<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] 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 Rule 14a-11(c) or Rule 14a-12
</TABLE>
CARDINAL BANCSHARES
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(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)(1) 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:
<PAGE> 2
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 1, 1997
Notice is hereby given that the 1997 Annual Meeting of Shareholders of
Cardinal Bancshares, Inc. will be held at The Vine Street Trust Company, 360
East Vine Street, Lexington, Kentucky on Thursday, May 1, 1997, at 9:00 a.m.
local time for the following purposes:
1. To elect seven directors for a one year term;
2. To consider and act upon such other business as may properly come
before the meeting or any adjournment or postponement thereof.
Only shareholders of record at the close of business on March 28, 1997 are
entitled to notice of and to vote at this meeting or any postponement thereof.
The stock transfer books will not be closed.
It is desirable that as many shareholders as possible be represented at the
meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN,
DATE AND RETURN YOUR PROXY IN THE REPLY ENVELOPE AS SOON AS POSSIBLE. Anyone
executing and delivering a proxy has the power to revoke it at any time prior to
the establishment of a quorum at the Annual Meeting. Your cooperation in signing
and returning the proxy promptly will be greatly appreciated.
By order of the Board of Directors,
/S/ John S. Penn
--------------------------------------------------
John S. Penn, President and Chief Executive Officer
April 4, 1997
<PAGE> 3
CARDINAL BANCSHARES, INC.
400 EAST VINE STREET
SUITE 300
LEXINGTON, KENTUCKY 40507
PROXY STATEMENT
ANNUAL MEETING TO BE HELD MAY 1, 1997
AT THE VINE STREET TRUST COMPANY
360 EAST VINE STREET, LEXINGTON, KENTUCKY
INTRODUCTION
The Board of Directors of Cardinal Bancshares, Inc. (the "Company" or
"Cardinal") solicits your proxy, and asks that you vote, sign, date and promptly
mail the enclosed proxy card for use at the Annual Meeting of Shareholders (the
"Annual Meeting") to be held May 1, 1997, at The Vine Street Trust Company, 360
East Vine Street, Lexington, Kentucky at 9:00 a.m. local time and at any
adjournment or postponement of such meeting. At the Annual Meeting, it is
anticipated that the proposal relating to the election of directors will be the
only action considered. The Company's 1996 Annual Report to the shareholders is
enclosed with this Proxy Statement. It is anticipated that this Proxy Statement
will be first mailed to shareholders on April 4, 1997.
VOTING
The Board of Directors has fixed the close of business on March 28, 1997 as
the record date ("Record Date") for the determination of stockholders entitled
to notice of and to vote at the Annual Meeting. On the Record Date, 1,593,557
shares of the Company's common stock, no par value, (the "Company's Common
Stock") were outstanding. Owners of record of the Company's Common Stock on
March 28, 1997 are entitled to notice of and one vote per share for each matter
presented at the Annual Meeting or any adjournment thereof. Under Kentucky law,
shareholders have cumulative voting rights with respect to the election of
directors. Under cumulative voting procedures, each shareholder is entitled to
cast as many votes in the aggregate as shall equal the number of shares of the
Company's Common Stock owned by him or her multiplied by the number of directors
to be elected. Each shareholder may cast all his or her votes for a single
nominee or may distribute them among two or more nominees. The persons named as
proxies reserve the right to cumulate votes represented by proxies which they
receive, and to distribute such votes among one or more of the nominees in their
discretion. The seven nominees for director receiving the highest number of
votes shall be elected directors, to hold office until the next succeeding
annual meeting or until the election and qualification of their successors.
<PAGE> 4
Employees of Cardinal who participate in the Cardinal Bancshares, Inc.
Affiliates Employee Stock Ownership Plan (the "ESOP") generally may vote the
shares held in their account (which generally are allocated in proportion to
each participant's compensation) by giving instructions for voting to the ESOP's
trustee. When shares held by the ESOP are allocated to a suspense account, each
participant in the ESOP is deemed to have one share for the purpose of directing
the trustee in voting the unallocated shares. The trustee of the ESOP will vote
all of the unallocated shares held by the ESOP in proportion to the instructions
it receives from participants. However, if a participant does not give voting
instructions, shares represented by the participant's vote will not be voted.
Employees of Cardinal who participate in either the First Federal Savings
Bank Management Retention Plan or the Mutual Federal Savings Bank Management
Retention Plan (collectively the "MRPs") are entitled to vote the shares held by
the trustee that are represented by their individual share awards. If the
trustee of the MRPs does not receive instructions with respect to a share award,
the trustee will vote such shares represented by the share award at the
direction of the Management Retention Plan Committee (the "MRP Committee").
The Vine Street Trust Company ("Vine Street"), the trustee of the ESOP and
the MRPs, is a subsidiary of Cardinal; therefore, participants' instructions
will be given to an independent third party for tabulation and then transmitted
to the trustee to protect the confidentiality of the vote.
