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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:
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<S> <C>
/X/ Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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CARDINAL BANCSHARES, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / 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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CARDINAL BANCSHARES, INC.
400 EAST VINE STREET, SUITE 300
LEXINGTON, KENTUCKY 40507
September 16, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Cardinal Bancshares, Inc. ("Cardinal") to be held on Friday, October 11, 1996 at
10:00 a.m., local time at the main offices of The Vine Street Trust Company,
360 East Vine Street, Lexington, Kentucky (the "Special Meeting"). As
described in the enclosed Proxy Statement, Cardinal stockholders will be asked
at the Special Meeting, or any adjournments or postponements thereof, to
consider and vote on the following matters: (i) approval of an amendment to
Cardinal's 1992 Limited Stock Option Plan (the "TARSOP"); (ii) approval of an
amendment to Cardinal's 1989 Restricted Stock Option Plan (the "1989 RSOP", and
together with the TARSOP, the "Plans"); and (iii) any other business as may
properly come before the meeting. (The proposed amendments to the TARSOP and
the 1989 RSOP are referred to collectively herein as the "Amendments.")
As described in the accompanying Proxy Statement, the primary purposes of
the Amendments are to change the vesting and exercisability terms of options
previously granted to James S. Mahan, III, a director and executive officer of
Cardinal, and Robert F. Stockwell, an executive officer of Cardinal. The
Amendments have been proposed in order to fulfill the underlying purpose of the
Plans in light of the unusual circumstances of Messrs. Mahan's and Stockwell's
separation from Cardinal. On May 23, 1996, Cardinal effected the spin-off (the
"Spin-Off") to its stockholders of its then wholly-owned subsidiary, Security
First Network Bank ("SFNB"). In connection with the regulatory approvals of
the Spin-Off, Cardinal and SFNB were required to commit to the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") that
within 120 days of the Spin-Off, Cardinal and SFNB will terminate all
management and director interlocks. Each of Mr. Mahan and Mr. Stockwell have
management positions with SFNB as well as Cardinal. In order to terminate such
interlocks, Mr. Mahan (together with two other shared directors) will resign
his present positions as a director and executive officer of Cardinal, and Mr.
Stockwell will resign his present position as a management official of Cardinal
on or before September 20, 1996.
The proposed amendments to the TARSOP are intended to accelerate the
vesting and exercisability of the option granted as of October 24, 1992 to Mr.
Mahan for 66,666 shares of common stock, no par value per share, of Cardinal
(the "Stock") at $5.00 per share to January 1, 1997. The TARSOP Amendments
also revise the calculation of Cardinal's net income for purposes of
determining if Cardinal has achieved the earnings per share goal (which is a
condition to the options thereunder being exercisable under certain
circumstances), to eliminate the effect of the Amendments (which, if approved,
will require a non-cash charge to earnings) and to eliminate the effect of any
one-time special assessment to recapitalize the Savings Association Insurance
Fund which may be imposed in 1996. The proposed Amendments to the 1989 RSOP
provide that Mr. Stockwell's options granted on January 2, 1994 and March 1,
1994, respectively, to purchase 3,600 and 400 shares of the Stock at $27.73 and
$27.83 per share, respectively, under the 1989 RSOP will be fully vested as of
the date of the termination of his employment with Cardinal and that such
options will be exercisable for 60 days after the later of (i) such termination
or (ii) the date on which the Amendment to the 1989 RSOP is approved by
Cardinal stockholders.
The Cardinal Board of Directors believes the Amendments are appropriate in
light of the significant contributions made by Messrs. Mahan and Stockwell to
Cardinal, and given that, but for the Federal Reserve Board requirement, their
service with Cardinal would not have been terminated.
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The Notice of Meeting, Proxy Statement and proxy card are included with
this letter. The Proxy Statement provides a detailed description of the
Amendments and the reasons therefor.
The Cardinal Board of Directors, excluding James S. Mahan, III, carefully
reviewed and considered the Amendments. The Cardinal Board has approved the
Amendments and recommends that stockholders of Cardinal vote FOR all of the
proposals set forth in the Proxy Statement. If stockholder approval is not
obtained, the Amendments will not be effected, and the options granted to
Messrs. Mahan and Stockwell under the TARSOP and 1989 RSOP, respectively, will
not become vested and will terminate according to their original terms upon
Messrs. Mahan's and Stockwell's separation from Cardinal.
The Amendments are subject to approval and adoption by the holders of a
majority of shares present and voting, in person or by proxy.
YOUR VOTE ON THIS MATTER IS VERY IMPORTANT. I URGE YOU TO REVIEW
CAREFULLY THE ATTACHED MATERIALS AND TO RETURN YOUR PROXY PROMPTLY.
Sincerely,
John S. Penn
President
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CARDINAL BANCSHARES, INC.
400 EAST VINE STREET, SUITE 300
LEXINGTON, KENTUCKY 40507
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 11, 1996
A Special Meeting of the stockholders (the "Special Meeting") of Cardinal
Bancshares, Inc. ("Cardinal") will be held on Friday, October 11, 1996 at 10:00
a.m., local time at the main offices of The Vine Street Trust Company, 360 East
Vine Street, Lexington, Kentucky to consider and act upon the following
matters:
1. To approve amendments to Cardinal's 1992 Limited Stock Option Plan, as
amended. (Proposal One)
2. To approve amendments to Cardinal's 1989 Restricted Stock Option Plan,
as amended. (Proposal Two)
3. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Pursuant to Cardinal's Bylaws, the Board of Directors has fixed the close
of business on September 4, 1996 as the record date for the Special Meeting.
Only holders of record of Cardinal common stock at the close of business on
such date are entitled to notice of and to vote at the Special Meeting or any
adjournments or postponements thereof. The affirmative vote of the holders of
a majority of shares present and voting, in person or by proxy, is required to
approve the Amendments.
By Order of the Board of Directors,
John S. Penn
President
September 16, 1996
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE. YOU MAY, IF YOU WISH,
REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE TIME IT IS VOTED.
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CARDINAL BANCSHARES, INC.
400 EAST VINE STREET, SUITE 300
LEXINGTON, KENTUCKY 40507
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being furnished to stockholders of Cardinal
Bancshares, Inc., a Kentucky corporation ("Cardinal"), on or about September 16,
1996, in connection with the Special Meeting of Cardinal stockholders to be
held on Friday, October 11, 1996 at 10:00 a.m., local time at the main offices
of The Vine Street Trust Company, 360 East Vine Street, Lexington, Kentucky
(the "Special Meeting"). At the Special Meeting, or any adjournments or
postponements thereof, Cardinal stockholders will be asked to vote on the
following matters: (i) approval of amendments to Cardinal's 1992 Limited Stock
Option Plan, as amended (the "TARSOP"); (ii) approval of amendments to
Cardinal's 1989 Restricted Stock Option Plan, as amended (the "1989 RSOP", and
together with the TARSOP, the "Plans"); and (iii) any other business as may
properly come before the meeting. (The proposed amendments to the TARSOP and
the 1989 RSOP are referred to collectively herein as the "Amendments.")
The Amendments change the vesting and exercisability terms of options
previously granted to James S. Mahan, III, a director and executive officer of
Cardinal, and Robert F. Stockwell, an executive officer of Cardinal. The
Amendments have been proposed in order to fulfill the underlying purpose of the
Plans in light of the unusual circumstances of Messrs. Mahan's and Stockwell's
separation from Cardinal. On May 23, 1996, Cardinal effected the spin-off (the
"Spin-Off") to its stockholders of its then wholly-owned subsidiary, Security
First Network Bank ("SFNB"). In connection with the regulatory approvals of
the Spin-Off, Cardinal and SFNB committed to the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") that within 120 days of
the Spin-Off, Cardinal and SFNB will terminate all management and director
interlocks. Each of Mr. Mahan and Mr. Stockwell have management positions with
SFNB as well as Cardinal. In order to terminate such interlocks, Mr. Mahan
(together with two other shared directors) will resign his present positions
as a director and executive officer of Cardinal, and Mr. Stockwell will resign
his present position as a management official of Cardinal on or before
September 20, 1996.
The proposed amendments to the TARSOP are intended to accelerate the
vesting and exercisability of the option granted as of October 24, 1992 to Mr.
Mahan for 66,666 shares of common stock, no par value per share, of Cardinal
(the "Stock") at $5.00 per share to January 1, 1997. The TARSOP amendments
also revise the earnings per share goal (which is a condition to the options
thereunder being exercisable under certain circumstances) to eliminate the
effect of the Amendments (which, if approved, will require a non-cash charge to
earnings) and to eliminate the effect of any one-time special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF") which may be
imposed in 1996. The proposed amendments to the 1989 RSOP provide that Mr.
