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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
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TELEBANC FINANCIAL CORPORATION
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(Name of Registrant as Specified in its Charter)
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(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:
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2) Aggregate number of securities to which transaction applies:
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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
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4) Proposed maximum aggregate value of transaction:
Not Applicable
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5) Total Fee paid:
None
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[ ] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[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
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 135,000,000 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.
- --------------------------------------------------------------------------------
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 135,000,000 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.
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
AMOUNTAND
NATURE OF PERCENTAGE
BENEFICIAL OF CLASS
NAME OF BENEFICIAL OWNER(1) OWNERSHIP OUTSTANDING
- ------------------------------------------------------ ------------ ------------
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
- ----------
* 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
(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
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.
TERM EXPIRES AT
ANNUAL MEETING
POSITION(S) HELD WITH DIRECTOR OF STOCKHOLDERS
NAME AGE TELEBANC (1) SINCE TO BE HELD IN
- ------------------------- ----- -------------------------------------- ---------- ----------------
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.
5
TERM EXPIRES AT
ANNUAL MEETING
POSITION(S) HELD WITH DIRECTOR OF STOCKHOLDERS
NAME AGE TELEBANC (1) SINCE TO BE HELD IN
- ----------------------- ----- ----------------------------------------------- ------------- ----------------
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
- ----------
(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
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
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
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 $14.50 per share.
As of April 16, 1999, options to acquire 8,000 in the aggregate are vested. As
of April 16, 1999, options to acquire 112,500 shares of common stock held in the
aggregate by such directors are outstanding.
9
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table shows the compensation paid by Telebanc and TeleBank to
the Named Executive Officers for services rendered to Telebanc in all capacities
earned during the periods indicated. Telebanc has not granted any stock
appreciation rights ("SARs").
LONG-TERM
COMPENSATION
AWARDS
-------------
ALL OTHER
ANNUAL COMPENSATION SECURITIES COMPENSATION
--------------------------------- UNDERLYING -------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
- ------------------------------- ------ ----------- ---------- ------------- -------------
David A. Smilow ............... 1998 $229,000 $250,000 200,000 $16,000
Chairman of the Board 1997 205,000 200,000 200,000 15,000
1996 205,000 188,000 -- 15,000
Mitchell H. Caplan ............ 1998 229,000 250,000 200,000 16,000
Vice Chairman, Chief Executive 1997 205,000 200,000 200,000 15,000
Officer and President 1996 205,000 188,000 -- 15,000
Aileen Lopez Pugh ............. 1998 100,000 130,000 60,000 16,000
Executive Vice President and 1997 79,500 100,000 20,000 15,000
Chief Financial Officer 1996 75,000 60,000 30,000 13,500
Laurence P. Greenberg ......... 1998 100,000 130,000 60,000 16,000
Executive Vice President and 1997 79,500 100,000 50,000 15,000
Chief Marketing Officer 1996 75,000 85,000 10,000 15,000
Stephen G. Dervenis ........... 1998 87,500 245,000 25,000 16,000
Executive Vice President
- ----------
(1) The total amounts shown for each of the years presented represent dollar
value of contributions made by Telebanc to its Employee Stock Ownership
Plan for the account of the Named Executive Officer.
10
STOCK OPTIONS GRANTS IN 1998
The following table contains information with respect to options to
purchase common stock granted to the Named Executive Officers in 1998. All
options were granted under Telebanc's 1994, 1997 or 1998 Stock Option Plans.
Telebanc has not granted any SARs.
OPTION TERM(1)
-----------------------------
INDIVIDUAL GRANTS
---------------------------------------------
POTENTIAL REALIZABLE
PERCENT
OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION --------------------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
- ------------------------------- ---------------- ------------ ----------- ----------- ------------- -------------
David A. Smilow ............... 200,000(2) 20.8% $ 14.50 10/23/08 $1,823,794 $4,621,853
Mitchell H. Caplan ............ 200,000(2) 20.8 14.50 10/23/08 1,823,794 4,621,853
Aileen Lopez Pugh ............. 60,000(3) 6.3 9.75 1/27/08 367,903 932,339
Laurence P. Greenberg ......... 60,000(3) 6.3 9.75 1/27/08 367,903 932,339
Stephen G. Dervenis ........... 25,000(2) 2.6 14.50 10/23/08 227,974 577,732
- ----------
(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% assumed annual growth rates mandated by the rules and
regulations promulgated by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the common stock price.
(2) The options vested 20% upon grant on October 23, 1998, and 20% vests
ratably on each of the next four anniversaries of the grant.
(3) The options vested 20% upon grant on January 27, 1998 and 20% vests ratably
on each of the next four anniversaries of the grant.
11
The following table shows information with respect to outstanding options
held by the Named Executive Officers at December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED-
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT TY-END AT FY-END($)(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- ------------- ------------- --------------- ------------- --------------
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
- ----------
(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
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
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. Telebanc's improved performance in
1998 was evidenced by (1) an increase in total assets of 109%, (2) a 118%
increase in retail deposits and (3) an increase in Telebanc's stock price during
1998 of over 300%. Mr. Caplan's salary and bonus for 1998 were 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
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
COMPARISON OF CUMULATIVE TOTAL RETURN
INITIAL PUBLIC
OFFERING LAST TRADING DATE IN
--------------- -----------------------------------------------------------------
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
- ----------
(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
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 135,000,000 from 29,500,000. If the proposal is
approved, the total authorized capital stock of Telebanc would consist of
135,500,000 shares of capital stock of which 135,000,000 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, stock splits and
other transactions.
Telebanc's board of directors has approved a 2-for-1 split of its shares of
common stock, payable to its stockholders of record as of the close of business
on May 28, 1999. The stock split is subject to stockholder approval of this
proposal to amend Telebanc's Certificate of Incorporation to increase its
authorized shares of common stock. If this proposal is approved at the annual
meeting, shares resulting from the stock split will be issued on June 8, 1999.
Other than the issuance of stock in the stock split, 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
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 with respect to
voting rights, book value of their stock and earnings per share.
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
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
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
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
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
1998 STOCK OPTION INCENTIVE PLAN
OPTIONS GRANTED
WEIGHTED AVERAGE (NUMBER
NAME AND POSITION EXERCISE PRICE OF SHARES)
- ------------------------------------------------------------ ------------------ ----------------
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
23
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
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
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