Abstentions and broker non-votes are not counted in determining the number
of votes cast and in effect represent no action taken on the matter by the
abstaining or non-voting shareholder.
The cost of soliciting proxies will be borne by Cardinal. The solicitation
of proxies will be primarily by mail. In addition to the solicitation of proxies
by mail, directors, officers and employees of Cardinal may solicit proxies
personally, by telephone, telegraph or otherwise. Cardinal will request persons,
firms and corporations holding shares in their names or in the names of their
nominees, which are beneficially owned by others, to send proxy materials to and
obtain proxies from such beneficial owners and will reimburse the holders for
their reasonable expenses in doing so. You may revoke your proxy at any time
before it is voted by giving written notice of its revocation to the Secretary
of the Company, by delivery of a later dated proxy, or by attending the annual
meeting and voting in person. Signing a proxy does not preclude you from
attending the meeting in person. The shares represented by all properly executed
proxies will be voted as specified. IN THE ABSENCE OF DIRECTION, PROPERLY
EXECUTED PROXIES WILL BE VOTED "FOR" THE NOMINEES TO THE BOARD SET FORTH BELOW.
2
<PAGE> 5
VOTING SECURITIES AND OWNERSHIP THEREOF
The following table sets forth information as of the Record Date with
respect to persons known by the Company to be beneficial owners of more than
five percent of the Company's Common Stock. The historical information set forth
below is based on beneficial ownership information known to the Company or
contained in the most recent Schedule 13D or 13G filed on behalf of such person
with the Securities and Exchange Commission ("SEC").
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of Company's
Beneficial Owner Beneficial Ownership Common Stock
- -------------------------- -------------------- --------------------
<S> <C> <C>
Carol M. Gatton 158,204 (1) 9.93%
Gatton Chevrolet-Cadillac
1000 West State Street
Bristol, Tennessee 37620
James S. Mahan, III 118,434 (2) 7.13%
3390 Peachtree Road NE
Atlanta, Georgia 30326
</TABLE>
(1) Shares do not include 3,517 shares in the C. M. Gatton Profit Sharing Plan
in which Mr. Gatton does not have voting or dispositive power.
(2) Includes 66,666 shares of the Company's Common Stock issuable upon exercise
of options exercisable within 60 days of the Record Date.
The following table sets forth information as of the Record Date with
respect to shares of the Company's Common Stock owned by all directors and
nominees, each of the named executive officers (defined below) of Cardinal, and
the directors and executive officers of Cardinal as a group.
<TABLE>
<CAPTION>
Name and Position of
Directors and Amount and Nature of Percent of Company's
Executive Officers Beneficial Ownership (1) Common Stock
- -------------------------------- ------------------------ --------------------
<S> <C> <C>
Samuel A. B. Boone 70,000 4.39%
Director
Jack H. Brown (2)(3) 30,546 1.91%
Chief Financial Officer
</TABLE>
3
<PAGE> 6
<TABLE>
<S> <C> <C>
Vernon J. Cole (4) 70,130 4.40%
Director
Scott P. Cvengros (2) 2,204 *
Senior Credit Officer
James M. Hill, IV 60,551 3.80%
Director
Loyd G. Jasper (2)(3) 18,233 1.14%
Director
James S. Mahan, III (2)(3)(5)(6) 118,434 7.13%
Chairman and Chief
Executive Officer
Ryan R. Mahan (6) 33,373 2.09%
Director
John S. Penn (2)(3)(5) 33,057 2.06%
Director, President and
Chief Executive Officer
Ronald C. Switzer (7) 77,547 4.87%
Director
Directors and Executive Officers 514,075 30.65%
as a Group (10 Persons)
</TABLE>
- ----------
(1) Unless otherwise indicated, shares beneficially owned are held with voting
and dispositive power.
(2) Includes shares of the Company's Common Stock acquired under the Company's
401(k) Plan through December 31, 1996. The number of shares acquired under the
plan for Messrs. Brown, Cvengros, Jasper, J. Mahan and Penn are 779, 687, 1,031,
915 and 699, respectively.
(3) Includes shares of the Company's Common Stock issuable upon exercise of
options exercisable within 60 days of the Record Date. The number of shares
issuable upon exercise of options exercisable within 60 days of the Record Date
to Messrs. Brown, Jasper, J. Mahan and Penn are 2,725, 3,417, 66,666 and 11,111,
respectively.
4
<PAGE> 7
(4) Mr. Cole's shares are held by The Cole Family Limited Partnership (62,630)
and by the Vernon J. Cole Revocable Trust (7,500).
(5) James S. Mahan, III was Chairman of the Board and Chief Executive Officer
until his resignation on September 20, 1996. Mr. Penn became Chief Executive
Officer on October 24, 1996.
(6) James S. Mahan, III and Ryan R. Mahan are brothers.