Stockwell's options granted on January 2, 1994 and March 1, 1994, respectively,
to purchase 3,600 and 400 shares of the Stock at $27.73 and $27.83 per share,
respectively, under the 1989 RSOP will be fully vested as of the date of the
termination of his employment with Cardinal and that such options will be
exercisable for 60 days after the later of (i) such termination or (ii) the
date on which the Amendment to the 1989 RSOP is approved by Cardinal
stockholders.
The Cardinal Board of Directors believes the Amendments are appropriate in
light of the significant contributions made by Messrs. Mahan and Stockwell to
Cardinal, and given that, but for the Federal Reserve Board requirement, their
service with Cardinal would not have been terminated. The Cardinal Board also
believes that the change in the earnings per share goal under the TARSOP is
appropriate given that the Amendments, and the resulting non-cash charge to
earnings, would not be necessary but for the Federal Reserve Board requirement.
The Board furthermore determined to eliminate the possible one-time assessment
to recapitalize SAIF because
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that extraordinary event, if it ever occurs, is an unusual action impacting the
thrift industry generally, and presumably will be recovered in future years by
reduced premiums for federal deposit insurance.
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
Each outstanding share of Stock entitles its owner to one vote on all
matters at which vote is taken at the Special Meeting of Cardinal stockholders
to be held on Friday, October 11, 1996 at 10:00 a.m., local time at the main
offices of The Vine Street Trust Company, 360 East Vine Street, Lexington,
Kentucky. The close of business on September 4, 1996 has been fixed by the
Board as the record date for determination of stockholders entitled to vote at
the Special Meeting (the "Special Meeting Record Date"). The number of shares
of Stock outstanding on the Special Meeting Record Date was _______, which were
held of record by ________ holders. The presence, in person or by proxy, of at
least a majority of the shares entitled to vote is necessary to constitute a
quorum at the Special Meeting. The affirmative vote of the holders of a
majority of shares present and voting, in person or by proxy, is necessary to
approve the Amendments. Abstentions and broker non-votes are not counted in
determining the number of votes cast and in effect represent no action taken on
a matter by the stockholder. If stockholder approval of either Proposal One or
Two is not obtained, the relevant Amendment will not be effected, and any
unvested options of Messrs. Mahan and Stockwell that are subject to the TARSOP
or 1989 RSOP, as the case may be, will terminate according to their original
terms upon Messrs. Mahan's and Stockwell's separation from Cardinal.
The accompanying proxy sent to Cardinal stockholders is being solicited on
behalf of the Board of Directors of Cardinal (the "Board"). All proxies
properly executed and returned to Cardinal prior to commencement of voting at
the Special Meeting will be voted at the meeting or any adjournments or
postponements thereof in accordance with the instructions thereon. Executed
but unmarked proxies will be voted FOR Proposal One (to approve Amendments to
the TARSOP), and FOR Proposal Two (to approve Amendments to the 1989 RSOP). If
any other matters are properly brought before the Special Meeting, proxies will
be voted in the discretion of the proxy holders. Cardinal is not aware of any
such matters that are proposed to be presented at the Special Meeting.
The presence of a Cardinal stockholder at the Special Meeting will not
automatically revoke such stockholder's proxy. A stockholder may, however,
revoke a proxy at any time prior to its exercise by delivering to Cardinal a
duly executed proxy bearing a later date, or by attending the Special Meeting
and voting in person, or by filing a written notice of revocation with the
Secretary of Cardinal.
The cost of soliciting proxies will be borne by Cardinal. In addition to
the solicitation of proxies by mail, Cardinal, through its directors, officers
and regular employees, may also solicit proxies personally or by telephone or
telegraph. Cardinal will also request persons, firms, and corporations holding
shares in their names or in the name of their nominees, which are beneficially
owned by others, to send proxy material to and obtain proxies from such
beneficial owners and will reimburse such holders for their reasonable
expenses.
Cardinal's directors, who as of the Special Meeting Record Date
beneficially owned _______ shares, or _______% of the issued and
outstanding shares of Stock entitled to vote at the Special Meeting, intend to
vote their shares for approval of each of Proposals One and Two. The Vine
Street Trust Company, a subsidiary of Cardinal and the trustee of the Cardinal
Employee Stock Ownership Plan (the "ESOP"), held _______ shares of Stock on the
Special Meeting Record Date (constituting approximately _______% of the
outstanding shares of Stock). Pursuant to the terms of the ESOP, shares held
by the ESOP that are allocated to the accounts of participants shall be voted
by the trustee as directed by such participants. Shares held by the ESOP that
are currently unallocated shall be voted by the trustee proportionate to the
directions given by participants with respect to allocated shares so long as
such vote is in accordance with the provisions of the Employee Retirement
Income Security Act of 1974 as amended ("ERISA"). Allocated shares for which
no
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instructions are received shall not be voted (to the extent consistent with
ERISA). Because the trustee is a related party, instructions from participants
with respect to the voting of shares of Stock allocated to their accounts shall
be directed to an independent third party tabulation and shall be provided to
the trustee in an manner calculated to protect the confidentiality of the
instructions given.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR
NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, PLEASE SIGN, DATE
AND COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
BACKGROUND OF THE AMENDMENTS
On May 23, 1996, Cardinal effected the Spin-Off. In addition to their
respective positions with Cardinal, Mr. Mahan is a director of SFNB and SFNB's
Chief Executive Officer, and Mr. Stockwell is the Treasurer and Chief Financial
Officer of SFNB. Shortly before Cardinal obtained final regulatory approvals
of the Spin-Off, the Federal Reserve Board requested that Cardinal and SFNB
commit to the Federal Reserve Board that within 120 days of the Spin-Off,
Cardinal and SFNB would terminate all management and director interlocks. In
order to obtain regulatory approvals of the Spin-Off, Cardinal and SFNB made
this commitment. To terminate such interlocks, Mr. Mahan (together with two
other shared directors) will resign his present positions as a director and
executive officer of Cardinal, and Mr. Stockwell will resign his present
position as a management official of Cardinal. It is expected that Messrs.
Mahan and Stockwell will resign their positions with Cardinal on or before
September 20, 1996.
The Plans currently provide that any outstanding options of Messrs. Mahan
and Stockwell will terminate upon the termination of their service with
Cardinal. Also, the options granted to Messrs. Mahan and Stockwell under the
TARSOP and 1989 RSOP, respectively, will not become vested and exercisable
under the existing terms of the respective Plans before such termination
occurs. Following the Spin-Off, and in light of the unusual circumstances of
the impending resignations of Messrs. Mahan and Stockwell, the Cardinal Board
has given substantial consideration to the appropriate action to be taken with
respect to unvested options held by Messrs. Mahan and Stockwell. As described
below, the Board has determined that it is appropriate and in accordance with
the goals of the Plans to adopt the Amendments so as to vest Mr. Mahan's option
under the TARSOP, subject to Cardinal satisfying an applicable earnings per
share target (as calculated pursuant to the Amendments), to vest Mr.
Stockwell's options under the 1989 RSOP and to prevent the options of both
officers, to the extent not vested, from terminating as a result of their
resignations from Cardinal.
PROPOSAL ONE - AMENDMENT OF THE TARSOP
TERMS OF THE AMENDMENT
Mr. Mahan currently holds an option granted pursuant to the TARSOP for
66,666 shares of Stock. Such option, which has a per share exercise price of
$5.00, has not become vested as of the date of this Proxy Statement. The
TARSOP presently provides that options will vest to the extent of one-third of
such shares as of January 1, 1997, 1998 and 1999, if (i) Cardinal achieves a
specified cumulative earnings per share goal ($3.36 per share) as of the fiscal
year ended December 31, 1996, and (ii) Mr. Mahan remains in the service of
Cardinal. The TARSOP further provides that even if Cardinal does not achieve
the earnings per share goal, the option will become vested on January 1, 2001
if Mr. Mahan remains in the service of Cardinal. Under the terms of the
TARSOP, if Mr. Mahan's employment with Cardinal terminates before January 1,
1997 other than because of his total and permanent disability (as defined) or
death, his option will not be vested or exercisable to any extent. For a
description of the TARSOP as currently in effect, see "Description of the
Plans."
