SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
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[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Capital One Financial Corporation
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LOGO
CAPITAL ONE FINANCIAL CORPORATION
2980 FAIRVIEW PARK DRIVE, SUITE 1300
FALLS CHURCH, VIRGINIA 22042-4525
NOTICE OF ANNUAL STOCKHOLDER MEETING
TO BE HELD APRIL 23, 1998
Dear Stockholder:
It is our pleasure to invite you to the annual stockholder meeting of
Capital One Financial Corporation ("Capital One"). The meeting will be held at
10:00 a.m. on Thursday, April 23, 1998 at the Fairview Park Marriott Hotel,
3111 Fairview Park Drive, Falls Church, Virginia 22042-4525.
At our annual meeting you will be asked to:
. Elect two directors;
. Approve an increase in the number of shares authorized for issuance
under the company's 1994 Stock Incentive Plan;
. Approve the appointment of Ernst & Young LLP as independent auditors
for 1998; and
. Conduct any other business properly brought before the meeting.
We will discuss the company's business and financial results of 1997 and
answer any questions you may have. We have also enclosed the 1997 Annual
Report, including financial statements.
If you were a stockholder of record at the close of business on February 27,
1998, you are entitled to vote at the annual meeting.
Your vote is important. PLEASE SIGN, DATE, AND RETURN THE ENCLOSED PROXY
CARD IN THE ENVELOPE PROVIDED. This way your shares will be voted even if you
are unable to attend the meeting. If you later attend the meeting and prefer
to vote in person or change your proxy vote, you may do so. We look forward to
seeing you at the meeting.
By Order of the Board of Directors,
LOGO
John G. Finneran, Jr.
Corporate Secretary
March 13, 1998
TABLE OF CONTENTS
PAGE
----
VOTING MATTERS AND PROCEDURES............................................. 1
Attendance at the Meeting............................................... 1
Request/Solicitation of Vote............................................ 1
Who is Entitled to Vote?................................................ 1
Stockholder List........................................................ 1
Quorum Requirement...................................................... 1
How Do You Vote?........................................................ 2
Vote Tally and Vote Necessary for Approval.............................. 2
Broker Nonvotes......................................................... 2
INFORMATION ABOUT CAPITAL ONE'S COMMON STOCK OWNERSHIP.................... 3
Certain Beneficial Owners............................................... 3
Directors and Named Executive Officers.................................. 4
Section 16(a) Beneficial Ownership Reporting Compliance................. 4
INFORMATION ABOUT OUR DIRECTORS AND EXECUTIVE OFFICERS.................... 5
Introductions........................................................... 5
Board Meetings.......................................................... 8
Committee Meetings...................................................... 8
Compensation of the Board............................................... 8
Related Party Transactions with Directors............................... 9
COMPENSATION OF EXECUTIVE OFFICERS........................................ 10
Summary Compensation Table.............................................. 10
Option Grant Table...................................................... 11
Option Exercise and Option Value Table.................................. 12
Company Arrangements with Executive Officers............................ 13
Pension Plans........................................................... 13
Performance Graph....................................................... 15
REPORT ON EXECUTIVE COMPENSATION FROM THE COMPENSATION COMMITTEE.......... 16
Compensation Philosophy................................................. 16
Methodology for Determining Compensation................................ 16
Components of the Executive Compensation Program........................ 17
Compensation of the Chief Executive Officer and the President and Chief
Operating Officer...................................................... 19
Deductibility of Compensation Expenses.................................. 20
ELECTION OF DIRECTORS..................................................... 21
APPROVAL OF AMENDMENT TO THE 1994 STOCK INCENTIVE PLAN.................... 22
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS......................... 25
OTHER BUSINESS............................................................ 26
ANNUAL REPORT TO STOCKHOLDERS............................................. 26
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING............................. 26
APPENDIX I................................................................ 27
LOGO
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
APRIL 23, 1998
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VOTING MATTERS AND PROCEDURES
ATTENDANCE AT THE MEETING
The are no restrictions on who may attend the meeting or any formal
requirements to attend the meeting. The members of the Board of Directors and
senior management of the company, as well as representatives of Ernst & Young
LLP, will attend the meeting.
REQUEST/SOLICITATION OF VOTE
This proxy statement and the proxy card are being mailed on or about March
18, 1998. The Board of Directors of the company is requesting your vote for
the matters presented in this proxy. The cost of preparing, assembling and
mailing the proxy card, this proxy statement, and other enclosed materials,
and all clerical and other expenses of solicitations will be at the expense of
Capital One. We have retained Georgeson & Company Inc. to assist us in the
solicitation of proxies for an aggregate fee of $7,000, plus reasonable out-
of-pocket expenses.
WHO IS ENTITLED TO VOTE?
All holders of the company's common stock of record at the close of business
on February 27, 1998 are entitled to vote. All stockholders are entitled to
one vote for each share held for all matters submitted for a vote at the
meeting. Cumulative voting for the election of directors is not permitted. On
February 27, 1998, there were 65,453,614 shares of the company's common stock
outstanding.
STOCKHOLDER LIST
We will make a list of stockholders available at the annual meeting and, for
ten days prior to the meeting, at our Northern Virginia offices located at
2980 Fairview Park Drive, Suite 1300, Falls Church, Virginia 22042-4525.
QUORUM REQUIREMENT
A quorum of stockholders is necessary to transact business at the annual
meeting. A quorum exists if the holders of a majority of the shares entitled
to vote are present in person or represented by proxy, including proxies on
which abstentions (withholding authority to vote) or a broker nonvote is
indicated.
HOW DO YOU VOTE?
You can vote by either:
. Signing and returning the enclosed proxy card; or
. Casting your vote in person at the annual meeting.
If you vote by signing the proxy card, the individuals identified on the
card will vote your shares as you designate.
If you return a duly executed proxy card but do not specify a choice, your
shares will be voted in favor of Items 1-3 on the proxy card and at the
discretion of the proxyholders for any other matters properly submitted to a
vote at the meeting.
If you vote by proxy, you may revoke your proxy at any time prior to the
final tallying of votes by delivering a written notice to the Corporate
Secretary of the company at the address on the front page of this proxy
statement, by executing and delivering a later-dated proxy or by attending the
meeting and voting in person.
VOTE TALLY AND VOTE NECESSARY FOR APPROVAL
Votes will be tabulated by the Inspector of Elections. The Board of
Directors has appointed representatives of First Chicago Trust Company of New
York, the company's stock transfer agent, as the Inspector of Elections.
Item 1 on the proxy card requests your vote for the two directors who are up
for reelection this year. You may cast or withhold your vote for each of the
nominees. Directors are elected by a plurality of votes cast, meaning that the
director nominees that receive the most votes shall be elected.
Item 2, the approval of an increase in the number of shares authorized for
issuance under the 1994 Stock Incentive Plan, and Item 3, the approval of the
appointment of Ernst & Young LLP as independent auditors for 1998, will be
approved if the holders of a majority of the shares present in person or
represented by proxy vote in favor of the matter. Consequently, abstentions
have the same legal effect as a vote "against" the matter. Broker nonvote
shares will not be counted as shares entitled to vote on a particular matter
and, therefore, will have no affect on the outcome of the vote.
BROKER NONVOTES
A "broker nonvote" occurs only if you hold shares in the name of a broker
and the broker does not vote on a particular matter due to the absence of
discretionary voting authority. This situation is a result of a New York Stock
Exchange rule that prohibits brokers from voting shares held for their
customers on certain matters without specific written instructions from their
customers. However, for Items 1-3 presented at this meeting, if you hold
shares through a broker, the broker is authorized to vote your shares without
any specific instruction from you.
2
INFORMATION ABOUT CAPITAL ONE'S COMMON STOCK OWNERSHIP
CERTAIN BENEFICIAL OWNERS
The following table lists stockholders that are known to the company to own
beneficially more than 5% of Capital One's common stock.
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP(1) CLASS(2)
---------------- ----------------- ----------
Capital Research and Management Company(3).... 5,795,000 8.85%
The Capital Group Companies, Inc.(3).......... 7,649,600 11.69
333 South Hope Street
Los Angeles, California 90071
Neuberger & Berman LLC(4)..................... 6,652,913 10.16
Neuberger & Berman Management Inc.(4)......... 6,652,913 10.16
Neuberger & Berman Guardian Portfolio(4)...... 4,445,000 6.79
605 Third Avenue
New York, New York 10158-3698
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(1) Beneficial ownership is a term broadly defined under Securities and
Exchange Commission ("SEC") rules and regulations. The information
contained in this table is based on Schedule 13G reports filed with the
SEC and the ownership interest indicated is current as of December 31,
1997. The beneficial owners report that they hold shares for themselves
and/or their affiliates, advisory clients and investors. Each beneficial
owner has certified in the SEC reports that the shares of common stock
were acquired in the ordinary course of business and were not acquired for
the purpose of and do not have the effect of changing or influencing the
control of the company and were not acquired in connection with or as a
participant in any transaction having such purpose or effect.
(2) All percentage calculations are based on the number of shares of common
stock issued and outstanding on February 27, 1998, which was 65,453,614.
(3) The Capital Group Companies, Inc. is the parent company of a group of
investment management companies that hold investment power and, in some
cases, voting power over these securities. Capital Research and Management
Company, an investment adviser and a wholly-owned subsidiary of The
Capital Group Companies, Inc., beneficially owns 5,795,000 shares of
Capital One's common stock. The remaining shares reported as being
beneficially owned by The Capital Group Companies, Inc. are beneficially
owned by its other subsidiaries. Both The Capital Group Companies, Inc.
and Capital Research and Management Company disclaim beneficial ownership
of these shares.
(4) Both Neuberger & Berman LLC and Neuberger & Berman Management, Inc. are
deemed to be the beneficial owners of 6,652,913 shares since they exercise
shared power to make decisions. Included in this share total are the
4,445,000 shares beneficially owned by Neuberger & Berman Guardian
Portfolio. Neuberger & Berman LLC and Neuberger & Berman Management, Inc.
serve as sub-adviser and investment manager of Neuberger & Berman Guardian
Portfolio and have the power to make decisions for other Neuberger &
Berman funds.
3
DIRECTORS AND NAMED EXECUTIVE OFFICERS
The following table lists the beneficial ownership of Capital One's common
stock, as of February 27, 1998, by our directors and the Named Executive
Officers (as defined herein).