(7) Includes 15,853 shares held by a profit sharing trust.
(*) Less than 1%.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's 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. Such persons are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file. Based solely on
its review of the copies of such forms received by it, or written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that during fiscal 1996 all filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with on a timely basis with the exception of a
tardy Form 4 filing reflecting one transaction made by Ronald C. Switzer, a
Cardinal director, and a tardy Form 4 filing reflecting one transaction made by
Robert F. Stockwell, formerly Cardinal's treasurer, who resigned September 20,
1996.
5
<PAGE> 8
ELECTION OF DIRECTORS
(PROPOSAL 1)
The Articles of Incorporation and Bylaws of the Company provide that the
Board of Directors shall be composed of not less than one nor more than 20
members with the exact number to be determined each year by resolution of a
majority of the full Board of Directors. The Board of Directors has fixed the
number of directors for the ensuing year at seven.
The Company's Board of Directors, as of the Record Date, consist of seven
(7) members and each member has been nominated for re-election at the 1997
Annual Meeting. Directors are elected annually to serve until the next
succeeding annual meeting or until the election and qualification of their
successors.
The Board of Directors does not know of any nominee who will be unable to
serve. If any nominee becomes unwilling or unable to accept nomination or
election, the Board of Directors may designate a substitute nominee, and the
proxies shall have the right to vote for any substitute nominee in place of the
nominee who becomes unwilling or unable to accept nomination or election, unless
an instruction to the contrary is indicated on the proxy card. The proxies shall
have discretionary authority in cumulating the votes with respect to any
substitute nominee.
There are no current family relationships between any director or executive
officer of the Company or any nominee. Ryan R. Mahan is the brother of James S.
Mahan, III, who served as Chairman and Chief Executive Officer of the Company
until September 20, 1996. There are no arrangements or understandings regarding
the election of any of the following nominees as directors, except that the
nomination of Loyd G. Jasper is made pursuant to the terms of the Agreement of
Conversion and Acquisition between Cardinal and Alliance Bank ("Alliance").
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
ELECTION OF THE SEVEN NOMINEES FOR DIRECTOR.
6
<PAGE> 9
INFORMATION ABOUT DIRECTORS AND NOMINEES
The following table sets forth information with respect to the nominees of
the Board for election as directors of Cardinal. Each nominee currently serves
on the Board of Cardinal.
DIRECTORS:
<TABLE>
<CAPTION>
Name and Age of Director (1) Position(s) Held Director Since
- ----------------------------- ------------------------ --------------
<S> <C> <C>
Samuel A. B. Boone, 36 Director 1996
Vernon J. Cole, 72 Director 1989
James M. Hill, IV, 59 Director 1996
Loyd G. Jasper, 62 Director 1993
Ryan R. Mahan, 44 Director 1989
John S. Penn, 45 Director, President and 1989
Chief Executive Officer
Ronald C. Switzer, 55 Director 1989
</TABLE>
- ----------
(1) Ages are as of March 28, 1997.
The following information, as of March 28, 1997, concerns the principal
occupation of each nominee for director for the past five years.
SAMUEL A. B. BOONE is President of The Lexington Quarry Company. He serves
as a director at First & Peoples Bank ("First & Peoples").
VERNON J. COLE, was President and Chief Executive Officer of HNB Bank, N.A.
("HNB") from 1986 until 1991. Mr. Cole is currently Chairman of the Board of
HNB.
JAMES M. HILL, IV, a veterinarian, is a self-employed breeder and racer of
thoroughbred horses. In addition, Dr. Hill entered the boot manufacturing and
marketing business in May 1996.
7
<PAGE> 10
LOYD G. JASPER, was President and Chief Executive Officer of Alliance from
1985 to July 1994. Mr. Jasper has been a member of the Board of Alliance since
1985 and became Chairman of the Board of Directors of Alliance in January 1993.
He has also been the President and a director of Mutual Service Corporation
("Mutual Service") since January 1986 and served as President and director of
Mutual Insurance Agency, Inc. ("Mutual Insurance"), now a wholly-owned
subsidiary of HNB, from 1985 to February, 1994.
RYAN R. MAHAN, has owned and operated Ryan R. Mahan and Associates, an
equine auctioneer firm, since 1975. He is also Vice President and co-owner of
Swinebroad-Denton, a real estate brokerage firm and has been associated with
such firm since 1988. Mr. Mahan is also an auctioneer at Keeneland Association,
Lexington, Kentucky. He is also director of auctions for Ocala Breeders Sales,
Inc., Barretts Equine Sales and Canadian Breeders Sales.
JOHN S. PENN, was President and Chief Operating Officer of Cardinal from
November 1987 to October 1996. In October 1996 he was elected President and
Chief Executive Officer of Cardinal. He is also a director of VST Financial
Services ("VST").
