<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
INNES STREET FINANCIAL CORP.
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
<PAGE>
Innes Street Financial Corporation
==================================
401 West Innes Street
P.O. Box 1929
Salisbury, North Carolina 28145
(704) 633-2341
----------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Date: February 5, 2001
Time: 10:00 a.m.
Place: Holiday Inn of Salisbury
520 South Jake Alexander Boulevard
Salisbury, North Carolina 28147
Matters to be Voted on at the Annual Meeting:
o Election of seven directors for one-year terms
o Ratification of appointment of Ernst & Young, LLP as our independent
auditor for the fiscal year ending September 30, 2001
o Any other matters that may properly be brought before the Annual Meeting
The Board of Directors of Innes Street Financial Corporation has
established December 15, 2000 as the record date for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting and at any
adjournments thereof. In the event there are not sufficient shares present in
person or by proxy to constitute a quorum at the time of the Annual Meeting, the
Annual Meeting may be adjourned in order to permit further solicitation of
proxies by the Company.
By Order of the Board of Directors
/s/ Ralphelle S. Butler
Ralphelle S. Butler
Secretary
Salisbury, North Carolina
January 5, 2001
A form of proxy is enclosed to enable you to vote your shares at the Annual
Meeting. You are urged, regardless of the number of shares you hold, to
complete, sign, date and return the proxy promptly. A return envelope, which
requires no postage if mailed in the United States, is enclosed for your
convenience.
The Proxy Statement provides detailed information about the proposed
matters under consideration. We encourage you to read it carefully.
<PAGE>
Innes Street Financial Corporation
==================================
PROXY STATEMENT
2001 ANNUAL MEETING OF STOCKHOLDERS
February 5, 2001
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
General
"We," "our," "Innes Street," and "the Company" each refers to Innes
Street Financial Corporation. "Citizens" and "the Bank" each refers to Citizens
Bank, FSB, the Company's wholly owned federally chartered stock savings bank.
These proxy materials are delivered in connection with the solicitation by Innes
Street's Board of Directors of proxies to be voted at the 2001 Annual Meeting of
Stockholders and at any adjournment or postponement. You are invited to attend
our Annual Meeting on February 5, 2001, at 10:00 a.m., Eastern Time, at the
Holiday Inn of Salisbury at 520 South Jake Alexander Boulevard, Salisbury, North
Carolina. The Company's telephone number is (704) 633-2341.
Proxy Statements are being mailed to stockholders beginning January 5,
2001.
Revocability of Proxy
A proxy may be revoked at any time before its exercise by (1) written
notice to the Secretary of the Company, (2) timely delivery of a valid
later-dated proxy or (3) voting by ballot at the Annual Meeting. However, if you
are a beneficial owner of shares of the Company's outstanding common stock that
are not registered in your own name, you will need appropriate documentation
from the holder of record of your shares to vote personally at the Annual
Meeting.
Solicitation
The Company will pay the expenses of soliciting proxies. Proxies may be
solicited on our behalf by the Company's and the Bank's directors, officers and
regular employees in person or by telephone, facsimile transmission or by
telegram. We have requested brokerage houses and nominees to forward these proxy
materials to the beneficial owners of shares held of record and, upon request,
we will reimburse them for their reasonable out-of-pocket expenses.
Voting at the Annual Meeting
Regardless of how many shares of common stock you own, your vote is
important to us. Since many of our stockholders cannot attend the Annual
Meeting, it is necessary that a large number be represented by proxy.
Accordingly, the Board of Directors has designated proxy holders to represent
those stockholders who cannot be present in person.
You are requested to vote by mail by completing, signing, dating and
returning the enclosed proxy in the postage-paid envelope provided by the
Company. You may vote for, against, or withhold authority to vote on any matter
to come before the Annual Meeting. The designated proxy holders will vote your
shares in accordance with your instructions. If you sign and return a proxy card
without giving specific voting instructions, your shares will be voted as
follows:
1
<PAGE>
o FOR the nominees for election to the Board of Directors named in
this Proxy Statement
o FOR ratification of the selection of Ernst & Young, LLP as the
Company's independent auditors for the fiscal year ending
September 30, 2001
If instructions are given with respect to some but not all proposals,
the proxy holders will follow the instructions given and will vote FOR the
proposals on which no instructions are given. If matters not described in this
Proxy Statement are presented at the meeting, the proxy holders will use their
own judgment to determine how to vote your shares. Currently, we are not aware
of any other matters to be presented except those described in the Proxy
Statement. If the Annual Meeting is adjourned, your common stock may be voted by
the proxies on the new meeting date as well, unless you have revoked your proxy
instructions.
You are entitled to vote your common stock if our records showed that
you held your shares as of December 15, 2000 (the "Record Date"). At the close
of business on December 15, 2000, a total of 1,974,325 shares of common stock of
the Company were outstanding and entitled to vote. Each share of common stock
has one vote on each matter calling for a vote of stockholders at the Annual
Meeting.
The presence, in person or by proxy, of the holders of a majority of
the votes entitled to be cast by the stockholders entitled to vote at the Annual
Meeting is necessary to constitute a quorum. The Annual Meeting may be adjourned
in order to permit the further solicitation of proxies if there is an
insufficient number of stockholders present to constitute a quorum.
Vote Required for Approval
A plurality of the votes cast is required for the election of
directors. As a result, those persons nominated for election as directors who
receive the largest number of votes will be elected directors. The affirmative
vote of a majority of the votes cast is required to ratify the appointment of
Ernst & Young, LLP.
Absentions and broker "non-votes" are not counted as votes cast and,
therefore, will have no effect on the vote for any proposal. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting power
for that particular item and has not received instructions from the beneficial
owner.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Securities Exchange Act of 1934, as amended ("the Exchange Act"),
requires that any person who acquires the beneficial ownership of more than 5%
of the common stock of the Company notify the Securities and Exchange Commission
("the SEC"), and the Company. Following is certain information, as of the Record
Date, regarding all persons or "groups," as defined in the Exchange Act, who
held of record or who are known to the Company to own beneficially more than 5%
of the Company's common stock.
Amount and
Nature of Percentage
Beneficial of
Name and Address Ownership(1) Class(2)
---------------- ------------ ----------
Gordon P. Hurley 383,960(3,4,5) 18.54%
24 Pine Tree Road
Salisbury, NC 28144
Harold C. Earnhardt 367,903(3,4,6) 17.76%
210 North Hambley Street
Rockwell, NC 28138
James W. Duke 279,932(3,7) 13.52%
P.O. Box 373
Salisbury, NC 27145-0373
------------------------------------
(1) Unless otherwise noted, all shares are owned directly or indirectly by
the named individuals, by their spouses and minor children, or by other
entities controlled by the named individuals.
(2) Based upon a total of 1,974,325 shares of common stock outstanding at
the Record Date and 96,679 stock options that have vested or are
exercisable within 60 days under the Stock Option Plan.
(3) This number includes 244,150 shares of the Company's common stock
held by the Bank's employee stock ownership plan (the "ESOP").
Mr. Earnhardt, Mr. Duke and Mr. Hurley serve as trustees of the ESOP
and, as such, share certain voting and investment power of such shares.
(4) This number includes 71,939 shares of the Bank's common stock held by
the MRP Trust as of September 30, 2000. Mr. Earnhardt, Mr. Hurley
and Mr. Lomax serve as trustees of the MRP Trust and, as such, share
certain voting and investment power of such shares.
(5) This number also includes for Mr. Hurley 6,745 shares subject to
options which have vested or are exercisable within 60 days under the
Stock Option Plan.
(6) This number also includes for Mr. Earnhardt 6,745 shares subject to
options which have vested or are exercisable within 60 days under the
Stock Option Plan.
(7) This number also includes for Mr. Duke 6,745 shares subject to options
which have vested or are exercisable within 60 days under the Stock
Option Plan.