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS* OWNERSHIP(1) CLASS(2)
----------------- ----------------- ----------
Richard D. Fairbank........................ 2,248,676(3)(4) 3.44%
Nigel W. Morris............................ 1,472,101(3)(5) 2.25%
James P. Donehey........................... 63,828(6) **
John G. Finneran, Jr....................... 78,221(7) **
James M. Zinn.............................. 91,483(8) **
W. Ronald Dietz............................ 24,915(9) **
James A. Flick, Jr......................... 24,500(9) **
Patrick W. Gross........................... 23,500(9) **
James V. Kimsey............................ 44,500(9) **
Stanley I. Westreich....................... 478,190(9)(10) **
All directors and executive officers as a
group (14 persons)........................ 4,776,230 7.30%
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* All addresses are c/o Capital One Financial Corporation, 2980 Fairview Park
Drive, Suite 1300, Falls Church, Virginia 22042-4525.
** Less than 1% of the outstanding shares of common stock.
(1) To the company's knowledge, each officer and director, together with his
spouse, has sole voting and investment power over the shares shown as
beneficially owned unless we have indicated otherwise. The totals include
shares of common stock (i) subject to options held by each person granted
under the company's 1994 Stock Incentive Plan (the "Stock Incentive Plan")
or the company's 1995 Non-Employee Directors Stock Incentive Plan (the
"Directors Plan"), that are or will become exercisable on or before April
28, 1998; (ii) held by the executive officer under the company's Associate
Savings Plan (the "Savings Plan"); and (iii) held by the executive officer
under the company's 1994 Associate Stock Purchase Plan (the "Stock
Purchase Plan").
(2) All percentage calculations are based on the number of shares of common
stock issued and outstanding on February 27, 1998, which was 65,453,614.
(3) Includes 35,834 shares owned by Fairbank Morris, Inc. Messrs. Fairbank and
Morris share voting and investment power for these shares.
(4) Includes 2,094,605 shares issuable upon the exercise of options.
(5) Includes 1,396,403 shares issuable upon the exercise of options.
(6) Includes 61,108 shares issuable upon the exercise of options.
(7) Includes 76,538 shares issuable upon the exercise of options.
(8) Includes 85,093 shares issuable upon the exercise of options.
(9) Includes 21,000 shares issuable upon the exercise of options.
(10) Includes 52,000 shares held in a trust, for which Mr. Westreich is the
trustee and ultimate beneficiary.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act requires that the company's
executive officers and directors, and persons that beneficially own more than
10% of the common stock, file certain reports of ownership of the common stock
and changes in such ownership with the SEC and provide copies of these reports
to Capital One. Based solely on our review of these reports and written
representations furnished to us, we believe that each of the reporting persons
complied with these filing requirements, except for Matthew J. Cooper, Senior
Vice President, who filed one late report covering a stock option exercise.
4
INFORMATION ABOUT OUR DIRECTORS AND EXECUTIVE OFFICERS
INTRODUCTIONS
Capital One's directors and executive officers are listed with a brief
description of their business experience.
RICHARD D. FAIRBANK CHAIRMAN AND CHIEF EXECUTIVE OFFICER AGE 47
Mr. Fairbank has been Chairman of the Board of Directors of Capital One
since February 28, 1995. He has been Chief Executive Officer and a director
since July 26, 1994. Prior to November 22, 1994, he was Executive Vice
President of Signet Bank's credit card division in charge of credit card
operations. Prior to May 1993, he was Executive Vice President in charge of
credit policy and marketing for Signet Bank's credit card operations (Signet
Bank has since been acquired by First Union National Bank on November 30,
1997). Prior to October 1988, he was Vice President and head of banking
practice at Strategic Planning Associates, Inc. (now Mercer Management
Consulting). Mr. Fairbank is a director of MasterCard International, Inc. Mr.
Fairbank is also a director of the company's two principal subsidiaries,
Capital One Bank (the "Bank") and Capital One, F.S.B. (the "Savings Bank").
NIGEL W. MORRIS PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR AGE 39
Mr. Morris has been a director of the company since February 28, 1995. He
has been President and Chief Operating Officer since July 26, 1994. Prior to
November 22, 1994, he was Executive Vice President of Signet Bank's credit
card division in charge of all customer service departments, account
management, existing account marketing and credit policy, the information and
systems group and the secured card business. Prior to October 1988, he was a
manager at Strategic Planning Associates, Inc. Mr. Morris is a member of Visa
U.S.A. Inc.'s Marketing Committee and is a director of Covance Inc. Mr. Morris
is also a director of the Bank and the Savings Bank.
MARJORIE M. CONNELLY SENIOR VICE PRESIDENT AGE 36
Ms. Connelly joined the company in March 1994. She is Senior Vice President,
Credit Card Operations, and is responsible for management of the inbound and
outbound call centers, including customer service, telemarketing and
retention, cardholder correspondence processing, chargebacks and retrievals,
credit operations, payment processing, embossing, image operations and
statement rendition. From August 1990 to February 1994, Ms. Connelly was Vice
President for First USA Bank, responsible for customer service. Ms. Connelly
is currently a member of the VISA Card Operations Advisors Committee.
MATTHEW J. COOPER SENIOR VICE PRESIDENT AGE 31
Mr. Cooper is a Senior Vice President of Capital One. He has been employed
in various capacities by the company and its predecessor since October 1989.
Mr. Cooper's major areas of responsibility include credit risk management
strategies, credit and marketing for the secured card business and exploring
international opportunities. Prior to October 1989, Mr. Cooper was employed as
a consultant by Strategic Planning Associates, Inc.
5
JAMES P. DONEHEY
SENIOR VICE PRESIDENT AND CHIEF INFORMATION OFFICER AGE 49
Mr. Donehey joined Capital One in November 1994. He is currently Senior Vice
President and Chief Information Officer. Mr. Donehey is responsible for all
computer operations, telecommunications and business applications software in
support of the company's activities. Mr. Donehey is also responsible for all
facilities and real estate. From February 1984 to October 1994, Mr. Donehey
was an executive director of Goldman Sachs & Company responsible for systems
management in its Chicago and London offices. Prior to February 1984, Mr.
Donehey held technical management positions with Duff & Phelps, LLC, LaSalle
Partners and A.B.Dick Company.
JOHN G. FINNERAN, JR.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND AGE 48
CORPORATE SECRETARY
Mr. Finneran joined Capital One in September 1994 as Senior Vice President,
General Counsel and Corporate Secretary. Prior to joining the company, he was
a Deputy General Counsel to the Federal Deposit Insurance Corporation (the
"FDIC"). From September 1991 to January 1994, he was an Associate General
Counsel to the FDIC. Prior to September 1991, he was Special Counsel to the
law firm Cleary, Gottlieb, Steen & Hamilton.
DENNIS H. LIBERSON SENIOR VICE PRESIDENT AGE 42
Mr. Liberson joined Capital One in February 1995. Mr. Liberson is a Senior
Vice President in charge of Human Resources and is responsible for the
development and implementation of human resources programs, including programs
related to compensation, benefits, recruitment and employee development. From
September 1989 to June 1994, Mr. Liberson was Vice President, Human Resources
Services for Burger King Corporation.
DAVID M. WILLEY
SENIOR VICE PRESIDENT, TREASURER AND ASSISTANT SECRETARY AGE 37
Mr. Willey is Senior Vice President, Treasurer and Assistant Secretary. He
has been employed in various capacities by the company and its predecessor
since September 1989. Mr. Willey is responsible for capital funding,
investments, securitizations and other capital markets activity and is
Chairman of the Asset/Liability Management Committee. Mr. Willey is also
responsible for acquisition and joint venture analysis, negotiation and
execution, and the development and implementation of financial structures for
the company. Mr. Willey is also a director of the Savings Bank.
JAMES M. ZINN SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AGE 45
Mr. Zinn joined Capital One in September 1994. He is a Senior Vice President
and Chief Financial Officer. Since joining the company, Mr. Zinn has
established and has been responsible for various staff functions, including
Corporate Communications, External Reporting, Finance & Accounting, Investor
Relations and Performance Management and Purchasing. Prior to joining the
company, he was a financial services partner in Ernst & Young LLP's national
offices based in both New York and Washington D.C., and was responsible for
consulting on emerging financial services, accounting, auditing and other
business issues. Mr. Zinn is also a director of the Bank and the Savings Bank.
6
W. RONALD DIETZ DIRECTOR AGE 55
Mr. Dietz is Chief Executive Officer of TARP, Arlington, Virginia, an
advisory firm offering services in the areas of customer care, customer
handling and call center performance. He is also President of Charter
Associates, Ltd., a firm engaged in a variety of consulting and venture
management activities. He has been a director of Capital One since
February 28, 1995. Mr. Dietz spent the first 16 years of his career with
Citibank, N.A., leaving in 1984 as Senior Vice President. From April 1993 to
July 1996, he was President and Chief Executive Officer of Anthem Financial,
Inc., an Indianapolis-based financial services company. He also served as a
director of Anthem Financial and as an Executive Vice President of Anthem's
parent company, the Associated Insurance Companies, Inc. Mr. Dietz is also a
director of the Savings Bank.
JAMES A. FLICK, JR. DIRECTOR AGE 63
Mr. Flick is President and Chief Executive Officer of Dome Corporation,
Baltimore, Maryland, a real estate development and management services
company. He has been a director of Capital One since February 28, 1995. From
October 1991 to January 1995, Mr. Flick was Executive Vice President of Legg
Mason, Inc., Baltimore, Maryland, an investment company. From November 1988 to
March 1991, he was Executive Vice President, Chief Financial Officer and a
director of USF&G Corporation, Baltimore, Maryland, an insurance and financial
services company. Mr. Flick is also a director of the Ryland Group, Inc.,
Bethlehem Steel Credit Affiliate One, Inc., Bethlehem Steel Credit Affiliate
Two, Inc., Forensic Technologies International Corporation and Youth Services
International, Inc. Mr. Flick is also a director of the Bank.
PATRICK W. GROSS DIRECTOR AGE 53
Mr. Gross is a founder of American Management Systems, Inc. ("AMS"),
Fairfax, Virginia, an information technology consulting, software development,
and systems integration firm, and is currently Chairman of its Executive
Committee. He has served as a Principal Executive Officer and Managing
Director of AMS since its incorporation in 1970. Mr. Gross is also Chairman of
the board of directors of Baker and Taylor Holdings, Inc., Charlotte, North
Carolina, a private company, and a director of Computer Network Technology
Corporation, Minneapolis, Minnesota and of Landmark Systems Corporation,
McLean, Virginia, both public NASDAQ companies. He has been a director of
Capital One since February 28, 1995. Mr. Gross is also a director of the
Savings Bank.