RONALD C. SWITZER, has been a certified public accountant since 1969. His
accounting firm is Switzer, McGaughey & Co., PSC in Lexington, Kentucky. He also
has owned and been the president of various restaurant franchises, a computer
franchise, and an athletic club. Mr. Switzer is also a director of Vine Street.
COMMITTEES OF THE CARDINAL BOARD OF DIRECTORS
The following describes the duties and responsibilities of certain
committees of the Cardinal Board of Directors, current membership of these
committees and the number of meetings held annually. The Board of Directors of
Cardinal acts as the nominating committee for selecting nominees for election as
directors and met once for that purpose in 1996. All nominations for membership
on the Board of Directors originated with the Board of Directors. The Board of
Directors will not consider nominees recommended by stockholders.
Executive Committee. Prior to the resignation of Carol M. Gatton from the
Cardinal Board of Directors on March 31, 1996 and the resignations of Robert W.
Copelan, James S. Mahan, III and Howard J. Runnion, Jr. from the Cardinal Board
of Directors on September 20, 1996, the Executive Committee consisted of Messrs.
Gatton, Copelan, J. Mahan, Runnion, Ronald C. Switzer and John S. Penn. On
October 24, 1996, the Board elected Mr. Penn, Mr. Switzer and Samuel A. B. Boone
to serve as members of the Executive Committee. The Executive Committee has the
authority to exercise all powers of the Board of Directors between regularly
scheduled meetings, except as limited by the Bylaws of Cardinal and Kentucky
law. The Committee meets as necessary to consider items of general concern to
Cardinal. The Executive Committee met five times in 1996.
8
<PAGE> 11
Audit Committee. Prior to October 24, 1996, the members of the Audit Committee
were Vernon J. Cole, Chairman, and Ronald C. Switzer. On October 24, 1996, Loyd
G. Jasper was appointed as an additional member of the Audit Committee. The
Audit Committee meets with outside auditors to discuss the results of the
annual audit and any related matters. This Committee also receives and reviews
all reports and findings and other information presented to them by Cardinal's
internal auditor. The Audit Committee met seven times during 1996.
Compensation Committee. Prior to the resignations of Carol M. Gatton and
Howard J. Runnion, Jr., the members of the Compensation Committee were Messrs.
Gatton and Runnion and Loyd G. Jasper. On October 24, 1996, the Board appointed
Mr. Jasper, Ronald C. Switzer and Vernon J. Cole to serve as members of the
Compensation Committee. The Compensation Committee meets as needed in order to
administer the CEO compensation program and the Limited Stock Option Plan. It
met once in 1996.
Stock Option Agreement Committee. Prior to October 24, 1996, the members of
the Stock Option Agreement Committee were Ronald C. Switzer and Vernon J. Cole.
On October 24, 1996, Mr. Cole, Samuel A. B. Boone and James M. Hill, IV were
appointed as members of the Stock Option Agreement Committee. The Stock Option
Agreement Committee administers the 1989 and 1994 Stock Option Plans and it met
three times in 1996.
Pension Planning Committee. Prior to the resignation of Dean Grimm from the
Cardinal Board of Directors on May 20, 1996 and the resignation of Mr. J. Mahan
on September 20, 1996, the Pension Planning Committee consisted of Messrs.
Grimm, J. Mahan and John S. Penn. On October 24, 1996, the Board appointed Mr.
Penn, Ryan R. Mahan and James M. Hill, IV to serve as members of the Pension
Planning Committee. The Committee meets as necessary between regular Board
meetings to consider items relating to the Cardinal Bancshares, Inc. Pension
Plan and Trust Agreement. It did not meet in 1996.
Management Retention Plan Committee. Prior to the resignation of Mr. J.
Mahan, the MRP Committee consisted of Mr. J. Mahan, John S. Penn and Ronald C.
Switzer. On October 24, 1996, the Board appointed Mr. Penn, Ryan R. Mahan and
James M. Hill, IV to serve as members of the MRP Committee. The MRP Committee
meets as necessary between regular Board meetings to consider awards under
subsidiary plans. It did not meet in 1996.
Cardinal Bancshares, Inc. -- 1992 First Federal Savings Bank Restricted
Stock Option Plan Committee. Prior to the resignation of Mr. J. Mahan, the
members of this Committee were Mr. J. Mahan, John S. Penn and Ronald C. Switzer.
On October 24, 1996, the Board appointed Mr. Penn, Ryan R. Mahan and James M.
Hill, IV to serve on the Committee. The Committee meets as necessary to consider
stock grants under the First Federal Savings Bank Restricted Stock Option Plan.
The Committee met one time in 1996.
9
<PAGE> 12
Cardinal Bancshares, Inc. -- 1993 Mutual Federal Savings Bank Restricted
Stock Option Plan Committee. Prior to the resignation of Mr. J. Mahan, the
members of this Committee were Mr. J. Mahan, John S. Penn and Ronald C. Switzer.
On October 24, 1996, the Board appointed Mr. Penn, Ryan R. Mahan and James M.