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The full text of the proposed TARSOP Amendment is attached at Appendix A
and incorporated by reference herein. In general, the TARSOP Amendment
provides that Mr. Mahan's employment by SFNB shall be deemed continued
employment by Cardinal through December 31, 1996. Thereafter, as of January 1,
1997, the Amendment provides that the option held by Mr. Mahan under the TARSOP
will become fully vested and exercisable and that it will continue to be
exercisable until December 31, 2001. The TARSOP Amendment also changes the
calculation of Cardinal's net income for purposes of determining if Cardinal
has achieved the earnings per share goal by eliminating from the calculation of
Cardinal's earnings the amount of any special assessment which may be charged
in 1996 related to a recapitalization of the SAIF and the amount of any charge
required to be recognized by Cardinal as a result of the Amendments. The
earnings per share goal for 1996 under the TARSOP is $3.36 per share. For the
six months ended June 30, 1996, Cardinal reported net income of $2.55 per
share. No assurance or estimation can be given as to net income for the full
year ended December 31, 1996. See "Reasons for Amendment of TARSOP;
Recommendation of Cardinal's Board." The other terms and conditions of options
under the TARSOP remain unchanged.
The amendment of the TARSOP is subject to approval by the holders of a
majority of shares present and voting, in person or by proxy. The Amendment
will not result in dissenters' rights for Cardinal stockholders.
The option for 66,666 shares of Stock held by Mr. Mahan has an exercise
price of $5.00 per share and expires on December 31, 2001 (or earlier, as
described above, in the event of termination of employment other than by reason
of death or total and permanent disability). As of September __, 1996, the
latest practicable date prior to the mailing of the Proxy Statement, the
closing price of the Stock on the Nasdaq Stock Market National Market System
was $____ per share.
Cardinal will not receive any additional consideration from Mr. Mahan in
exchange for effecting the amendment to the TARSOP.
REASONS FOR THE AMENDMENT OF THE TARSOP; RECOMMENDATION OF CARDINAL'S BOARD
The Board, excluding Mr. Mahan, approved the Amendment to the TARSOP. In
reaching its decision to approve the amendment to the TARSOP, the Board
determined that, if Cardinal achieves the earnings per share target under the
TARSOP as of December 31, 1996 (as adjusted by the Amendment), the underlying
purpose of the TARSOP would be substantially fulfilled by modifying and
accelerating the vesting of Mr. Mahan's option to January 1, 1997 and extending
to December 31, 2001 the period during which the option can be exercised
following termination of Mr. Mahan's employment by Cardinal. The Board
considered that a primary purpose of the option grants under the TARSOP was to
align the interests of Mr. Mahan with those of Cardinal stockholders, as
reflected by the inclusion of the earnings per share goal. The Board concluded
that it would be consistent with such purpose to modify and accelerate the
vesting of the option, and to extend the period during which the option can be
exercised after termination of employment, given that Mr. Mahan's resignation
from Cardinal is due solely to unique regulatory conditions, and not because he
has voluntarily chosen to leave Cardinal or has been terminated for cause. Mr.
Mahan does not have an employment contract with Cardinal, and will not receive
any form of termination or severance benefits.
Because Mr. Mahan has been prevented from continuing in his present
position with Cardinal as a result of the regulatory approvals of the Spin-Off,
and the Board has concluded that the Spin-Off was in the best interests of the
shareholders of Cardinal, the Board does not believe it would be fair for Mr.
Mahan to forfeit any portion of his option (assuming achievement of the
earnings per share target during fiscal 1996) because of his termination of
employment under these unique circumstances, which were not contemplated at the
time the TARSOP was adopted. Also, given the financial results achieved by
Cardinal during the approximately four and one-half fiscal years during which
the option has been outstanding, the Board feels that it is appropriate to
allow Mr. Mahan to exercise the option until December 31, 2001 (when it will
expire by its terms under the
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TARSOP), provided Cardinal achieves the earnings per share goal (as calculated
pursuant to the Amendment).
The Board further considered that an intended effect of the option has
substantially been achieved, in that Mr. Mahan has continuously served Cardinal
from the time the option was granted until prevented from doing so by
regulatory requirements and that he has expended considerable efforts on behalf
of Cardinal, particularly with respect to the development of the Internet
banking activities now conducted by SFNB, which significantly benefited the
stockholders of Cardinal. But for the regulatory requirement that management
and director interlocks with SFNB be terminated, Mr. Mahan would be free to
continue in his present position with Cardinal and the Board has every reason
to believe that he would have done so. Moreover, the Board believes the
amendment to the TARSOP fulfills a principal purpose of the TARSOP, in that it
continues the requirement that Cardinal satisfy a cumulative earnings per share
target, as of December 31, 1996, in order for Mr. Mahan's option to become
exercisable. Although Mr. Mahan will resign from Cardinal before the end of
fiscal 1996, he will have expended considerable efforts on behalf of Cardinal
since it began business and through September 1996, and the Board therefore
believes it is appropriate for Mr. Mahan to be able to exercise his option his
option in full following the end of the 1996 fiscal year if the cumulative
earnings goal is attained.
In addition to the foregoing factors, the Board considered the fact that
Mr. Mahan may enjoy a significant economic benefit as a result of the
Amendments to the TARSOP; however, the Board determined that such benefit, if
any, is consistent with the underlying purpose of the option and the TARSOP, as
described above. Also, the Board considered the fact that the amendment to the
TARSOP will likely be accounted for as a grant of a new option, which is likely
to result in a non-cash charge against earnings for Cardinal's fiscal 1996
equal to the value of the new grant, which value is calculated based upon the
difference between the fair market value of the Stock as of the date on which
the Amendment to the TARSOP is approved by Cardinal stockholders (based on the
closing price of the Stock on the Nasdaq Stock Market), and the $17.50 per
share value assigned to the option at the time of grant in 1992. As of
September __, 1996, the closing price of the Stock on the Nasdaq Stock Market
was $___ per share. Based on that price, the non-cash charge against earnings,
net of applicable tax benefits, would be approximately $___ million. The Board
concluded that the benefits accrued by Cardinal over the course of Mr. Mahan's
long-standing service with Cardinal outweighed any likely charge to income
resulting from the accounting treatment of amending the TARSOP. The Board also
believes that, given that the Amendments would not be proposed but for
Cardinal's required commitment to the Federal Reserve Board to effect the
Spin-Off of SFNB, it is not appropriate to reduce Cardinal's earnings for
purposes of calculating the TARSOP earnings per share goal because of a
non-cash charge incurred solely as a result of the Amendments.
Furthermore, although no action has been taken as of the date of this
Proxy Statement, Cardinal believes it likely that in 1996 or 1997 legislation
will be adopted to recapitalize the SAIF. Based on the current forms of
proposed legislation in the United States Congress, the recapitalization likely
will include a one-time assessment on SAIF-insured deposits, and a concurrent
reduction in premiums paid to the SAIF. The amount of the special assessment
to recapitalize the SAIF has been estimated at 65 basis points of an
institution's SAIF deposits at March 31, 1995. For Cardinal, this may result
in an assessment, net of tax benefits, of as much as approximately $___ million
(or $___________ per share). Although Cardinal has no way of predicting
whether such legislation will be passed, or if there will be or the amount of
any special assessment, the Board does not believe such assessment should
reduce Cardinal's earnings for purposes of calculating the earnings per share
goal under the TARSOP, especially since the assessment presumably will be
recovered by lower SAIF insurance assessments in the future.
In light of the foregoing factors, the Board believes that the amendments
to the TARSOP are in the best interests of Cardinal stockholders, and
recommends that the Cardinal stockholders vote FOR approval of Proposal One.
One Cardinal director, Ronald C. Switzer, voted against the Amendments as a
director, and intends to do so as a stockholder as well.
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All material factors considered by the Board are set forth above. In view
of the variety and the number of factors considered in connection with its
evaluation of Proposal One, the Board did not find it practicable to, and did
not, quantify or otherwise attempt to assign relative weights to the factors
considered in reaching its decision.
PROPOSAL TWO - AMENDMENT OF THE 1989 RSOP
TERMS OF THE AMENDMENT
Mr. Stockwell currently holds options that were granted on January 2, 1994
and March 1, 1994, to purchase 3,600 and 400 shares of Stock, respectively, at
$27.73 and $27.83 per share, respectively, pursuant to the 1989 RSOP. The 1989
RSOP provides that such options will vest five years after the date of grant,
provided that Mr. Stockwell remains in the service of Cardinal (except that the
options would be fully vested upon Mr. Stockwell's death after having completed
two years of continuous service with Cardinal).
The proposed Amendment to the 1989 RSOP is attached at Appendix B and
incorporated by reference herein. Under such Amendment, any outstanding
unvested options held by Mr. Stockwell under the 1989 RSOP will fully vest and
become exercisable upon Mr. Stockwell's resignation from Cardinal. The options
will be exercisable for 60 days after the later of (i) Mr. Stockwell's
resignation from Cardinal or (ii) the date on which the Amendment to the
1989 RSOP is approved by Cardinal stockholders. In addition, the options will
continue to be subject to all of the remaining terms and conditions under the
1989 RSOP. For a description of the 1989 RSOP, see "Description of the Plans."
The amendment of the 1989 RSOP is subject to approval by the holders of a
majority of shares, present in person or by proxy, and entitled to vote. The
Amendment will not result in dissenters' rights for Cardinal stockholders.