JAMES V. KIMSEY DIRECTOR AGE 58
Mr. Kimsey is the founding Chief Executive Officer and is currently Chairman
Emeritus of America Online, Inc., Dulles, Virginia ("America Online"). He
served as Chairman of the board of directors of America Online from 1985 to
1995. He was also President of America Online from 1985 to January 1991 and
Chief Executive Officer from 1985 to April 1993. Mr. Kimsey is currently
Chairman AOL Foundation. He is a director of Batterson Venture Partners and is
on the Board of Advisors of Carousel Capital Partners. He has been a director
of Capital One since February 28, 1995. Mr. Kimsey is also a director of the
Bank.
STANLEY I. WESTREICH DIRECTOR AGE 61
Mr. Westreich has been President of Westfield Realty, Inc., Arlington,
Virginia, a real estate development and construction company since 1965. He
has been a director of Capital One since July 26, 1994. From 1985 until
February 28, 1995, Mr. Westreich served as a director of Signet Banking
Corporation (which has since been acquired by First Union Corporation on
November 30, 1997) and Signet Bank. He is also a director of Voice Control
Systems, Inc. Mr. Westreich is also a director of the Bank.
7
BOARD MEETINGS
The Board of Directors oversees the business of the company and directs
management of the company. The Board does not involve itself with the day-to-
day operations and implementation of the business. Instead the Board meets
periodically with management to review the company's performance and its
future business strategy. Members of the Board also continually consult with
management to keep informed about the company's progress. The full Board of
Directors met ten times during 1997. Each director attended all of the Board
meetings held during the year.
COMMITTEE MEETINGS
The Board also conducts business through two committees: the Audit Committee
and the Compensation Committee. The Audit Committee met seven times during
1997 and the Compensation Committee met eight times. Each member of these
committees attended all of the meetings.
THE AUDIT Members: Messrs. Dietz (Chairman), Flick and Gross. The
COMMITTEE Audit Committee recommends the selection of independent
auditors, approves the scope of the audits by the
independent auditors and our internal auditors and reviews
audit findings, accounting policies and compliance
matters. The Audit Committee investigates any audit or
compliance matter brought to its attention. The Audit
Committee also reviews all reports of examination and
management's responses and any transactions between the
company and any of its directors, executive officers or
their affiliates. The Audit Committee is composed entirely
of directors who are not employees of the company and who
are free from any relationships that in the opinion of the
Board of Directors would interfere with their exercise of
independent judgment.
THE COMPENSATION
COMMITTEE Members: Messrs. Westreich (Chairman) and Kimsey. The
Compensation Committee recommends officers for election or
reelection, and approves all salary levels and incentive
awards for senior management, subject to the Board's
approval of compensation for Messrs. Fairbank and Morris.
The Compensation Committee also administers the company's
Stock Incentive Plan and Stock Purchase Plan. The
Compensation Committee is composed entirely of directors
who are not employees of the company and who are free from
any relationships that in the opinion of the Board of
Directors would interfere with their exercise of
independent judgment.
COMPENSATION OF THE BOARD
ANNUAL FEES We compensate directors who are not employees of Capital
One as follows:
.payment of an annual retainer of $20,000;
.payment of $1,000 for each board or committee meeting
attended; and
. reimbursement of expenses to attend meetings.
The chairmen of the Audit and Compensation Committees
receive an additional annual retainer of $4,000. Employees
of the company who serve as directors do not receive any
additional compensation for serving as a director.
8
STOCK/OPTION
GRANTS We also grant each director who is not an employee of the
company common stock and options under the Directors Plan
as follows:
. at the time an individual first becomes a director, a
one-time restricted stock grant of the lesser of (a)
2,500 shares of common stock and (b) the number of
whole shares of common stock determined by dividing
$50,000 by the fair market value of the common stock on
the date of the grant; and
. each year, a grant of a stock option to purchase 7,000
shares of common stock.
The restrictions on the stock grant prohibit the sale or
transfer of the shares of common stock until one year
after the grant date. The options, which have a ten-year
term, are granted on the date of the annual meeting and
become exercisable in full one year after that date. The
option exercise price is equal to the fair market value of
the common stock on the grant date.
OTHER BENEFITS Under our 1994 Deferred Compensation Plan, directors who
are not employees of the company may voluntarily defer all
of their annual fees and receive deferred income benefits.
Directors accounts are credited monthly with an interest
equivalent in an amount determined from time to time by
the company. Directors electing this deferral will begin
to receive their deferred income benefits in cash when
they cease to be directors, or earlier if authorized by
the Compensation Committee. Benefits are generally payable
in monthly installments beginning within 90 days after
retirement and extending no later than the date the
individual reaches age 80. These benefits will be paid to
the beneficiaries or estates of directors who die before
they receive their benefits. Upon a change of control of
the company and unless otherwise directed by a director,
the company shall pay to each director within thirty days
of the change of control, a lump sum cash payment equal to
such director's account balance as of the date of the
change of control.
RELATED PARTY TRANSACTIONS WITH DIRECTORS
AMERICAN
MANAGEMENT From time to time, the company has retained AMS, a
SYSTEMS, INC. consulting company specializing in information technology,
applications and systems integration, to provide services.
Mr. Gross, a director of Capital One, is also a director
and principal executive officer of AMS. Capital One and
its subsidiaries entered into an agreement with AMS on
April 5, 1995. Under this agreement, AMS agreed to perform
general consulting and other tasks agreed to through work
orders.
During 1997, Capital One paid AMS a total of $2.87 million
for services under this agreement. The company intends to
continue its relationship with AMS in the future and is
currently negotiating another contract with AMS for
additional consulting services. The company believes that
the terms of existing AMS agreements are, and that any
future arrangements will be, fair and reasonable and no
less favorable to Capital One as those we could obtain
from unrelated third parties.
CHARTER In 1997, the company also retained Charter Associates to
ASSOCIATES LTD. provide consulting services to seek out possible venture
management opportunities. Mr. Dietz, a director of Capital
One, is also the President and owner of Charter
Associates. During 1997, the company paid $150,500 to
Charter Associates and all services have been completed.
We believe that the terms of this arrangement were fair
and reasonable and no less favorable to the company as
those we could have obtained from unrelated third parties.
9
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes compensation awarded to, earned by or paid to
our Chief Executive Officer and the other four most highly compensated
executive officers for the year ended December 31, 1997 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ -----------------------
AWARDS
-----------------------
SECURITIES
NAME AND RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS OPTIONS COMPENSATION
------------------ ---- -------- ------- ------------ ---------- ------------
RICHARD D. FAIRBANK 1997 $676,250 $ 0 -- 411,453(1) $38,190(2)
Chairman of the Board 1996 635,416 0 -- -- 45,597
and Chief Executive
Officer................ 1995 550,000 0 -- 1,500,000(3) 14,553
NIGEL W. MORRIS 1997 497,083 0 -- 274,302(1) 28,072(2)
President, Chief
Operating 1996 435,000 0 -- -- 46,916
Officer and Director.... 1995 375,000 0 -- 1,000,000(3) 17,423
JAMES P. DONEHEY 1997 194,168(4) 137,750 -- 71,484(1) 14,529(2)
Senior Vice President
and 1996 132,002(4) 157,090 -- 28,400 16,072
Chief Information
Officer................ 1995 113,668(4) 86,920 -- 47,417(5) 7,620
JOHN G. FINNERAN, JR. 1997 236,250 127,252(4) -- 74,308(1) 15,648(2)
Senior Vice President,
General 1996 213,916 156,331(4) -- 32,400 25,251
Counsel and Corporate
Secretary.............. 1995 201,000 128,082(4) -- 56,556(5) 3,541
JAMES M. ZINN 1997 251,458 44,221(4) -- 64,517(1) 13,244(2)
Senior Vice President
and 1996 237,499 90,000(4) -- 22,400 25,120
Chief Financial
Officer................ 1995 226,042 76,751(4) -- 53,126(5) 18,750
- --------
(1) Includes new stock options and reload options granted under the Stock
Incentive Plan, including the options more fully discussed below. On
December 18, 1997, the Board of Directors approved awards of performance-
based options to Messrs. Fairbank and Morris. Messrs. Fairbank and Morris
were granted these awards in exchange for their agreement to give up their
entire salary and all benefits under the Stock Purchase Plan, the Savings
Plan and the company's Unfunded Excess Savings Plan (the "Excess Savings
Plan") through 2000. On December 18, 1997, the Board of Directors also
approved awards of performance-based options to Messrs. Donehey, Finneran
and Zinn under the 1997 Special Option Program (as discussed more fully on
page 18 of the "Report on Executive Compensation from the Compensation
Committee"). Under this program, these executive officers elected to give
up a portion of their cash bonuses for the next three years (up to 50% of
their annual target) in exchange for this stock option grant. The number
of options indicated next to their names includes the following option
grants under this 1997 Special Option Program: Mr. Donehey 36,908, Mr.
Finneran 36,908 and Mr. Zinn 30,117. All of these performance-based
options vest if the fair market value of the common stock remains at or
above $84.00 for at least ten trading days in any 30-day calendar period
on or before December 18, 2000. The options also vest immediately upon a
change of control of the company on or before December 18, 2000. All of
these performance-based options are subject to stockholder approval of
Item 2 of this proxy statement.
(2) All other compensation consists of the amount of contributions the company
made under the Stock Purchase Plan and the Savings Plan and credits to the
account of the employee under the Excess Savings Plan. For 1997, matching
company contributions equal to 17.65% of the employee contributions under
the Stock Purchase Plan were as follows: Mr. Fairbank $17,903, Mr. Morris
$13,160, Mr. Donehey $4,089, Mr. Finneran $3,921 and Mr. Zinn $3,001. For
1997, the company contributed $4,750 under the Savings Plan
10
for each of these executive officers. For 1997, the amounts of matching
credits under the Excess Savings Plan were: Mr. Fairbank $15,537, Mr.
Morris $10,162, Mr. Donehey $5,690, Mr. Finneran $6,977 and Mr. Zinn
$5,493.