3
<PAGE>
Set forth below is certain information, as of the Record Date,
regarding those shares of common stock owned beneficially by each of the members
of the boards of directors of the Company and the Bank, each of the executive
officers of the Company and the Bank, and the directors and executive officers
of the Company and the Bank as a group.
<TABLE>
<CAPTION>
Amount and
Nature of Percentage
Beneficial of
Name and Address Ownership(1) Class(2)
---------------- ------------ ----------
<S> <C>
Ronald E. Bostian 99,145(6) 4.79%
Chairman, CEO and President
134 Glendower Drive
Salisbury, NC 28144
Harold C. Earnhardt 367,903(3,5,7) 17.76%
Vice Chairman
210 North Hambley Street
Rockwell, NC 28138
Malcolm B. Blankenship, Jr. 48,741(7) 2.35%
Director
2250 Godbey Road
Woodleaf, NC 27054
James W. Duke 279,932(3,7) 13.52%
Director
P.O. Box 373
Salisbury, NC 28145-0373
K. V. Epting, Jr. 19,234(7) 0.93%
Director
1908 Sherwood Street
Salisbury, NC 28144-6830
Gordon P. Hurley 383,960(3,5,7) 18.54%
Director
24 Pine Tree Road
Salisbury, NC 28144
Bobby A. Lomax 100,701(5,7) 4.86%
Director
1653 Wiltshire Road
Salisbury, NC 28144-2272
Jeffrey C. Chisholm 36,718(8) 1.77%
Senior Vice President/
Chief Lending Officer
30 Winchester Circle
Salisbury, NC 28144
Dianne E. Hawkins 27,651(8) 1.34%
Vice President, Treasurer and Controller
795 Lake Mist Drive
Stanley, NC 28164
Directors and Executive Officers as a Group 731,807(4) 35.34%
(9 persons)
</TABLE>
4
<PAGE>
------------------------------------
(1) Unless otherwise noted, all shares are owned directly or indirectly by
the named individuals, their spouses and minor children, or other
entities controlled by the named individuals.
(2) Based upon a total of 1,974,325 shares of common stock outstanding at
the Record Date and 96,679 stock options that have vested or are
exercisable within 60 days under the Stock Option Plan.
(3) Mr. Earnhardt, Mr. Duke and Mr. Hurley serve as trustees of the ESOP
which holds 244,150 shares of the Company's common stock. The
trustees of such plan share certain voting and investment power of
such shares.
(4) The 244,150 shares held by the ESOP for which the trustees share voting
and investment power, the 71,939 shares held by the MRP Trust as of
September 30, 2000 for which the MRP trustees share voting and
investment power, and the 96,679 shares underlying options that have
vested or are exercisable within 60 days under the Stock Option Plan
each have been included only once in the total number of shares owned
beneficially by the directors and executive officers as a group.
(5) Mr. Earnhardt, Mr. Hurley and Mr. Lomax serve as trustees of the MRP
Trust which holds 71,939 shares of the Bank's common stock as of
September 30, 2000. The trustees of such plan share certain voting and
investment power of such shares.
(6) This number includes 22,483 shares underlying options that have vested
or are exercisable within 60 days under the Stock Option Plan.
(7) This number includes 6,745 shares underlying options that have vested
or are exercisable within 60 days under the Stock Option Plan.
(8) This number includes 11,242 shares underlying options that have vested
or are exercisable within 60 days under the Stock Option Plan.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of the Company's
common stock, to file reports of ownership and changes in ownership with the
SEC. Executive officers, directors and greater than 10% beneficial owners are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Other than as noted below, based solely on a review of the copies of
such forms furnished to the Company and written representations from the
Company's executive officers and directors, the Company believes that during the
fiscal year ended September 30, 2000, all of its executive officers and
directors and greater than 10% beneficial owners complied with all applicable
Section 16(a) filing requirements. A Form 4 for each executive officer and
director was not filed at the time of the (i) granting of options to purchase
an aggregate of 62,954 shares of the Company's common stock on February 1,
2000 pursuant to the Stock Option Plan and (ii) award of an aggregate of 89,930
restricted shares of the Company's common stock on February 1, 2000 pursuant
to the Citizens Bank, FSB Management Recognition Plan and Trust. The
directors and executive officers at all times believed that they were in
compliance with the applicable law with respect to these transactions, and a
Form 4 for each of Malcolm B. Blankenship, Jr., Ronald E. Bostian, Jeffrey C.
Chisholm, James W. Duke, Harold C. Earnhardt, K. V. Epting, Jr., Dianne E.
Hawkins, Gordon P. Hurley, and Bobby A. Lomax, was filed as soon as they were
made aware of the filing requirement.
5
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
Nominees
The Articles of Incorporation of the Company provide that the number of
directors of the Company shall not be less than five (5) nor more than fifteen
(15), with the exact number within this range to be fixed from time to time by
the Board of Directors. The Board of Directors has currently fixed the size of
the Board at seven (7) members.
The Articles of Incorporation and Bylaws provide that at all times that
the number of directors is less than nine (9) each director is to be elected for
a term ending as of the next succeeding annual meeting of stockholders or until
his or her earlier death, resignation, retirement, removal or disqualification
or until his or her successor is elected and qualified.
The Board of Directors has nominated the seven (7) persons named below
for election as directors, to serve for the term specified, or until their
earlier death, resignation, retirement, removal or disqualification or until
their successors are elected and qualified. All nominees currently serve as
directors of the Company and the Bank.
The proxy holders named in the accompanying form of proxy intend to
vote any shares of common stock represented by valid proxies received by them to
elect these seven (7) nominees as directors for the term expiring at the 2002
annual meeting of stockholders, unless authority to vote is withheld or such
proxies are duly revoked. In the event that any of the nominees should become
unavailable to accept nomination or election, it is intended that the
proxyholders will vote to elect in his stead such other person as the present
Board of Directors may recommend or to reduce the number of directors to be
elected at the Annual Meeting by the number of such persons unable or unwilling
to serve (subject to the requirements of the Company's Articles of
Incorporation). The present Board of Directors has no reason to believe that any
of the nominees named herein will be unable to serve if elected to office. In
order to be elected as a director, a nominee need only receive a plurality of
the votes cast. As a result, those seven nominees who receive the largest number
of votes will be elected as directors of the Company until the next annual
meeting or until their successors are elected and qualified. Accordingly, shares
not voted for any reason with respect to any one or more nominees will not be
counted as votes against such nominees.
No stockholder has the right to vote his or her shares cumulatively in
the election of directors.
6
<PAGE>
The following table sets forth each nominee's name, age, principal
occupation during the last five years, the term for which he has been nominated,
and the year he was first elected as a director of the Bank. All of the nominees
currently serve, and have served since the Company's incorporation in July 1998,
as directors of the Company.
The Board of Directors recommends a vote FOR all of the nominees for election as
directors.
<TABLE>
<CAPTION>
Age at Existing Director
September 30, Principal Occupation Term of Bank
Name 2000 During Last Five Years Expires Since
---- ---- ---------------------- ------- -----
<S> <C>
Malcolm B. Blankenship, Jr. 53 Law Partner - Kluttz, Reamer, 2001 1991
Blankenship, Hayes & Randolph, L.L.P.
Ronald E. Bostian 62 President and Chief Executive 2001 1984
Officer of Citizens Bank and the
Company
James W. Duke 71 Retired manufacturer's 2001 1979
representative - M. W. Window Corp.
Harold C. Earnhardt 68 Retired General Officer of the North 2001 1984
Carolina Air National Guard
K. V. Epting, Jr. 70 Retired Executive Director of the 2001 1992
Salisbury-Rowan Chamber of Commerce
Gordon P. Hurley 62 President, Hurley Foundation 2001 1980
Bobby A. Lomax 72 Dentist 2001 1977
</TABLE>
Board of Directors of the Bank
The Bank also has a seven-member board of directors which is composed
of the same persons who are currently directors of the Company.
