
which expires or is terminated unexercised will again be available for issuance
under the Incentive Plan. Generally, no award or any right or interest therein
is assignable or transferable except under certain limited exceptions set forth
in the Incentive Plan.
The Incentive Plan is administered by the Stock Option Committee of the
Board of Directors of the Corporation (the "Committee"). In granting awards
under the Incentive Plan, the Committee considers, among other things,
significant contribution or expected contribution to the profits or growth of
the Corporation or a subsidiary.
8
Stock Options
The Committee may authorize the grant of either Incentive Stock Options
("ISOs"), as defined under Section 422 of the Internal Revenue Code of 1986, as
amended, or Non-Qualified Stock Options ("NQSOs" and together with ISOs,
referred to herein as "Options"), which are subject to certain terms and
conditions including the following: (1) the Option exercise price per share will
be determined by the Committee, provided however, an ISO will not, in any event,
be granted at less than 100 percent of the fair market value of the Corporation
Common Stock on the date the ISO is granted; (2) the term of the Option will be
fixed by the Committee, but the maximum period in which an ISO may be exercised
shall not, in any event, exceed ten years from the date the ISO is granted; (3)
Options will not be transferable other than by will or the laws of descent and
distribution; (4) the purchase price of the Common Stock upon exercise of an
Option will be paid in full to the Corporation at the time of the exercise of
the Option in cash, or at the discretion of the Committee, by surrender to the
Corporation of previously acquired shares of Common Stock, which will be valued
at the fair market value of such shares on the date preceding the date the
Option is exercised; (5) an Option may expire upon termination of employment or
within a specified period of time after termination of employment as provided by
the Committee; (6) the aggregate fair market value (determined on the date of
grant) of the shares of Common Stock with respect to which ISOs are exercisable
for the first time by any individual during any calendar year shall not exceed
$100,000; and (7) the Committee may elect to cash out all or part of the portion
of any Option to be exercised by a participant by payment in cash or Common
Stock of an amount determined in accordance with the Incentive Plan.
Effect of Merger and Other Adjustments
Shares as to which awards may be granted under the Incentive Plan, and
shares then subject to awards, will be adjusted by the Committee in the event of
any merger, consolidation, reorganization, recapitalization, stock dividend,
stock split or other change in the corporate structure of the Corporation.
At the discretion of the Committee, in the event of a Change in
Control, any outstanding Option may become fully exercisable and vested to the
full extent of the original grant. Under the Incentive Plan a "Change of
Control" shall be deemed to have taken place if: (i) a third person, including a
"group" as defined in Section 13(d)(3) of the Exchange Act becomes the
beneficial owner of shares of the Corporation Common Stock achieving 20% or more
of the total number of votes that may be cast for the election of directors of
the Corporation, or (ii) as the result of, or in connection with, any cash or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions (a
"Transaction"), the persons who were directors of the Corporation before the
Transaction shall cease to constitute a majority of the Board of the Corporation
or any successor to the Corporation.
Amendment and Termination
The Board may amend or terminate the Incentive Plan; however, no
amendment may become effective until shareholder approval is obtained if the
amendment (i) materially increases the aggregate
9
number of shares that may be issued pursuant to Options, (ii) materially
increases the benefits to participants under the Incentive Plan, or (iii)
materially changes the requirements as to eligibility for participation in the
Incentive Plan. No amendment shall, without a participant's consent, adversely
affect any rights of such participant under any Option award outstanding at the
time such amendment is made.
Federal Income Tax Consequences
Under current Federal income tax laws, the principal Federal tax
consequences to participants and to the Corporation of the grant and exercise of
ISOs and NQSOs pursuant to provisions of the Incentive Plan, are summarized
below.
(i) The grant of an award, by itself, will generally neither
result in the recognition of taxable income to the participant nor
entitle the Corporation to a deduction at the time of such grant.
