SCHEDULE 14A INFORMATION
(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 [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Under Rule 14a-12
1st STATE BANCORP, 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] 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:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[1st State Bancorp, Inc. Letterhead]
December 30, 2003
Dear Stockholder:
We invite you to attend the Annual Meeting of Stockholders (the "Annual
Meeting") of 1st State Bancorp, Inc. (the "Company") to be held at the main
office of 1st State Bank (the "Bank") located at 445 S. Main Street, Burlington,
North Carolina, on Tuesday, February 3, 2004, at 5:30 p.m., Eastern Standard
Time.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. During the meeting, we will
also report on the operations of 1st State Bank, the Company's wholly owned
subsidiary. Directors and officers of the Company and the Bank will be present
to respond to any questions the stockholders may have.
ON BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO SIGN, DATE AND RETURN
THE ACCOMPANYING FORM OF PROXY AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO
ATTEND THE ANNUAL MEETING. Your vote is important, regardless of the number of
shares you own. This will not prevent you from voting in person but will assure
that your vote is counted if you are unable to attend the meeting.
On behalf of the Board of Directors and all the employees of the Company
and the Bank, I wish to thank you for your continued support.
Sincerely,
/s/ James. C. McGill
James C. McGill
President
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1st STATE BANCORP, INC.
445 S. MAIN STREET
BURLINGTON, NORTH CAROLINA 27215
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 3, 2004
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NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of 1st State Bancorp, Inc. (the "Company") will be held at the main
office of 1st State Bank (the "Bank"), located at 445 S. Main Street,
Burlington, North Carolina, on Tuesday, February 3, 2004, at 5:30 p.m., Eastern
Standard Time.
A Proxy Statement and Proxy Card for the Annual Meeting are enclosed.
The Annual Meeting is for the purpose of considering and acting upon the
following matters:
1. The election of three directors of the Company for three-year terms;
and
2. The transaction of such other business as may properly come before the
Annual Meeting or any adjournment thereof.
The Board of Directors is not aware of any other business to come before
the Annual Meeting.
Any action may be taken on any one of the foregoing proposals at the Annual
Meeting on the date specified above or on any date or dates to which, by
original or later adjournment, the Annual Meeting may be adjourned. Stockholders
of record at the close of business on December 19, 2003, are the stockholders
entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof.
You are requested to fill in and sign the enclosed proxy card which is
solicited by the Board of Directors and to mail it promptly in the enclosed
envelope. The proxy will not be used if you attend and vote at the Annual
Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ A. Christine Baker
A. Christine Baker
Secretary
Burlington, North Carolina
December 30, 2003
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE
OF FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
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PROXY STATEMENT
OF
1st STATE BANCORP, INC.
445 S. MAIN STREET
BURLINGTON, NORTH CAROLINA 27215
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ANNUAL MEETING OF STOCKHOLDERS
FEBRUARY 3, 2004
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GENERAL
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This Proxy Statement is furnished to stockholders of 1st State Bancorp,
Inc. (the "Company") in connection with the solicitation by the Board of
Directors of the Company of proxies to be used at the Annual Meeting of
Stockholders (the "Annual Meeting") which will be held at the main office of 1st
State Bank (the "Bank"), located at 445 S. Main Street, Burlington, North
Carolina, on Tuesday, February 3, 2004, at 5:30 p.m., Eastern Standard Time, and
at any adjournment thereof. The accompanying Notice of Annual Meeting and proxy
card and this Proxy Statement are being first mailed to stockholders on or about
December 30, 2003.
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VOTING AND REVOCABILITY OF PROXIES
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Stockholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by properly executed proxies
will be voted at the Annual Meeting and all adjournments thereof. Proxies may be
revoked by written notice to A. Christine Baker, Secretary of the Company, at
the address shown above, by filing a later-dated proxy prior to a vote being
taken on a particular proposal at the Annual Meeting or by attending the Annual
Meeting and voting in person. The presence of a stockholder at the Annual
Meeting will not in itself revoke such stockholder's proxy.
Proxies solicited by the Board of Directors of the Company will be voted in
accordance with the directions given therein. WHERE NO INSTRUCTIONS ARE
INDICATED, PROXIES WILL BE VOTED "FOR" THE NOMINEES FOR DIRECTOR SET FORTH
BELOW. The proxy confers discretionary authority on the persons named therein to
vote with respect to the election of any person as a director where the nominee
is unable to serve or for good cause will not serve, and matters incident to the
conduct of the Annual Meeting. If any other business is presented at the Annual
Meeting, proxies will be voted by those named therein in accordance with the
determination of a majority of the Board of Directors. Proxies marked as
abstentions will not be counted as votes cast. Shares held in "street name"
which have been designated by brokers on proxies as not voted will not be
counted as votes cast. Proxies marked as abstentions or as broker non-votes,
however, will be treated as shares present for purposes of determining whether a
quorum is present.
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VOTING SECURITIES AND SECURITY OWNERSHIP
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The securities entitled to vote at the Annual Meeting consist of the
Company's common stock, par value $.01 per share (the "Common Stock").
Stockholders of record as of the close of business on December 19, 2003 (the
"Record Date") are entitled to one vote for each share of Common Stock then
held. As of the Record Date, there were 2,971,902 shares of Common Stock issued
and outstanding. The presence, in person or by proxy, of at least one-third of
the total number of shares of Common Stock outstanding and entitled to vote will
be necessary to constitute a quorum at the Annual Meeting.
Persons and groups beneficially owning more than 5% of the Common Stock are
required to file certain reports with respect to such ownership pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The following
table sets forth information regarding the shares of Common Stock beneficially
owned as of the Record Date by persons who beneficially own more than 5% of the
Common Stock, each of the Company's directors, the executive officers of the
Company named in the Summary Compensation Table set forth under "Proposal I --
Election of Directors -- Executive Compensation -- Summary Compensation Table,"
and all of the Company's directors and executive officers as a group.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED PERCENT OF
AS OF THE RECORD DATE (1) CLASS (2)
------------------------- ----------
5% STOCKHOLDER:
---------------
1st State Bancorp, Inc. 311,646 (3) 10.49%
Employee Stock Ownership Plan ("ESOP")
445 S. Main Street
Burlington, North Carolina 27215
1st State Bank Deferred Compensation Plan ("DCP") 304,066 (4) 10.23
445 S. Main Street
Burlington, North Carolina 27215
Maurice J. Koury 210,330 (5) 7.08
P.O. Drawer 850
Burlington, North Carolina 27216
DIRECTORS:
----------
Bernie C. Bean 31,675 (7) 1.06
James C. McGill 166,849 (6) 5.47
Virgil L. Stadler 71,315 (7) 2.39
James A. Barnwell, Jr. 61,675 (6) 2.06
James G. McClure 53,913 (7) 1.80
T. Scott Quakenbush 72,986 (7) 2.44
Richard C. Keziah 65,978 (6) 2.21
Richard H. Shirley 47,219 (7) 1.58
Ernest A. Koury, Jr. 1,000 (7) 0.03
EXECUTIVE OFFICERS:
-------------------
A. Christine Baker 96,981 3.21
Fairfax C. Reynolds 84,051 2.79
Frank Gavigan 33,594 1.13
John D. Hansell 14,800 0.50
All directors and executive 802,036 24.52
officers of the Company
as a group (13 persons)
(footnotes on following page)
2
(footnotes for table from previous page)
-------------------
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of
Common Stock if he or she has or shares voting or investment power with
respect to such Common Stock or has a right to acquire beneficial ownership
at any time within 60 days from the Record Date. As used herein, "voting
power" is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of shares. The
listed amounts include 15,816, 79,078, 15,816, 15,816, 15,816,15,816,
15,816, 15,816, 0, 45,000, 45,000, 11,250, 7,500 and 298,540 shares that
Directors Bean, McGill, Stadler, Barnwell, McClure, Quakenbush, Keziah,
Shirley and Koury, Executive Officers Baker, Reynolds, Gavigan and Hansell,
and all directors and executive officers of the Company as a group,
respectively, have the right to acquire upon the exercise of options
exercisable within 60 days of the Record Date.