Meetings of the Board and Committees of the Board
During fiscal year 2000, the Board of Directors of the Company held
seventeen (17) meetings. All of the existing directors of the Company, including
the nominees for election listed above, attended at least 75% of the aggregate
number of meetings of the Board of Directors and committees of the Board on
which they served during the year ended September 30, 2000.
The Board of Directors of the Company has one standing committee--
the Audit Committee. The Audit Committee of the Board consists of Malcolm B.
Blankenship, Jr., James W. Duke, Harold C. Earnhardt, K. V. Epting, Jr.,
Gordon P. Hurley, and Bobby A. Lomax. These members are believed to be
independent as that term is defined in Rule 4200(a)(15) of the National
Association of Securities Dealers' listing standards. In accordance with its
written charter adopted by the Board of Directors on May 30, 2000, a copy of
which is attached as Appendix A, the Audit Committee meets on an as needed
basis and (i) oversees the independent auditing of the Company and the
Bank; (ii) arranges for periodic reports from the independent auditors,
from management of the Company and the Bank, and from the internal auditor of
the Company in order to assess the impact of significant regulatory and
accounting changes and developments; (iii) advises the Board of Directors
regarding significant accounting and regulatory developments; (iv) reviews
the Company's and the Bank's policies regarding compliance with laws and
regulations, conflicts of interest
7
<PAGE>
and employee misconduct and reviews situations related thereto; (v) develops and
implements the Company's and the Bank's policies regarding internal and external
auditing and appoints, meets with and oversees the performance of those employed
in connection therewith; and (vi) performs such other duties as may be assigned
to it by the Board of Directors. The Audit Committee met one (1) time during the
fiscal year ended September 30, 2000.
The Audit Committee reviewed and discussed with the independent
auditors all matters required by generally accepted auditing standards,
including those described in Statement on Auditing Standards No. 61, as amended,
and reviewed and discussed the audited financial statements of the Company, both
with and without management present. In addition, the Audit Committee obtained
from the independent auditors a formal written statement describing all
relationships between the auditors and the Company that might bear on the
auditors' independence consistent with Independence Standards Board Standard No.
1, "Independent Discussions with Audit Committees," and discussed with the
auditors any relationships that may impact their objectivity and independence
and satisfied itself as to the auditors' independence. Based upon the Audit
Committee's review and discussions with management and the independent auditors
referenced above, the Audit Committee recommended to the Board of Directors that
the Company's audited financial statements be included in its Annual Report on
Form 10-KSB for the fiscal year ended September 30, 2000, for filing with the
SEC. The Audit Committee also recommended reappointment, subject to shareholder
approval, of the independent auditors and the Board of Directors concurred in
such recommendation.
Malcolm B. Blankenship, Jr. James W. Duke
Harold C. Earnhardt K. V. Epting, Jr.
Gordon P. Hurley Bobby A. Lomax
In addition, the full Board of Directors acts as a nominating committee
each year prior to the annual meeting of stockholders to nominate persons for
election to the Board of Directors.
The Bank's board of directors has established one other standing
committee to which certain responsibilities have been delegated--an Audit
Committee. The members of the Company's Audit Committee also serve on the Bank's
Audit Committee. The Bank's Audit Committee met one (1) time during the fiscal
year ended September 30, 2000.
The Board of Directors of the Company does not have a compensation
committee. The Bank's full board of directors determines the compensation of the
executive officers of the Company and the Bank. The salaries of each of the
executive officers is determined based upon the executive officer's
contributions to the Bank's overall profitability, maintenance of regulatory
compliance standards, professional leadership, and management effectiveness in
meeting the needs of day-to-day operations. The Bank's board of directors also
compares the compensation of the Bank's executive officers with compensation
paid to executives of comparable financial institutions in North Carolina and
executives of other businesses in the Bank's market area. Mr. Bostian
participates in the deliberations of the Board of Directors regarding
compensation of executive officers other than himself. He does not participate
in the discussions or decisions regarding his own compensation.
Director Compensation
Directors' Fees. Members of the Company's Board of Directors receive
$200 for each monthly board meeting attended. All members of the Board of
Directors are also directors of the Bank and are compensated for that service.
For their service on the Bank's board of directors, each member of the board,
including Mr. Bostian, receives a monthly retainer of $700; $400 for each board
meeting attended and $200 for each committee meeting attended, if the committee
meeting is scheduled on a day different from the regularly scheduled board
meeting.
Directors Deferred Compensation Plan. The Bank maintains two
non-qualified deferred compensation plans for all of its directors, a
diversified plan and a nondiversified plan. Under each of the plans, each
director may elect to defer a portion or all of his director's fees to the plans
each year. Directors are fully vested in all amounts they contribute to the
plans.
Benefits under the plans are payable in the event of the director's
retirement, death, disability, or termination of service, in a lump sum.
8
<PAGE>
Installment payments are available to a retiring director if so elected by the
director at the time of his initial deferral election. If the director dies
before receiving all of his accrued benefit under the plans, his beneficiary
will receive the remaining benefits due him under the plans in a lump sum.
Effective June 30, 1998, the Bank established two rabbi trusts for each
director to hold his accrued benefits under each of the plans.
Stock Option Plan and Management Recognition Plan and Trust. Members of
the Board of Directors participate in the Innes Street Financial Corporation
Stock Option Plan (the "Stock Option Plan" or the "Plan") and the Citizens
Savings Bank, FSB Management Recognition Plan and Trust (the "MRP"), each of
which were adopted by the stockholders on February 1, 2000. Each of these plans
are discussed more fully below in the discussion entitled "Executive
Compensation-Stock Option Plan" and "Executive Compensation-Management
Recognition Plan and Trust."
Executive Officers
The following table presents certain information with respect to the
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age at September 30, 2000 Position Held With the Company
---- ------------------------- ------------------------------
<S> <C>
Ronald E. Bostian 62 President and Chief Executive Officer
Dianne E. Hawkins 37 Treasurer and Controller
Ralphelle S. Butler 52 Secretary
</TABLE>
The following table presents certain information with respect to the
executive officers of the Bank:
<TABLE>
<CAPTION>
Age at Positions and Occupations Employed By
Name September 30, 2000 During Last Five Years the Bank Since
---- ------------------ ------------------------- --------------
<S> <C>
Ronald E. Bostian 62 Chairman, President and Chief 1990
Executive Officer
Jeffrey C. Chisholm 44 Senior Vice President and Chief 1991
Lending Officer
Dianne E. Hawkins 37 Vice President, Treasurer and 1991
Controller
</TABLE>
9
<PAGE>
Executive Compensation
The following table sets forth for the fiscal years ended September 30,
1998, 1999 and 2000 certain information as to the cash compensation earned by
Ronald E. Bostian, the President and Chief Executive Officer of the Company and
the Bank, Jeffrey C. Chisholm, the Senior Vice President and Chief Lending
Officer of the Bank, and Dianne E. Hawkins, the Vice President, Treasurer and
Controller of the Company and the Treasurer and Controller of the Bank. No other
executive officers of the Company or the Bank received cash compensation
exceeding $100,000 for services in all capacities.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------------------------------
Securities Underlying
Options/Stock
Name and Restricted Appreciation Rights
Other Annual Stock ("SARs") (in All Other
Principal Position Year Salary Bonus Compensation(7) Awards shares) Compensation(14)
------------------ ---- ------ ----- --------------- ---------- --------------------- ----------------
<S> <C>
Ronald E. Bostian 2000 $162,929(1) $81,774(4) -- $187,044(8) 44,965/44,965(11) $15,913.75(15)
President, Chief Executive
Officer and Chairman 1999 $163,329(2) $35,000 -- -- -- $10,885
1998 $164,129(3) $14,000 -- -- -- $2,213
Jeff C. Chisholm 2000 $100,943 $29,237(5) -- $116,896(9) 22,482/22,482(12) $9,429.30(16)
Sr. Vice President
Chief Lending Officer 1999 $97,830 -- -- -- -- $ 5,843
1998 $94,071 -- -- -- -- $1,432
Dianne E. Hawkins 2000 $74,100 $29,237(6) -- 116,896(1) 22,482/22,482(13) $7,818.30(17)
Vice President,
Treasurer and Controller 1999 69,300 4,000 -- -- -- $4,398
1998 $64,420 -- -- -- -- $999
</TABLE>
--------------------
(1) Includes $12,700 in Citizens Bank directors' fees and $2,700 in Innes
Street directors' fees paid to Mr. Bostian in the fiscal year ended
September 30, 2000.