(3) On September 15, 1995, the Board of Directors approved awards of
performance-based options to Messrs. Fairbank and Morris in lieu of all
other compensation (other than salary and contributions under the Stock
Purchase Plan, the Savings Plan and the Excess Savings Plan) for a period
of five years beginning with the 1995 calendar year. The company achieved
the performance targets and all of these options are exercisable.
(4) Under the company's 1995 Special Option Program, Messrs. Finneran and Zinn
elected to forego a part of their cash bonuses and Mr. Donehey elected to
forego a part of his annual salary for three years beginning 1995, in
amounts equal to 25% of their 1995 base salaries, in exchange for options
granted in 1995. Cash bonuses otherwise payable to Mr. Finneran and Mr.
Zinn were reduced, and Mr. Donehey's annual salary was reduced, in each of
1997, 1996 and 1995 by the following amounts: Mr. Finneran $49,998, Mr.
Zinn $56,249 and Mr. Donehey $37,498. The amounts shown in this table are
cash bonuses awarded and salary paid, net of amounts foregone.
(5) Includes the following option grants under the 1995 Special Option
Program: Mr. Donehey 15,417, Mr. Finneran 20,556 and Mr. Zinn 23,126.
OPTION GRANT TABLE
The following table sets forth information concerning grants of stock
options made to the Named Executive Officers in 1997.
1997 OPTION GRANTS
INDIVIDUAL GRANTS
-----------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS ASSOCIATES FOR THE PRICE PER EXPIRATION ------------------------------
NAME GRANTED(1) 1997 FISCAL YEAR(2) SHARE(3) DATE 5% 10%
---- ---------- ------------------- --------- ---------- ------------ --------------
Richard D. Fairbank..... 411,453(5) 17.76% $48.75 12/18/07 $ 0(6) $ 0(6)
Nigel W. Morris......... 274,302(5) 11.84 48.75 12/18/07 0(6) 0(6)
James P. Donehey........ 1,176(7) 0.05 47.94 04/21/07 35,454 89,846
20,000(8) 0.86 37.56 09/13/07 472,426 1,197,219
13,400(8) 0.58 46.47 12/11/07 391,611 992,420
36,908(5) 1.60 48.75 12/18/07 0(6) 0(6)
John G. Finneran, Jr.... 20,000(8) 0.86 37.56 09/13/07 472,426 1,197,219
17,400(8) 0.75 46.47 12/11/07 508,510 1,288,665
36,908(5) 1.60 48.75 12/18/07 0(6) 0(6)
James M. Zinn........... 1,000(7) 0.04 47.94 04/21/07 30,148 76,400
20,000(8) 0.86 37.56 09/13/07 472,426 1,197,219
13,400(8) 0.58 46.47 12/11/07 391,611 992,420
30,117(5) 1.30 48.75 12/18/07 0(6) 0(6)
- --------
(1) The company also granted options to its executive officers and associates
in January 1997 for their performance during 1996. Because these grants
rewarded performance in 1996, they were reported in our proxy statement
for last year's annual meeting and are not reported in the table above.
(2) For purposes of determining the percentage in this column, the total
number of options granted to associates for the 1997 fiscal year was
determined based on the aggregate number of options granted to associates
during 1997 (2,925,709), less the options granted to associates in January
1997 (609,440) for performance during 1996.
(3) Equal to the fair market value of the common stock on the date of grant
determined on the basis of the average of the high and low price as
reported by the New York Stock Exchange Composite Transaction Tape.
11
(4) The dollar amounts under these columns are calculated based on assumed
rates of stock appreciation prescribed by the SEC and are not intended to
be a forecast of possible future stock price appreciation.
(5) On December 18, 1997, the Board of Directors approved awards of
performance-based options to Messrs. Fairbank and Morris. Messrs. Fairbank
and Morris were granted these awards in exchange for their agreement to
give up their entire salary and all benefits under the Stock Purchase
Plan, the Savings Plan and the Excess Savings Plan through 2000. On
December 18, 1997, the Board of Directors also approved awards of
performance-based options to Messrs. Donehey, Finneran and Zinn under the
1997 Special Option Program. Under this program, these executive officers
elected to give up a portion of their cash bonuses (up to 50% of their
annual target bonus) in exchange for this performance-based option grant.
All of these performance-based options vest if the fair market value of
the common stock reaches and remains at or above $84.00 for at least ten
trading days in any 30 calendar-day period, on or before December 18,
2000. The options also vest immediately upon a change of control of the
company on or before December 18, 2000. All of these performance-based
options are subject to stockholder approval of Item 2 of this proxy
statement.
(6) These dollar amounts reflect the value of only that portion of the options
that will become exercisable by December 18, 2000 based on the stock
performance vesting criteria described in footnote (5). At the assumed 5%
and 10% rates of stock price appreciation, these options will not become
exercisable and would have no value.
(7) These options are reload options that were granted under the Stock
Incentive Plan. See footnote (8). Reload options are exercisable, in full,
six months after their grant date and immediately upon a change of
control.
(8) These options were granted under the Stock Incentive Plan. The options
vest in one-third annual increments and become fully exercisable upon a
change in control. These options include a reload feature, under which the
executive will receive an additional option grant at the time he
surrenders already owned shares of the company's common stock as payment
for the exercise price of this option. One reload option with an exercise
price equal to the fair market value on the date of grant is issued for
each such share surrendered.
OPTION EXERCISE AND OPTION VALUE TABLE
The following table sets forth information concerning exercises of stock
options made by the Named Executive Officers in 1997 and the values at 1997
year end of unexercised options held by the Named Executive Officers.
1997 OPTION EXERCISES AND OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 1997 YEAR END AT 1997 YEAR END
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED(1) UNEXERCISABLE UNEXERCISABLE(2)
---- --------------- ----------------- ------------------------ ----------------------
Richard D. Fairbank..... 0 $ 0 1,719,605/1,182,857 $50,291,289/26,379,373
Nigel W. Morris......... 0 0 1,146,403/788,572 33,527,513/17,586,274
James P. Donehey........ 3,526 112,612 51,209/115,690 1,522,592/1,384,584
John G. Finneran, Jr.... 0 0 70,738/125,560 2,181,886/1,534,912
James M. Zinn........... 11,644 350,825 76,627/104,626 2,456,782/1,316,961
- --------
(1) The value realized is the net value of the shares (market price less the
exercise price) or cash received.
(2) In-the-Money Options are those for which the 1997 year-end market price of
the underlying shares of common stock exceeded the exercise price of the
option. The value of the In-the-Money Options is the difference between
the market price (determined on the basis of the average of the high and
low price as reported by the New York Stock Exchange Composite Transaction
Tape on the last business day of 1997) of the common stock ($53.875 per
share) and the exercise price of the option multiplied by the number of
shares underlying the option.
12
COMPANY ARRANGEMENTS WITH EXECUTIVE OFFICERS
EMPLOYMENT The company does not have employment agreements with any
AGREEMENTS of its executive officers. The compensation arrangements
with these officers, however, encourage their continued
employment with the company.
CHANGE OF CONTROL
EMPLOYMENT All of the executive officers identified in "Information
AGREEMENTS about the Directors and Executive Officers" have change
of control employment agreements. The agreements are
designed to assure that if a change of control of the
company occurs, our business will continue with minimal
disruption as these agreements provide greater employment
security to key operational and management executives. A
change of control is defined as the acquisition of 20% or
more of the company's common stock or the combined voting
power of the voting securities by a person or group,
certain changes in the majority of the Board of
Directors, certain mergers involving the company,
liquidation, dissolution or sale of all or substantially
all of the company's assets.
The agreements with Messrs. Fairbank, Morris, Zinn and
Finneran entitle them to receive (i) their base salary
and a pro rata bonus through the date of termination,
(ii) a lump sum payment of three times their salary and
highest bonus, (iii) any deferred compensation and
accrued vacation not yet paid and (iv) certain special
retirement benefits; if within three years of the change
of control they are terminated without cause, or if they
voluntarily leave for good reason (which includes leaving
for any reason during the 30-day period beginning one
year after a change in control). The agreements also
provide a tax gross-up feature to cover excise or similar
taxes (including excise taxes and income taxes imposed
upon the gross-up payment) that the officer may have to
pay resulting from payments received due to a change of
control.
All other executive officers identified under the heading
"Information About our Directors and Executives" have
change of control agreements that entitle them to receive
(i) their base salary and a pro rata bonus through the
date of termination, (ii) a lump sum payment of two times
their salary and highest bonus, (iii) any deferred
compensation and accrued vacation not yet paid and (iv)
certain special retirement benefits; if within two years
of the change of control they are terminated without
cause, or if they voluntarily leave for a good cause (but
which does not include leaving for any reason during a
specified period). The agreements also provide a tax
gross-up feature to cover excise or similar taxes
(including excise taxes and income taxes imposed upon the
gross-up payment) that the officer may have to pay
resulting from payments received due to a change of
control.
PENSION PLANS
GENERAL In 1995, the company made a number of changes to its
pension and deferred compensation plans. Among the
changes were that we stopped making further pay-based
contributions to the company's cash balance pension plan
(the "Cash Balance Pension Plan") and the related excess
cash balance pension plan (the "Excess Cash Balance
Plan"). We also eliminated the Executive Employees
Supplemental Retirement Plan and the ability of executive
officers to defer compensation under the 1994 Deferred
Compensation Plan.
13
CASH BALANCE
PENSION PLAN AND
EXCESS CASH
BALANCE PLAN Before it was amended in November 1995, the Cash Balance
Pension Plan covered all full-time salaried employees of
Capital One and its subsidiaries. The Cash Balance
Pension Plan is a type of defined benefit plan intended
to qualify under section 401(a) of the Internal Revenue
Code under which participants were credited with pay-
based credits equal to 4% of compensation for
participants with less than 20 years of service, and 5%
of compensation for participants with 20 or more years of
service. Service with the company's predecessor or one of
its subsidiaries is recognized as service with Capital
One for all purposes under the plan. Compensation
generally included all annual paid compensation up to
$150,000, as indexed for cost of living increases.
Participants are fully vested in plan benefits after five
years of service.
Before it was amended in November 1995, the Excess Cash
Balance Plan was available to certain executive officers
(including the Named Executive Officers). The Excess Cash
Balance Plan provided additional benefits to participants
to the extent benefits under the Cash Balance Pension
Plan were restricted because of limitations imposed by
provisions of the Internal Revenue Code.