(2) Based on a total of 2,971,902 shares of Common Stock outstanding as of the
Record Date.
(3) These shares are currently held in a suspense account for future allocation
and distribution among participants as the loan used to purchase the shares
is repaid. At the Record Date, 123,726 shares had been allocated or
committed to be allocated. See footnote 7 below for information on how
these shares are voted.
(4) The shares held by the DCP trust are held for the benefit of directors and
executive officers of the Company in the following amounts: Mr. Bean
12,437; Mr. McGill 97,030; Mr. Stadler 17,325; Mr. Barnwell 13,348; Mr.
McClure 13,007; Mr. Quakenbush 17,465; Mr. Keziah 18,449; Mr. Shirley
13,348; Ms. Baker 45,349; Mr. Reynolds 51,580; Mr. Gavigan 3,446; and Mr.
Hansell 1,282. Such individuals do not have voting or investment power over
such shares.
(5) Based on a Schedule 13G filed by Mr. Koury on January 31, 2003. This total
does not include 17,500 shares held by the Maurice J. Koury Foundation,
Inc. (the "Koury Foundation"), 53,500 shares held by Carolina Hosiery
Mills, Inc. ("Carolina Hosiery"); and 19,000 shares held by the Carolina
Hosiery Mills, Inc. Employee Profit Sharing Trust ("Trust"). Mr. Koury is
(a) one of four directors and president of the Koury Foundation; (b) a
director, president and 23.6% shareholder of Carolina Hosiery; and (c) a
trustee of the Trust. In all such cases, Mr. Koury may have input into
decisions concerning the voting power over the shares held by the Koury
Foundation, Carolina Hosiery and the Trust in certain limited
circumstances.
(6) The listed amounts do not include shares with respect to which Directors
Barnwell, Keziah and McGill share voting power by virtue of their positions
as directors of 1st State Bank Foundation, Inc. (the "Foundation"), which
holds 117,585 shares of Common Stock. The shares held by the Foundation are
voted in the same ratio as all other shares of Common Stock are voted on
any given proposal submitted to stockholders.
(7) The listed amounts do not include shares with respect to which Directors
Shirley, McClure and Stadler have voting power by virtue of their positions
as trustees of the trust holding 304,066 shares under the DCP nor the
shares with respect to which Directors Quakenbush, Bean and Koury have
voting power by virtue of their positions as trustees of the trust holding
311,646 shares under the ESOP. Shares held by the ESOP trust and allocated
to the accounts of participants are voted in accordance with the
participants' instructions, and unallocated shares are voted in the same
ratio as ESOP participants direct the voting of allocated shares or, in the
absence of such direction, in the ESOP trustees' best judgment. The shares
held by the DCP trust are voted in the same proportion as the ESOP trustees
vote the shares held in the ESOP trust.
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PROPOSAL I -- ELECTION OF DIRECTORS
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GENERAL
The Company's Board of Directors consists of nine members. The Company's
Articles of Incorporation require that directors be divided into three classes,
as nearly equal in number as possible, with approximately one-third of the
directors elected each year. At the Annual Meeting, three directors will be
elected for a term expiring at the 2007 annual meeting of stockholders. The
Board of Directors has nominated James A. Barnwell, Jr., James G. McClure and T.
Scott Quakenbush to serve as directors for a three-year period. All nominees are
currently members of the Board. Under Virginia law and the Company's Bylaws,
directors are elected by a plurality of the votes present in person or by proxy
at a meeting at which a quorum is present.
It is intended that the persons named in the proxies solicited by the Board
of Directors will vote for the election of the named nominees. If either nominee
is unable to serve, the shares represented by all valid proxies will be voted
for the election of such substitute as the Board of Directors may recommend or
the size of the Board may be reduced to eliminate the vacancy. At this time, the
Board knows of no reason why any nominee might be unavailable to serve.
3
The following table sets forth, for each nominee for director and
continuing director of the Company, his age, the year he first became a director
of the Bank, which is the Company's principal operating subsidiary, and the
expiration of his term as a director. All such persons except Mr. Koury were
appointed as directors of the Company in 1998 in connection with the
incorporation and organization of the Company. Each director of the Company also
is a member of the Board of Directors of the Bank.
YEAR FIRST
AGE AT ELECTED AS CURRENT
SEPTEMBER 30, DIRECTOR OF TERM
NAME 2003 THE BANK TO EXPIRE
---- -------- ---------- ---------
BOARD NOMINEES FOR TERMS TO EXPIRE IN 2007
James A. Barnwell, Jr. 63 1988 2004
James G. McClure 58 1989 2004
T. Scott Quakenbush 72 1978 2004
DIRECTORS CONTINUING IN OFFICE
Richard C. Keziah 71 1983 2005
Ernest A. Koury, Jr. 49 2000 2005
Richard H. Shirley 56 1987 2005
Bernie C. Bean 73 1978 2006
James C. McGill 62 1988 2006
Virgil L. Stadler 67 1982 2006
Set forth below is information concerning the Company's directors. Unless
otherwise stated, all directors have held the positions indicated for at least
the past five years.
JAMES A. BARNWELL, JR. is President of Huffman Oil Co., Inc., a petroleum
marketer in Burlington, North Carolina. He has served on the advisory board of
the Salvation Army Boys & Girls Club and the Alamance County YMCA board. He
serves as a director of the Foundation. He also serves on the Board of Directors
of the Alamance Regional Medical Center.
JAMES G. McCLURE is President of Green & McClure, a retail furniture store
in Graham, North Carolina. He currently serves as President of the Graham Area
Business Association and has served on the zoning board for the City of Graham.
He is active in the Graham Presbyterian Church.
T. SCOTT QUAKENBUSH retired in April 1997 from his position as Vice
President and sales manager with Carolina Paper Box Company in Burlington, North
Carolina.
RICHARD C. KEZIAH, the Chairman of the Board of Directors of the Company,
is President of Monarch Hosiery Mills, Inc. in Burlington, North Carolina. He
also serves on the Board of Directors of Elon Homes for Children. He also serves
as a director of the Foundation.