(2) Includes $14,000 in Citizens Bank directors' fees and $1,800 in Innes
Street directors' fees paid to Mr. Bostian in the fiscal year ended
September 30, 1999.
(3) Includes $16,600 in Citizens Bank directors' fees paid to Mr. Bostian
in the fiscal year ended September 30, 1998.
(4) Includes a $35,000 discretionary bonus paid under Mr. Bostian's
employment agreement with the Bank. This amount also includes a stock
award made to Mr. Bostian pursuant to the MRP of 3,598 shares of the
common stock that vested immediately upon grant. Such shares had an
aggregate fair market value of $46,774 on the date of grant. See
footnote 8 below for more information on the stock grant awards made to
Mr. Bostian and "Management Recognition Plan and Trust" for more
information about the terms of the MRP.
(5) This amount also includes a stock award made to Mr. Chisholm pursuant
to the MRP of 1,799 shares of the common stock that vested immediately
upon grant. Such shares had an aggregate fair market value of $29,237
on the date of grant. See footnote 9 below for more information on the
stock grant awards made to Mr. Chisholm and "Management Recognition
Plan and Trust" for more information about the terms of the MRP.
10
<PAGE>
(6) This amount also includes a stock award made to Ms. Hawkins pursuant to
the MRP of 1,799 shares of the common stock that vested immediately
upon grant. Such shares had an aggregate fair market value of $29,237
on the date of grant. See footnote 10 below for more information on the
stock grant awards made to Ms. Hawkins and "Management Recognition Plan
and Trust" for more information about the terms of the MRP.
(7) Under the "Other Annual Compensation" category, perquisites for the
fiscal year ended September 30, 2000 did not exceed the lesser of
$50,000, or 10% of salary and bonus.
(8) This amount represents the fair market value on the date of grant of
14,388 unvested shares awarded to Mr. Bostian pursuant to the MRP. On
February 1, 2000, Mr. Bostian was awarded 17,986 shares of the
Company's common stock at a fair market value of $13.00 on the date of
grant. On September 30, 2000, the fair market value per share was
$11.1875, for an aggregate value of $201,218. Twenty percent of the
shares vested immediately (the value of the vested shares ($46,774) is
included under the bonus category herein). The remaining 80% of the
shares will vest 20% each year thereafter until all such shares are
vested on February 1, 2004. Mr. Bostian's unvested shares are being
held in the MRP Trust. All dividends paid on unvested shares are held
by the trustees for Mr. Bostian's benefit and such dividends, with any
interest earned, will be paid to Mr. Bostian after the shares vest.
(9) This amount represents the fair market value on the date of grant of
8,992 unvested shares awarded to Mr. Chisholm pursuant to the MRP. On
February 1, 2000, Mr. Chisholm was awarded 11,241 shares of the
Company's common stock at a fair market value of $13.00 on the date of
grant. On September 30, 2000, the fair market value per share was
$11.1875, for an aggregate value of $125,759. Twenty percent of the
shares vested immediately (the value of the vested shares ($29,237) is
included under the bonus category herein). The remaining 80% of the
shares will vest 20% each year thereafter until all such shares are
vested on February 1, 2004. Mr. Chisholm's unvested shares are being
held in the MRP Trust. All dividends paid on unvested shares are held
by the trustees for Mr. Chisholm's benefit and such dividends, with any
interest earned, will be paid to Mr. Chisholm after the shares vest.
(10) This amount represents the fair market value on the date of grant of
8,992 unvested shares awarded to Ms. Hawkins pursuant to the MRP. On
February 1, 2000, Ms. Hawkins was awarded 11,241 shares of the
Company's common stock at a fair market value of $13.00 on the date of
grant. On September 30, 2000, the fair market value per share was
$11.1875, for an aggregate value of $125,759. Twenty percent of the
shares vested immediately (the value of the vested shares ($29,237) is
included under the bonus category herein). The remaining 80% of the
shares will vest 20% each year thereafter until all such shares are
vested on February 1, 2004. Ms. Hawkins' unvested shares are being held
in the MRP Trust. All dividends paid on unvested shares are held by the
trustees for Ms. Hawkins' benefit and such dividends, with any interest
earned, will be paid to Ms. Hawkins after the shares vest.
(11) These options, granted pursuant to the Company's Stock Option Plan,
entitled Mr. Bostian to purchase, at any time after vesting and before
February 1, 2010, shares of the common stock in exchange for an
exercise price of $13.00 per share, which was the fair market value of
the shares on the date of grant. On July 3, 2000, the Company paid a
cash dividend which was characterized as a return of capital to its
stockholders. The Stock Option Plan provides that the option exercise
price may be adjusted under certain circumstances, including the
payment of a special cash dividend. On July 3, 2000, the Board of
Directors of the Company through the Stock Option Plan Committee and
pursuant to and in accordance with Section 16(a) of the Stock Option
Plan adjusted the exercise price of the options to $9.28 per share in
order to reflect the effect of the cash dividend paid by the Company on
July 3, 2000 on the fair market value of a share of common stock.
Therefore, Mr. Bostian currently is entitled to purchase, at any time
after vesting and before February 1, 2010, 44,965 shares of the common
stock in exchange for an adjusted exercise price of $9.28 per shares.
These shares vested 25% on February 1, 2000 and will vest 25% each year
thereafter until all such options are vested on February 1, 2003.
Options become 100% vested upon death, disability, or retirement as
defined in the Stock Option Plan. See "Stock Option Plan" and the
accompanying tables for more information about the terms of the Stock
Option Plan.
(12) These options, granted pursuant to the Company's Stock Option Plan,
entitled Mr. Chisholm to purchase, at any time after vesting and before
February 1, 2010, shares of the common stock in exchange for an
exercise price of $13.00 per share, which was the fair market value of
the shares on the date of grant. On July 3, 2000, the Company paid a
cash dividend which was characterized as a return of capital to its
stockholders. The Stock Option Plan provides that the option exercise
price may be adjusted under certain circumstances, including the
payment of a special cash dividend. On July 3, 2000, the Board of
Directors of the Company through the Stock Option Plan Committee and
pursuant to and in accordance with Section 16(a) of the Stock Option
Plan adjusted the exercise price of the options to $9.28 per share in
order to reflect the effect of the cash dividend paid by the Company on
July 3, 2000 on the fair market value of a share of common stock.
Therefore, Mr. Chisholm currently is entitled to purchase, at any time
after vesting and before February 1, 2010, 22,482 shares of the common
stock in exchange for an adjusted exercise price of $9.28 per shares.
These shares vested 25% on February 1, 2000 and will vest 25% each year
thereafter until all such options are vested on February 1, 2003.
Options become 100% vested upon death, disability, or retirement as
defined in the Stock Option Plan. See "Stock Option Plan" and the
accompanying tables for more information about the terms of the Stock
Option Plan.