In November 1995, we amended the Cash Balance Pension
Plan and the Excess Cash Balance Plan to eliminate
further pay-based credits to participants as of December
31, 1995, and to provide that there would be no new
participants in such plans on or after January 1, 1996.
Interest credits continue to be credited on plan balances
on a quarterly basis. Based on the account balance of
each Named Executive Officer as of January 1, 1998, the
projected annual retirement benefits under the Cash
Balance Pension Plan and the Excess Cash Balance Plan,
respectively, are $13,545 and $29,736 for Mr. Fairbank,
$13,525 and $15,795 for Mr. Morris, $8,630 and $702 for
Mr. Donehey, $9,670 and $4,794 for Mr. Finneran and
$9,953 and $5,634 for Mr. Zinn. Messrs. Fairbank, Morris,
Donehey, Finneran and Zinn are currently credited with
three years of service under the plans. These projected
benefits assume interest credits under each of the plans
to be 5% per annum.
In lieu of the pay-based credits under the Cash Balance
Pension Plan and the Excess Cash Balance Plan, beginning
January 1, 1996, we began making automatic contributions
equal to 3% of an employee's eligible compensation to the
employee's account in the Savings Plan and, if
applicable, the Excess Savings Plan.
14
PERFORMANCE GRAPH
The following graph compares cumulative total stockholder return on our
common stock with the S&P Composite 500 Stock Index and an industry index, the
S&P Financial Composite Index, for the period from November 18, 1994 (the
first Friday following the date on which our common stock began trading on the
New York Stock Exchange) to December 31, 1997. The graph assumes that the
value of the investment in the common stock and each index was $100 at
November 18, 1994 and that all dividends were reinvested. The stock price
performance on the graph below is not necessarily indicative of future
performance.
LOGO
15
REPORT ON EXECUTIVE COMPENSATION
FROM THE COMPENSATION COMMITTEE
As the Compensation Committee of the Board of Directors, we offer this
report to describe the compensation philosophy and policies underlying our
recommendations to the Board for the compensation package of the company's
executive officers generally and the Chief Executive Officer and the President
and Chief Operating Officer more specifically. PLEASE READ THIS REPORT
CAREFULLY AS CERTAIN FEATURES OF THE COMPENSATION ARRANGEMENTS REQUIRE YOU TO
APPROVE AN AMENDMENT TO THE STOCK INCENTIVE PLAN AT THIS YEAR'S ANNUAL
MEETING.
COMPENSATION PHILOSOPHY
We have designed and adopted a compensation program for the company's
executives based on three underlying principles: recruitment and retention of
top executive talent, value creation and flexibility. Although we believe that
executive compensation should be market based, to enable us to recruit and
retain top performers with the necessary skills and talent, the compensation
package has to provide the executive with an opportunity for compensation to
exceed market standards. To this end, we have linked compensation to
stockholder value by using stock options as the principal vehicle to achieve
an above-market compensation opportunity. As a result, the compensation
packages reward the accomplishments of management only to the extent such
accomplishments create stockholder wealth. We believe that such a stock
option-based program best aligns the interests of management with the
interests of stockholders and is in the best interests of Capital One and its
stockholders. Finally, we believe that the company's compensation program must
maintain the flexibility to respond rapidly to market opportunities.
Accordingly, we have avoided the use of rigid performance criteria under the
plans, as such criteria could interfere with the company's business
strategies.
METHODOLOGY FOR DETERMINING COMPENSATION
COMPENSATION COMPARATORS. In determining the overall amount of compensation,
we considered the compensation and benefits paid to similar executives within
(i) those organizations against whom Capital One competes to recruit executive
officers, (ii) companies in the financial services sector generally and (iii)
other credit card companies.
SURVEYS. We reviewed surveys, published by leading compensation and benefits
consulting firms, showing compensation levels for executives in the group of
comparable companies. In addition, with respect to the compensation of the
Chief Executive Officer and the President and Chief Operating Officer, we
reviewed information presented by our independent compensation consultants.
ENTREPRENEURIAL APPROACH. To support an entrepreneurial approach, we
developed a compensation package that emphasizes the use of stock-based
incentives. Stock options are the only form of long-term incentive provided to
our executives and, as a result, management can achieve compensation that is
above market levels for executives in comparable companies only if the value
of our company's common stock increases.
TIER APPROACH. Capital One uses management "Tiers" in determining the
overall compensation of its associates, including the executive officers, and
assigns each executive officer to a designated Tier based on job
responsibility and such officer's contribution to the management of the
company.
16
COMPONENTS OF THE EXECUTIVE COMPENSATION PROGRAM
Executives are eligible to receive compensation in three forms:
. base salary,
. annual cash incentive awards, and
. annual stock option awards.
Each compensation component is offered to executives in various
combinations, depending on the executive's Tier. The combined package provides
a total compensation opportunity that places executive compensation at
approximately the 75th percentile in the range of total compensation paid to
comparable executives at comparable companies.
BASE SALARY. Each management Tier has a salary band. The salary band defines
the minimum and maximum salary levels for the Tier. Targeted salaries are
based on the 50th percentile for executives at comparable companies.
Individual salaries within the band reflect the officer's scope of
responsibility, prior experience and accomplishments, and other individual
factors, as well as market data on salary levels for comparable positions.
Base salaries are adjusted annually within the salary bands depending on
individual performance, and are determined based on subjective evaluations of
various factors, including recent performance and time in job. The company
expects to adhere rigorously to the 50th percentile level for executive
officers' salaries and therefore adjustments in targeted base salaries will be
limited only to amounts necessary to maintain such level.
ANNUAL INCENTIVES. The compensation program also provides executive officers
with annual cash incentive awards based on individual and corporate
performance criteria. Annual incentive targets have been established as a
specified percentage (between 30% to 50%) of the base salary amount for each
Tier such that total cash compensation (base salary and annual cash
incentives) for executive officers is at approximately the 65th percentile of
comparable companies. Actual cash incentive awards are determined based on a
combination of corporate and individual performance and may be greater or less
than the targeted annual incentive. Annual incentives can be as high as 200%
of the target levels when performance exceeds the targeted criteria.
Performance below the threshold level results in no award.
Individual performance is based on subjective evaluations of factors similar
to the criteria specified above for adjustments in base salaries. For
corporate performance, we maintain a flexible approach to performance
measurement so that we are able to respond appropriately to emerging and
evolving business opportunities. The corporate performance criteria for 1997
annual incentives included earnings per share, marketing expenses, loan and
account growth, credit quality, customer satisfaction, marketing innovation,
operating efficiency, associate management, technological innovation,
recruiting, flexibility, management integration and other factors.
STOCK OPTIONS. Stock options provide executive officers with a strong
economic interest to maximize stockholder value, and align the interests of
the executive officers with those of stockholders. Stock option grants
compensate management only to the extent value in the form of stock price
appreciation has been created. Stock options are granted with an exercise
price equal to the market price on the grant date and therefore have no
economic value unless Capital One's stock price increases. Given the company's
emphasis on stock options in the overall compensation package, an executive
officer's total compensation will be highly dependent on the performance of
the common stock. This compensation component is intended to encourage
individual commitment to corporate business strategies and to focus executives
on improving stock performance.
17
Stock option targets are established for each Tier. Individual grants are
determined based on individual performance and can be increased or decreased
by as much as 50% from the target levels. In evaluating individual
performance, we consider an officer's responsibilities, recent performance and
accomplishments and the expected future contribution of the officer to Capital
One's performance. We determine individual performance based on a subjective
evaluation of these factors.
ENTREPRENEURGRANTS. To link more strongly the company's interests with that
of its stockholders, in 1995 we offered senior management an opportunity
voluntarily to forego cash compensation, either salary or annual bonus, in an
amount of up to 25% of their 1995 base salaries for the next three years in
exchange for a non-qualified stock option grant. We called this the 1995
Special Option Program or the "EntrepreneurGrant." 43 of the 50 individuals
eligible to participate elected to do so to the extent of 76% of the options
available under the program. The total amount of foregone cash compensation
was $2,113,561 (over 3 years) and options to purchase 289,632 shares were
granted in exchange for that amount. All of the executive officers named in
the proxy statement that year (six at that time, all of whom are still at the
company) elected to forego the maximum allowable amount in exchange for
options. The option exercise price is $29.19 per share, the fair market value
of the common stock on the grant date. These options vest in one-third annual
increments and become fully exercisable upon a change of control. The options
expire on September 15, 2005.
Based on the success of the 1995 Special Option Program and because we
believe stock option grants continue to be extremely important to our overall
compensation package, this year we developed a similar option program, the
1997 Special Option Program or the "EntrepreneurGrant II." In December 1997,
we offered senior management another opportunity to forego payment of future
cash compensation, this time in an amount of up to 50% of their annual target
bonus for the next three years, in exchange for a non-qualified stock option
grant. 80 of the 84 individuals eligible to participate elected to forego cash
compensation to the extent of 84% of the options available under such program.
Senior managers gave up a total of $5,405,370 in cash compensation (over 3
years) and options to purchase 681,366 shares were granted in exchange for
that amount. All of the executive officers identified in this proxy statement
under the heading "Information About our Directors and Executive Officers"
elected to forego compensation in exchange for options.
EntrepreneurGrant II differs in several respects from the previous
EntrepreneurGrant, focusing more on stock price performance and retention
benefits to the company. The terms of EntrepreneurGrant II vary according to
the officer's Tier level. For Tier 2 and 3 executives (22 executives in
total), the options granted become exercisable if the stock price of the
company's common stock reaches and remains at or above $84.00 for at least ten
trading days in any 30 calendar-day period on or before the third anniversary
of the grant date (December 18, 2000). In order to achieve this vesting
requirement, the price of the common stock has to increase an average of 20%
annually in the three-year period from the date these option grants were made
to December 18, 2000. The options also vest immediately upon any change of
control of the company that occurs on or before December 18, 2000. If the
options do not meet this vesting criteria, the options will terminate. For
Tier 4 managers (58 participating managers in total) the options vest in full
on the third anniversary of the grant date (December 18, 2000), without regard
to stock price, and immediately upon any change of control of the company.
The purchase price for all the shares under the EntrepreneurGrant II options
is $48.75 per share, equal to the average of the high and low of the company's
common stock on December 18, 1997, the date the grants were made. All of the
grants are subject to stockholder approval of Item 2 of this proxy statement
which would amend the Stock Incentive Plan to increase the number of shares
available for issuance under the plan.