ERNEST A. KOURY, JR. is Vice President of Carolina Hosiery Mills, Inc., a
hosiery mill in Burlington, North Carolina. He serves as Vice Chairman of the
Alamance County Planning Board and a member of the Elon University Board of
Visitors.
RICHARD H. SHIRLEY is President of Dick Shirley Chevrolet, Inc., an
automobile dealership located in Burlington, North Carolina. He has served as
the President of the Alamance County YMCA and as a member and chairman of the
Economic Development Committee of the Burlington area Chamber of Commerce.
4
BERNIE C. BEAN is retired. From 1988 to 1995 he was the President and
General Manager of Craftique, Inc., a furniture manufacturer located in Mebane,
North Carolina.
JAMES C. McGILL is the President and Chief Executive Officer of the Company
and has been the President and Chief Executive Officer of the Bank since
December 1988. He has served on the Boards of Hospice of Alamance and Alamance
Community College and in 1997 served as the chairman of the North Carolina
Bankers Association. He also serves as a director of 1st State Bank Foundation,
Inc. (the "Foundation"), a charitable foundation dedicated to charitable and
community service causes within the Bank's community.
VIRGIL L. STADLER retired in October 2001 from his position as Chief
Executive Officer of Stadler's Country Hams, Inc. in Elon College, North
Carolina. He is active with the Front Street United Methodist Church and Elon
Homes for Children.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following sets forth information with respect to executive officers who
do not serve on the Board of Directors.
AGE AT
SEPTEMBER 30,
NAME 2003 TITLE
---- ------------- -----
A. Christine Baker 50 Treasurer and Secretary of the Company and the
Bank and Executive Vice President - Chief Financial
Officer of the Bank
Fairfax C. Reynolds 50 Vice President and Assistant Secretary of the
Company and Executive Vice President - Commercial
and Retail Banking of the Bank
Frank Gavigan 45 Senior Vice President - Senior Credit Officer of the
Bank
John D. Hansell 66 Manager - First Capital Services, LLC
A. CHRISTINE BAKER is the Treasurer and Secretary of the Company and served
as the Executive Vice President, Secretary and Treasurer of the Bank since April
1985. She currently serves on the Boards of the Women's Resource Center of
Alamance County and Alamance County Meals on Wheels. She is a member of the
Board of Trustees of Elon University.
FAIRFAX C. REYNOLDS is the Vice President and Assistant Secretary of the
Company and has served as the Bank's Executive Vice President in charge of
Commercial and Retail Banking since 1989. He serves on the Boards of Directors
of Alamance County YMCA, the Alamance County Arts Council and the United Way of
Alamance County.
FRANK GAVIGAN has served as the Bank's Senior Vice President - Senior
Credit Officer since 1990. He serves on the Boards of Directors of Hospice of
Alamance County and Alamance Eldercare.
JOHN D. HANSELL has served since May 1987 as Manager of First Capital
Services Company, LLC and its predecessor, First Capital Services, Inc.,
entities the Company owns that sell annuities, mutual funds and insurance
products on an agency basis. He has served on the small business council of the
Alamance Chamber of Commerce and on the Board of Directors of the Financial
Planning Association.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company meets monthly and may have additional
special meetings. During the year ended September 30, 2003, the Board of
Directors of the Company met 12 times and the Board of
5
Directors of the Bank met 12 times. No director attended fewer than 75% in the
aggregate of the total number of Company Board of Directors meetings held during
the year ended September 30, 2003 and the total number of meetings held by
committees on which he served during such fiscal year. The Company's Board of
Directors has standing Audit and Executive Committees.
During the fiscal year ended September 30, 2003, the Board of Directors'
Audit Committee consisted of Directors Keziah, McClure and Stadler, who served
as Chairperson. For the fiscal year ended September 30, 2004, the Audit
Committee is composed of directors McClure, Koury, and Shirley, who serves as
Chairperson. Each of these past and present members of the Audit Committee are
"independent," as "independent" is defined in Rule 4200(a)(15) of the National
Association of Securities Dealers' listing standards. Additionally, Director
Shirley has background and experience that results in his having "financial
sophistication" as defined by Rule 4350(d) of the of the National Association of
Securities Dealers' listing standards. However, the Board has also determined
that neither Director Shirley, nor any other member of the audit committee, has
the attributes to meet the definition of an "audit committee financial expert"
as defined in Item 401(h) of Regulation S-K. Therefore, the Company does not
have an "audit committee financial expert" serving on its audit committee. The
Board of Directors has determined that by satisfying the requirements of the
listing standards of the National Association of Securities Dealers' with a
member of the audit committee that has the requisite "financial sophistication"
qualifications, the Company's audit committee has the financial expertise
necessary to fulfill the duties and the obligations of the audit committee. The
Board of Directors has concluded that the appointment of an additional director
to the audit committee is not necessary at this time.
The function of the Audit Committee is: to review and discuss the audited
financial statements with management, internal audit and the independent
auditors; to receive disclosures required by SAS No. 61 and the independence
letter from the independent auditors; to engage the independent auditors of the
Company; to review the internal audit function and internal accounting controls;
and to review and approve the internal audit plan. The Company's Board of
Directors adopted a written charter for the Audit Committee on December 16, 2003
which is attached hereto as Appendix A. The Audit Committee met four times
during the year ended September 30, 2003.
During the year ended September 30, 2003, the Board of Directors' Executive
Committee consisted of Directors McGill, Barnwell, Shirley and Keziah and one
additional director who served on a rotating basis for a three-month period. The
Executive Committee, among other things, evaluates the compensation and benefits
of the directors, officers and employees, recommends changes, and monitors and
evaluates employee performance. The Executive Committee reports its evaluations
and findings to the full Board of Directors and all compensation decisions are
ratified by the full Board of Directors. Directors of the Company who also are
officers of the Company abstain from discussion and voting on matters affecting
their compensation. The Executive Committee also monitors the performance of the
Company's investment portfolio and reviews loans. The Executive Committee is
empowered to exercise all of the authority of the Board when the Board is not in
session. The Executive Committee met 12 times during the fiscal year ended
September 30, 2003.
The Company's full Board of Directors acts as a nominating committee. The
Board of Directors met once during the year ended September 30, 2003 for the
purpose of considering potential nominees to the Board of Directors. In its
deliberations, the Board, functioning as a nominating committee, considers the
candidate's knowledge of the banking business and involvement in community,
business and civic affairs, and also considers whether the candidate would
provide for adequate representation of its market area. The Company's Articles
of Incorporation set forth procedures that must be followed by stockholders
seeking to make nominations for director. In order for a stockholder of the
Company to make any nominations, he or she must give written notice thereof to
the Secretary of the Company not less than thirty days nor more than sixty days
prior to the date of any such meeting; provided, however, that if less than
forty days' notice of the meeting is given to stockholders, such written notice
shall be delivered or mailed, as prescribed, to the Secretary of the Company not
later than the close of business on the tenth day following the day on which
notice of the meeting was mailed to stockholders. Each such notice given by a
stockholder with respect to nominations for the election of directors must set
forth (i) the name, age, business address and, if known, residence address of
each nominee proposed in such notice; (ii) the principal occupation or
employment of each such nominee; and (iii) the number of shares of stock of the
Company which are beneficially owned by each such nominee. In addition, the
stockholder making such nomination must promptly provide any other information
reasonably requested by the Company.