The options to purchase 3,600 and 400 shares of Stock that are held by Mr.
Stockwell have an exercise price of $27.73 and $27.83 per share, respectively,
and expire on January 2, 2004 and March 1, 2004, respectively, unless earlier
terminated because of termination of employment other than because of death.
As of September __, 1996, the latest practicable date prior to the mailing of
the Proxy Statement, the closing price of the Stock on the Nasdaq Stock Market
was $________ per share.
Cardinal will not receive any additional consideration from Mr. Stockwell
in exchange for effecting the amendment to the 1989 RSOP.
REASONS FOR THE AMENDMENT OF THE 1989 RSOP; RECOMMENDATION OF CARDINAL'S BOARD
The Board has approved the amendment to the 1989 RSOP. In reaching its
decision to approve the amendment to the 1989 RSOP, the Board determined that
the underlying purpose of the 1989 RSOP would be fulfilled by accelerating the
vesting of Mr. Stockwell's options and deleting the requirement that Mr.
Stockwell remain in the service of Cardinal. The Board considered that the
primary purposes of the option grants under the 1989 RSOP included providing an
opportunity for Mr. Stockwell to acquire or increase a proprietary interest in
Cardinal and to align his interests with those of Cardinal stockholders. The
Board concluded that it would be consistent with such purposes to accelerate
the vesting of such options in the current circumstances, i.e., where Mr.
Stockwell is required to resign from Cardinal due to unique regulatory
conditions, and not because he has voluntarily chosen to leave Cardinal or has
been terminated for cause. Given that Mr. Stockwell has been prevented from
continuing in his present position with Cardinal as a result of the regulatory
approvals of the Spin-Off, the Board does not believe it would be fair to
penalize Mr. Stockwell by terminating his options in circumstances not
contemplated by the original terms of the 1989 RSOP. Mr. Stockwell does not
have an employment contract with Cardinal, and is not receiving any form of
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termination or severance benefits. However, the Board also amended the terms
of Mr. Stockwell's option granted in January 1995 under Cardinal's 1994
Restricted Stock Option Plan for 3,500 shares at a per share exercise price of
$28.65. That amendment accelerated the vesting of such stock option for the
same reasons as expressed below in connection with the RSOP Amendments. Under
the terms of Cardinal's 1994 Restricted Stock Option Plan, no stockholder
approval is required for such amendment.
The Board further considered that the intended effect of the options
substantially has been achieved, in that Mr. Stockwell has continuously served
Cardinal from the time the options were granted and has expended considerable
efforts on behalf of Cardinal, particularly with respect to the development of
the Internet banking activities now conducted by SFNB. But for the regulatory
requirement that management and director interlocks with SFNB be terminated,
Mr. Stockwell would be free to continue in his present position with Cardinal
and the Board believes that he would have done so.
In addition to the foregoing factors, the Board considered the fact that
Mr. Stockwell may enjoy a significant economic benefit as a result of the
Amendment to the 1989 RSOP; however, the Board determined that such benefit, if
any, is consistent with the underlying purpose of the options and the 1989
RSOP, as described above. Also, the Board considered the fact that the
amendment to the 1989 RSOP will likely be accounted for as a new grant of
options, which is likely to result in a non-cash charge to earnings equal to
the value of the new grant, which value is calculated based upon the difference
between the fair market value of the Stock at the date the Amendment is
approved by Cardinal stockholders (based on the closing price of the Stock on
the Nasdaq Stock Market) and the $27.74 weighted average per share exercise
price of the options. As of September __, 1996, the closing price of the Stock
on the Nasdaq Stock Market was $___ per share. Based on that price, the
non-cash charge against earnings, net of applicable tax benefits, would be
approximately $__________. The Board concluded that the benefits accrued by
Cardinal over the course of Mr. Stockwell's continuous service with Cardinal
since December 1994 outweighed any likely charge to income resulting from the
accounting treatment of amending the 1989 RSOP.
In light of the foregoing factors, the Board believes that the amendments
to the 1989 RSOP are in the best interests of Cardinal stockholders, and
recommends that the Cardinal stockholders vote FOR approval of Proposal Two.
One Cardinal director, Ronald C. Switzer, voted against the Amendments as a
director, and intends to do so as a stockholder as well.
All material factors considered by the Board are set forth above. In view
of the variety and the number of factors considered in connection with its
evaluation of Proposal Two, the Board did not find it practicable to, and did
not, quantify or otherwise attempt to assign relative weights to the factors
considered in reaching its decision.
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NEW PLAN BENEFITS
The following table sets forth certain information regarding the benefits
to be received by Messrs. Mahan and Stockwell as a result of the Amendments.
<TABLE>
<CAPTION>
AMENDMENTS TO TARSOP AND 1989 RSOP
NAME AND POSITION DOLLAR VALUE (1) NUMBER OF OPTIONS
----------------- ---------------- -----------------
<S> <C> <C>
James S. Mahan, III,
Chairman of the Board of Directors........ $
Robert F. Stockwell,
Chief Financial Officer................... $
</TABLE>
- ----------------------
(1) Based on an exercise price of $5.00 per share for Mr. Mahan's option and
a weighted average price of $27.74 per share for Mr. Stockwell's options,
and the closing price of Stock of $_______ per share on September __, 1996,
the latest practicable date prior to mailing the Proxy Statement.
FEDERAL INCOME TAX CONSEQUENCES OF THE
ISSUANCE AND EXERCISE OF OPTIONS
Federal Income Tax Consequences to Cardinal. Options granted under the
Plans are nonqualified stock options. Generally, the grant or modification of
a nonqualified option should not be a taxable event for Cardinal provided that,
if the per share exercise price of the option is less than the market value of
a share of Stock on the date of grant or modification, there is a substantial
risk, on the basis of all the facts and circumstances, that the value of the
Stock could be less than the option exercise price during the term of the
option.
Subject to applicable reporting requirements, Cardinal generally will be
allowed a business expense deduction to the extent the optionee recognizes
ordinary income upon the exercise of a nonqualified option (subject to the
$1,000,000 annual limitation on the deduction of compensation that is paid to
the chief executive officer and four other most highly compensated officers of
a public corporation and subject to additional limitations in the case of an
option that becomes vested or exercisable because of a change in control of
Cardinal).
Federal Income Tax Consequences to Option Holders. Generally, the grant
or modification of a nonqualified option should not be a taxable event for the
optionee provided that, if the per share exercise price of the option is less
than the market value of a share of Stock on the date of grant or modification,
there is a substantial risk, on the basis of all the facts and circumstances,
that the value of the Stock could be less than the option exercise price during
the term of the option. Upon exercising a nonqualified option, generally an
optionee will recognize ordinary income in an amount equal to the difference
between the exercise price and the fair market value of the Stock on the date
of exercise (except that, if the optionee is subject to certain restrictions
imposed by the securities laws, the measurement date may be delayed, unless the
optionee makes a special tax election within 30 days after exercise to have
income determined without regard to the restrictions). Upon a subsequent sale
or exchange of shares acquired pursuant to the exercise of a nonqualified
option, the optionee will have taxable gain or loss, measured by the difference
between the amount realized on the disposition and the tax basis of the shares
(generally, the amount paid for the shares plus the amount treated as ordinary
income at the time the option was exercised).
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If, pursuant to an option agreement, the optionee surrenders shares of
Stock in payment of part or all of the exercise price for a nonqualified
option, generally no gain or loss will be recognized with respect to the shares
surrendered and the optionee will be treated as receiving an equivalent number
of shares pursuant to the exercise of the option in a nontaxable exchange. The
basis of the shares surrendered generally will be treated as the substituted
tax basis for an equivalent number of option shares received and the new shares
will be treated as having been held for the same holding period as had expired
with respect to the transferred shares. However, the fair market value of any
shares received in excess of the number of shares surrendered (i.e., the
difference between the aggregate option exercise price and the aggregate fair
market value of the shares received pursuant to the exercise of the option)
will be taxed as ordinary income.
DESCRIPTION OF THE PLANS
The following descriptions of the current terms of the Plans should be
read in conjunction with the descriptions contained elsewhere herein of the
proposed Amendments to the Plans. See "Proposal One - Amendment of the TARSOP"
and "Proposal Two - Amendment of the 1989 RSOP."
THE TARSOP
The TARSOP is intended to provide incentive awards to employees of
Cardinal or any of its subsidiaries who, in the opinion of the Board of
Directors, are materially responsible for the management of the business or
have materially contributed to the successful performance of the Company or any
of its subsidiaries. The total number of shares of Stock that are authorized
to be issued upon exercise of options granted under the TARSOP is 100,000.