(13) These options, granted pursuant to the Company's Stock Option Plan,
entitled Ms. Hawkins to purchase, at any time after vesting and before
February 1, 2010, shares of the common stock in exchange for an
exercise price of $13.00 per share, which was the fair market value of
the shares on the date of grant. On July 3, 2000, the Company paid a
cash dividend which was characterized as a return of capital to its
stockholders. The Stock Option Plan provides that the option exercise
price may be adjusted under certain circumstances, including the
payment of a special cash dividend. On July 3, 2000, the Board of
Directors of the Company through the Stock Option Plan Committee and
pursuant to and in accordance with Section 16(a) of the Stock Option
Plan adjusted the exercise price of the options to $9.28 per share in
order to reflect the effect of the cash dividend paid by the Company on
July 3, 2000 on the fair market value of a share of common stock.
Therefore, Ms. Hawkins currently is entitled to purchase, at any time
after vesting and before February 1, 2010, 22,482 shares of the common
stock in exchange for an adjusted exercise price of $9.28 per shares.
11
<PAGE>
These shares vested 25% on February 1, 2000 and will vest 25% each year
thereafter until all such options are vested on February 1, 2003.
Options become 100% vested upon death, disability, or retirement as
defined in the Stock Option Plan. See "Stock Option Plan" and the
accompanying tables for more information about the terms of the Stock
Option Plan.
(14) Unless otherwise noted below, "All Other Compensation" consists of
contributions made by the Bank to the Bank's 401(k) plan for the
benefit of the designated officer during the respective fiscal year.
(15) In addition to contributions made by the Bank to the Bank's 401(k) plan
for the benefit of Mr. Bostian during the fiscal year ended September
30, 2000, this number includes the aggregate amount of $6,744.75 paid
by the Bank as cash dividend payments to Mr. Bostian as the holder of
44,965 options held at the times such dividends were paid with respect
to the Company's common stock.
(16) In addition to contributions made by the Bank to the Bank's 401(k) plan
for the benefit of Mr. Chisholm during the fiscal year ended September
30, 2000, this number includes the aggregate amount of $3,372.30 paid
by the Bank as cash dividend payments to Mr. Chisholm as the holder of
22,482 options held at the times such dividends were paid with respect
to the Company's common stock.
(17) In addition to contributions made by the Bank to the Bank's 401(k) plan
for the benefit of Ms. Hawkins during the fiscal year ended September
30, 2000, this number includes the aggregate amount of $3,372.30 paid
by the Bank as cash dividend payments to Ms. Hawkins as the holder of
22,482 options held at the times such dividends were paid with respect
to the Company's common stock.
12
<PAGE>
Bonus Compensation
All employees, except Mr. Bostian, receive annual discretionary holiday
bonuses, which during fiscal year 2000 totaled $18,120 in the aggregate. The
Bank anticipates that discretionary bonuses will continue to be paid to its
employees in the future. However, as is the case with the Bank's compensation
arrangements in general, the Bank's bonus compensation is subject to regulatory
oversight and, therefore, could be changed in the future in response to
regulatory requirements or otherwise.
401(k) Retirement Plan
The Bank implemented a contributory savings plan for its employees
which meets the requirements of Section 401(k) of the Internal Revenue Code of
1986, as amended ("the Code"), effective July 1, 1998. All employees who are at
least 21 years of age and who will work at least 1,000 hours annually are
eligible to participate in the plan on the first day of the month coinciding
with or following the initiation of their employment, as applicable. Eligible
employees may elect to contribute a percentage of their compensation to the plan
each year, subject to certain maximums imposed by federal law. The Bank will
match 50% of each participant's contribution, up to a maximum employer
contribution of 3% of the participant's compensation. The Bank also intends to
make discretionary contributions to the plan, expected to be equal to
approximately 3% of each participant's compensation each year.
Participants are fully vested in amounts they contribute to the plan
and are fully vested in amounts contributed to the plan on their behalf by the
Bank as employer matching contributions and as profit sharing contributions
after one year of service.
Benefits under the plan are payable in the event of the participant's
retirement, death, disability, or termination of employment. Normal retirement
age under the plan is 65 years of age. The plan does not have an early
retirement provision.
Deferred Compensation Plan for Officers
The Bank maintains two non-qualified deferred compensation plans, a
diversified plan and a nondiversified plan, for certain officers of the Bank.
Eligible officers selected by the Bank's board of directors may elect to
contribute a percentage of their compensation to each of the plans each year.
The Bank may make supplemental contributions to the plans as well, in amounts
determined by the board of directors each year. To date, the Bank has made no
such supplemental contributions. Participants are fully vested in all amounts
contributed to the plans by them or on their behalf. Currently, four management
officers participate in the plans.
Benefits under the plans are payable in the event of the participant's
retirement, death, disability, or termination of employment, in a lump sum or in
installments if so elected by the participant at the time of his initial salary
reduction election. If the participant dies before receiving all of his accrued
benefit under the plans, his beneficiary will receive the remaining benefits due
him under the plans. Normal retirement age under the plans is 65 years of age.
Effective June 30, 1998, the Bank established two rabbi trusts for each
participant to hold the participant's accrued benefit under each of the plans.
Stock Option Plan. On February 1, 2000, the stockholders of the Company
approved the Innes Street Financial Corporation Stock Option Plan. The Company
has reserved 224,825 shares of its common stock for issuance upon the exercise
of options that have been granted under the Stock Option Plan. All directors,
officers, and employees of the Company, the Bank and any subsidiaries are
eligible for participation in the Plan.
The Stock Option Plan is administered by a committee of the Company's
Board of Directors (the "Stock Option Plan Committee"). The Stock Option Plan
Committee, in its sole discretion, determines who will participate in the Stock
Option Plan. Options granted pursuant to the Stock Option Plan vest in
accordance with each optionee's Stock Option and Grant Agreement executed by
each optionee and the Company. Unless the Stock Option Plan Committee
specifically states otherwise at the time an option is granted, options become
100% vested upon death, disability, or termination of employment because of
death, disability, or retirement or upon a change in control, as provided in the
13
<PAGE>
Stock Option Plan. Unvested options may not vest after a participant's
employment with the Company, the Bank or any subsidiary is terminated for any
reason other than the participant's death, disability or retirement.
On February 1, 2000, the Stock Option Plan Committee granted options to
purchase 152,881 shares of the Company's common stock to eligible participants
of the Plan. No cash consideration was paid for the options. The awarded options
had an exercise price of $13.00, the fair market value of the common stock on
the date of grant. On July 3, 2000, the Company paid a special cash dividend
which was characterized as a return of capital to its stockholders ("return of
capital"). The Stock Option Plan provides that the option exercise price may be
adjusted under certain circumstances, including the payment of a special cash
dividend. On July 3, 2000, the Board of Directors of the Company through the
Stock Option Plan Committee and pursuant to and in accordance with Section 16(a)
of the Stock Option Plan adjusted the exercise price of the options to $9.28 per
share in order to reflect the effect of the special cash dividend paid by the
Company on July 3, 2000 on the fair market value of a share of the Company's
common stock. Therefore, the current exercise price of the options awarded is
$9.28 per share. The exercise price may be paid either in cash, by check, bank
draft or money order or, if permitted by the Committee, by delivering shares of
common stock (including shares acquired pursuant to the exercise of an option)
with a fair market value equal to the exercise price. Options granted under the
Stock Option Plan have a term of ten (10) years and are not transferrable except
upon death.
Twenty-five percent (25%) of the options awarded to employees and
officers of the Bank and the Company vested immediately upon grant (February 1,
2000), with 25% vesting on each anniversary date thereafter, so that all options
awarded to such officers and employees will have vested no later than February
1, 2003. All stock options granted to non-employee members of the Board of
Directors vested immediately upon grant.