6
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Overview and Philosophy
The Company's executive compensation policies are established by the
Executive Committee of the Board of Directors (the "Committee"). The Committee
is responsible for developing the Company's executive compensation policies. The
Company's President, James C. McGill, under the direction of the Committee,
implements the Company's executive compensation policies. Mr. McGill abstains
from voting on and discussions of matters affecting his compensation. The
Committee's objectives in designing and administering the specific elements of
the Company's executive compensation program are as follows:
o To link executive compensation rewards to increases in shareholder
value, as measured by favorable long-term operating results and
continued strengthening of the Company's financial condition.
o To provide incentives for executive officers to work towards achieving
successful annual results as a step in achieving the Company's
long-term operating results and strategic objectives.
o To correlate, as closely as possible, executive officers' receipt of
compensation with the attainment of specified performance objectives.
o To maintain a competitive mix of total executive compensation, with
particular emphasis on awards related to increases in long-term
shareholder value.
o To attract and retain top performing executive officers for the
long-term success of the Company.
In furtherance of these objectives, the Committee has determined that there
should be three specific components of executive compensation: base salary, a
cash bonus and stock benefit plans.
Base Salary. The Committee makes recommendations to the Board concerning
executive compensation on the basis of surveys of salaries paid to executive
officers of other bank holding companies, non-diversified banks and other
financial institutions similar in size, market capitalization and other
characteristics. The Committee's objective is to provide for base salaries that
are competitive with the average salary paid by the Company's peers.
Bonus. The Company pays a discretionary bonus on an annual basis based on
satisfaction of a combination of individual and Company performance objectives.
Whether bonuses are paid each year and the amount of such bonuses are determined
by the Committee, subject to ratification by the Board of Directors, at year end
based on the Company's ability to achieve performance goals established by the
Board in each year's Business Plan. Discretionary bonuses for achieving specific
performance goals during the year are paid during the next fiscal year.
Stock Benefit Plans. In addition, the Committee believes that stock-related
award plans are an important element of compensation since they provide
executives with incentives linked to the performance of the Common Stock.
Accordingly, the Board of Directors adopted a stock option plan and a management
recognition plan. Stockholders approved these plans at a special meeting held on
June 6, 2000.
Under the stock option plan, the Company reserved for issuance a number of
shares equal to 10% of the originally issued Common Stock. The Committee
believes that stock options are an important element of compensation because
they provide executives with incentives linked to the performance of the Common
Stock. The Company awards stock options as a means of providing employees the
opportunity to acquire a proprietary interest in the Company and to link their
interests with those of the Company's stockholders. Options are granted with an
exercise price equal to the market value of the Common Stock on the date of
grant, and thus acquire value
7
only if the Company's stock price increases. There are currently no options
available for grant under the option plan.
Under the management recognition plan, officers and directors were granted
awards of restricted Common Stock, subject to vesting and forfeiture as
determined by the Committee. Under this plan, the Company reserved for issuance
a number of shares equal to 4% of the originally issued Common Stock. The
purpose of a management recognition plan is to reward and retain personnel of
experience and ability in key positions of responsibility by providing such
employees with a proprietary interest in the Company as compensation for their
past contributions to the Company and the Bank and as an incentive to make
further contributions in the future. There currently are no shares available for
award under this plan.
Compensation of the President
Mr. McGill's base salary is established in accordance with the terms of the
employment agreement entered into between the Bank and Mr. McGill. See "--
Executive Compensation -- Employment Agreements." The Committee determines the
President's compensation on the basis of several factors. In determining Mr.
McGill's base salary, the Committee reviewed compensation paid to chief
executive officers of similarly situated banks and non-diversified banks and
other financial institutions of similar asset size. The Committee believes that
Mr. McGill's base salary is generally competitive with the average salary paid
to executives of similar rank and expertise at banking institutions which the
Committee considered to be comparable and taking into account the Bank's
superior performance and complex operations relative to comparable institutions.
Mr. McGill received bonus compensation for fiscal year 2003 pursuant to the
same basic factors as described above under "-- Bonus." In establishing Mr.
McGill's bonus, the Committee considered the Company's overall performance,
record of increase in shareholder value and success in meeting strategic
objectives and his personal leadership and accomplishments. These factors were
considered in conjunction with the Company's financial results for fiscal 2003
in relation to the established Business Plan and achieving certain annual
performance goals, including but not limited to return on assets and return on
equity and satisfactory results of regulatory examinations and independent
audits.
The Committee believes that the Company's executive compensation program
serves the Company and its shareholders by providing a direct link between the
interests of executive officers and those of shareholders generally and by
helping to attract and retain qualified executive officers who are dedicated to
the long-term success of the Company.
Members of the Executive Committee
James A. Barnwell
Richard C. Keziah
James C. McGill
Richard H. Shirley
8
Comparative Stock Performance Graph
The graph and table which follow show the cumulative total return on the
Common Stock for the period from April 26, 1999 (the day trading began in the
Common Stock following completion of the Company's initial public offering)
through the fiscal year ended September 30, 2003 with (1) the total cumulative
return of all companies whose equity securities are traded on the Nasdaq Stock
Market, and (2) the total cumulative return of banks and bank holding companies
traded on the Nasdaq Stock Market. The comparison assumes $100 was invested on
April 26, 1999 in the Company's Common Stock and in each of the foregoing
indices and assumes reinvestment of dividends. The stockholder returns shown on
the performance graph are not necessarily indicative of the future performance
of the Common Stock or of any particular index.
CUMULATIVE TOTAL STOCKHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDEXES
APRIL 26, 1999 THROUGH SEPTEMBER 30, 2003
[Line graph appears here depicting the cumulative total shareholder return of
$100 invested in the Common Stock as compared to $100 invested in all companies
whose equity securities are traded on the Nasdaq Stock Market and $100 invested
in banks and bank holding companies whose equity securities are traded on the
Nasdaq Stock Market. Line graph plots the cumulative total return from April 26,
1999 to September 30, 2003. Plot points are provided below.]
-----------------------------------------------------------------------------------------------------
4/26/99 9/30/99 9/30/00 9/30/01 9/30/02 9/30/03
-----------------------------------------------------------------------------------------------------
COMPANY $100.00 $103.05 $118.59 $143.43 $163.93 $196.08
-----------------------------------------------------------------------------------------------------
NASDAQ 100.00 163.15 216.67 88.55 69.59 106.64
-----------------------------------------------------------------------------------------------------
NASDAQ BANKS
AND BANK HOLDING 100.00 91.40 99.31 117.69 128.51 155.19
COMPANIES
-----------------------------------------------------------------------------------------------------
9
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash and
noncash compensation for the fiscal years ended September 30, 2003, 2002 and
2001 awarded to or earned by the President and the four other executive officers
who earned salary and bonus in fiscal 2003, 2002 and 2001 exceeding $100,000 for
services rendered in all capacities to the Company and the Bank.