18
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER AND THE PRESIDENT AND CHIEF
OPERATING OFFICER
In 1995, with the aid of our independent compensation consultants, we
developed an innovative and entrepreneurial approach for the compensation of
the company's two top executive officers. This compensation package was
designed to resemble the compensation structures of highly entrepreneurial
companies and was highly dependent on the performance of the common stock.
Under the 1995 compensation package, Messrs. Fairbank and Morris agreed to
give up all cash bonuses, annual stock option grants and supplemental
retirement benefits for five years in exchange for an option grant that vested
only upon the achievement of certain performance targets. Since that time, the
company's common stock price has exceeded the performance target prices and
this option grant has fully vested.
In the compensation packages recommended by this Committee and approved by
the full Board of Directors in December 1997, we have continued this
entrepreneurial approach to an even greater extent. Messrs. Fairbank and
Morris have now agreed to give up their entire salary plus any benefits under
the Stock Purchase Plan, the Savings Plan and the Excess Savings Plan for the
next three years in exchange for a non-qualified stock option grant. The base
salary that Mr. Fairbank otherwise would receive in 1998 is $690,000 and the
base salary that Mr. Morris otherwise would receive in 1998 is $520,000. The
increases in 1998 base salaries for Messrs. Fairbank and Morris, from their
respective 1997 salaries of $675,000 and $495,000, were necessary to bring
their base salaries to approximately the 50th percentile of the salaries of
comparable executives in the groups of comparable companies. Under this
compensation arrangement, total salary and other benefits foregone by Mr.
Fairbank over the three-year period is $2,287,647 and by Mr. Morris is
$1,724,022. These amounts foregone are in addition to the cash bonuses, annual
stock option grants and supplemental retirement plan benefits previously given
up by the two executives under the 1995 compensation package. In exchange, Mr.
Fairbank received an option to purchase 411,453 shares and Mr. Morris received
an option to purchase 274,302 shares of the company's common stock. These
options, like the EntrepreneurGrant II for Tier 2 & 3 executives, will vest if
the stock price reaches and remains at or above $84.00 per share for at least
ten trading days in any 30 calendar-day period on or before the third
anniversary of the grant date (December 18, 2000). This vesting requirement
reflects a 20% compounded annual rate of stock price increase from the date
these options were granted. The options also vest immediately upon any change
of control of the company that occurs on or before December 18, 2000. In the
event that neither of the vesting requirements is met, the options will
terminate.
Because these options, and the EntrepreneurGrant II for Tier 2 and 3
executives, are performance-based options, the company will be required to
recognize as compensation expense the difference between the $48.75 exercise
price of the options and the $84.00 vesting target. This expense will
approximate $40 million which will be recognized over the estimated vesting
period of the options. Based upon the appreciation of the company's common
stock since the date these performance-based options were granted, the company
currently expects to recognize a significant portion of this expense in 1998.
This expense is not expected to have a material effect on the company's
ability to meet its earnings target for 1998. A discussion of the company's
earnings target for 1998 is contained in the company's 1997 Annual Report.
This 1997 compensation arrangement, which establishes compensation for
Messrs. Fairbank and Morris for the next three years, requires your approval
of Item 2 of this proxy statement to amend the Stock Incentive Plan to
increase the number of authorized shares under this plan.
19
DEDUCTIBILITY OF COMPENSATION EXPENSES
It is the responsibility of the Committee to address the issues raised by
the Omnibus Budget Reconciliation Act ("OBRA"), which provides that
compensation, including certain stock option compensation, that is paid to the
chief executive officer and the four most highly compensated executive
officers (other than the chief executive officer) in excess of $1 million is
not deductible by the company for federal income tax purposes unless it
qualifies as "performance-based" compensation. To qualify as "performance-
based" under OBRA, compensation payments must be made from a plan that is
administered by a committee of outside directors and must be based on the
achievement of objective performance goals. In addition, the material terms of
the plan must be disclosed to and approved by stockholders, and the Committee
must certify that the performance goals have been achieved.
The Committee has considered the impact of this tax code provision in
designing the company's compensation plans. We believe it is more important to
have executive officers focused on the business opportunities afforded by
Capital One's information-based strategies rather than to use inappropriate
measures to capture the benefits of the tax deduction. Under the executive
compensation arrangements described above, none of the executive officers will
receive over $1 million in cash compensation. Moreover, the Committee believes
that the Stock Incentive Plan establishes performance criteria which will
qualify awards made under such plan as performance-based awards, and thus
performance-based compensation under the Stock Incentive Plan will not be
taken into account in applying the $1 million limitation. In addition, in
connection with the compensation arrangements established for the Chief
Executive Officer and the President and Chief Operating Officer under which
all compensation is comprised of stock option grants to such officers, Capital
One has been advised by counsel that, because stock option income generally is
treated as performance-based compensation, assuming the amendment to the Stock
Incentive Plan contemplated by Item 2, the $1 million limitation should not
cause the company to lose any part of the tax deduction related to the Chief
Executive Officer's and the President and Chief Operating Officer's
compensation under the compensation program. The Committee will continue to
examine the effects of the new provisions and will monitor the level of
compensation paid to the executive officers in order to take any steps which
we may deem appropriate in response to the provisions of OBRA.
The Compensation Committee
Stanley I. Westreich (Chairman)
James V. Kimsey
20
ELECTION OF DIRECTORS
(ITEM 1 ON THE PROXY CARD)
The Board of Directors is divided into three classes. At each annual meeting
the term of one class expires. Directors in each class are elected to serve
for three-year terms. At the 1996 annual meeting, James A. Flick, Jr., Patrick
W. Gross and James V. Kimsey were elected to serve on the Board of Directors
for three year terms expiring at the annual meeting to be held in 1999. At the
1997 annual meeting, Richard D. Fairbank and Stanley I. Westreich were elected
to serve on the Board of Directors for three year terms expiring at the annual
meeting to be held in 2000. All of the current directors began serving as
directors as of the close of business on February 28, 1995, except Mr.
Fairbank and Mr. Westreich who have served as directors since July 26, 1994.
THE NOMINEES FOR REELECTION THIS YEAR ARE NIGEL W. MORRIS AND W. RONALD
DIETZ. Each has consented to serve a three-year term. Messrs. Morris and Dietz
have been directors of the company since February 28, 1995.
In the event either nominee should not continue to be available for
election, the Board may designate a substitute as a nominee. Proxies will be
voted for the election of such substitute. As of the date of this proxy
statement, the Board of Directors has no reason to believe that either of the
nominees will be unable or unwilling to serve.
Information about the two proposed nominees for election as directors, and
about each other current director whose term will continue after the annual
meeting, is set forth under "Information About our Directors and Executive
Officers" starting on page 5 of this proxy statement.
Directors will be elected by a plurality of the votes cast for the election
of directors at the meeting. Cumulative voting is not permitted.
The Board recommends a vote "FOR" these directors.
21
APPROVAL OF AMENDMENT TO THE 1994 STOCK INCENTIVE PLAN
(ITEM 2 ON THE PROXY CARD)
The Board of Directors is recommending your approval of an amendment to the
Stock Incentive Plan to increase by 3,250,000 the number of shares that may be
issued under this plan. This amendment is required to support (i) the
compensation package for Mr. Fairbank, our Chairman and Chief Executive
Officer, and Mr. Morris, our President and Chief Operating Officer, (ii) the
options granted to senior management on December 18, 1997 under
EntrepreneurGrant II and (iii) future option grants to employees as may be
approved by the Compensation Committee and/or the Board from time to time.
We have summarized below the reasons why we are recommending this amendment
to the Stock Incentive Plan. The material provisions of the Stock Incentive
Plan are summarized in Appendix I. You may obtain a copy of the entire plan by
contacting the Corporate Secretary at the address on the front cover of this
proxy statement.
BRIEF SUMMARY The Stock Incentive Plan currently authorizes the issuance
of up to 7,370,880 shares of common stock. On December 18,
1997, the Board of Directors approved an amendment to the
Stock Incentive Plan to increase the number of shares
reserved for issuance under the plan by 3,250,000 shares
to 10,620,880. Due to prior stock option and restricted
stock grants, as of December 31, 1997, 97,814 shares
remain available for issuance under the Stock Incentive
Plan (not including the 685,755 shares issuable upon
exercise of the stock options granted to Messrs. Fairbank
and Morris in December 1997 and the 681,366 shares
issuable upon exercise of the stock options granted to
other members of the company's senior management in
EntrepreneurGrant II). As a result, your approval of this
amendment is necessary to approve the December 1997 grants
to Messrs. Fairbank and Morris and the EntrepreneurGrant
II to members of senior management.
PURPOSE OF THIS
AMENDMENT The Board of Directors strongly recommends your approval
of this amendment. The Board believes that stock option
grants are extremely important to the company's overall
compensation package and to the continued success of the
company. To recruit and, more importantly, to retain top
performers with the skills and talent necessary to succeed
with the company's strategy, the compensation package
offered to our executives must provide an opportunity for
compensation that exceeds market standards. To this end,
the Board of Directors has linked executive compensation
to stockholder value by using stock options as the
principal vehicle to achieve this above market
compensation opportunity. Stock options provide executive
officers a strong economic interest in maximizing
stockholder value and align their interests with that of
stockholders. Given the company's emphasis on stock
options in the overall compensation package, an executive
officer's total compensation will be highly dependent on
the performance of the company's common stock.
Your approval of this amendment will permit the Board to
implement very unique compensation packages for Messrs.
Fairbank and Morris, as well as for the other 80 most
senior managers of your company participating in the
program.
22
As described in the Compensation Committee's Report on
Executive Compensation, Messrs. Fairbank and Morris have
agreed to give up ALL SALARY and other forms of cash
compensation for the next three years in exchange for
stock options. Together with the cash bonuses and other
compensation they previously gave up for earlier option
grants, Messrs. Fairbank and Morris will not receive any
compensation from the company (other than these options)
until 2001. Moreover, absent a change of control of the
company, these options do vest unless and until the stock
price equals or exceeds $84.00 per share for at least ten
trading days in any 30 calendar-day period on or before
December 18, 2000. At the time the options were granted by
the Board on December 18, 1997, this vesting target
represented a 20% compounded annual increase in the price
of the common stock. As a result of this compensation
arrangement, Messrs. Fairbank and Morris will be
compensated only if the stock price continues to
appreciate or if a change of control occurs. Similarly,
other senior managers of the company have elected to
forego a substantial amount of their cash compensation for
option grants under EntrepreneurGrant II. For 22 of the
top managers, the options have vesting criteria identical
to the options granted to Messrs. Fairbank and Morris. For
the remaining 58 participating managers, the options do
not vest until December 18, 2000, thus serving as a strong
management retention device. A description of the material
terms of these options is also contained in this proxy
statement under "Compensation of Executive Officers--
Summary Compensation Table" and "--Company Arrangements
with Executive Officers."