The following table provides certain information with respect to the
grant of stock options to certain executive officers made during fiscal year
ended September 30, 2000. No options were exercised by any of the following
persons during the fiscal year ended September 30, 2000.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------------------------------------------------------------------
Number of % of Total Exercise Adjusted
Securities Options/SARs or Base Exercise Price
Underlying Granted to Price on as of
Options/SARs Employees Date of Grant July 3, 2000 Expiration
Name Granted(1) in Fiscal Year ($/sh)(2) ($/sh)(3) Date
---- ------------ -------------- ------------- -------------- ----------
<S> <C>
Ronald E. Bostian 44,965/44,965 29.41%/29.41% $13.00 $9.28 February 1, 2010
Jeffrey C. Chisholm 22,482/22,482 14.71%/14.71% $13.00 $9.28 February 1, 2010
Dianne E. Hawkins 22,482/22,482 14.71%/14.71% $13.00 $9.28 February 1, 2010
</TABLE>
(1) Twenty-five percent (25%) of the options vested upon grant (February 1,
2000), and 25% will vest each year thereafter until all such options
are fully vested on February 1, 2003.
(2) Represents the closing selling price of the Company's common stock on
Nasdaq on the date of grant (February 1, 2000). See footnote 3 below
regarding the repricing of options during the fiscal year ended
September 30, 2000.
(3) Represents the exercise price per share of the Company's common stock
as adjusted by the Stock Option Plan Committee on July 3, 2000. On July
3, 2000, the Company paid a cash dividend which was characterized as a
return of capital to its stockholders. The Stock Option Plan provides
that the option exercise price may be adjusted under certain
circumstances, including the payment of a special cash dividend. On
July 3, 2000, the Board of Directors of the Company through the Stock
Option Plan Committee and pursuant to and in accordance with Section
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<PAGE>
16(a) of the Stock Option Plan adjusted the exercise price of the
options to $9.28 per share in order to reflect the effect of the cash
dividend paid by the Company on July 3, 2000 on the fair market value
of a share of the Company's common stock. Therefore, the current
exercise price of the options awarded is $9.28 per share.
No options were exercised by Mr. Bostian, Mr. Chisholm, and Ms. Hawkins
during the fiscal year ended September 30, 2000.
The following table also provides additional information with respect to
outstanding stock options held by certain executive officers at the fiscal year
ended September 30, 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised in-the-Money
Acquired Value Securities Underlying Options/SARs at
Name On Exercise Realized Options/SARs at FY-End(1) FY-End(2)
---- ----------- -------- -------------------------------- ---------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C>
Ronald E. Bostian 0 $ 0 11,242/11,242 33,724/33,724 $125,769.88 $377,287.25
Jeffrey C. Chisholm 0 $ 0 5,621/5,621 16,861/16,861 $62,884.94 $188,632.44
Dianne E. Hawkins 0 $ 0 5,621/5,621 16,861/16,861 $62,884.94 $188,632.44
</TABLE>
(1) All stock options were granted on February 1, 2000, and 25% were vested
immediately on that date. Stock options for 11,242 shares for
Mr. Bostian and 5,621 shares each for Mr. Chisholm and Ms. Hawkins
vested in the fiscal year ended September 30, 2000.
(2) Dollar amounts shown represent the value of stock options held as of
September 30, 2000. All of Mr. Bostian's, Mr. Chisholm's or Ms.
Hawkins options were "in-the-money" at such date. Options are
considered to be "in-the-money" if the fair market value of the
Company's common stock exceeds the exercise or base price of the
shares subject to the options at the fiscal year end (September 30,
2000). At September 30, 2000, the exercise price of the stock options
was $9.28, and the closing market price per share for the Common Stock
as reported by Nasdaq was $11.1875. On July 3, 2000, the Company paid
a special cash dividend which was characterized as a return of capital
to its stockholders ("return of capital"). The Stock Option Plan
provides that the option exercise price may be adjusted under certain
circumstances, including the payment of a special cash dividend. On
July 3, 2000, the Board of Directors of the Company through the Stock
Option Plan Committee and pursuant to and in accordance with Section
16(a) of the Stock Option Plan adjusted the exercise price of the
options to $9.28 per share in order to reflect the effect of the
special cash dividend paid by the Company on July 3, 2000 on the fair
market value of a share of the Company's common stock.
Options granted under the Stock Option Plan were granted in tandem with
stock appreciation rights, pursuant to which optionees have the right to
surrender exercisable options in exchange for payment by the Company of an
amount equal to the excess of the market value of shares of the common stock
subject to the surrendered options over the exercise price of the surrendered
options. In the discretion of the Stock Option Plan Committee, this payment may
be made in cash or in shares of common stock or in some combination of cash and
common stock. Stock appreciation rights will terminate upon exercise of the
options to which they are attached. Stock appreciation rights are subject to the
same vesting and termination provisions as are applicable to the stock options
to which they are attached.
Under the terms of the Stock Option Plan, the Board of Directors may
award eligible directors and employees cash payments at the time of payment of a
dividend or other distribution with respect to the common stock of the Company.
The cash payment will equal the dividend or distribution paid per share
multiplied by the number of shares of common stock subject to the non-forfeited,
unexercised options held by such optionee. During the fiscal year ended
September 30, 2000, the Board of Directors awarded cash payments to director and
employee option holders at the times dividends were paid with respect to the
common stock.
In the event of a stock split, reverse stock split or stock dividend,
the number of shares of common stock under the Stock Option Plan, the number of
15
<PAGE>
shares to which any option relates and the exercise price per share under any
option will be adjusted to reflect an increase or decrease in the total number
of shares of common stock outstanding. In addition, in the event the Company
declares a special cash dividend or return of capital, the per share exercise
price of all previously granted options which remain unexercised as of the date
of such declaration may be proportionately adjusted to give effect to a special
cash dividend or return of capital as of the date of payment of a special cash
dividend or return of capital, subject to certain limitations.
Management Recognition Plan and Trust. Pursuant to the Citizens Bank,
FSB Management Recognition Plan and Trust, 224,825 shares of the Company's
common stock have been reserved for issuance pursuant to the terms of the MRP.
The MRP is administered by a committee of the Bank's Board of Directors (see
"MRP Committee"). The Bank's Board of Directors appointed trustees of the trust
established pursuant to the MRP (the "MRP Trust"). The trustees have the
responsibility to invest all funds contributed by the Bank to the MRP Trust. All
directors and certain executive officers of the Bank are eligible for
participation in the MRP. The MRP Committee, in its sole discretion, determines
who will participate in the MRP.
At this time, nine (9) directors, officers and employees are eligible
to participate in the MRP. On February 1, 2000, the MRP Committee awarded a
total of 89,930 restricted shares of common stock to eligible participants and
the MRP Trust under the MRP. As of September 30, 2000 and the Record Date,
71,939 unvested shares remained held in the MRP. No cash consideration was paid
for the shares awarded, which had a market value of $13.00 per share at the time
of the award. Twenty percent (20%) of the shares which were vested immediately
upon grant (February 1, 2000), and twenty percent (20%) will vest on each
anniversary date thereafter, so that all shares currently awarded will have
vested no later than February 1, 2004. Grants of the common stock under the MRP
immediately vest upon the death, disability or termination of employment with or
service to the Company, the Bank or any subsidiary due to death or disability or
following a change of control of the Company or the Bank, as defined in the MRP.
Under the terms of the MRP, if a recipient terminates employment or service for
reasons other than death, or disability or following a change in control of the
Company or the Bank, the recipient will forfeit all rights to the allocated
shares which have not yet vested. The awards under the MRP are not forfeitable
upon vesting.
Shares awarded under the MRP are issued at no cost to the recipients.
Recipients are entitled to direct the MRP trustees with respect to the voting of
shares which have been awarded under the MRP and which are not yet vested or
distributed, subject to the rules and procedures adopted by the MRP Committee
for this purpose. Recipients are entitled to all voting and other stockholder
rights with respect to shares which have vested and been distributed to the
recipient under the MRP. However, until such stocks have vested, they will be
held in the MRP Trust. Such unvested shares may not be sold, pledged or
otherwise disposed of. In addition, any cash dividends or stock dividends
declared with respect to unvested share awards will be held by the MRP Trust for
the benefit of the recipients, and such dividends, plus any interest earned
thereon, will be paid out proportionately by the MRP Trust to the recipients as
soon as practicable after the stock awards become vested.