LONG-TERM COMPENSATION
----------------------
AWARDS
----------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
------------------------------------
FISCAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME YEAR SALARY BONUS COMPENSATION (1) AWARD(S) OPTIONS COMPENSATION
---- ---- ------ ----- ---------------- ------------ ------- ------------
James C. McGill 2003 $175,000 $422,000 $ -- -- -- $ 186,378 (2)
President and Chief 2002 175,000 404,500 -- -- -- 208,332
Executive Officer of 2001 175,000 342,000 -- -- -- 203,021
the Company and the
Bank
A. Christine Baker 2003 $ 100,000 $ 211,000 $ -- -- -- $ 84,666 (2)
Treasurer and 2002 100,000 202,250 -- -- -- 99,224
Secretary of the 2001 100,000 171,000 -- -- -- 92,244
Company and the
Bank and Executive
Vice President-
Chief Financial
Officer of the Bank
Fairfax C. Reynolds 2003 $ 100,000 $ 211,000 $ -- -- -- $ 87,646 (2)
Vice President and 2002 100,000 202,250 -- -- -- 102,201
Assistant Secretary 2001 100,000 171,000 -- -- -- 95,221
of the Company and
Executive Vice
President of the
Bank
Frank Gavigan 2003 $ 85,000 $ 30,000 $ -- -- -- $ 28,307 (2)
Senior Vice 2002 80,000 35,000 -- -- -- 33,209
President-Senior 2001 80,000 30,000 -- -- -- 30,000
Credit Officer of
the Bank
John D. Hansell 2003 $ 50,000 $ 71,560 (3) -- -- -- $ 23,663 (2)
Manager-First Capital 2002 50,000 70,640 (3) -- -- -- 37,135
Services Company, 2001 50,000 111,803 (3) -- -- -- 30,000
LLC
--------------------
(1) Executive officers receive indirect compensation in the form of certain
perquisites and other personal benefits. The amount of such benefits
received by the named executive officer in fiscal 2003 did not exceed 10%
of the executive officer's salary and bonus.
(2) Includes $146,378, $44,666 and $47,646 accrued under the Company's Deferred
Compensation Plan for the benefit of executive officers McGill, Baker and
Reynolds, respectively, for service as an employee during the year ended
September 30, 2003. Also includes $40,000, $40,000, $40,000, $25,757 and
$22,163 in shares of Common Stock committed to be allocated during the year
ended September 30, 2003 under the ESOP to the accounts of executive
officers McGill, Baker, Reynolds, Gavigan and Hansell, respectively, and
$2,550 and $1,500 in matching contributions under the Bank's 401(k) Plan
for executive officers Gavigan and Hansell, respectively.
(3) Consists of commissions.
10
Fiscal Year-End Option Values. The following table sets forth information
concerning the value as of September 30, 2003 of options held by the executive
officers named in the Summary Compensation Table set forth above. No options
were exercised during fiscal year 2003.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
---------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------ ----------- ------------- ----------- -------------
James C. McGill 79,078 -- $960,007 $ --
A. Christine Baker 45,000 -- 546,300 --
Fairfax C. Reynolds 45,000 -- 546,300 --
Frank Gavigan 11,250 -- 136,575 --
John D. Hansell 7,500 -- 91,050 --
-----------
(1) Based on the difference between the fair market value of the underlying
Common Stock as quoted on the Nasdaq National Market System on September
30, 2003 of $26.85 per share, and the exercise price of $14.71 per share,
which was adjusted to reflect the effect of the return of capital of $5.17
per share paid on October 2, 2000.
No options held by any executive officer of the Company repriced during the
past ten full fiscal years.
Employment Agreements and Guaranty Agreements. The Bank has entered into
employment agreements with James C. McGill, A. Christine Baker and Fairfax C.
Reynolds (each individual is referred to herein as an "Employee" and the three
individuals are referred to collectively as the "Employees"). The Board believes
that the employment agreements assure fair treatment of the Employees in their
careers with the Company by assuring them of some financial security.
The employment agreements became effective on April 23, 1999 and provide
for a term of three years, with an annual base salary equal to the Employee's
existing base salary rate in effect on the date of conversion. On each
anniversary date of the commencement of the employment agreements, the term of
the Employee's employment will be extended for an additional one-year period
beyond the then effective expiration date upon a determination by the Bank's
Board of Directors that the performance of the Employee has met the required
performance standards and that such employment agreements should be extended.
The employment agreements provide the Employee with a salary review by the Board
of Directors not less often than annually, as well as with inclusion in any
discretionary bonus plans, retirement and medical plans, vacation and sick leave
and any fringe benefits that become available to senior management, including
for example, any stock option or incentive compensation plans and any other
benefits commensurate with their responsibilities. If the Board decides not to
renew an employment agreement for any reason, and if the Employee remains an
employee of the Bank until the Agreement expires, the Bank must pay the Employee
an amount equal to two times total compensation if the Employee is later
terminated.
The employment agreements terminate upon the Employee's death, may
terminate upon the Employee's disability, are terminable for just cause, and no
severance benefits are available. If the Bank terminates the Employee without
just cause, the Employee is entitled to receive three times total compensation
as well as continued medical and dental insurance under any group plan chosen by
the Employee from the plans the Bank maintains, unless that coverage is not
permitted by the terms of such plan, in which case the Bank will remit to the
Employee, not less frequently than monthly, the actual cost to the Employee of
equivalent insurance. These provisions are in addition to, and not in lieu of,
any other rights that the Employee has under the employment agreement and will
continue until the Employee first becomes eligible for participation in
Medicare. If the employment agreements are terminated due to the Employee's
"disability" as defined in the employment agreements, the Employee will be
entitled to a continuation of his or her salary and benefits through the date of
termination, including any period prior to the establishment of the Employee's
disability. In the event of the Employee's death during the term of the
employment agreements, his or her estate will be entitled to receive three times
total compensation determined as of the date of death. Each Employee is able to
voluntarily terminate his or her employment agreement by providing 90 days'
written notice to the Board of Directors, in which case the Employee is entitled
to receive only his or her compensation, vested rights, and benefits up to the
date of termination.
11
The Bank will pay a severance benefit equal to the difference between the
product of 2.99 and the Employee's "base amount" as defined in the Internal
Revenue Code Section 280G(b)(3) and the sum of any other "parachute payments" as
defined under Code Section 280G(b)(2) that the Employee receives on account of
the change in control, and (ii) provide long-term disability and medical
insurance for 18 months if any of the following occur:
o the Employee's involuntary termination of employment other than for
"just cause" during the period beginning six months before a change in
control and ending on the later of the first anniversary of the change
in control or the expiration date of the employment agreements (the
"Protected Period");
o the Employee's voluntary termination within 90 days of the occurrence
of certain specified events occurring during the Protected Period
which have not been consented to by the Employee; or
o the Employee's voluntary termination of employment for any reason
within the 30-day period beginning on the date of the change in
control.