This compensation program encourages the individual
commitment of all senior management to corporate business
strategies and focuses executives on improving stock
performance.
DILUTION OF
OPTIONS OFFSET BY On July 10, 1997, the Board of Directors approved a
STOCK REPURCHASES program to repurchase up to 2,000,000 shares in order to
partially offset the dilutive and earnings per share
impact of new issuances of common stock under the
company's various stock plans, including the Stock
Incentive Plan. As of February 27, 1998, the company had
repurchased 1,326,800 shares under this program. The
company uses these repurchased shares for issuances under
the Stock Incentive Plan and other benefit plans.
STOCKHOLDER
APPROVAL NEEDED
FOR TAX
DEDUCTIBILITY Stockholder approval of this amendment is required so that
we can deduct for federal income tax purposes the
compensation expense associated with awards paid under the
Stock Incentive Plan to certain of our senior executives.
See "Report on Executive Compensation from the
Compensation Committee--Deductibility of Compensation
Expenses."
23
NEW PLAN BENEFITS
TABLE The following table summarizes the stock option grants
that have been made to the Named Executive Officers and
certain groups, subject to your approval of this proposed
plan amendment. The remaining 1,882,879 shares of common
stock that would be available for issuance under the Stock
Incentive Plan will be used for future awards, the
recipients of which are not determinable at this time.
NEW PLAN BENEFITS
NUMBER OF
UNDERLYING SHARES
NAME AND POSITION GRANTS OF OPTIONS(1)
----------------- --------------------
Richard D. Fairbank....................................... 411,453(2)
Chairman and Chief Executive Officer
Nigel W. Morris........................................... 274,302(2)
President and Chief Operating Officer
James P. Donehey.......................................... 36,908(2)
Senior Vice President and Chief Information Officer
John G. Finneran, Jr. .................................... 36,908(2)
Senior Vice President, General Counsel and Corporate
Secretary
James M. Zinn............................................. 30,117(2)
Senior Vice President and Chief Financial Officer
All Executive Officers as a Group......................... 901,889(2)(3)
Non-Executive Officer Employee Group (73 individuals)..... 465,232(4)
- --------
(1) The exercise price of all these options is $48.75, the average of the high
and low of the company's common stock on December 18, 1997, the date of
grant. All of the options vest immediately upon a change of control that
occurs on or before December 18, 2000.
(2) These options vest if the stock price reaches and remains at or above
$84.00 for at least ten trading days in any 30 calendar-day period on or
before December 18, 2000.
(3) Includes the 789,688 shares underlying the option grants to the Named
Executive Officers listed above.
(4) 241,332 of these options will vest based on the stock performance vesting
requirement described in footnote (2). The remaining 223,900 options will
vest in full, regardless of the stock price, on December 18, 2000.
STOCK PRICE On March 11, 1998, the closing price of the company's
common stock on the New York Stock Exchange was $74 3/16.
VOTE
The affirmative vote of the holders of a majority of the
shares of common stock present in person or represented by
proxy and entitled to vote at the annual meeting is
required to approve the proposed amendment to the Stock
Incentive Plan.
The Board of Directors recommends that you vote "FOR" the
amendment to the 1994 Stock Incentive Plan to increase by
3,250,000 shares the aggregate number of shares reserved
for issuance under the plan.
24
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
(ITEM 3 ON THE PROXY CARD)
The Board of Directors, upon the recommendation of the Audit Committee, has
selected the firm of Ernst & Young LLP as independent auditors for 1998. The
Board is submitting this proposal to the vote of the stockholders in order to
obtain their view on the Board's selection. If stockholders do not ratify the
selection of Ernst & Young LLP, the Board of Directors will reconsider the
selection of independent auditors.
Representatives of Ernst & Young LLP are expected to be present at the
annual meeting. They will have the opportunity to make a statement if they
desire to do so and will be available to respond to appropriate questions.
The affirmative vote of a majority of the shares of common stock present in
person or represented by proxy and entitled to vote at the annual meeting is
required to ratify the selection of Ernst & Young LLP as independent auditors
for 1998.
The Board recommends a vote "FOR" the ratification of Ernst & Young LLP as
the independent auditors for 1998.
25
OTHER BUSINESS
We know of no other business that will be presented for consideration at the
annual meeting. If other matters are properly brought before the meeting, the
persons named in the accompanying proxy card will vote such proxy at their
discretion.
ANNUAL REPORT TO STOCKHOLDERS
The Annual Report to Stockholders for the fiscal year ended December 31,
1997, including consolidated financial statements, is being furnished along
with this proxy statement to stockholders of record on February 27, 1998. The
Annual Report to Stockholders does not constitute a part of the proxy
soliciting material. A copy of our Annual Report on Form 10-K, which is filed
with the Securities and Exchange Commission, may be obtained at the meeting or
by contacting our Investor Relations Department at the company's address on
the front cover of this proxy statement.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
If you wish to present a stockholder proposal at the 1999 annual meeting and
wish to have such proposal considered for inclusion in our 1999 proxy
statement, you must send us the proposal, along with any supporting statement,
to the Corporate Secretary, so that it is received at the address on the front
cover of this proxy statement on or before November 18, 1998. All proposals
must comply with applicable Securities and Exchange Commission regulations.
Under our bylaws, if you wish to nominate directors for election, or present
other business before the stockholders, you must give proper written notice of
any such nomination or business to the Corporate Secretary not less than
seventy nor more than ninety days prior to the first anniversary of the
preceding year's annual meeting. If the annual meeting is not within thirty
days before or seventy days after such anniversary date, you must send notice
within ten days following any notice or publication of the meeting. Your
notice must include certain information specified in our bylaws concerning the
nomination or the business. A copy of our bylaws may be obtained from the
Corporate Secretary at the company's address on the front cover of this proxy
statement.
By Order of the Board of Directors,
LOGO
John G. Finneran, Jr.
Corporate Secretary
March 13, 1998
26
APPENDIX I
SUMMARY DESCRIPTION OF THE STOCK INCENTIVE PLAN
The Stock Incentive Plan currently authorizes the issuance of up to
7,370,880 shares of common stock. The plan is administered by the Compensation
Committee of the Board of Directors. Executive officers (including the Named
Executive Officers) and all other company employees are eligible to
participate in the plan. The Stock Incentive Plan is intended to provide a
means for employees to increase their personal financial interest in the
company, thereby stimulating the efforts of these employees and strengthening
their desire to remain with the company. The Stock Incentive Plan terminates
on October 27, 2004, unless sooner terminated by the Board of Directors.
The Board of Directors may amend the Stock Incentive Plan in such respects
as it deems advisable; provided that, if and to the extent required by the
Internal Revenue Code, the stockholders of Capital One must approve any
amendment that would (i) materially increase the benefits accruing to
participants under the plan, (ii) materially increase the number of shares of
common stock that may be issued under the plan, or (iii) materially expand the
class of persons eligible for participation in the plan.
STOCK OPTIONS. Options to purchase shares of common stock granted under the
Stock Incentive Plan may be incentive stock options that qualify for favorable
income tax treatment or nonstatutory stock options. The purchase price of
common stock covered by an option may not be less than 100% (or, in the case
of an incentive stock option granted to a 10% stockholder, 110%) of the fair
market value of the common stock on the date of the option grant. The value of
incentive stock options, based on the exercise price, which can be exercisable
for the first time in any calendar year under the Stock Incentive Plan or any
other similar plan maintained by the company is limited to $100,000.
Options may only be exercised at such times as may be specified by the
Compensation Committee in the optionee's stock option agreement. Generally, an
incentive stock option shall not be exercisable after the first to occur of
(i) ten years (or, in the case of an incentive stock option granted to a 10%
stockholder, five years) from the date on which the incentive stock option was
granted, (ii) three months from the optionee's termination of employment for
reasons other than death or disability, or (iii) one year from the optionee's
termination of employment on account of death or disability. The Committee may
grant options with more liberal exercise provisions provided that the optionee
must consent to the exercise provisions if such provisions would cause the
incentive stock option to lose its favorable tax treatment. The Committee also
may grant options with a provision that an option not otherwise exercisable
will vest upon a change of control, and/or that restrictions on stock options
will lapse, upon a change of control.
If the option so provides, an optionee exercising an option may pay the
purchase price in cash; by delivering shares of common stock which were held
by the optionee for at least six months; by delivering a promissory note; by
delivering an exercise notice together with irrevocable instructions to a
broker to promptly deliver to the company the amount of sale or loan proceeds
from the option shares to pay the exercise price or by such other methods of
exercise as may be approved by the Committee from time to time. The Committee
may, in its discretion, provide that an employee who exercises an option by
delivering already-owned shares of common stock will automatically be granted
a new option in an amount equal to the number of shares delivered to exercise
the option with an exercise price equal to the fair market value of the common
stock on the date of delivery (a "reload option"). The Committee may, in its
discretion, include a reload option in an option when granted or amend an
outstanding option to grant a reload option.
STOCK APPRECIATION RIGHTS. The Compensation Committee may award stock
appreciation rights with an incentive or nonstatutory stock option, or the
Committee may subsequently award and attach stock appreciation rights to a
previously awarded nonstatutory stock option, and impose such conditions upon
their exercise as it deems appropriate. When the stock appreciation right is
exercisable, the holder may surrender all or a portion of his unexercised
stock appreciation right and receive in exchange an amount equal to the excess
of (i) the fair
27
market value on the date of exercise of the common stock covered by the
surrendered portion of the stock appreciation right over (ii) the exercise
price of the common stock under the related option. The Committee may limit
the amount that can be received when a stock appreciation right is exercised.
When a stock appreciation right is exercised, the underlying option, to the
extent surrendered, will no longer be exercisable. Similarly, when an option
is exercised, any stock appreciation rights attached to the option will no
longer be exercisable. The company's obligation arising upon the exercise of a
stock appreciation right may be paid in common stock or in cash, or in any
combination of the two, as the Committee may determine.