Effective as of October 24, 1992, the Board of Directors granted options to
purchase 66,666 and 33,334 shares of Stock to James S. Mahan, III and John S.
Penn, respectively, at a purchase price of $5.00 per share pursuant to the
TARSOP. The options granted under the TARSOP do not constitute "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
The timing of the exercise of the options granted under the TARSOP is
based on Cardinal and its subsidiaries meeting an "Annual Performance Goal" and
a "Cumulative Performance Goal" for the fiscal years ended December 31, 1992,
1993, 1994, 1995 and 1996. The TARSOP provides that the "Annual Performance
Goal" will be met for a certain year if the net income per common share on a
fully diluted basis of Cardinal and its consolidated subsidiaries ("EPS") for
such year, when compared with the EPS for all prior fiscal years beginning with
1992, reflects an average annual increase of 15%, compounded annually, over the
net income per common share on an undiluted basis for the fiscal year ended
December 31, 1991, which was set at $1.68. The TARSOP provides that the
"Cumulative Performance Goal" is met if Cardinal achieves the Annual
Performance Goal for fiscal 1996. The earnings per share goal for 1996 under
the TARSOP is $3.36 per share. For the six months ended June 30, 1996,
Cardinal reported net income of $2.55 per share. No assurance or estimation
can be given as to net income for the full year ended December 31, 1996.
If Cardinal fails to achieve the Cumulative Performance Goal, all options
held by an optionee will become exercisable on January 1, 2001. If Cardinal
achieves the Cumulative Performance Goal, then one-third of the options will
become exercisable on January 1, 1997 and an additional one-third will become
exercisable on January 1 of each of the next two years; provided, however, if
the optionee ceases to be an employee of Cardinal or any of its subsidiaries
because of disability or death, then all such options may be exercised by the
optionee or the optionee's representative within one year after the date of the
termination of employment. If Cardinal fails to achieve the Cumulative
Performance Goal and the optionee dies or becomes disabled, then a portion of
the options may be exercisable by the optionee or his representative under
certain circumstances as more fully set forth in the TARSOP.
Options granted under the TARSOP shall cease to be exercisable upon the
earliest of (i) the date of the termination of employment of the Optionee
(other than by reason of disability or death),
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(ii) December 31, 2001, or (iii) any earlier date expressly set forth in
the optionee's option agreement. No option will be exercisable before January
1, 1997 except in the event of an optionee's disability or death.
Payment for shares purchased under the TARSOP may be made either in cash
or by exchanging shares of Stock with a fair market value equal to or less than
the total option price plus cash for any difference, or by a combination of the
foregoing. No fractional shares will be issued by Cardinal on exercise of
options and no cash will be paid in lieu of any fractional shares.
Options granted under the TARSOP are nontransferable except upon the death
of the optionee.
If the outstanding shares of Stock are increased or decreased or changed
into or exchanged for a different number or kind of shares or securities of
Cardinal, by reason of any recapitalization, reclassification, stock split-up,
combination of shares, exchange of shares, stock dividend or other distribution
payable in capital stock, or other increase or decrease in such shares without
receipt of consideration by Cardinal, an appropriate and proportionate
adjustment will be made in the number and kinds of shares subject to the
TARSOP, and in the number, kinds, and per share exercise price of shares
subject to the unexercised portion of options granted prior to any such change.
Any such adjustment in an outstanding option, however, will be made without a
change in the total price applicable to the unexercised portion of the option
but with a corresponding adjustment in the per share option price.
If there is a Change in Control of Cardinal (as defined in the TARSOP),
any options then outstanding will become immediately exercisable on and after
the date of the Change in Control. In the event of a Change in Control, the
kind of shares of common stock which shall be subject to the TARSOP and to each
outstanding option shall automatically be converted into and replaced by shares
of common stock, or such other class of equity securities having rights and
preferences no less favorable than common stock of the successor, and the
number of shares subject to the options and the purchase price per share upon
exercise of the options shall be correspondingly adjusted as provided in the
TARSOP.
The Committee of the Board administering the TARSOP may amend the TARSOP
from time to time with respect to options not yet granted. However, a majority
of Cardinal's stockholders must approve any amendment that would (1) reduce the
option price for any outstanding option (except for adjustments upon changes in
capitalization); (2) extend the exercise period for any outstanding option; or
(3) increase the maximum number of shares that may be sold pursuant to options
granted under the TARSOP (except for adjustments upon changes in
capitalization).
Unless previously terminated, the TARSOP will terminate automatically on
December 31, 2001. No termination, suspension or amendment of the TARSOP may,
without the consent of the optionee to whom an option has been granted,
adversely affect the rights of the holder of the option.
THE 1989 RSOP
The 1989 RSOP is intended to promote the interests of Cardinal by
affording an incentive to certain key employees to remain in the employ of
Cardinal and to use their best efforts on Cardinal's behalf, by providing such
employees the opportunity to acquire or increase their proprietary interest in
Cardinal through option grants. The total number of shares of Stock that may
be issued upon exercise of options granted under the 1989 RSOP is 43,000. The
options granted under the 1989 Stock Option Plan do not constitute "incentive
stock options" within the meaning of Section 422 of the Code.
The 1989 RSOP is administered, interpreted and applied by a committee (the
"Committee") consisting of two or more disinterested directors. The Committee
is authorized to select the employees to whom options are granted, determine
the number of shares of Stock subject to each
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option, determine the time or times when options will be granted and fix other
provisions of individual option agreements as they may deem necessary or
desirable consistent with the 1989 RSOP.
An option granted under the 1989 RSOP is not exercisable until the
optionee has had continuous employment with Cardinal for a period of five years
after the date of grant and must be exercised, if at all, within 10 years after
the date of grant.
Except as otherwise provided in the 1989 RSOP, no option granted under the
1989 RSOP may be exercised unless the optionee at the time of the exercise is
an employee of Cardinal or its subsidiaries. If the optionee dies prior to
exercising an option or any portion thereof, the optionee's successor in
interest has 60 days after the optionee's death to exercise the option,
provided the optionee has had continuous service with Cardinal for two years.
If an optionee's employment by Cardinal is terminated for any reason other than
death, such optionee or the optionee's successor in interest shall have 60 days
after the date of termination to exercise any vested option held by the
optionee at the time of termination. Otherwise, all options held on the date
of termination will expire automatically on the date of termination.
Under the 1989 RSOP, the option exercise price is equal to 100% of the
book value of a share of Stock as of the last day of the month immediately
preceding the date the option is granted; provided, that options granted on or
prior to February 1, 1993 have an exercise price of $17.50 per share.
The options granted under the 1989 RSOP are not transferable except by
will or in accordance with the laws of descent and distribution.
If the outstanding shares of Stock are increased or decreased or changed
into or exchanged for a different number or kind of shares or securities of
Cardinal, by reason of any recapitalization, reclassification, stock split-up,
combination of shares, exchange of shares, stock dividend or other distribution
payable in capital stock, or other increase or decrease in such shares without
receipt of consideration by Cardinal, an appropriate and proportionate
adjustment will be made in the number and kinds of shares subject to the 1989
RSOP, and in the number, kinds, and per share exercise price of shares subject
to the unexercised portion of options granted prior to any such change. Any
such adjustment in an outstanding option, however, will be made without a
change in the total price applicable to the unexercised portion of the option
but with a corresponding adjustment in the per share option price.
In the event of a Change in Control, the kind of shares of common stock
which shall be subject to the TARSOP and to each outstanding option shall
automatically be converted into and replaced by shares of common stock, or such
other class of equity securities having rights and preferences no less
favorable than common stock of the successor, and the number of shares subject
to the options and the purchase price per share upon exercise of the options
shall be correspondingly adjusted as provided in the TARSOP. In addition, upon
notice of an offer to Cardinal or its stockholders that could result in a
change of control, all outstanding options will become exercisable.
The Board of Directors has the right to amend, suspend or terminate the
1989 RSOP, at any time, in any respect that it may deem to be in the best
interests of the Company, except that no amendments shall be made that would:
(i) increase the total number of shares for which options may be granted under
the plan for all key employees or for any one of them, except for certain
capital adjustments, (ii) change the minimum purchase price for the optioned
shares, except for certain capital adjustments, (iii) affect outstanding
options or any unexercised rights thereunder, except as provided in and
required in the event of a capital adjustment, or (iv) extend the termination
date.
The Board at any time may terminate or suspend the 1989 RSOP. Unless
previously terminated, the 1989 RSOP will terminate automatically on October
21, 1999 the tenth anniversary of the effective date of the 1989 RSOP.