The Employee will be paid either in one lump sum within ten days of the
later of the date of the change in control and the Employee's last day of
employment or if prior to the date which is 90 days before the date on which a
change in control occurs, the Employee filed a duly executed irrevocable written
election, payment of such amount shall be made according to the elected
schedule. "Change in control" generally refers to the acquisition, by any person
or entity, of the ownership or power to vote more than 25% of the Company's or
the Bank's voting stock, the control of the election of a majority of the
Company's or the Bank's directors, or the exercise of a controlling influence
over the Company's or the Bank's management or policies. In addition, under the
employment agreements, a change in control occurs when, during any consecutive
two-year period, directors of the Company or the Bank at the beginning of such
period cease to constitute two-thirds of the Board of Directors of the Company
or the Bank, unless the election of replacement directors was approved by a
two-thirds vote of the initial directors then in office. The employment
agreements provide that within 10 business days of a change in control, the
Company must deposit in a trust an amount equal to the Internal Revenue Code
Section 280G maximum. The payments that would be made to Mr. McGill, Ms. Baker
and Mr. Reynolds assuming termination of employment under the foregoing
circumstances at September 30, 2003 would have been approximately $2.7 million,
$1.3 million and $1.3 million, respectively. These provisions may have an
anti-takeover effect by making it more expensive for a potential acquiror to
obtain control of the Company. In the event that the Employee prevails over the
Bank, or obtains a written settlement, in a legal dispute as to the employment
agreement, he or she will be reimbursed for legal and other expenses.
In addition to the employment agreements, the Company has entered into
guaranty agreements with each of the Employees. The guaranty agreements provide
that the Company will perform all covenants and honor all obligations required
to be performed or to which the Bank is subject pursuant to the employment
agreements in the event that such covenants are not performed or obligations are
not honored by the Bank, and that to the extent permitted by law, the Company
will be jointly and severally liable with the Bank for the payment of all
amounts due under the employment agreements. The guarantee agreements provide
the Employee with a salary review by the Board of Directors not less often than
annually, as well as with inclusion in any discretionary bonus plans, retirement
and medical plans, customary fringe benefits, vacation and sick leave.
DIRECTOR COMPENSATION
Fees. Each non-employee member of the Bank's Board of Directors receives a
monthly retainer fee based on the following schedule:
o the Chairman of the Board - $2,000;
o members of the Executive Committee - $1,750; and
o other directors - $1,500.
12
In addition, non-employee members of the Company's Board of Directors receive a
monthly retainer fee of $500. Officers who are directors are not compensated for
their service as directors.
Deferred Compensation Plan. The Bank adopted the DCP for the Bank's
directors and select executive officers. Under the DCP, before each fiscal year
begins, each non-employee director may elect to defer receipt of all or part of
his future fees and any other participant may elect to defer receipt of up to
25% of his or her salary or 100% of his or her bonus compensation for the year.
Deferred amounts are credited at the end of the calendar year to bookkeeping
accounts in the name of each participant. No amounts were credited to the
accounts of nonemployee directors during the year ended September 30, 2003. Each
participant is fully vested in his or her account balance under the DCP.
Until distributed in accordance with the terms of the DCP, each
participant's account will be credited with a rate of return equal to the Bank's
highest rate of interest paid on the Bank's one-year certificates of deposit or
the total return on the Company's Common Stock, as elected by each participant.
Account balances will normally be distributed in five substantially equal annual
installments beginning during the first quarter of the calendar year following
the calendar year in which the participant ceases to be a director or employee,
with any subsequent distributions being made by the last day of the first
quarter of each subsequent calendar year until the participant has received the
entire amount of his or her account. Participants may, however, elect to receive
their distributions in a lump sum or in installments paid over a period of up to
10 years. In the event of a participant's death, the balance of his plan account
will be paid in a lump sum (unless the participant elects to continue the
previously designated distribution method) to his designated beneficiary, or if
none, his estate.
The Bank has established a trust in order to hold assets with which to pay
plan benefits to participants. Trust assets are subject to claims of general
creditors. In the event a participant prevails over the Bank in a legal dispute
as to the terms or interpretation of the DCP, he or she would be reimbursed for
his legal and other expenses.
TRANSACTIONS WITH MANAGEMENT
The Bank offers loans to its directors and executive officers. These loans
were 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 collectibility or present other unfavorable features. Under
current law, the Bank's loans to directors and executive officers are required
to be made on substantially the same terms, including interest rates, as those
prevailing for comparable transactions with other persons and must not involve
more than the normal risk of repayment or present other unfavorable features.
Furthermore, all loans to such persons must be approved in advance by a
disinterested majority of the Company's Board of Directors. At September 30,
2003, loans to directors and executive officers and their affiliates totaled
$25.1 million, or 40.0% of the Company's stockholders' equity, at that date.
13
--------------------------------------------------------------------------------
REPORT OF THE AUDIT COMMITTEE
--------------------------------------------------------------------------------
The Audit Committee of the Board of Directors (the "Audit Committee") has:
1. Reviewed and discussed the audited financial statements for the fiscal
year ended September 30, 2003 with the management of the Company.
2. Discussed with the Company's independent auditors the matters required
to be discussed by Statement of Accounting Standards No. 61, as the
same was in effect on the date of the Company's financial statements;
and
3. Received the written disclosures and the letter from the Company's
independent auditors required by Independence Standards Board Standard
No. 1 (Independence Discussions with Audit Committees), as the same
was in effect on the date of the Company's financial statements.
Based on the foregoing materials and discussions, the Audit Committee
recommended to the Board of Directors that the audited financial statements for
the fiscal year ended September 30, 2003 be included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2003.
The Audit Committee has reviewed the non-audit services currently provided
by the Company's independent auditor and has considered whether the provision of
such services is compatible with maintaining the independence of the Company's
independent auditors.
Members of the Audit Committee
Richard H. Shirley, Chairman
Ernest A. Koury, Jr.
James G. McClure
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
KPMG LLP was the Company's independent auditor for the 2003 fiscal year.
KPMG LLP has been retained by the Board of Directors to be the Company's auditor
for the 2004 fiscal year. A representative of KPMG LLP is expected to be present
at the Annual Meeting and will have the opportunity to make a statement if he or
she so desires. The representative will also be available to answer appropriate
questions.
--------------------------------------------------------------------------------
AUDIT FEES
--------------------------------------------------------------------------------
For the years ended September 30, 2003 and 2002, the Company was billed by
KPMG LLP for aggregate fees of $110,435 and $107,850, respectively. Such fees
were comprised of the following:
AUDIT FEES
The aggregate fees billed for the audit of the Company's annual financial
statements and for the reviews of the financial statements included in the
Company's Quarterly Reports on Form 10-Q were $90,500 and $86,300 for the fiscal
years ended September 30, 2003 and 2002, respectively.