Employment Agreement
The Bank has entered into an employment agreement with Ronald E.
Bostian, President and Chief Executive Officer, in order to establish his duties
and compensation and to provide for his continued employment with the Bank. The
agreement provides for an initial term of employment of three (3) years.
Commencing on the first anniversary date and continuing on each anniversary date
thereafter, following an evaluation of Mr. Bostian's performance, the agreement
may be extended for an additional year so that the remaining term equals three
years, unless written notice of non-renewal is given by the board of directors.
The agreement also provides that Mr. Bostian's base salary will be reviewed by
the board of directors not less often than annually. In addition, the employment
agreement provides for possible profitability and discretionary bonuses and
participation in all other pension, profit-sharing or retirement plans
maintained by the Bank or the Company for employees of the Bank, as well as
fringe benefits normally associated with the employee's office. The employment
agreement provides that Mr. Bostian may be terminated by the Bank for "Just
Cause" as defined in the agreement, and that he may terminate his employment for
"Good Reason" as defined in the agreement.
16
<PAGE>
Severance Plan
The Bank's board of directors has adopted a Severance Plan for the
benefit of its employees. The Severance Plan provides that in the event there is
a "change in control" (as defined in the Severance Plan) of the Bank or the
Company and (i) the Bank or any successor of the Bank terminates the employment
of any full time employee of the Bank in connection with, or within 24 months
after the change in control, other than for "cause" (as defined in the Severance
Plan), or (ii) an employee terminates his or her employment with the Bank or any
successor following a decrease in the level of such employee's annual base
salary rate or a transfer of such employee to a location more than 40 miles
distant from the employee's primary work location within 24 months after a
change in control, the employee shall be entitled to a severance benefit equal
to the greater of (a) an amount equal to two weeks' salary at the employee's
existing salary rate multiplied times the employee's number of complete years of
service as a Bank employee or (b) the amount of one month's salary at the
employee's salary rate at the time of termination. Any officer of the Bank who,
at the time of a "change in control," is a party to an employment agreement is
not covered by the Severance Plan.
Employee Stock Ownership Plan
The Bank has established the ESOP for its eligible employees. Employees
who have completed one year of service with the Bank and who have attained age
21 are eligible to participate. The ESOP used funds borrowed from the Company to
purchase 179,860 shares of the Company's common stock, which serve as collateral
for the loan. It is expected that the loan will be repaid principally from the
Bank's discretionary contributions to the ESOP within 15 years. Regular cash
dividends, if any, paid on shares held by the ESOP may also be used to reduce
the loan. Shares purchased by the ESOP and pledged as security for the loan will
be held in a suspense account for allocation among participants as the loan is
repaid. Following receipt on unallocated shares under the ESOP of the $4.00 per
share return of capital paid on July 3, 2000, the ESOP purchased 59,333
additional shares of the Company's common stock to be allocated to ESOP
participants as provided below. As of September 30, 2000, the ESOP held 244,150
shares of the Company's common stock.
Contributions to the ESOP and shares released from the suspense account
in an amount proportional to the repayment of the ESOP loan will be allocated
among ESOP participants on the basis of relative compensation in the year of
allocation. Benefits will vest in full upon five years of service with credit
given for years of service prior to the Bank's conversion from mutual to stock
form of ownership. Benefits are payable upon death or disability. The Bank's
contributions to the ESOP are not fixed, so benefits payable and corresponding
expenses under the ESOP cannot be determined.
In connection with the establishment of the ESOP, the Board of
Directors appointed trustees for the ESOP. The Board of Directors may instruct
the trustees regarding investment of funds contributed to the ESOP.
Participating employees may instruct the trustees as to the voting of all shares
allocated to their respective accounts and held in the ESOP. The unallocated
shares held in the suspense account, and all allocated shares for which voting
instructions are not received, will be voted by the trustees in their discretion
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended.
PROPOSAL 2
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
Ernst & Young, LLP, the Company's independent auditor for the year
ended September 30, 2000, has been selected as the Company's independent auditor
for the 2001 fiscal year. Such selection is being submitted to the Company's
stockholders for ratification. A representative of Ernst & Young, LLP will
attend the Annual Meeting and will be afforded an opportunity to make a
statement, if he so desires, and to respond to appropriate questions from
stockholders.
The Board of Directors recommends that the stockholders vote FOR this
proposal.
17
<PAGE>
DATE FOR RECEIPT OF STOCKHOLDER PROPOSALS
It is presently anticipated that the 2002 Annual Meeting of
Stockholders will be held in February of 2002. If the meeting is held, in order
for stockholder proposals to be included in the proxy material for that meeting,
such proposals must be received by the Secretary of the Company at the Company's
principal executive office not later than September 1, 2001, and meet all other
applicable requirements for inclusion in the proxy materials.
In the alternative, if a stockholder follows the SEC's proxy
solicitation rules, the stockholder may commence his own proxy solicitation and
present a proposal from the floor at the 2002 annual meeting of stockholders of
the Company. In order to do so, the stockholder must notify the Secretary of the
Company in writing, at the Company's principal executive office no later than
November 21, 2001, of his proposal. If the stockholder does not notify the
Secretary of the Company by November 21, 2001, the Company may vote proxies
under the discretionary authority granted by the proxies solicited by the board
of directors for such annual meeting.
The Company's Bylaws provide that, in order to be eligible for
consideration at an annual meeting of stockholders, all nominations of
directors, other than those made by the Company's Board of Directors, must be
made in writing and must be delivered to the Secretary of the Company not less
than 30 days nor more than 50 days prior to the meeting at which such
nominations will be made; provided, however, if less than 21 days notice of the
meeting is given to stockholders, such nominations must be delivered to the
Secretary of the Company not later than the close of business on the seventh
(7th) day following the day on which the notice of meeting was mailed.
OTHER MATTERS
Management knows of no other matters to be presented for consideration
at the Annual Meeting or any adjournments thereof. If any other matters shall
properly come before the Annual Meeting, it is intended that the proxyholders
named in the enclosed form of proxy will vote the shares represented thereby in
accordance with their judgment, pursuant to the discretionary authority granted
therein.
MISCELLANEOUS
The Company's Annual Report for the year ended September 30, 2000,
which includes condensed consolidated financial statements audited and reported
upon by the Company's independent auditor, is being mailed along with this Proxy
Statement; however, it is not intended that the Annual Report be deemed a part
of this Proxy Statement or a solicitation of proxies.
THE FORM 10-KSB FILED BY THE COMPANY WITH THE SEC, INCLUDING THE
FINANCIAL STATEMENTS AND SCHEDULES THERETO, WILL BE PROVIDED FREE OF CHARGE TO
THE COMPANY'S STOCKHOLDERS UPON WRITTEN REQUEST DIRECTED TO: INNES STREET
FINANCIAL CORPORATION, P.O. BOX 1929, 401 WEST INNES STREET, SALISBURY, NORTH
CAROLINA 28145-1929, ATTENTION: RONALD E. BOSTIAN.
By Order of the Board of Directors
/s/ Ralphelle S. Butler
Ralphelle S. Butler, Secretary
Salisbury, North Carolina
January 5, 2001
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APPENDIX A
Audit Charter
Innes Street Financial Corporation
Salisbury, NC
ORGANIZATION
The Audit Committee of the Board of Directors of Innes Street Financial
Corporation (the "Company") shall be comprised of at least three directors who
are independent of management and the Company. Members of the Audit Committee
shall be considered independent if they have no relationship to the Company that
may interfere with the exercise of their independence from management and the
Company.