Hill, IV to serve on the Committee. The Committee meets as necessary to consider
stock grants under the Mutual Federal Savings Bank Restricted Stock Option Plan.
The Committee met one time in 1996.
Regular meetings of the Board of Directors are held quarterly. During 1996,
there were ten meetings of the Board of Directors, including scheduled and
special meetings. Each of the directors attended at least 75% of the aggregate
of the total number of meetings of the Board of Directors (held during the
period for which he was a director) and of all committees of the Board on which
such director served during the period that he served during fiscal 1996, except
for James S. Mahan, III, who attended 67% of the meetings held.
DIRECTORS' COMPENSATION
Directors' Fees. Beginning with the fourth regularly scheduled quarterly
meeting during 1996, nonmanagement directors of Cardinal received $1,000 for
attending each meeting. Prior to the fourth regularly scheduled quarterly
meeting, directors of Cardinal did not receive any compensation for attending
Cardinal Board of Directors or Committee meetings. In addition, each member of
Cardinal's Audit Committee, beginning after July 1996, received $250 per meeting
attended. Directors of Vine Street, First & Peoples and HNB receive a fee of
$300 for each directors' meeting attended. Directors of Alliance receive a fee
of $500 per Board meeting held, whether or not the director attends the Board
meeting. Directors of Jefferson Banking Company ("Jefferson") receive a fee of
$400 for each directors' meeting attended. Directors of VST, Mutual Service and
Mutual Insurance do not receive fees. Messrs. Boone, Cole, Hill, Jasper, Ryan
Mahan and Switzer received $3,950, $4,450, $1,000, $1,750, $1,000 and $1,750,
respectively, in directors' fees from Cardinal and Cardinal subsidiaries during
fiscal 1996.
Consulting Agreements. Pursuant to a consulting agreement entered into with
Cardinal when he became a director in 1990, Howard J. Runnion, Jr. received a
fee of $1,000 for each calendar quarter in which he attended a regular meeting
of the Board of Directors. Mr. Runnion received $2,000 during 1996 for
consulting services. Mr. Runnion resigned from the Board of Directors on
September 20, 1996.
Employment Agreements. Mr. Jasper 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
10
<PAGE> 13
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 1996 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
service 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, 1996, Mr. Cole received $28,000 in
deferred compensation payments.
MANAGEMENT
The following table sets forth certain information with respect to all of
the executive officers of Cardinal.
<TABLE>
<CAPTION>
Name and Age of Officer (1) Position(s) Held Year First Elected
- ---------------------------- ----------------------- ------------------
<S> <C> <C>
John S. Penn, 45 Director, President and 1987
Chief Executive Officer
Jack H. Brown, 47 Chief Financial Officer 1988
Scott P. Cvengros, 33 Senior Credit Officer 1996
- ----------
</TABLE>
(1) Ages are as of March 28, 1997.
11
<PAGE> 14
Information concerning the principal occupation of Mr. Penn is set forth
under "Information about Directors and Nominees." Information concerning the
principal occupation during the last five years of those executive officers who
are not directors of Cardinal is set forth below.
JACK H. BROWN, has been the Chief Financial Officer of Cardinal since 1988.
He is currently the Secretary-Treasurer of VST and a vice president of Vine
Street, Jefferson, First & Peoples, HNB and Alliance.
SCOTT P. CVENGROS, has been the Senior Credit Officer of Cardinal since
January 1996. Mr. Cvengros served as a lending officer at Vine Street from
February 1989 until January 1995. He was a lending officer at VST from January
1995 until June 1995 at which time he became president of VST. He served as
president of VST until he joined Cardinal in January 1996.
EXECUTIVE COMPENSATION
Compensation. The following table sets forth certain information concerning
compensation paid or accrued by the Company during the last three fiscal years
to or on behalf of Cardinal's CEOs and each of the two other most highly
compensated executive officers of Cardinal whose total annual salary and bonus
exceeded $100,000 in fiscal 1996 (the "named executive officers"). Cardinal does
not have any stock appreciation rights ("SARs").
12
<PAGE> 15
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
Other Annual Securities All
Name and Compen- Underlying Other
Principal Salary Bonus sation Options/ Compensation
Position (1) Year ($) ($) ($) (2) SARs (#) ($) (3)
------------ ---- --- --- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
James S. Mahan, III, 1996 131,250 - - - 5,250
Chairman of the 1995 200,000 - 9,998 - (4) 8,000
Board and Chief 1994 167,835 - 1,573 - 2,000
Executive Officer
John S. Penn, 1996 142,040 - 6,636 - 5,682
Director, President and 1995 142,040 - 4,344 - 5,682
Chief Executive Officer 1994 142,040 - 2,835 - 1,420
Jack H. Brown, 1996 109,400 - - 2,000 4,376
Chief Financial 1995 109,400 - - - 4,376
Officer 1994 109,400 - - 2,275 1,094
Scott P. Cvengros, 1996 89,792 29,012 - 3,500 4,572
Senior Credit Officer 1995 78,250 7,250 - 2,500 3,420
1994 56,125 3,700 - 500 1,160
</TABLE>
(1) Mr. Mahan was Chairman of the Board and Chief Executive Officer until his
resignation on September 20, 1996. Mr. Penn became Chief Executive Officer on
October 24, 1996.