14
AUDIT-RELATED FEES
The aggregate fees for audit-related services were $3,000 and $2,200,
respectively, for the fiscal years ended September 30, 2003 and 2002. For both
fiscal years, these fees related to the FHLB agreed-upon procedures engagement.
TAX FEES
The aggregate fees for tax services for the fiscal years ended September
30, 2003 and 2002 were $16,935 and $19,350, respectively. For fiscal year ended
September 30, 2003, these fees consisted of $16,250 for tax compliance services
and $685 for miscellaneous tax consulting services. For fiscal year ended
September 30, 2002, these fees consisted of $19,350 for tax compliance services.
ALL OTHER FEES
The aggregate fees for all other services, exclusive of the fees disclosed
above, rendered during each of the fiscal years ended September 30, 2003 and
2002, were $0.
--------------------------------------------------------------------------------
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
--------------------------------------------------------------------------------
Pursuant to regulations promulgated under the Exchange Act, the Company's
officers and directors and all persons who own more than ten percent of the
Common Stock ("Reporting Persons") are required to file reports detailing their
ownership and changes of ownership in the Common Stock and to furnish the
Company with copies of all such ownership reports that are filed. Based solely
on the Company's review of the copies of such ownership reports which it has
received in the past fiscal year or with respect to the past fiscal year, or
written representations that no annual report of changes in beneficial ownership
were required, the Company believes that during fiscal year 2003 all Reporting
Persons have complied with these reporting requirements.
--------------------------------------------------------------------------------
OTHER MATTERS
--------------------------------------------------------------------------------
The Board of Directors is not aware of any business to come before the
Annual Meeting other than those matters described above in this proxy statement
and matters incident to the conduct of the Annual Meeting. However, if any other
matters should properly come before the Annual Meeting, it is intended that
proxies in the accompanying form will be voted in respect thereof in accordance
with the determination of a majority of the Board of Directors.
--------------------------------------------------------------------------------
MISCELLANEOUS
--------------------------------------------------------------------------------
The cost of soliciting proxies will be borne by the Company. The Company
will reimburse brokerage firms and other custodians, nominees and fiduciaries
for reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of Common Stock. In addition to solicitations by mail,
directors, officers and regular employees of the Company may solicit proxies
personally or by telegraph or telephone without additional compensation.
The Company's 2003 Annual Report to Stockholders, including financial
statements, is being mailed to all stockholders of record as of the close of
business on the Record Date. Any stockholder who has not received a copy of such
Annual Report may obtain a copy by writing to the Secretary of the Company. The
Annual Report is not to be treated as a part of the proxy solicitation material
or as having been incorporated herein by reference.
15
-------------------------------------------------------------------------------
STOCKHOLDER PROPOSALS
-------------------------------------------------------------------------------
For consideration at the Annual Meeting, a stockholder proposal must be
delivered or mailed to the Company's Secretary no later than January 5, 2004. In
order to be eligible for inclusion in the proxy materials of the Company for the
Annual Meeting of Stockholders for the year ending September 30, 2003, any
stockholder proposal to take action at such meeting must be received at the
Company's executive offices at 445 S. Main Street, Burlington, North Carolina
27215 by no later than August 28, 2004. Any such proposals shall be subject to
the requirements of the proxy rules adopted under the Exchange Act.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ A. Christine Baker
A. Christine Baker
Secretary
December 30, 2003
Burlington, North Carolina
-------------------------------------------------------------------------------
ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 2003 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
WILL BE FURNISHED WITHOUT CHARGE TO EACH STOCKHOLDER AS OF THE RECORD DATE UPON
WRITTEN REQUEST TO THE CORPORATE SECRETARY, 1st STATE BANCORP, INC., 445 S. MAIN
STREET, BURLINGTON, NORTH CAROLINA 27215.
16
APPENDIX A
AUDIT COMMITTEE
CHARTER
The Board of Directors of 1st State Bancorp, Inc. (the "Company") has
constituted and established an audit committee (the "Committee") with authority,
responsibility, and specific duties as described in this Audit Committee
Charter.
Committee Mission: The primary responsibility of the Committee is to
oversee the Company's financial reporting process on behalf of the Board of
Directors and report the results of these activities to the Board. Management of
the Company is responsible for preparing the Company's financial statements, and
the independent auditors retained by the Committee are responsible for auditing
those financial statements. The Committee in carrying out its responsibilities
believes its policies and procedures should remain flexible, in order to best
react to overall changing conditions and circumstances. The Committee should
take the appropriate actions to set the overall corporate policy for quality
financial reporting, sound business risk management policies and ethical
behavior.
A. COMPOSITION
The Committee shall consist of three or more directors, each of whom is
"independent" as such term is defined in Section 10A(m)(3) of the Securities
Exchange Act of 1934, as amended (the "Act") and regulations promulgated
thereunder by the Securities and Exchange Commission (the "SEC"), the ("SEC
Regulations "), or whose failure to be "independent" shall fall within one of
the exemptions set forth in the Act and SEC Regulations, and is independent
under the rules of The Nasdaq Stock Market ("Nasdaq") as set forth in the
National Association of Securities Dealers' Manual (the "Manual").
Each director shall be free from any relationship that, in the opinion of
the Board of Directors, as evidenced by its annual selection of such Committee
members, would interfere with the exercise of independent judgment as a
Committee member. Each Committee member shall be able to read and understand
financial statements (including the Company's balance sheet, income statement
and cash flow statement). Additionally, at least one Committee member shall have
past employment experience in finance or accounting, requisite professional
certification in accounting, or other comparable experience or background
resulting in the individual's financial sophistication, including having been a
chief executive officer, chief financial officer or other senior officer with
financial oversight responsibilities.
These requirements are intended to satisfy the Act and the Nasdaq listing
requirements relating to the composition of audit committees, and shall be
construed accordingly.
B. MISSION STATEMENT AND PRINCIPAL FUNCTIONS
The Committee shall have access to all records of the Company and shall
have and may exercise such powers as are appropriate to its purpose. The
Committee shall perform the following functions:
(1) Understand the accounting policies used by the Company for financial
reporting and tax purposes and approve their application; it shall also
consider any significant changes in accounting policies that are proposed
by management or required by regulatory or professional authorities.
(2) Study the format and timeliness of financial reports presented to the
public or used internally and, when indicated, recommend changes for
appropriate consideration by management.
A-1
(3) Meet and discuss with the Company's legal counsel, as appropriate, legal
matters that may have a significant impact on the Company or its financial
reports.
(4) Ensure that management has been diligent and prudent in establishing
accounting provisions for probable losses or doubtful values and in making
appropriate disclosures of significant financial conditions or events.
(5) Review and reassess the adequacy of this Charter annually.
(6) Be directly responsible for the appointment, compensation, retention and
oversight of the work of the independent auditors employed for the purpose
of preparing or issuing an audit report with respect to the Company or
preparing other audit, review or attest services for the Company; such
independent auditors shall be duly registered with the Public Accounting
Oversight Board following its establishment; and, such independent auditors
shall be instructed to report directly to the Committee.