(ii) In order to qualify as an ISO, a stock option awarded under
the Incentive Plan must meet the conditions contained in Section 422
of the Code, including the requirement that the shares acquired upon
the exercise of the stock option be held for one year after the date
of exercise and two years after the grant of the option. The exercise
of an ISO will generally not, by itself, result in the recognition of
taxable income to the participant nor entitle the Corporation to a
deduction at the time of such exercise. However, the difference
between the exercise price and the fair market value of the option
shares on the date of exercise is an item of tax preference which may,
in certain situations, trigger the alternative minimum tax. If the
shares acquired upon exercise of an ISO are not held for at least one
year after transfer of such shares to the participant or two years
after the grant of the ISO, whichever is later, the participant will
recognize ordinary income or loss upon disposition of the shares in an
amount equal to the difference between the exercise price and the fair
market value on the date of exercise of the Option. In such an event,
the Corporation will generally be entitled to a corresponding
deduction, provided the Corporation meets its federal withholding tax
obligations. The participant will also recognize capital gain or loss
in an amount of the difference, if any, between the sale price and the
fair market value of the shares on the date of exercise of the ISO;
such capital gain or loss will be characterized as long-term if the
shares were held for more than one year after the date of exercise of
the ISO. The Corporation will not be entitled to a corresponding
deduction for such capital gain or loss. If the shares are held by the
participant for one year after the ISO is exercised and two years
after the ISO was granted, the participant will recognize a long-term
capital gain or loss upon disposition of the shares and the
Corporation will not be entitled to a corresponding deduction.
Long-term capital gains for shares held between one year and 18 months
are currently taxed at a maximum rate of 28%. Shares held for longer
than 18 months are currently taxed at a maximum rate of 20%.
(iii) The exercise of a NQSO will result in the recognition of
ordinary income by the participant on the date of exercise in an
amount equal to the difference between the exercise price and the fair
market value on the date of exercise of the shares acquired pursuant
to the stock option. The Corporation will be allowed a deduction at
the time and in the amount of
10
any ordinary income recognized by the participant upon the exercise of
a NQSO, provided the Corporation meets its federal tax withholding
obligations. Upon sale of the shares acquired upon exercise of a NQSO,
any appreciation or depreciation in the value of such shares from the
time of exercise will result in the recognition of a capital gain or
loss by the participant. Such gain or loss will be long-term capital
gain or loss if the participant held the shares for more than one year
following exercise of the NQSO.
Awards Under the 1996 Incentive Plan
The following table presents information as of March 31, 1998, with
respect to the dollar value and the number of awards granted by the Committee,
subject to stockholder approval of the amendment to the Incentive Plan.
=============================================================================================================
1996 INCENTIVE PLAN
- -------------------------------------------------------------------------------------------------------------
Dollar Value Number of
Participant ($) (1) Units (2)
- -------------------------------------------------------------------------------------------------------------
Thomas W. Winfree, President and Chief Executive Officer............... -- --(3)
Jane C. Hickok, Director nominee....................................... -- 3,000
Dale C. Smith, Director nominee........................................ -- 3,000
All Executive Officers as a group (9 persons)......................... -- --
All Non-Employee Directors as a group (11 persons)(4) -- 30,500
All Non-Executive Officer Employees as a group......................... -- --
==============================================================================================================
(1) The exercise price of all Options set forth in the table will be equal the
market value of the Common Stock on the date of the Option grant.
Accordingly, the value of such Options on the date of grant (stockholder
approval of the amendment to the Incentive Plan) will be zero.
(2) Each unit represents an Option to purchase one share of the Common Stock.
(3) On March 14, 1998, Mr. Winfree received Options to purchase 8,000 shares of
Common Stock under the Incentive Plan. See "Executive Compensation."
(4) This category includes five advisory directors who were granted Options to
purchase 12,500 shares of Common Stock in the aggregate.
Additional awards under the Incentive Plan may be granted to eligible
participants in the future at the discretion of the Committee.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF THE PROPOSAL TO AMEND THE 1996 INCENTIVE PLAN.
PROPOSAL III - RATIFICATION OF APPOINTMENT OF AUDITORS
At the Meeting, stockholders will consider and vote on the ratification
of the appointment of BDO Seidman, LLP as the Corporation's independent
accountants for the Corporation's fiscal year ending March 31, 1999. The Board
of Directors has renewed the Corporation's arrangement for BDO Seidman to be its
independent accountants, subject to ratification by the Corporation's
stockholders.