(2) Value of personal use of company-owned automobile.
(3) Consists of matching contributions under the Company's 401(k) Savings Plan.
(4) Does not include options for 929,200 shares of Security First Network Bank
("SFNB") common stock (as adjusted for stock splits to date) granted by Cardinal
to Mr. Mahan in 1995 which became exercisable (subject to vesting) upon the
spin-off of SFNB in May, 1996.
13
<PAGE> 16
Employment Agreements. None of the named executive officers of Cardinal has
an employment agreement with Cardinal or any of its subsidiaries.
Stock Options. The following table contains information with respect to
grants of stock options to the named executive officers who received stock
options during fiscal 1996.
OPTIONS/SAR GRANTS 1996 FISCAL YEAR
Individual Grants (1)
<TABLE>
<CAPTION>
Potential
Number of Realized Value at
Securities % of Total Assumed Annual
Underlying Options/ Rates of Stock Price
Options/ SARs Granted Exercise Appreciation
SARs to Employees or Base for Option Term
Granted in Fiscal Price Expiration --------------------- Grant
Name (#) Year ($/sh) Date 5% ($) 10% ($) Date
---- --- ---- ------ ---- ------ ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Jack H. Brown 2,000 5.58% 39.67 06/21/06 49,900 126,440 06/21/96
Scott P. Cvengros 3,500 9.76% 39.67 06/21/06 87,325 221,270 06/21/96
</TABLE>
(1) Option grants are exercisable in full 5 years from grant date.
The following table provides information related to options exercised by
the named executive officers during fiscal 1996 and the number and value of
options held at year end by such officers. The Company does not have any SARs.
14
<PAGE> 17
AGGREGATED OPTION/SAR EXERCISES IN 1996 FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SAR's at Options/SAR's at
Shares FY-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 - 2,733,306 (3)
John S. Penn - - - 33,334 - 1,366,694
Jack H. Brown - - 2,725 4,275 77,663 49,060
Scott P. Cvengros - - - 7,200 - 67,677
</TABLE>
(1) Represents the difference between the fair market value of the Company's
Common 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 Common Stock at December 31, 1996.
Options are in-the-money if the fair market value of the Company's Common Stock
exceeds the exercise price of the option.
(3) Mr. Mahan holds an option for 66,666 shares granted pursuant to the 1992
Limited Stock Option Plan, as amended, ("the TARSOP"). The Cardinal stockholders
approved an amendment to the TARSOP which accelerated the vesting and
exercisability of the option upon achieving an earnings per share goal of $3.36
per share for fiscal year 1996 after eliminating from the calculation of
Cardinal's earnings the amount of any special assessment which may be charged in
1996 related to the recapitalization of the Savings Association Insurance Fund
and the amount of any charge required to be recognized by Cardinal as a result
of the amendments. Based upon audited net income for 1996, the earnings per
share goal for 1996 has been achieved. Therefore, as of March 21, 1997, the
date Cardinal received its audited financial statements, the option held by Mr.
Mahan is fully vested and exercisable and will continue to be exercisable until
December 31, 2001.
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 years of 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.
15
<PAGE> 18
PENSION PLAN TABLE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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 paid to any benefit plan on behalf of the
employee. For 1996, 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 above.
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 March 28, 1997, the number of years of credited service for
each of Messrs. J. Mahan, Penn, and Brown was nine years. The number of years of
credited service for Mr. Cvengros was eight years.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Vine Street, HNB, Jefferson, First & Peoples 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 its 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.
16
<PAGE> 19
Bluegrass Commerce Center Partners received $120,168 in lease
payments from Cardinal for the period from January 1, 1996 to December 31, 1996.
Each current and former 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 (collectively the "Shares") of the Company's
Common Stock from the Company 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 issued by
Cardinal under the Contracts.
In the event of a capital adjustment in the Company's Common 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
Company's Common 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.
Each director is obligated to purchase Shares as specified in a 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 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 shall be performed by a person
designated herein as a Director Representative.
As of March 28, 1997, each current and former Director has fulfilled his
obligation under his Contract, except Mr. James Mahan. Mr. Mahan resigned as a
director of Cardinal on September 20, 1996 but is still obligated to purchase
the shares as specified in his Contract at any time before November 5, 2003.
17
<PAGE> 20
REPORT OF THE COMPENSATION COMMITTEE AND STOCK OPTION AGREEMENT COMMITTEE
The Company's CEO compensation program is administered by the Compensation
Committee, which also administers the Company's Limited Stock Option Plan. The
Stock Option Agreement Committee administers the 1989 and 1994 Stock Option
Plans.