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COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS OF CARDINAL
DIRECTORS' COMPENSATION
Directors' Fees. Directors of Cardinal do not receive any compensation
for attending Cardinal Board of Directors or Committee meetings. Directors of
Cardinal who serve as directors of certain of Cardinal's subsidiaries receive
compensation for such service. In particular, directors of the Vine Street
Trust Company ("Vine Street") and HNB Bank ("HNB") receive a fee of $300 for
each Board meeting attended. Directors of Alliance Bank ("Alliance") receive a
fee of $500 per Board meeting held, whether or not the director attends the
meeting. Directors of Jefferson Banking Company ("Jefferson") receive a fee of
$400 for each Board meeting attended. Directors of Cardinal Credit Corporation
("Cardinal Credit"), VST Financial Services, Inc. ("VST"), Mutual Service
Corporation ("Mutual Service") and Mutual Insurance Agency, Inc. ("Mutual
Insurance") do not receive any compensation for attending the Board meetings of
such subsidiaries. Vernon J. Cole, Dr. Robert W. Copelan and Ronald C. Switzer
received $1,800, $1,800 and $2,400, respectively, in directors' fees from
Cardinal subsidiaries during fiscal 1995.
Consulting Agreements. Pursuant to a consulting agreement entered into
with Cardinal when he became a director in 1990, Howard J. Runnion, Jr.
receives a fee of $1,000 for each calendar quarter in which he attends a
regular meeting of the Board of Directors. Mr. Runnion received $4,000 during
1995 for consulting services.
Employment Agreements. Lloyd G. Jasper, a director of Cardinal, entered
into an employment agreement with Alliance in connection with the affiliation
of Alliance and Cardinal (the "Employment Agreement"). The Employment
Agreement provides for a three year term of employment extended annually so
that the remaining term is for three years. The Employment Agreement provides
that if employment is terminated for any reason other than cause, Mr. Jasper
would continue to receive compensation for the unexpired term of the Agreement.
In 1994, Mr. Jasper resigned his position of Chief Executive Officer of
Alliance; therefore, his Employment Agreement was not extended and it will
expire in October 1997. Mr. Jasper's salary under the Employment Agreement for
fiscal 1995 was $85,086. Additionally, Mr. Jasper was granted 15% of the stock
options granted under the Cardinal Bancshares, Inc. - 1993 Mutual Federal
Savings Bank Restricted Stock Option Plan, and is entitled to participate in
any Cardinal or Alliance employee benefit provided to executive employees,
including medical and life insurance plans.
Deferred Compensation Agreements. Pursuant to a deferred compensation
agreement (the "Cole Agreement") between HNB and Mr. Cole relating to his
services as President and Chief Executive Officer of HNB until 1991, Mr. Cole
is entitled to receive $2,333 per month until January 2001. If Mr. Cole dies
before all of his deferred compensation has been paid pursuant to the Cole
Agreement, his wife will be paid the monthly installments. If Mr. Cole becomes
disabled, he will be entitled to payments pursuant to the Cole Agreement. In
the event the Cole Agreement is terminated prior to Mr. Cole's death or
disability, Mr. Cole shall be entitled to benefits upon his termination of
employment for a period of one month for each full year of continuous service
under the Cole Agreement, not to exceed a period of 60 months, in the amount of
$2,333 per month. The Cole Agreement is terminable by either party on at least
90 days prior written notice. Pursuant to the Cole Agreement, no payment of
any unpaid installment shall be made and all rights of Mr. Cole, his spouse and
beneficiaries will be forfeited if he competes with HNB or refuses to provide
advice and counsel to HNB. During the year ended December 31, 1995, Mr. Cole
received $28,000 in deferred compensation payments.
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EXECUTIVE COMPENSATION
Compensation. The following table sets forth certain information
concerning compensation paid or accrued by Cardinal during the last three
fiscal years to or on behalf of Cardinal's Chief Executive Officer and each of
the two other most highly compensated executive officers of Cardinal whose
salary and bonus exceeded $100,000 in fiscal 1995 (the "named executive
officers"). Cardinal does not have any stock appreciation rights (SARs).
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
-------------------- COMPENSATION
------------
AWARDS PAYOUTS
------ -------
OTHER
ANNUAL SECURITIES ALL
NAME & COMPEN- UNDERLYING OTHER
PRINCIPAL SALARY BONUS SATION OPTIONS/ COMPENSATION
POSITION YEAR ($) ($) ($) (1) SARS (#) ($) (2)
- -------------------- ---- -------- ------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
James S. Mahan, III, 1995 $200,000 - $9,998 - $8,000
Chairman of the 1994 200,000 - 1,573 - 2,000
Board and CEO 1993 167,835 - - - -
John S. Penn, 1995 142,040 - 4,344 - 5,682
Director, President 1994 142,040 - 2,835 - 1,420
and Chief 1993 126,308 - - - -
Operating Officer
Jack H. Brown, 1995 109,400 - - - 4,376
Chief Financial 1994 109,400 - - 2,275 1,094
Officer 1993 98,149 - - 7,725 (3) -
</TABLE>
(1) Value of personal use of company-leased automobile.
(2) Consists of matching contributions under Cardinal's 401(k) Savings Plan.
(3) Mr. Brown received option grants for 5,000 shares in 1989 and for 2,725
shares in 1991. The exercise price of such options were repriced in fiscal 1993
at $17.50 to better reflect the market value of the Stock at that time. Prior
to February 1993, no public market for the Stock existed.
Employment Agreements. None of the named executive officers of Cardinal
has an employment agreement with Cardinal or any of its subsidiary banks.
Stock Options. None of the named executive officers received stock
options in fiscal year 1995.
Option Exercises. The following table provides information related to
options exercised by the named executive officers during fiscal 1995 and the
number and value of options held at year end by such officers. Cardinal does
not have any SARs.
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<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1995 FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SAR's at Fiscal Options/SAR's at
Shares Year-End (#) FY-End (2) ($)
Acquired Value -------------------------------------------------------
on Exercise Realized
Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James S. Mahan, III - - - 66,666 - 3,599,964
John S. Penn - - - 33,334 - 1,800,036
Jack H. Brown 5,000 187,500 2,725 2,275 113,088 65,975
</TABLE>
(1) Represents the difference between the fair market value of the Stock
underlying the option and the exercise price on the date of exercise.
(2) Value is calculated based on the difference between the option price and
the closing market price of the underlying Stock at December 31, 1995. Options
are in-the-money if the fair market value of the Stock exceeds the exercise
price of the option.
PENSION PLANS
Pension Plans. The following table sets forth the estimated aggregate
annual benefits payable under the Cardinal Bancshares, Inc. Pension Plan and
Trust Agreement (the "Pension Plan") to persons in specified average final
compensation and credited service classifications upon retirement at age 65.
Amounts shown in the table include Social Security benefits which would be
deducted in calculating benefits under the Pension Plan. The employee's years
of service is limited to no more than thirty years. The aggregate annual
retirement benefits do not increase as a result of additional credited service
after thirty years.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
- --------------------------------------------------------------------
Estimated Aggregate Annual Retirement
Benefit
Assuming Credited Service of:
Average ------------------------------------------------------
Final 30 Years
Compensation 15 Years 20 Years 25 Years and Over
- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
$ 80,000 $16,056 $21,408 $26,759 $32,111
90,000 18,306 24,408 30,509 36,611
100,000 20,556 27,408 34,259 41,111
110,000 22,806 30,408 38,009 45,611
120,000 25,056 33,408 41,759 50,111
130,000 27,306 36,408 45,509 54,611
140,000 29,556 39,408 49,259 59,111
150,000 31,806 42,408 53,009 63,611
</TABLE>
For purposes of the Pension Plan, an employee's earnings are the first
$150,000 of base salary or wages paid, including fees, commissions, bonuses and
overtime pay and excluding amounts
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paid to any benefit plan on behalf of the employee. For 1995, compensation for
purpose of determining retirement benefits for each of the named executive
officers in the Summary Compensation Table differed by less than 10% from the
amount shown in the table, except for Mr. James Mahan whose annual compensation
is above $150,000.
Average final compensation is defined as average earnings of the five
consecutive and complete plan years in which the employee's earnings were the
greatest. Accrued retirement benefits vest upon completion of five years
service. The benefits shown in the table above are calculated on a
straight-life annuity basis. As of September ___, 1996, the number of years of
credited service for each of Messrs. James Mahan, Penn and Brown was eight
years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee and Limited Stock Option Plan Committee for
fiscal 1995 were comprised of three nonemployee members of Cardinal's Board of
Directors -- Messrs. Carol M. Gatton, Howard J. Runnion, Jr. and Lloyd G.