(7) Approve in advance any non-audit service permitted by the Act, including
tax services, that its independent auditors renders to the Company, unless
such prior approval has been waived.
(8) To the extent required by applicable regulations, disclose in periodic
reports filed by the Company with ( the SEC, approval by the Committee of
allowable non-audit services to be performed for the Company by its
independent auditors.
(9) Delegate to one or more members of the Committee the authority to grant
pre-approvals for auditing and allowable non-auditing services, which
decision shall be presented to the full Committee at its next scheduled
meeting for ratification.
(10) Receive a timely report from its independent auditors performing the audit
of the Company, which details: (1) all "critical accounting policies and
practices" to be used in the audit; (2) all alternate presentation and
disclosure of financial information within generally accepted accounting
principles ( that have been discussed with management officials of the
Company, ramifications of the use of such alternative disclosure and the
treatment preferred by the independent auditors; and (3) other material
written communications between the independent auditors and the management
of the Company, including, but not limited to, any management letter or
scheduled or unadjusted differences.
(11) Meet with management and independent auditors to (a) discuss the scope of
the annual audit, (b) discuss the annual audited financial statements
including disclosures made in "Management's Discussion and Analysis"
portion of the Company's annual report on Form 10-K, (c) discuss any
significant matter arising from the audit or report as disclosed to the
Committee by management or the independent auditors, (d) review the form of
opinion the independent auditors propose to render with respect to the (
audited annual financial statements, (e) discuss significant changes to the
Company's auditing and accounting principles, policies, or procedures
proposed by management or the independent auditors, (f) inquire of the
independent auditors of significant risks or exposures, if any, that have
come to the attention of the independent auditors and any difficulties
encountered in conducting the audit, including any restrictions on the
scope of activities or access to requested information and any significant
disagreement with management.
(12) Ensure that the independent auditors submit to the Committee written
disclosures and the letter from the ( independent auditors required by
Independence Standards Board Standard No. 1 Independence Discussions with
Audit Committees, and discuss with the independent auditors their
independence.
A-2
(13) Discuss with the independent auditors the matters required to be discussed
by SAS 61 Communication with Audit Committees and SAS 90 Audit Committee
Communications, which include:
(a) methods used to account for significant unusual transactions;
(b) the effect of significant accounting policies in controversial or
emerging areas for which there is a lack of authoritative guidance or
consensus;
(c) the process used by management in formulating particularly sensitive
accounting estimates and the basis for the auditor's conclusions
regarding the reasonableness of those estimates;
(d) disagreements with management over the application of accounting
principles, the basis for management's accounting estimates, and the
disclosures in the financial statements; and
(e) information regarding the auditor's judgment about quality, not just
acceptability, of the Company's auditing principles.
(14) Engage independent counsel and other advisers, as the Committee may
determine in its sole discretion to be necessary and appropriate, to carry
out the Committee's duties.
(15) Be provided with appropriate funding by the Company, as determined by the
Committee, for payment of:
(a) compensation to any independent auditors engaged for the purpose of
preparing or issuing an audit report or performing other audit, review
or attest services for the Company;
(b) compensation to any advisers employed by the audit committee under
Section 17 above; and
(c) ordinary administrative expenses of the audit committee that are
necessary or appropriate in carrying out its duties.
(16) Obtain from the independent auditors, at least annually, a formal written
statement delineating all relationships between the independent auditors
and the Company, and at least annually discuss with the independent
auditors any relationship or services which may impact the independent
auditors' objectivity or independence, and take appropriate actions to
ensure such independence.
(17) Establish procedures for the receipt, retention and treatment of complaints
received by the Company regarding accounting, internal accounting controls
or auditing matters.
(18) Establish procedures for the confidential, anonymous submission by
employees of the Company of concerns regarding questionable accounting
matters.
C. MEETINGS
Meetings of the Committee will be held at least quarterly and such other
times as shall be required by the Chairman of the Board, or by a majority of the
members of the Committee. Written minutes pertaining to each meeting shall be
filed with the Company's Secretary and an oral report shall be presented by the
Committee at each Board meeting.
At the invitation of the Chairman of the Committee, the meetings shall be
attended by the President and Chief Executive Officer, the Chief Financial
Officer, the representatives of the independent auditors, and such other persons
whose attendance is appropriate to the matters under consideration.
Approved by the Board of the Company as of December 16, 2003.
A-3
REVOCABLE PROXY
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1st STATE BANCORP, INC.
BURLINGTON, NORTH CAROLINA
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ANNUAL MEETING OF STOCKHOLDERS
FEBRUARY 3, 2004
The undersigned hereby appoints Richard H. Shirley, Virgil L. Stadler and
Bernie C. Bean with full powers of substitution, to act as attorneys and proxies
for the undersigned, to vote all shares of the common stock of 1st State
Bancorp, Inc. which the undersigned is entitled to vote at the Annual Meeting of
Stockholders, to be held at the main office of 1st State Bank (the "Bank")
located at 445 S. Main Street, Burlington, North Carolina, on Tuesday, February
3, 2004, at 5:30 p.m. Eastern Standard Time (the "Annual Meeting"), and at any
and all adjournments thereof, as follows:
VOTE
FOR WITHHELD
1. The election as directors of all --- --------
nominees listed below (except as
marked to the contrary below). [ ] [ ]
For a term expiring at the 2007 Annual Meeting:
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James A. Barnwell, Jr.
James G. McClure
T. Scott Quakenbush
INSTRUCTION: TO WITHHOLD YOUR VOTE
FOR ANY OF THE INDIVIDUALS NOMINATED, INSERT
THAT NOMINEE'S NAME ON THE LINE PROVIDED BELOW.
------------------------------------------------
2. The transaction of such other business as may
properly come before the Annual Meeting or any
adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED
ABOVE.
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THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE ELECTION OF DIRECTORS. IF ANY OTHER BUSINESS IS
PRESENTED AT THE ANNUAL MEETING, INCLUDING MATTERS RELATING TO THE CONDUCT OF
THE ANNUAL MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN
ACCORDANCE WITH THE DETERMINATION OF A MAJORITY OF THE BOARD OF DIRECTORS. AT
THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE
PRESENTED AT THE ANNUAL MEETING.
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THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Annual Meeting
or at any adjournment thereof, then the power of said attorneys and prior
proxies shall be deemed terminated and of no further force and effect. The
undersigned may also revoke his proxy by filing a subsequent proxy or notifying
the Secretary of his decision to terminate his proxy.
The undersigned acknowledges receipt from the Company prior to the
execution of this proxy of a Notice of Annual Meeting and a Proxy Statement
dated December 30, 2003.
Dated: , 200_
------------------------------
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PRINT NAME OF STOCKHOLDER PRINT NAME OF STOCKHOLDER
--------------------------------------- ------------------------------------
SIGNATURE OF STOCKHOLDER SIGNATURE OF STOCKHOLDER
Please sign exactly as your name appears on the enclosed card. When signing
as attorney, executor, administrator, trustee or guardian, please give your full
title. Corporation proxies should be signed in corporate name by an authorized
officer. If shares are held jointly, each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.