Base Compensation. Compensation of the CEO is determined by the
Compensation Committee. The CEO determines the compensation of the Company's
other executive officers. Factors considered by the CEO in determining the
compensation of the Company's other executive officers are the Company's
performance and financial prospects and the individual's performance. Base
salaries for executive officers, including the CEO, were unchanged from 1995 to
1996, except for Mr. Cvengros whose base salary increased 14.7% between 1995 and
1996.
Stock Options. To encourage growth and shareholder value, stock options are
granted under the Company's 1989 and 1994 Stock Option Plans to key management
personnel who are in a position to make substantial contributions to the
long-term success of the Company. The Stock Option Agreement Committee believes
that the grant of options focuses attention on managing the Company from the
perspective of an equity owner. After review of the 1995 performance of the
Company, as well as the number of options granted in prior years to the named
executive officers, the Stock Option Agreement Committee granted options to
certain executive officers in 1996.
CEO Compensation. The CEO's compensation for fiscal 1996 consisted of base
salary and stock options issued under the Limited Stock Option Plan discussed
below. Mr. Mahan was CEO from January 1 to September 20, 1996. Mr. Penn became
CEO on October 24, 1996. Neither Mr. Mahan's nor Mr. Penn's base salary changed
from 1995 to 1996.
In 1992, the Board of Directors established the Company's Limited Stock
Option Plan under which Mr. Penn received grants of 33,334 shares which vest
upon the attainment of certain performance goals by the Company. The timing of
the exercise of the options granted under the Limited Stock Option Plan is based
on the Company and its subsidiaries meeting an "Annual Performance Goal" and a
"Cumulative Performance Goal" for the fiscal years ending in 1992, 1993, 1994,
1995 and 1996 as described in the Limited Stock Option Plan. The Limited Stock
Option Plan provides that the "Annual Performance Goal" of Cardinal and its
subsidiaries on a consolidated basis will be met for a certain year if the net
income earned per common share on a fully diluted basis ("EPS") for that year
reflects an average annual increase in EPS of 15%, compounded annually, over the
net income per common share (on an undiluted basis) when compared with the EPS
for all prior fiscal years, if any, ending after December 31, 1991, with the EPS
for December 31, 1991 set at $1.68 per common share. The "Cumulative Performance
Goal"
18
<PAGE> 21
means that for the fiscal year ending in 1996 Cardinal achieves the Annual
Performance Goal for that year.
On October 18, 1996 the Cardinal shareholders approved an amendment to the
Limited Stock Option Plan which changed the calculation of Cardinal's net income
for purposes of determining if Cardinal 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 the recapitalization
of the Savings Association Insurance Fund and the amount of any charge required
to be recognized by Cardinal as a result of such amendments approved on October
18, 1996. Based upon reported net income for 1996, the "Cumulative Performance
Goal" has been achieved.
Compensation Committee Stock Option Agreement Committee
---------------------- --------------------------------
Vernon J. Cole Samuel A. B. Boone
Loyd G. Jasper Vernon J. Cole
Ronald C. Switzer James M. Hill, IV
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to October 24, 1996, the Compensation Committee for fiscal 1996 was
comprised of three nonemployee members of the Company's Board of Directors --
Messrs. Gatton, Runnion and Jasper. On October 24, 1996, the Board appointed as
members of the Compensation Committee Messrs. Cole, Jasper and Switzer. Mr. Cole
formerly was the president and chief executive officer of HNB, a subsidiary of
the Company, from 1986 until 1991. Mr. Jasper formerly was the president and
chief executive officer of Alliance, a subsidiary of the Company, from 1985 to
July 1994.
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return (stock
price appreciation plus dividends) on the Company's Common Stock with the
cumulative total return of all banks (SNL index) and all NASDAQ U.S. Stocks for
the period December 3, 1993 to December 31, 1996. The Company's Common Stock
began trading on NASDAQ on December 7, 1993. Therefore, the total return for the
Company's Common Stock and the two comparative indices have been calculated from
December 7, 1993. The graph assumes that the values of the investment in
Company's Common Stock and each index was $100 on December 7, 1993 and that all
dividends were reinvested. For each period indicated, the index value for the
Company has excluded the effect of the distribution of SFNB common stock to the
Company's shareholders on May 23, 1996.
19
<PAGE> 22
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
PERIOD ENDING
-------------------------------------------------------
INDEX 12/8/93 12/31/93 12/31/94 12/31/95 12/31/96
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cardinal Bancshares, Inc 100.00 107.59 101.15 214.47 353.78
NASDAQ - Total US 100.00 101.08 98.80 139.73 171.88
SNL Banks (All) Index (1) 100.00 100.93 98.64 153.57 214.29
</TABLE>
(1) All banks traded on the New York and American Stock Exchanges, as well as
NASDAQ and over-the-counter markets.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
The Board of Directors has appointed the firm of KPMG Peat Marwick LLP as
independent auditors to audit the accounts of the Company for the year 1997.