Jasper. Mr. Jasper formerly was the president and chief executive officer of
Alliance, a subsidiary of Cardinal from 1985 to July 1994.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Vine Street, HNB, Jefferson and Alliance have, in the ordinary course of
business, extended credit to various of their directors and executive officers
or corporations or other entities in which they may be interested or in which
they own a controlling interest. All such loans have been made in the ordinary
course of business, on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
with other persons and did not involve more than the normal risk of collection
or present other unfavorable features. All such transactions were on terms no
less favorable to Cardinal than those entered into with non-affiliates.
Cardinal's main office and Vine Street's operations center are leased from
Bluegrass Commerce Center Partners, a general partnership in which James S.
Mahan, III owns a 30.7% interest. Both leases are on terms which are
competitive for the Lexington area. Bluegrass Commerce Center Partners
received $102,232 in lease payments from Cardinal and $5,106 in lease
payments from Vine Street for the period from January 1, 1995 to December 31,
1995.
Each Director has entered into a Stock Contract with Cardinal (the
"Contracts") whereby each member of the Board of Directors has agreed to
purchase 7,500 shares (the "Shares") of the Stock from Cardinal at $25.00 per
share (the "Purchase Price") by November 5, 2003. The Contracts received
shareholder approval on July 28, 1994. Consistent with continuing discussions
concerning proper director compensation, the Board chose to approve the
Contracts in recognition of the previous six years of service and in lieu of
customary directors' fees in the immediate future. During Cardinal's first six
years of operation, the directors did not receive board fees, options or
grants.
The aggregate number of Shares which must be purchased under the Contracts
is 75,000. Either authorized and unissued shares or shares reacquired by
Cardinal, including shares purchased in the open market, may be sold by
Cardinal under the Contracts.
In the event of a capital adjustment in the Stock by reason of any
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger or consolidation, or any other change (after the effective date
of the Contract) in the nature or number of shares of the Stock, a
proportionate adjustment shall be made in the maximum number and kind of Shares
which may be delivered under the Contract, and in the Purchase Price, and the
number and kind of Shares covered by the Contract. By virtue of such a capital
adjustment, the price of any Share shall be adjusted so that there will be no
change in the aggregate purchase price payable upon the purchase of the Shares.
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<PAGE> 21
PRELIMINARY COPIES
Each director is obligated to purchase the Shares as specified in the
Contract at any time before November 5, 2003. In the event of the death of a
director while serving as a member of Cardinal's Board of Directors, such
obligation to purchase Shares granted to him pursuant to the Contract shall be
passed to his estate to be performed by the person or persons entitled thereto
by will or by applicable laws of descent and distribution ("Director
Representative") and the Director Representative shall have the obligation to
purchase the Shares to which the director was entitled to the full extent such
Shares were able to be purchased on the date of his death. Likewise, in the
case of the permanent and total disability of a director (within the meaning of
Section 22(e) (3) of the Internal Revenue Code of 1986, as amended), the
director continues to be obligated under the Contract and such duties may be
performed by a person designated herein as a Director Representative.
As of September ___, 1996, each Director has fulfilled his obligation
under the Contract, except Mr. Mahan.
BENEFICIAL OWNERSHIP OF CARDINAL COMMON STOCK
The following table sets forth information as of the Special Meeting
Record Date with respect to beneficial ownership of Stock owned by (i)
directors and executive officers of Cardinal, (ii) the directors and executive
officers of Cardinal as a group, and (iii) owners of 5% or more of Stock
(indicating such persons' address(es)).
<TABLE>
<CAPTION>
Percent of Common
Name Number of Shares (1) Stock Outstanding
---- -------------------- -----------------
<S> <C> <C>
Samuel A.B. Boone (2)............ %
Jack H. Brown (3)(4).............
Vernon J. Cole (5)...............
Robert W. Copelan, D.V.M. (6)....
Carol M. Gatton (7)..............
Loyd G. Jasper (3)(4)............
Scott Cvengros (3)...............
James S. Mahan, III (3)..........
Ryan R. Mahan ...................
John S. Penn (3).................
Howard J. Runnion, Jr............
Robert F. Stockwell (3)(8).......
Ronald C. Switzer (9)............
Directors and Executive Officers
as a Group (12 Persons)..........
</TABLE>
__________________________
* Less than 1%.
(1) The directors have entered into contracts with Cardinal, which require
them to each purchase 7,500 shares of Stock by November 5, 2003. The
shares subject to the Contracts have been included in calculating the
percentage of ownership for all directors, except for Mr. Mahan.
(2) Includes 23,054 shares of Stock held on behalf of Boone Enterprises No. 7
and 21,887 shares of Stock held on behalf of Boone Enterprises No. 8.
(3) Includes shares of Stock acquired under Cardinal's 401(k) Plan through
June 30, 1996. The number of shares acquired under the plan for
Messrs. Brown, Jasper, Penn, Mahan, Stockwell and Cvengros are 637, 498,
561, 811, 502 and 335.
(4) Includes shares of Stock issuable upon exercise of options exercisable
within 60 days of the Special Meeting Record Date. The number of such
shares issuable upon exercise of options held by Messrs. Brown and Jasper
are 2,725 and 2,278, respectively.
(5) Mr. Cole's shares are held by The Cole Family Limited Partnership
(62,230) and by the Vernon J. Cole Revocable Trust (7,500).
(6) Include 4,923 shares held by Robert W. Copelan, D.V.M. Retirement Plan.
- 17 -
<PAGE> 22
PRELIMINARY COPIES
(7) Does not include 1,543 shares in the C.M. Gatton Profit Sharing Plan in
which Mr. Gatton has no voting or dispositive power, nor beneficial
ownership. Mr. Gatton's business address is: Gatton Chevrolet-Cadillac,
814 State and 11th Streets, Bristol, Tennessee 37620.
(8) Mr. Stockwell's shares are held jointly with his wife, Jana, except for
502 shares held in Cardinal's 401(k) Plan and 750 shares held in Mr.
Stockwell's IRA.
(9) Includes 3,853 shares held by a profit sharing trust.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, Cardinal stockholders may
present proposals for inclusion in Cardinal's proxy statement and for
consideration at the next annual meeting of Cardinal stockholders by submitting
their proposals to Cardinal in a timely manner. As noted in Cardinal's proxy
statement relating to the 1996 Annual Meeting of Cardinal stockholders, to be
considered for the 1997 Annual Meeting of Cardinal stockholders, stockholder
proposals must be received by Cardinal no later than December 5, 1996 and must
comply with the requirements of Rule 14a-8.
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<PAGE> 23
PRELIMINARY COPIES
APPENDIX A
<PAGE> 24
SECOND AMENDMENT
TO THE CARDINAL BANCSHARES, INC.
1992 LIMITED STOCK OPTION PLAN
WHEREAS, the Board of Directors (the "Board") of Cardinal Bancshares, Inc.
(the "Corporation") has heretofore adopted the Cardinal Bancshares, Inc. 1992
Limited Stock Option Plan effective October 24, 1992, as amended effective
March 22, 1993 (the "TARSOP"); and
WHEREAS, pursuant to Section 11 of the TARSOP, the Plan Committee
of the Board subject to the approval of the Board when required under a
specific provision of the TARSOP, may amend the TARSOP, except that, among
other things, without the approval of a majority of the votes represented and
entitled to be voted at a duly held meeting of the stockholders of the
Corporation, the period during which an Option may be exercised may not be
extended beyond the period provided in Section 5 of the TARSOP; and
WHEREAS, the Board has determined that it is desirable and in the best
interests of the Corporation to amend the TARSOP, effective May 24, 1996, but
subject to stockholder approval in accordance with Section 11 thereof, as set
out in this Second Amendment;
NOW, THEREFORE, the TARSOP is hereby amended as follows, effective as set
out above:
1. Section 5.C. of the TARSOP is amended to read in its entirety as
follows:
C. Period for Exercise of Options. Options shall be
exercisable only during the period from the date of grant through
December 31, 2001, only as and at the times provided below, and all
Options shall lapse and cease to be exercisable upon the earliest
of [w] the date of the termination of employment of the Optionee
(other than by reason of Disability or Death, as set out below) by
the Company or any of its subsidiaries if such termination occurs
before January 1, 1997; [x] the date of the termination of the
Optionee's employment by the Company or any of its subsidiaries
(other than by reason of Disability or Death, as set out below)
after December 31, 1996, if the Corporation fails to achieve the
Cumulative Performance Goal; [y] December 31, 2001; or [z] any
earlier date expressly set forth in the grant. For purposes of
this Section 5, employment by Security First Network Bank or any
subsidiary thereof (collectively, "SFNB") during the period from
May 24, 1996 through December 31, 1996 shall be deemed to be
employment by the Corporation; provided, however, that any Optionee
who is not an employee of the Corporation or one or more
<PAGE> 25
of its subsidiaries after December 31, 1996 shall be deemed to have
terminated employment with the Corporation and such subsidiaries as
of the later of (i) January 1, 1997 or (ii) the actual date of such
termination of employment (in either case, whether or not such
Optionee is then employed by SFNB). No Option shall be exercisable
before January 1, 1997 except in the event of an Optionee's
Disability or Death, as provided below.