Stock appreciation rights may be exercised only when the underlying option
is exercisable. There are further limitations on when an officer or director
may exercise a stock appreciation right. In particular, such persons may not
exercise stock appreciation rights within the first six months after they are
granted and must generally exercise the rights in brief window periods
following quarterly earnings releases.
RESTRICTED STOCK. Restricted stock issued pursuant to the Stock Incentive
Plan is subject to the following general restrictions: (i) none of such shares
may be sold, transferred, pledged, or otherwise encumbered or disposed of
until the restrictions on such shares shall have lapsed or been removed under
the provisions of the plan, and (ii) if a holder of restricted stock ceases to
be employed by the company, such holder will forfeit any shares of restricted
stock on which the restrictions have not lapsed or been otherwise removed.
The Committee establishes as to each share of restricted stock issued under
the Stock Incentive Plan the terms and conditions upon which the restrictions
on such shares shall lapse. Such terms and conditions may include, without
limitation, the lapsing of such restrictions at the end of a specified period
of time, the meeting of performance goals, or as a result of the disability,
death or retirement of the recipient or a change of control. In addition, the
Committee may at any time, in its sole discretion, accelerate the time at
which any or all restrictions will lapse or remove any and all such
restrictions. The Committee may also provide that all restrictions will lapse
upon a change of control.
INCENTIVE STOCK. The Committee may establish performance programs with fixed
goals and designate key employees as eligible to receive incentive stock if
the goals are achieved. Incentive stock will only be issued in accordance with
the program established by the Committee. More than one performance program
may be established by the Committee and such programs may operate concurrently
or for varied periods of time and a participant may participate in more than
one program at the same time. A participant who is eligible to receive
incentive stock has no rights as a stockholder until incentive shares are
received.
TERMINATION/ADJUSTMENTS/TRANSFERABILITY. If a stock option is cancelled,
terminates or lapses, any unissued shares allocable to such stock option may
be subjected again to an award. Similarly, if shares of restricted stock are
returned to, cancelled or otherwise reacquired by the company, such shares may
again be subjected to an award under the Stock Incentive Plan. Adjustments
will be made in the number of shares that may be issued under the Stock
Incentive Plan in the event of a future stock dividend, stock split or similar
pro rata change in the number of outstanding shares of common stock or the
future creation or issuance to stockholders generally of rights, options or
warrants for the purchase of common stock or preferred stock. Generally, any
award under the Stock Incentive Plan may not be sold, transferred, pledged, or
otherwise disposed of, other than by will or by the laws of descent and
distribution, and all rights granted to a participant under the Stock
Incentive Plan shall be exercisable during his lifetime only by such
participant, or his guardians or legal representatives. However, the
Committee, in its discretion, may provide that all or a portion of a stock
option (other than incentive stock options) and stock appreciation rights may
be granted upon such terms that permit the transfer of such awards in the form
and manner determined by the Committee. Upon the death of a participant, his
personal representative or beneficiary may exercise his rights to the extent
permitted under the terms of the Stock Incentive Plan and the award granted
under the Stock Incentive Plan.
FEDERAL INCOME TAX CONSEQUENCES. Generally federal income tax is not
incurred when an employee is granted a nonstatutory stock option or an
incentive stock option or when the employee is granted restricted stock. An
employee will be subject to federal income tax on the award of restricted
stock when the restrictions imposed
28
lapse or the stock becomes transferable, unless the employee makes a Section
83(b) election to have the grant taxed as compensation income at fair market
value on the date of grant, with the result that any future appreciation (or
depreciation) in the value of the stock subject to the grant will be taxed as
capital gain (or loss) at the time the stock is sold. An employee who is
eligible to receive incentive stock if performance goals are met will not
incur federal income tax until the incentive stock is received.
Upon exercise of a nonstatutory stock option or a stock appreciation right,
an employee generally will recognize compensation income, which is subject to
income tax withholding by the company, equal to the difference between the
fair market value of the common stock on the date of the exercise and the
purchase price. An employee who has received shares of restricted stock will
include in his gross income as compensation income an amount equal to the fair
market value of the shares of restricted stock at the time the restrictions
lapse or the stock becomes transferable. An employee who receives shares of
incentive stock will include in his gross income as compensation income an
amount equal to the fair market value of the shares of incentive stock on the
date of transfer to the employee. Generally, such amounts will be included in
income in the tax year in which such event occurs, but special tax rules may
apply in the case of a director or officer that would defer recognition of
income until the restricted stock or incentive stock could be sold by such
person without incurring a liability under Section 16 of the Securities
Exchange Act. The compensation income recognized by the employee will be
subject to income tax withholding by the company.
When an employee exercises an incentive stock option, he generally will not
recognize income subject to tax, unless the employee is subject to the
alternative minimum tax.
An employee may deliver shares of common stock instead of cash to acquire
shares under an incentive stock option or nonstatutory stock option, without
having to recognize taxable gain (except in some cases with respect to
"statutory option stock") on any appreciation in value of the shares
delivered. However, if an employee delivers shares of "statutory option stock"
in satisfaction of all, or any part, of the exercise price under an incentive
stock option, and if the applicable holding periods for the "statutory option
stock" have not been met, he will be considered to have made a taxable
disposition of the "statutory option stock". "Statutory option stock" is stock
acquired upon the exercise of incentive stock options.
Assuming that the recipient's compensation is otherwise reasonable and that
the new statutory limitations on compensation deductions by publicly held
companies (as discussed below) imposed by Section 162(m) of the Internal
Revenue Code do not apply, the company usually will be entitled to a business
expense deduction at the time and in the amount that the recipient of an
incentive award recognizes ordinary compensation income in connection
therewith. As stated above, this usually occurs upon exercise of nonstatutory
options and stock appreciation rights or when restrictions imposed upon
restricted stock lapse or upon the receipt of incentive stock. Generally, in
these instances the deduction is contingent upon the company meeting tax
reporting requirements with respect to employees; however, the tax laws
referred to above now impose a $1 million limitation on the amount of the
annual compensation deduction allowable to a publicly-held company in respect
of each of its chief executive officer and its four most highly paid executive
officers other than the chief executive officer. An exception is provided for
certain performance-based compensation if statutory provisions pertaining to
stockholder approval (and related disclosure) and outside director
requirements are satisfied.
The Stock Incentive Plan is designed to comply with the statutory provisions
so that compensation income recognized upon the exercise of a nonstatutory
option or a stock appreciation right will be performance-based.
No deduction is allowed in connection with an incentive stock option, unless
the employee disposes of common stock received upon exercise in violation of
the holding period requirements.
This summary of federal income tax consequences of nonstatutory stock
options, incentive stock options, stock appreciation rights, restricted stock
and incentive stock does not purport to be complete. There may also be state
and local income taxes applicable to these transactions. The plan document for
the Stock Incentive Plan, as amended, is incorporated by reference to Exhibit
10.9 of the Capital One Financial Corporation Form 10-K for the year ended
December 31, 1996.
29
REVOCABLE PROXY
CAPITAL ONE FINANCIAL CORPORATION
Annual Meeting of Stockholders--April 23, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY
The undersigned hereby appoints Richard D. Fairbank and John G. Finneran,
Jr., and either of them, proxies of the undersigned, with full power of
substitution, to vote all the shares of Common Stock of Capital One Financial
Corporation, a Delaware corporation (the "Corporation"), held of record by the
undersigned on February 27, 1998, at the Annual Meeting of Stockholders to be
held April 23, 1998, and at any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED BY THE
UNDERSIGNED STOCKHOLDER. IF NO CHOICE IS SPECIFIED BY THE STOCKHOLDER, THIS
PROXY WILL BE VOTED "FOR" ALL PORTIONS OF ITEMS (1), (2) AND (3), AND IN THE
PROXIES' DISCRETION ON ANY OTHER MATTERS COMING BEFORE THE MEETING.
The undersigned hereby revokes any proxy or proxies heretofore given to
vote upon or act with respect to such stock and hereby ratifies and confirms all
that said proxies, their substitutes or any of them may lawfully do by virtue
hereof.
Nominees for the Election of Directors are:
1. W. Ronald Dietz 2. Nigel W. Morris
(Continued and to be dated and signed on reverse side)
- --------------------------------------------------------------------------------
Fold and Detach Here If You Are Returning Your Proxy Solicitation/Voting
Instruction Card By Mail
[X] Please mark your 2539
votes as in this
example.
- --------------------------------------------------------------------------------
Directors recommend a vote FOR Items 1, 2 and 3.
- --------------------------------------------------------------------------------
WITHHOLD
FOR AUTHORITY
1. Election of Directors [_] [_]
(All nominees listed on reverse side.)
To withhold authority to vote for any individual nominee, write such nominee's
name in the space provided below.
- ------------------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of Amendment to the 1994 [_] [_] [_]
Stock Incentive Plan.
FOR AGAINST ABSTAIN
3. Ratification of the selection of [_] [_] [_]
Ernst & Young LLP as independent
auditors of the Corporation for
1998.
4. In their discretion the proxies are
authorized to vote upon such other
matters as may come before the
meeting or any adjournment thereof.
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All as more particularly described in the Corporation's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 23, 1998, receipt of which is
hereby acknowledged.
Please date this Proxy Card and sign your name exactly as it appears hereon.
Where there is more than one owner, each should sign. When signing as an
attorney, administrator, executor, guardian or trustee, please add your title as
such. If executed by a corporation, this Proxy Card should be signed by a duly
authorized officer indicating such officer's authority. If executed by a
partnership, please sign in partnership name by authorized persons indicating
such authority.
SIGNATURE (S) DATE
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Fold And Detach Here If You Are Returning Your Proxy Solicitation/Voting
Instruction Card By Mail
CAPITAL ONE FINANCIAL CORPORATION
Annual Meeting
of Stockholders
Thursday, April 23, 1998
10:00 a.m.
Fairview Park Marriott Hotel
3111 Fairview Park Drive
Falls Church, VA 22042-4525
You may vote by telephone. Voting by telephone will eliminate the need to mail
voted cards. To vote by phone please follow the steps below:
1) Have this card and your social security number available.
2) Using a touch-tone telephone, dial 1-800-OK2-VOTE (1-800-652-8683)
The telephone voting system preserves the confidentiality of your vote and will
confirm your voting instructions with you during the call. You may also change
your selections on any or all of the proposals to be voted.
YOUR VOTE IS IMPORTANT TO US. THANK YOU FOR VOTING.
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