That firm has audited the accounts of the Company since its inception.
A representative of the firm of KPMG Peat Marwick LLP will be present at
the Annual Meeting. He will be given the opportunity to make a statement if he
so desires, and will be available to respond to appropriate questions.
20
<PAGE> 23
PROPOSALS OF SHAREHOLDERS
Any shareholder desiring to submit a proposal for consideration at the 1998
Annual Meeting of the Company must forward the proposal to the Company. Any such
proposal or proposals intended to be presented at the 1998 annual meeting and
included in the Company's proxy materials relating to that meeting must forward
the proposal so that it will be received by the Company's principal executive
office no later than December 5, 1997.
OTHER MATTERS
The Board does not expect to present any matters at the Annual Meeting
other than those referred to herein and at this date is unaware of any other
matters that will be presented. Should any other matter be properly presented at
the meeting, the persons named in the accompanying proxy will vote upon them in
accordance with their best judgment.
ANY STOCKHOLDER MAY OBTAIN WITHOUT CHARGE A COPY OF THE COMPANY'S ANNUAL
REPORT TO THE SEC FOR 1996 ON FORM 10-K AND THE EXHIBITS THERETO REQUIRED TO BE
FILED WITH THE SEC UNDER THE EXCHANGE ACT BY SUBMITTING A REQUEST IN WRITING TO:
CARDINAL BANCSHARES, INC., BLUEGRASS COMMERCE CENTER, 400 EAST VINE STREET,
SUITE 300, LEXINGTON, KENTUCKY, 40507, ATTENTION: CAROLYN L. GABRIEL, CORPORATE
SECRETARY.
21
<PAGE> 24
Appendix A
REVOCABLE PROXY
CARDINAL BANCSHARES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF CARDINAL BANCSHARES, INC.
Proxy for Annual Meeting of Shareholders
May 1, 1997
The undersigned shareholder of Cardinal Bancshares, Inc., a Kentucky corporation
("Company"), does hereby constitute and appoint John S. Penn and Jack H. Brown
and each of them (each with full power of substitution and with full power to
act without the other and, if both of them act hereunder, by action of both of
them), the proxies of the undersigned, to represent the undersigned and to vote
at the Annual Meeting of Shareholders of the Company to be held on May 1, 1997
at 9:00 a.m. (Lexington time) at The Vine Street Trust Company, 360 East Vine
Street, Lexington, Kentucky, and any adjournment or postponement thereof, all
the shares of common stock of the Company which the undersigned would be
entitled to vote if then personally present. This Proxy is given, except as
indicated below, for the following purposes:
1. To vote FOR the Board of Directors' nominees who are listed below for
election as directors, for a one year term, except to the extent authority to
vote for a particular nominee is specifically withheld, with discretionary
authority to exercise cumulative voting rights.
[ ] FOR all nominees listed below (except as marked to the contrary below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE, STRIKE A LINE
THROUGH THE NOMINEE'S NAME IN THE LIST BELOW):
Samuel A. B. Boone Loyd G. Jasper John S. Penn
Vernon J. Cole Ryan R. Mahan Ronald C. Switzer
James M. Hill, IV
2. TO VOTE UPON ANY OTHER MATTER AS MAY PROPERLY COME BEFORE THE MEETING OR
ANY ADJOURNMENT OR POSTPONEMENT THEREOF. MANAGEMENT IS NOT AWARE OF ANY OTHER
MATTER THAT WILL BE PRESENTED FOR ACTION AT THE MEETING.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders of the Company dated April 4, 1997 and the Proxy Statement of the
same date furnished therewith.
YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED BY GIVING WRITTEN
NOTICE OF ITS REVOCATION TO THE SECRETARY OF THE COMPANY, BY DELIVERY OF A LATER
DATED PROXY, OR BY ATTENDING THE ANNUAL MEETING AND VOTING IN PERSON. SIGNING A
PROXY DOES NOT PRECLUDE YOU FROM ATTENDING THE MEETING IN PERSON. THE SHARES
REPRESENTED BY ALL PROPERLY EXECUTED PROXIES WILL BE VOTED AS SPECIFIED BY YOU.
IN THE ABSENCE OF DIRECTION, PROPERLY EXECUTED PROXIES WILL BE VOTED "FOR" THE
NOMINEES TO THE BOARD SET FORTH ABOVE.
Dated: ______________________, 1997
___________________________________
(Signature)
___________________________________
(Signature)
Please sign exactly as name appears on
your stock certificate. If the stock is
registered in the name of two or more
persons, each should sign. When
signing as an executor, administrator,
trustee, guardian, attorney, or corporate
officer, please add your full title as such.