2. Section 5.C.[3] is amended by adding the following at the end
thereof:
Notwithstanding the foregoing provisions of the Section 5.C.[3], in
the case of an Optionee whose employment with the Corporation is
terminated due to commitments made by the Corporation to the
Federal Reserve Board in connection with the regulatory approvals
necessary to permit the Corporation to spin-off of its former
subsidiary, Security First Network Bank, on May 24, 1996, if the
Corporation achieves the Cumulative Performance Goal, then as of
January 1, 1997, the Options held by such an Optionee shall become
fully vested and exercisable and shall continue to be exercisable
through December 31, 2001 notwithstanding any termination of the
Optionee's employment with the Corporation or any subsidiary after
May 24, 1996.
3. Section 5.E. is amended by adding a new sentence after the second
sentence of the definition of "Annual Performance Goal" as follows:
For all fiscal years ending after December 31, 1995, there shall
not be included in earnings of the Corporation any charge arising
as a result of (i) any special assessment imposed by the Savings
Association Insurance Fund ("SAIF") or Federal Deposit Insurance
Corporation after July 31, 1996 related to recapitalization of the
SAIF or (ii) the Second Amendment to the Plan, the First Amendment
to the Cardinal Bancshares, Inc. 1994 Restricted Stock Option Plan
or the Amendment to the Cardinal Bancshares, Inc. 1989 Restricted
Stock Option Plan as Amended April 16, 1992, that were adopted by
the Board of Directors on September __, 1996 or any amendment of an
option heretofore granted under any such Stock Option Plan in
accordance with such amendments.
4. The foregoing amendments shall be effective as of May 24, 1996,
subject, however, to the approval of a majority of the votes represented and
entitled to be voted at a duly held meeting of the stockholders of the
Corporation held within 12 months of the date of adoption of such amendments by
the Committee.
<PAGE> 26
5. In all other respects, the TARSOP shall continue in full force
and effect.
* * *
This Second Amendment to the 1992 Limited Stock Option Plan was duly
adopted and approved by the Board of Directors of Cardinal Bancshares, Inc. by
resolution at a meeting held on the ______ day of ________________, 1996.
---------------------------------
Secretary
This Second Amendment to the 1992 Limited Stock Option Plan was duly
approved by the shareholders of Cardinal Bancshares, Inc. in accordance with
Section 11 thereof at a meeting held on the ______ day of ________________,
1996.
---------------------------------
Secretary
<PAGE> 27
PRELIMINARY COPIES
APPENDIX B
<PAGE> 28
AMENDMENT
TO THE CARDINAL BANCSHARES, INC.
1989 RESTRICTED STOCK OPTION PLAN
AS AMENDED APRIL 16, 1992
WHEREAS, the Board of Directors (the "Board") of Cardinal Bancshares, Inc.
(the "Corporation") has heretofore adopted, and the stockholders of the
Corporation have approved, the Cardinal Bancshares, Inc. 1989 Restricted Stock
Option Plan, as amended April 16, 1992 (the "1989 Plan"); and
WHEREAS, pursuant to Section 11 of the 1989 Plan, the Board may amend the
1989 Plan, except that no amendments shall be made that would, among other
things, affect outstanding options, except as provided in Section 10 of the
1989 Plan; and
WHEREAS, the Board has determined that it is desirable and in the best
interests of the Corporation to amend the 1989 Plan, effective May 24, 1996,
but subject to stockholder approval in accordance with Section 11 thereof, as
set out in this Amendment;
NOW, THEREFORE, the 1989 Plan is hereby amended as follows, effective as
set out above, but subject to approval of the stockholders of the Corporation
in accordance with the bylaws of the Corporation and the Corporation Law of the
State of Kentucky:
1. The second sentence of Section 7.A. of the 1989 Plan is amended
to read in its entirety as follows:
Notwithstanding the above, should an optionee's employment with the
Corporation terminate due to (i) the death of the optionee after
the optionee has completed not less than two (2) years continuous
service with the Corporation or (ii) commitments made by the
Corporation to the Federal Reserve Board in connection with the
regulatory approvals necessary to permit the Corporation to
spin-off of its former subsidiary, Security First Network Bank, on
May 24, 1996 (the "Commitments"), all options shall immediately
become fully vested and (y) in the case of the optionee's death,
the optionee's successor in interest shall have sixty (60) days
after the optionee's date of death to exercise such option or (z)
in the case of a termination due to the Commitments, the optionee
shall have sixty (60) days after the later of (i) such termination
or (ii) stockholder approval of the Amendment to the Plan adopted
by the Board on _______________ __, 1996, to exercise such option,
in either case, in accordance with the terms hereof, provided,
<PAGE> 29
however, that such option must be exercised within ten (10) years
after the date such option is granted.
2. Section 9 of the 1989 Plan is amended by adding the following new
sentence before the first sentence thereof:
If an optionee's employment by the Corporation is terminated due to
the Commitments (as defined in Section 7.A. above) the optionee
shall have sixty (60) days after the later of (i) such termination
or (ii) stockholder approval of the Amendment to the Plan adopted
by the Board on _______________ __, 1996, to exercise such option,
in either case, in accordance with the terms hereof, provided,
however, that such option must be exercised within ten (10) years
after the date such option is granted.
3. The first sentence of Section 9 of the 1989 Plan is amended by
adding the word "other" before the word "reason" and deleting the word
"whatsoever".
4. The foregoing amendments shall be effective as of May 24, 1996.
5. In all other respects, the 1989 Plan shall continue in full force
and effect.
* * *
This Amendment to the Cardinal Bancshares, Inc. 1989 Restricted Stock
Option Plan, as amended April 16, 1992, was duly adopted and approved by the
Board of Directors of Cardinal Bancshares, Inc. by resolution at a meeting held
on the ______ day of ________________, 1996.
------------------------------
Secretary
This Amendment to the 1989 Restricted Stock Option Plan was duly approved
by the stockholders of the Corporation in accordance with the bylaws of the
Corporation and the Corporation Law of the State of Kentucky at a meeting held
on the ______ day of ________________, 1996.
------------------------------
Secretary
<PAGE> 30
APPENDIX C
REVOCABLE PROXY
CARDINAL BANCSHARES, INC.
400 EAST VINE STREET, SUITE 300
LEXINGTON, KENTUCKY 40507
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, being a shareholder of Cardinal Bancshares, Inc. (the
"Company"), hereby appoints John S. Penn and Jack H. Brown, or either of them,
with full power of substitution in each, as proxies and hereby authorizes such
proxies to represent the undersigned at the Special Meeting of Shareholders of
the Company to be held at the main offices of The Vine Street Trust Company,
360 East Vine Street, Lexington, Kentucky 40507 on October 11, 1996 at 10:00
a.m., local time, and at any adjournments of said meeting, and to act at such
meeting with respect to all votes that the undersigned would be entitled to
cast, if then personally present, in accordance with the following
instructions. The undersigned shareholder hereby revokes any proxy or proxies
heretofore given.
This proxy will be voted as directed by the undersigned shareholder.
UNLESS CONTRARY DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSALS 1
AND 2 AND IN THE DISCRETION OF THE NAMED PROXIES AS TO OTHER MATTERS. The
undersigned shareholder may revoke this proxy at any time before it is voted by
delivering to the Secretary of the Company either a written revocation of the
proxy or a duly executed proxy bearing a later date, or by appearing at the
Special Meeting and voting in person. The undersigned shareholder hereby
acknowledges receipt of the Notice of Special Meeting and Proxy Statement.
(Continued and to be signed and dated on reverse side)
<PAGE> 31
1. Proposal to approve amendments to the Company's 1992 Limited Stock
Option Plan, as amended.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
[ ] [ ] [ ]
</TABLE>
2. Proposal to approve amendments to the Company's 1989 Restricted Stock
Option Plan, as amended.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
[ ] [ ] [ ]
</TABLE>
3. To vote, in its discretion, upon any other business that may properly
come before the Special Meeting or any adjournment thereof. Except with
respect to procedural matters incident to the conduct of the Special Meeting,
management is not aware of any other matters which should come before the
Special Meeting.
Dated:_____________________ , 19___
____________________________________
I plan to attend Signature
the meeting
[ ] ____________________________________
Signature
Note: Please sign exactly as your
name appears on this proxy. Only one
signature is required where the stock
is held jointly. When signing in a
representative capacity, please give
title.