STATEMENT OF POLICY
The Audit Committee shall provide assistance to the directors in fulfilling
their responsibility to the shareholders, potential shareholders, and investment
community relating to corporate accounting, reporting practices of the Company,
and the quality and integrity of financial reports of the Company. In so doing,
it is the responsibility of the Audit Committee to maintain free and open
communication between the directors, the independent auditors, and the financial
management of the Company.
RESPONSIBILITIES
In carrying out its responsibilities, the Audit Committee believes its policies
and procedures should remain flexible, in order to best react to changing
conditions and to ensure to the directors and shareholders that the corporate
accounting and reporting practices of the Company are in accordance with all
requirements and are of the highest quality.
In carrying out these responsibilities, the Audit Committee will:
o Obtain the full board of directors' approval of this Charter and review and
reassess this Charter as conditions dictate (at least annually).
o Review and recommend to the directors the independent auditors to be
selected to audit the financial statements of the Company and its divisions
and subsidiaries.
o Have a clear understanding with the independent auditors that they are
ultimately accountable to the board of directors and the Audit Committee,
as the shareholders' representatives, who have the ultimate authority in
deciding to engage, evaluate, and if appropriate, terminate their services.
o Meet with the independent auditors and financial management of the Company
to review the scope of the proposed audit and timely quarterly reviews for
the current year and the procedures to be utilized, the adequacy of the
independent auditor's compensation, and at the conclusion thereof review
such audit or review, including any comments or recommendations of the
independent auditors.
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o Review with the independent auditors and financial and accounting
personnel, the adequacy and effectiveness of the accounting and financial
controls of the Company, and elicit any recommendations for the improvement
of such internal controls or particular areas where new or more detailed
controls or procedures are desirable. Particular emphasis should be given
to the adequacy of internal controls to expose any payments, transactions,
or procedures that might be deemed illegal or otherwise improper. Further,
the Committee periodically should review company policy statements to
determine their adherence to the code of conduct.
o Review reports received from regulators and other legal and regulatory
matters that may have a material effect on the financial statements or
related company compliance policies.
o Inquire of management and the independent auditors about significant risks
or exposures and assess the steps management has taken to minimize such
risks to the Company.
o Review the quarterly financial statements with financial management and the
independent auditors prior to the filing of the Form 10-Q (or prior to the
press release of results, if possible) to determine that the independent
auditors do not take exception to the disclosure and content of the
financial statements, and discuss any other matters required to be
communicated to the Committee by the auditors. The Chair of the Committee
may represent the entire Committee for purposes of this review.
o Review the financial statements contained in the annual report to
shareholders with management and the independent auditors to determine that
the independent auditors are satisfied with the disclosure and content of
the financial statements to be presented to the shareholders. Review with
financial management and the independent auditors the results of their
timely analysis of significant financial reporting issues and practices,
including changes in, or adoptions of, accounting principles and disclosure
practices, and discuss any other matters required to be communicated to the
Committee by the auditors. Also review with financial management and the
independent auditors their judgments about the quality, not just
acceptability, of accounting principles and the clarity of the financial
disclosure practices used or proposed to be used, and particularly, the
degree of aggressiveness or conservatism of the organization's accounting
principles and underlying estimates, and other significant decisions made
in preparing the financial statements.
o Provide sufficient opportunity for the independent auditors to meet with
the members of the Audit Committee without members of management present.
Among the items to be discussed in these meetings are the independent
auditors' evaluation of the Company's financial, accounting, and auditing
personnel, and the cooperation that the independent auditors received
during the course of the audit.
o Review accounting and financial human resources and succession planning
within the Company.
o Report the results of the annual audit to the board of directors. If
requested by the board, invite the independent auditors to attend the full
board of directors meeting to assist in reporting the results of the annual
audit or to answer other directors' questions (alternatively, the other
directors, particularly the other independent directors, may be invited to
attend the Audit Committee meeting during which the results of the annual
audit are reviewed).
o On an annual basis, obtain from the independent auditors a written
communication delineating all their relationships and professional services
as required by Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees. In addition, review with the independent
auditors
2
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the nature and scope of any disclosed relationships or professional
services and take, or recommend that the board of directors take,
appropriate action to ensure the continuing independence of the auditors.
o Review the report of the Audit Committee in the annual report to
shareholders and the Annual Report on Form 10-K disclosing whether or not
the Committee had reviewed and discussed with management and the
independent auditors, as well as discussed within the Committee (without
management or the independent auditors present), the financial statements
and the quality of accounting principles and significant judgments
affecting the financial statements. In addition, disclose the Committee's
conclusion on the fairness of presentation of the financial statements in
conformity with GAAP based on those discussions.
o Submit the minutes of all meetings of the Audit Committee to, or discuss
the matters discussed at each committee meeting with, the board of
directors.
o Investigate any matter brought to its attention within the scope of its
duties, with the power to retain outside counsel for this purpose if, in
its judgment, that is appropriate.
o Review the Company's disclosure in the proxy statement for its annual
meeting of shareholders that describes that the Committee has satisfied its
responsibilities under this Charter for the prior year. In addition,
include a copy of this Charter in the annual report to shareholders or the
proxy statement at least triennially or the year after any significant
amend to the Charter.
Adopted 05/30/00
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INNES STREET FINANCIAL CORPORATION
REVOCABLE PROXY
ANNUAL MEETING OF STOCKHOLDERS
February 5, 2001 10:00 a.m.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints the official proxy committee of Innes Street
Financial Corporation (the "Company") comprised of all of the members of the
Board of Directors of the Company, each with full power of substitution, to act
as attorneys and proxies for the undersigned, and to vote all shares of common
stock of the Company which the undersigned is entitled to vote only at the
Annual Meeting of Stockholders, to be held on February 5, 2001 at the Holiday
Inn of Salisbury, 520 South Jake Alexander Boulevard, Salisbury, North Carolina
at 10:00 a.m. and at any and all adjournments thereof, as follows:
1. The approval of the election of the following named directors:
Malcolm B. Blankenship, Jr., Ronald E. Bostian, James W. Duke, Harold C.
Earnhardt, K. V. Epting, Jr., Gordon P. Hurley and Bobby A. Lomax, who
will serve as directors until the 2002 Annual Meeting of Stockholders or
until their successors are duly elected and qualify.
For [_] Withhold [_] For All Except [_]
INSTRUCTION: To withhold authority to vote for any individual nominee,
mark "For All Except" and write that nominee's name in the space provided
below.
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2.The ratification of Ernst & Young LLP as the Company's independent
auditor.
For [_] Against [_] Abstain [_]
PLEASE CHECK BOX IF YOU PLAN TO ATTEND THE ANNUAL MEETING: [_]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS.
(Continued and to be signed on the other side)
<PAGE>
(Continued from other side)
If a proxy is returned and no instructions are given, the proxy will be voted
for the election of the proposed nominees and the ratification of the indepen-
dent auditor. If instructions are given with respect to one but not all propos-
als, (i) such instructions as are given will be followed and, (ii) the proxy
will be voted FOR any proposal for which no instructions are given. If any
other business that falls within the purposes set forth in the Notice of Annual
Meeting is presented at the Annual Meeting, this proxy shall be voted in accor-
dance with the proxy committee's best judgment.
Date ...............................
....................................
Stockholder sign above
....................................
Co-Holder (if any) sign above
The above signed acknowledges
receipt from the Company, prior to
the election of this Proxy, of a
Notice of Annual Meeting and a
Proxy Statement dated January 5,
2001. Please sign exactly as your
name appears hereon. When signing
as attorney, executor,
administrator, trustee or guardian,
please give your full title. If
shares are held jointly, each
holder may sign, but only one
signature is required.
PLEASE ACT PROMPTLY SIGN, DATE AND MAIL YOUR PROXY CARD TODAY