11
Representatives of BDO Seidman, LLP are expected to attend the Meeting
to respond to appropriate questions and to make a statement if they so desire.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF BDO SEIDMAN, LLP AS THE CORPORATION'S
INDEPENDENT ACCOUNTANTS FOR THE FISCAL YEAR ENDING MARCH 31, 1999.
CERTAIN TRANSACTIONS
The Bank has followed a policy of granting loans to eligible directors,
officers, employees and members of their immediate families for the financing of
their personal residences and for consumer purposes. All loans by the Bank to
its senior officers and directors are subject to OTS regulations restricting
loans and other transactions with affiliated persons of the Bank. All
outstanding loans to the Bank's directors and senior officers have been made in
the ordinary course of business and on the same terms, including collateral and
interest rates, as those prevailing at the time for comparable transactions and
did not involve more than the normal risk of collectibility.
STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in the Corporation's proxy
materials for next year's Annual Meeting of Stockholders, any stockholder
proposal to take action at such meeting must be received at the Corporation's
executive offices located at 38 North Central Avenue, Staunton, Virginia 24401,
no later than March 2, 1999. Any such proposal shall be subject to the
requirements of the proxy rules adopted under the Exchange Act.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matter should properly come before the Meeting, it is
intended that holders of the proxies will act in accordance with their best
judgment.
12
REVOCABLE PROXY
COMMUNITY FINANCIAL CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
To be held on July 29, 1998
The undersigned hereby appoints the members of the Board of Directors of
Community Financial Corporation (the "Corporation"), and the survivor of them,
with full powers of substitution, to act as attorneys and proxies for the
undersigned to vote all shares of Common Stock of the Corporation which the
undersigned is entitled to vote at the Annual Meeting of Stockholders (the
"Meeting"), to be held on July 29, 1998, at 7:00 p.m., and at any and all
adjournments thereof, as follows:
I. The election as directors of all nominees listed below for three-year terms
(except as marked to the contrary).
VOTE FOR ALL
FOR WITHHELD EXCEPT
[ ] [ ] [ ]
Instructions: To vote for all nominees mark the box "FOR" with an "X".
To withhold your vote for all nominees mark the box "WITHHOLD" with and "X". To
withhold your vote for an individual nominee mark the box "FOR ALL EXCEPT" with
an "X" and strike a line in the nominee's name in the list below
JANE C. HICKOK DALE C. SMITH
II. The approval and adoption of an amendment to the Corporation's 1996
Incentive Plan to increase by 120,000 the number of shares reserved for issuance
under such plan
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
III. Ratification of the appointment of BDO Seidman as the Corporation's
auditors for the fiscal year ending March 31, 1999.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion, upon such other matters as may properly come before
the Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" the listed propositions.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY
IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
IMPORTANT! PLEASE SIGN AND DATE ON REVERSE SIDE. THIS PROXY IS SOLICITED ON
BEHALF OF THE BOARD OF DIRECTORS
This proxy may be revoked at any time before it is voted by: (i) filing
with the Secretary of the Corporation at or before the Meeting a written notice
of revocation bearing a later date than the proxy; (ii) duly executing a
subsequent proxy relating to the same shares and delivering it to the Secretary
of the Corporation at or before the Meeting; or (iii) attending the Meeting and
voting in person (although attendance at the Meeting will not in and of itself
constitute revocation of a proxy). If this proxy is properly revoked as
described above, then the power of such attorneys and proxies shall be deemed
terminated and of no further force and effect.
The undersigned acknowledges receipt from the Company, prior to the
execution of this Proxy, of the Notice of the Meeting, a Proxy Statement dated
June 30, 1998 and an Annual Report to Stockholders.
Dated: __________________, 1998
-------------------------------------
SIGNATURE OF STOCKHOLDER
-------------------------------------
SIGNATURE OF STOCKHOLDER
Please sign exactly as your name
appears above on this card. When
signing as attorney, executor,
administrator, trustee or
guardian, please give your full
title. If shares are held
jointly, each holder should
sign.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS PROXY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE