FLAG FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 15, 2003
To the Shareholders of Flag Financial Corporation:
The 2003 Annual Meeting of Shareholders of Flag Financial Corporation (the
"Company") will be held at 3475 Piedmont Road, N.E., Suite 550, Atlanta, Georgia
30305, on Tuesday, April 15, 2003, at 2:00 p.m., for the purposes of:
(1) Electing three directors to serve for the term indicated in the
accompanying Proxy Statement;
(2) Ratifying the appointment of Porter Keadle Moore, LLP as the Company's
independent accountants for fiscal 2003; and
(3) Transacting any other business as properly may come before the Annual
Meeting or any adjournments of the meeting.
The Board of Directors has set February 21, 2003, as the record date for
the determination of the shareholders entitled to notice of and to vote at the
meeting.
I hope that you will be able to attend the Annual Meeting. If you plan to
attend, please mark the appropriate box at the bottom of your proxy card so that
we can make proper arrangements for the anticipated number of guests. Whether or
not you plan to attend the Annual Meeting, please complete, date, sign and
return the enclosed proxy card as soon as possible. Returning your proxy will
help insure the greatest number of shareholders is present either in person or
by proxy. If you attend the Annual Meeting and wish to vote your shares in
person, you may do so at any time before the vote takes place.
By Order of the Board of Directors,
Joseph W. Evans
Chairman of the Board, President and Chief Executive
Officer
Atlanta, Georgia
March 7, 2003
Please read the attached Proxy Statement and then promptly complete, date,
sign and return the enclosed proxy card in the postage-paid envelope. You can
spare your company the expense of further proxy solicitation by returning your
proxy card promptly.
FLAG FINANCIAL CORPORATION
---------------
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 15, 2003
---------------
INTRODUCTION
Time and Place of the Meeting
The Company's Board of Directors is furnishing this Proxy Statement to
solicit proxies for use at the 2003 Annual Meeting of Shareholders of the
Company to be held on Tuesday, April 15, 2003, at 2:00 p.m. local time at 3475
Piedmont Road, N.E., Suite 550, Atlanta, Georgia 30305, and at any adjournment
of the meeting.
Record Date and Mailing Date
The close of business on February 21, 2003 is the record date for the
determination of shareholders entitled to notice of and to vote at the meeting.
We first mailed this Proxy Statement and accompanying proxy card to shareholders
on or about March 7, 2003.
Number of Shares Outstanding
As of the close of business on the Record Date, the Company had 20,000,000
shares of Common Stock, $1.00 par value, authorized, of which 8,391,540 shares
were outstanding. Each outstanding share is entitled to one vote on all matters
to be presented at the meeting.
VOTING AT THE ANNUAL MEETING
Procedures for Voting by Proxy
The accompanying proxy card is for use at the Annual Meeting if a
shareholder is unable to attend in person or is able to attend but does not wish
to vote in person. You should specify your choices with regard to the proposals
on the proxy card. If you properly sign, return and do not revoke your proxy,
the persons named as proxies will vote your shares according to the instructions
you have specified on your proxy card.
If you sign and return your proxy card but do not specify how the persons
appointed as proxies are to vote your shares, the shares represented by your
signed and dated proxy card will be voted FOR each of the proposals described in
this Proxy Statement. If any nominee for election to the board of directors
named in this Proxy Statement becomes unavailable for election for any reason,
the proxy will be voted for a substitute nominee selected by the board of
directors. If any other matters properly come before the Annual Meeting, the
persons named as proxies will vote upon the matters according to their judgment.
The Board of Directors is not aware of any other business to be presented for a
vote of the shareholders at the Annual Meeting.
Revoking Your Proxy
Returning your proxy does not affect your right to vote in person if you
attend the Annual Meeting. You can revoke your proxy at any time before it is
voted by delivering to J. Daniel Speight, Secretary of the Company, at 3475
Piedmont Road, N.E., Suite 550, Atlanta, Georgia 30305, either a written
revocation of your proxy or a duly executed proxy bearing a later date or by
attending the meeting and voting in person.
Requirements for Shareholder Approval
A quorum will be present at the meeting if a majority of the outstanding
shares of common stock is represented in person or by valid proxy. We will count
abstentions and broker non-votes, which are described below, in determining
whether a quorum exists. Only those votes actually cast for the election of a
director, however, will be counted for purposes of determining whether a
particular director nominee receives sufficient votes to be elected. To be
elected, a director nominee must receive more votes than any other nominee for
the particular seat on the board of directors. As a result, if you withhold your
vote as to one or more nominees, it will have no effect on the outcome of the
election unless you cast that vote for a competing nominee. We do not know of
any competing nominees.
Abstentions. A shareholder who is present in person or by proxy at the
Annual Meeting and who abstains from voting on any or all proposals will be
included in the number of shareholders present at the Annual Meeting for the
purpose of determining the presence of a quorum. Abstentions do not count as
votes in favor of or against a given matter.
Broker Non-Votes. Brokers who hold shares for the accounts of their clients
may vote these shares either as directed by their clients or in their own
discretion if permitted by the exchange or other organization of which they are
members. Proxies that contain a broker vote on one or more proposals but no vote
on one or more other proposals are referred to as "broker non-votes" with
respect to the proposal(s) not voted upon. Broker non-votes are included in
determining the presence of a quorum. A broker non-vote, however, does not count
as a vote in favor of or against a particular proposal for which the broker has
no discretionary voting authority. Broker votes are permitted in connection with
uncontested elections of directors and proposals to ratify the appointment of
independent accountants. As a result, broker non-votes will not exist in
connection with the Annual Meeting unless a non-discretionary proposal is
properly brought before the meeting.
The ratification of our independent accountants and the approval of any
other matter that may properly come before the Annual Meeting requires the
affirmative vote of a majority of shares of common stock represented in person
or by valid proxy and entitled to vote on the matter. Abstentions and broker
non-votes will be counted in determining the minimum number of votes required
for approval and will, therefore, have the effect of negative votes.
Solicitation of Proxies
The Company will pay the cost of proxy solicitation. Our directors,
officers and employees may, without additional compensation, solicit proxies by
personal interview, telephone, fax, or otherwise. We will direct brokerage firms
or other custodians, nominees or fiduciaries to forward our proxy solicitation
material to the beneficial owners of common stock held of record by these
institutions and will reimburse them for the reasonable out-of-pocket expenses
they incur in connection with this process.
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PROPOSAL 1 - ELECTION OF DIRECTORS
The Board of Directors consists of eight members, including a Chairman and
three Vice Chairmen. The Board is divided into three classes, which are as
nearly equal in number as possible. Each class of directors serves staggered
three-year terms. As a result, the term of office of one of the classes of
directors expires each year at the Annual Meeting of Shareholders, and a new
class is elected by the shareholders each year at that time.
Nominees
At this Annual Meeting, the terms of the Class III directors listed below
will expire. The Board of Directors has nominated each of these directors to
stand for re-election as directors at the Annual Meeting. If elected by the
shareholders, each of the nominees will serve a three-year term that will expire
at the 2006 Annual Meeting of Shareholders and upon the election and
qualification of their successors. The Class III Director nominees are:
William H. Anderson, II
H. Speer Burdette, III
J. Thomas Wiley, Jr.
If any of the nominees should be unavailable to serve for any reason (which
we do not anticipate), the Board of Directors may (1) designate a substitute
nominee or nominees (in which case the persons named as proxies on the enclosed
proxy card will vote the shares represented by all valid proxy cards for the
election of such substitute nominee or nominees), (2) allow the vacancy or
vacancies to remain open until a suitable candidate or candidates are located,
or (3) by resolution provide for a lesser number of directors.
The Board of Directors unanimously recommends that shareholders vote FOR
the proposal to re-elect each of the director nominees described above.
Information Regarding Nominees and Continuing Directors
The following table shows information regarding the three nominees to serve
as directors, as well as the five incumbent directors whose terms as directors
will continue following the Annual Meeting. All of the directors of the Company
except for Mr. Anderson, are also directors of Flag Bank, a wholly-owned
subsidiary of the Company. Except as otherwise indicated, each of the named
persons has been engaged in his or her present principal occupation for more
than five years. The ages shown are as of December 31, 2002.
Class III Director Nominees
Term Expiring in 2006
Name Age Business Information
William H. Anderson, II 65 Mr. Anderson is Chairman and Chief Executive
Officer of Southern Trust Corporation and
various subsidiaries. He also served as
Chairman of Century South Banks, Inc. from
1997 to January 2002 and served as Chairman
of Bank Corporation of Georgia prior to its
1997 merger into Century South.
3
H. Speer Burdette, III 50 Since January 2003, Mr. Burdette has been
President and General Manager of Callaway
Foundation, Inc. and the Fuller E. Callaway
Foundation and President of Charitable
Services Company. He was previously an
owner, director, Vice President and
Treasurer of J.K. Boatwright & Co., P.C., an
accounting firm in LaGrange, Georgia. He has
served as a director of the Company since
1994 and as a director of Flag Bank or a
predecessor of Flag Bank since 1993.
J. Thomas Wiley, Jr. 50 Mr. Wiley has served as the Company's Vice
Chairman and Chief Banking Officer since
November 2002. He served as its Executive
Vice President and Chief Banking Officer
from February 2002 to November 2002 and has
served as President and Chief Executive
Officer of Flag Bank since February 2002.
From 1999 to January 2002, he served as
Executive Vice President and Chief Banking
Officer of Century South Banks, Inc. He
served as President and Chief Executive
Officer of AmeriBank, N.A., a subsidiary of
Century South Banks, Inc. and previously of
Bank Corporation of Georgia, from 1990 to
1999. Mr. Wiley served in various capacities
with Bank Corporation of Georgia beginning
in 1982, being named Executive Vice
President in 1989 and serving in that
capacity until its merger with Century South
Banks, Inc. in 1997.
Continuing Class I Directors
Term Expires in 2004
Name Age Business Information
David B. Dunaway 57 Mr. Dunaway has had his own law practice,
the Law Office of David B. Dunaway in
Thomaston, Georgia, since June 2002 and was
previously a partner in the law firm of
Adams, Barfield, Dunaway & Hankinson, LLP in
Thomaston, Georgia. Mr. Dunaway has been a
director of the Company since 1999 and of
Flag Bank or a predecessor since 1976.
Joseph W. Evans 53 Mr. Evans has served as the Company's
Chairman and Chief Executive Officer since
February 2002 and was additionally appointed
as its President in November 2002. He was
employed by Bank Corporation of Georgia from
1980 to 1997, serving as its President and
Chief Executive Officer from 1984 until its
merger with Century South Banks, Inc. in
1997. He was named President, Chief
Operating Officer and Chief Financial
Officer of Century South in 1997 and served
as Chief Executive Officer from 2000 until
January 2002.
5
J. Daniel Speight 46 Mr. Speight has served as the Company's Vice
Chairman since November 2002 and as its
Chief Financial Officer and Secretary since
July 2002. From February 2002 to November
2002, he also served as President of the
Company. At the Bank level, he has served as
Chairman since February 2002 and as Chief
Financial Officer since July 2002.
Mr. Speight served as Chief Executive
Officer of the Company and President and
Chief Executive Officer of Flag Bank from
1998 to February 2002. He also served as the
Company's President from 1998 to 2000.
Mr. Speight served as Chief Executive
Officer and as a director of Middle Georgia
Bankshares, Inc. from 1989 until 1998, when
Middle Georgia Bankshares, Inc. merged with
the Company. Mr. Speight has served as a
director of the Company since 1998 and as a
director of Flag Bank or a predecessor of
Flag Bank since 1984.
Mr. Speight also served in various executive
positions for Citizens Bank beginning in
1984, including President and Chief
Executive Officer, and served as the Chief
Executive Officer of First Flag Bank from
1999 until December 2000, when First Flag
Bank and Citizens Bank merged. Mr. Speight
is also a director of Regan Holding Corp. in
Petaluma, California.
Class II Director Nominees
Term Expiring in 2005
Name Age Business Information
StephenW.Doughty 51 Mr. Doughty has served as the Company's Vice
Chairman and Chief Risk Management Officer
since November 2002 and as its Executive
Vice President and Chief Risk Management
Officer from February 2002 to November 2002.
He served as Executive Vice President, Chief
Financial Officer and Chief Risk Management
Officer of Century South Banks, Inc. from
2000 to January 2002 and as its Executive
Vice President and Chief Credit Officer from
1997 to January 2002. Mr. Doughty joined
Bank Corporation of Georgia in 1984, was
named Executive Vice President in 1989 and
served in that capacity until its merger
into Century South in 1997.
5
James W. Johnson 61 Mr. Johnson is owner and President of
McCranie Motor and Tractor Company, Inc., a
retail seller of tractors and implement
equipment in Unadilla, Georgia. Mr. Johnson
has served as a director of the Company
since 1998 and as a director of Flag Bank or
a predecessor of Flag Bank since 1985. He is
the former Chairman of the Board of Middle
Georgia Bankshares, Inc. and served as the
Chairman of the Board of Citizens Bank from
1999 until December 2000. He currently
serves as a director of Taylor Regional
Hospital in Hawkinsville, Georgia and Rock
Tenn Corporation in Norcross, Georgia.
Executive Officers
Messrs. Evans, Speight, Doughty and Wiley are also executive officers of
the Company. Please see "Information Regarding Nominees and Continuing
Directors" above for information about their titles, background and experience.
Management Stock Ownership
The following table lists the number and percentage ownership of shares of
common stock beneficially owned by each director and director nominee of the
Company, each executive officer named in the Summary Compensation Table, all
current executive officers and directors as a group and each person known to
management to own over five percent of the Company's outstanding common stock,
based solely on reports on Schedule 13D or 13G filed with the Securities and
Exchange Commission. Information relating to beneficial ownership of Company
common stock is based upon "beneficial owner" concepts set forth in rules under
the Securities and Exchange Act of 1934, as amended. Under these rules, a person
is deemed to be a "beneficial owner" of a security if that person has or shares
"voting power" or "investment power" over the security. Voting power includes
the power to vote or to direct the voting of the security, and investment power
includes the power to dispose or to direct the disposition of the security.
Under the rules, more than one person may be deemed to be a beneficial owner of
the same securities.
Amount and
Nature of Beneficial Percent
Name Ownership of Total (%)
---- -------------------- ------------
(a) Directors and Named
Executive Officers
William H. Anderson, II 417,625 (1) 4.9
H. Speer Burdette, III 41,022 (2) *
Stephen W. Doughty 300,875 (3) 3.5
David B. Dunaway 66,997 (4) *
Joseph E. Evans 360,200 (5) 4.2
Charles O. Hinely 120,208 (6) 1.4
John S. Holle 113,004 (7) 1.3
James W. Johnson 170,460 (8) 2.0
J. Daniel Speight 397,868 (9) 4.7
J. Thomas Wiley, Jr 302,600 (10) 3.5
6
Amount and
Nature of Beneficial Percent
Name Ownership of Total (%)
5% Shareholders
Jeffrey L. Gendell 445,000 (11) 5.3
(b) All Directors and Current Executive
Officers as a group
(8 persons) 2,057,647 (12) 22.4
(c)
-----------------------------
* Represents less than one percent.
(1) Consists of (a) 12,625 shares held by Mr. Anderson, (b) 250,000 shares held
by Southern Insurance Company, a controlled business entity, (c) 20,000
shares held by a trust, (d) 9,800 shares held by VHA Partners, a controlled
business entity, (e) 5,000 shares subject to options exercisable within 60
days, and (f) 150,000 shares subject to exercisable warrants.
(2) Consists of (a) 6,298 shares held in Individual Retirement Accounts for the
benefit of Mr. Burdette, and (b) 34,724 shares subject to options
exercisable within 60 days.
(3) Consists of (a) 150,000 shares held by Mr. Doughty; (b) 875 shares held as
custodian for Chandler Doughty; and (c) 150,000 shares subject to
exercisable warrants.
(4) Consists of (a) 29,912 shares held by Mr. Dunaway, (b) 20,439 shares held
by Mr. Dunaway's spouse, as to beneficial ownership is shared, (c) 4,146
shares held by Mr. Dunaway as custodian for D. Bruce Dunaway, and (d)
12,500 shares subject to options exercisable within 60 days.
(5) Consists of (a) 210,200 shares held by Mr. Evans and (b) 150,000 shares
subject to exercisable warrants.
(6) Consists of (a) 24,913 shares held by Mr. Hinely, (b) 691 shares held in an
Individual Retirement Account for the benefit of Mr. Hinely, (c) 1,832
shares held by Mr. Hinely's spouse, as to which beneficial ownership is
shared, (d) 678 shares held by Mr. Hinely's spouse as custodian for Rebecca
E. Hinely, (e) 5,677 shares issued pursuant to the Company's 401(k) Plan,
(f) 62,417 shares subject to options exercisable within 60 days, and (g)
24,000 shares subject to exercisable warrants.
(7) Consists of (a) 21,818 shares held by Mr. Holle, (b) 31,230 shares issued
pursuant to the Company's 401(k) Plan, (c) 53,956 shares subject to options
exercisable within 60 days, and (d) 6,000 shares subject to exercisable
warrants.
(8) Consists of (a) 64,377 shares held by Mr. Johnson, (b) 2,716 shares held by
Mr. Johnson's spouse, as to which beneficial ownership is shared, (c)
84,010 shares held by McCranie Companies, Inc. Profit Sharing Plan for the
benefit of Mr. Johnson, (d) 13,357 shares subject to options exercisable
within 60 days, and (e) 6,000 shares subject to exercisable warrants.
(9) Consists of (a) 180,000 shares held by Mr. Speight, (b) 5,000 shares held
by Mr. Speight as trustee for Patricia Ruth Davis, (c) 3,500 shares held by
Mr. Speight as trustee for Anna Davis, (d) 1,677 shares held by Mr. Speight
as custodian for Alex Speight, (e) 1,677 shares held by Mr. Speight as
custodian for J. Daniel Speight, III, (f) 7,371 shares held in an
Individual Retirement Account for the benefit of Mr. Speight, (g) 39,917
shares held by Sp8Co., Inc. as to which beneficial ownership is shared, (h)
18,645 shares issued pursuant to the Company's 401(k) Plan, (i) 110,081
shares subject to options exercisable within 60 days, and (j) 30,000 shares
subject to exercisable warrants.
7
(10) Consists of (a) 152,000 shares held by Mr. Wiley, (b) 300 shares held as
custodian for J. T. Wiley, III, (c) 300 shares held as custodian for James
Wiley, and (d) 150,000 shares subject to exercisable warrants.
(11) Consists of shares owned of record by Tontine Financial Partners, L.P.
("TFP"), a Delaware limited partnership. Tontine Management, L.L.C. ("TM"),
a Delaware limited liability company and the general partner of TFP, and
Jeffrey L. Gendell, the managing member of TM, share voting and investment
power with TFP with respect to the indicated shares. The address of TRP, TM
and Mr. Gendell is 237 Park Avenue, 9th Floor, New York, New York 10017.
(12) Includes (a) 18,645 shares held in the Company's 401(k) Plan, (b) 175,662
shares subject to options exercisable within 60 days, and (c) 636,000
shares subject to exercisable warrants. Mr. Hinely and Mr. Holle are not
currently executive officers of the Company.
Meetings and Committees of the Board of Directors
The Board of Directors of the Company conducts its business through
meetings of the full Board and through joint committees of the Boards of
Directors of the Company and its subsidiary bank. The Company's committees
include an Audit and Exam Committee, a Benefits and Compensation Committee, and
an Executive Management Committee. During 2002, the Board of Directors held 12
meetings, the Audit and Exam Committee held four meetings and the Benefits and
Compensation Committee held three meetings. The Executive Management Committee
did not meet during 2002. Each director attended at least 75% of all meetings of
the full Board of Directors and of each committee of the Board of which he or
she is a member.
The Audit and Exam Committee is responsible for reviewing with the
Company's independent accountants their audit plan, the scope and results of
their audit engagement and the accompanying management letter, if any; reviewing
the scope and results of the Company's internal auditing procedures; consulting
with the independent accountants and management with regard to the Company's
accounting methods and the adequacy of the Company's internal accounting
controls; approving professional services provided by the independent
accountants; reviewing the independence of the independent accountants; and
reviewing the range of the independent accountants' audit and non-audit fees.
Audit and Exam Committee members are William H. Anderson, II, H. Speer Burdette,
III, David B. Dunaway and James W. Johnson.
The Benefits and Compensation Committee is responsible for setting the
compensation and benefits of the executive officers and other employees of the
Company and its subsidiaries. Benefits and Compensation Committee members are
William H. Anderson, II, H. Speer Burdette, III, David B. Dunaway and James W.
Johnson.
The Executive Management Committee reviews, on a monthly basis, the
Company's financial reports, including reports of loans made and savings
activities during the preceding month. The Executive Management Committee also
reviews and ratifies any investments made by the Company. Executive Management
Committee members are Stephen W. Doughty, Joseph W. Evans, J. Daniel Speight and
J. Thomas Wiley, Jr.
The Board of Directors as a whole functions as a nominating committee to
select management's nominees for election as directors of the Company. The Board
of Directors will consider nominees recommended by shareholders if submitted to
the Company in accordance with the procedures set forth in
8
Section 2.14 of the Bylaws of the Company. See "Shareholder Proposals for 2004
Annual Meeting" below.
Audit and Exam Committee Report
The Audit and Exam Committee reports as follows with respect to the audit
of the Company's 2002 audited consolidated financial statements.
o The Committee has reviewed and discussed the Company's 2002 audited
consolidated financial statements with the Company's management;
o The Committee has discussed with the independent auditors, Porter
Keadle Moore, LLP, the matters required to be discussed by SAS 61,
which include, among other items, matters related to the conduct of
the audit of the Company's consolidated financial statements;
o The Committee has received written disclosures and the letter from the
independent auditors required by ISB Standard No. 1, which relates to
the auditor's independence from the corporation and its related
entities, and has discussed with the auditors the auditors'
independence from the Company; and
o Based on review and discussions of the Company's 2002 audited
consolidated financial statements with management and discussions with
the independent auditors, the Audit Committee recommended to the Board
of Directors that the Company's 2002 audited consolidated financial
statements be included in the Company's Annual Report on Form 10-K.
March 7, 2003 H. Speer Burdette, III, Chairman
William H. Anderson, II
David B. Dunaway
James W. Johnson
Audit and Exam Committee Charter
The Board of Directors has adopted a written charter for the Audit and Exam
Committee. The Board of Directors reviews and approves any changes to the Audit
and Exam Committee charter.
Independence of Audit and Exam Committee Members
The Company's Audit and Exam Committee is comprised of William H. Anderson,
II, H. Speer Burdette, III. David B. Dunaway and James W. Johnson. Each of these
members meets the requirements for independence as defined by the applicable
Nasdaq Stock Market listing standards.
Director Compensation
Non-employee members of the Board of Directors receive $3,750 per quarter,
which includes all board meetings and assigned committee meetings for the
Company's and Flag Bank's boards. The Company paid a total of $56,650 in
directors' fees in 2002. Directors who are employees of the Company or its
subsidiaries do not receive directors' fees.
The Company's 1994 Directors Stock Incentive Plan (the "Directors Stock
Plan"), provides that each person who becomes a director of the Company and who
is not an employee of the Company or any
6
of its subsidiaries will be granted an option for the purchase of 5,000 shares
of common stock upon the commencement of his or her service as a director.
Additionally, the Directors Stock Plan provides that as of each March 1st,
starting at March 1, 1995 and ending on March 1, 2004, the non-employee
directors as a group will be entitled to receive options to purchase an
aggregate of 6,000 shares of common stock if the Company's book value as of the
immediately preceding December 31st equals or exceeds 106% of the Company's book
value as of the prior December 31st. If the options are granted, the 6,000
shares subject to the options are allocated equally among the non-employee
directors.
No directors received options pursuant to this provision of the Directors
Stock Plan in 2002. However, on February 19, 2002, the following persons who
were then serving as Company directors were granted the following numbers of
options. In each case, the options have an exercise price of $9.10 per share,
representing the fair market value of the common stock on the date of grant.
Each of these directors, except for Messrs. Burdette, Dunaway and Johnson, also
received a cash payment of $30,000 on that date in connection with his
resignation from the Company's Board.
No. of
Name Options
---- -------
A. Glenn Bailey 15,000
James A. Brett 7,500
H. Speer Burdette, III 15,000
Robert G. Cochran 7,500
David B. Dunaway 7,500
Fred A. Durand, III 15,000
John R. Hines, Jr. 7,500
James W. Johnson 7,500
Kelly R. Linch 15,000
John W. Stewart, Jr. 15,000
Robert W. Walters 15,000
In addition, William H. Anderson, II was elected to the Board on that date
and was granted an option to purchase 5,000 shares at an exercise price of $9.10
per share.
Selected directors participate in the First Flag Bank Director Indexed Fee
Continuation Program, while others participate in the Citizens Bank Director
Indexed Fee Continuation Program. Both of these programs are now sponsored by
Flag Bank and provide retirement benefits to the participants and death benefits
to their designated beneficiaries. Under these programs, predecessors of Flag
Bank purchased split-dollar whole life insurance contracts on the lives of each
of the participating directors. Flag Bank retains the tax-free build-up of cash
surrender value in the policies up to the after-tax opportunity costs for
premiums paid on the policies. Any remaining earnings from the policies are
accrued to deferred compensation liability accounts for the directors. The
earnings in a director's account are payable in ten annual installments
commencing 30 days following the director's retirement as a director. In the
event the insurance contracts fail to produce positive returns, Flag Bank has no
obligation to contribute to the programs. As of December 31, 2002 the cash
surrender value of the insurance contracts for all participants, including
directors of Flag Bank who are not directors of the Company, was approximately
$4,629,000 and the expense incurred during 2002 for the benefits was
approximately $6,000.
Compensation Committee Interlocks and Insider Participation
Until February 2002, the Benefits and Compensation Committee of the Board
of Directors of the Company consisted of three non-employee directors, Dr. A.
Glenn Bailey, Fred A. Durand, III, and James
10
W. Johnson, and two employee directors, John S. Holle, who then served as
Chairman of the Board of the Company, and J. Daniel Speight, who then served as
Chief Executive Officer of the Company. Mr. Durand served as Chairman of the
Committee.
From February 2002 to February 2003, the Benefits and Compensation
Committee consisted of Messrs. Anderson, Burdette, Dunaway, Evans and Johnson.
Mr. Evans is the Chairman, President and Chief Executive Officer of the Company
and is also a director of Southern Trust Insurance Company and certain
affiliated corporations in which Mr. Anderson serves as a director and/or
executive officer. Mr. Evans resigned from the Benefits and Compensation
Committee in February 2003. Messrs. Holle, Speight and Evans did not participate
in compensation discussions affecting themselves or decisions regarding the
award of stock-based compensation under the Company's 1994 Employee Stock
Incentive Plan.
In February 2002, each of Messrs. Anderson, Bailey, Evans, Holle, Johnson
and Speight purchased shares of Company common stock and warrants to purchase
Company common stock at an exercise price of $9.10 per share in a private
placement. The date of purchase, number of securities purchased and purchase
price are indicated below. Each person paid the full amount of the purchase
price by means of a promissory note in favor of the Company. Each note bore
interest at 4.75% per annum, was payable in 30 days and was repaid in full in
March 2002.
Total
No. of Price Per No. of Price Per Purchase
Name Date Shares Share Warrants Warrant Price
---- ---- ------ --------- --------- --------- ----------
Mr. Anderson 2/19/02 150,000 $9.10 150,000 $1.00 $1,515,000
Dr. Bailey 3/5/02 6,000 $9.90 6,000 $1.00 $ 65,400
Mr. Evans 2/19/02 150,000 $9.10 150,000 $1.00 $1,515,000
Mr. Holle 2/19/02 6,000 $9.10 6,000 $1.00 $ 60,600
Mr. Johnson 2/19/02 6,000 $9.10 6,000 $1.00 $ 60,600
Mr. Speight 2/19/02 30,000 $9.10 30,000 $1.00 $303,000
On October 15, 2002, the Company repurchased 56,062 options held by Mr.
Holle for an aggregate purchase price of $112,124, which the Board determined to
be the fair market value of the options as of that date.
Benefits and Compensation Committee Report
on Executive Compensation
The Benefits and Compensation Committee (the "Committee") of the Board of
Directors of the Company establishes the general compensation policies of the
Company, establishes the compensation plans and specific compensation levels for
executive officers and awards stock-based compensation to executive officers and
employees of the Company. The Committee generally is responsible for the
compensation and benefit plans for all employees and is directly accountable for
reviewing and monitoring compensation and benefit plans, and payment and awards
under those plans, for the Company's senior executives. In carrying out these
responsibilities, the Committee reviews the design of all compensation and
benefit plans applicable to executive officers, determines base salaries,
reviews incentive plan performance measures, establishes incentive targets,
approves cash incentive awards based on performance, grants stock options and
other long-term incentives, and monitors the administration of the various
plans. In all of these matters, the Committee's decisions are reviewed and
approved or ratified by the Board of Directors.
11
During 2001 and early 2002, the Benefits and Compensation Committee
consisted of Fred A. Durand, III (Chairman), Glenn A. Bailey, John S. Holle,
James W. Johnson and J. Daniel Speight In February 2002, Messrs. Durand, Bailey
and Holle resigned as directors of the Company and the Benefits and Compensation
Committee was reconstituted to consist of William H. Anderson, II, H. Speer
Burdette, III, David B. Dunaway, Joseph W. Evans and James W. Johnson. Mr. Evans
resigned from the Committee in February 2003.
This report is submitted by the members of the prior and reconstituted
committees who participated in deliberations regarding 2002 executive
compensation and who are currently directors or employees of the Company. The
prior committee approved the compensation paid to Messrs. Speight, Holle and
Hinely and the initial salaries for Messrs. Doughty and Wiley, with Mr. Speight
abstaining from all discussions and decisions regarding his own compensation.
The reconstituted committee approved subsequent changes to Mr. Hinely's
compensation, the terms of the change in control agreements and bonus payments
for Messrs. Doughty and Wiley and (with Mr. Evans abstaining) prospective
compensation for the Chief Executive Officer for 2003.
Base Salaries
The salary of the Chairman and Chief Executive Officer is evaluated solely
by the Committee (excluding the Chairman and Chief Executive Officer with
respect to his own salary). Salaries for the other executive officers generally
are recommended by the Chairman and Chief Executive Officer and reviewed by the
Committee. Executive officer salaries are based principally on a subjective
review of the executive's individual performance and degree of experience and
are also designed to be competitive with salaries paid to executives in similar
positions in financial institutions of comparable asset size. See "Compensation
of the Chief Executive Officer" for information regarding his base salary
arrangements.
Annual Incentives
One of the Committee's objectives in managing executive compensation is to
link directly a significant portion of executive pay to Company performance. The
Committee awarded bonuses to the Company's executive officers (excluding its
Chief Executive Officer, whose compensation is discussed separately below) based
upon the Company's performance against budget in 2002. The amounts of these
bonuses ranged from $32,375 to $62,500 and are shown in the Summary Compensation
Table.
Long-term Incentives
Another major objective of the Committee in managing executive compensation
is to reward executives for increasing the value of the Company to its
shareholders. The Flag Financial Corporation 1994 Employees Stock Incentive Plan
(the "Plan") accomplishes this objective by providing executives with
opportunities to earn and acquire a meaningful ownership interest in the
Company. The Committee (excluding employee members) is authorized to make awards
of stock options and other stock-based incentives and has the sole authority to
select the officers and other key employees to whom awards may be made under the
Plan.
Under the terms of the Plan, it must be administered by a committee of
non-employee directors. Accordingly, neither Mr. Evans nor, when they were
members of the Committee, Mr. Speight or Mr. Holle, participated in the
administration of the Plan, including the granting of awards under the Plan,
except to the extent of making recommendations to the Committee regarding awards
of stock-based compensation under the Plan.
12
Because the value of stock options and other stock awards is determined by
the price of the common stock, the Committee believes these awards benefit
stockholders by linking a potentially significant portion of executive pay to
the performance of the common stock. In addition, the Plan assists the Company
in attracting and retaining key employees and providing a competitive
compensation opportunity. Awards to executive officers under the Plan for 2002
were granted based on the Committee's subjective assessment of the executive's
contributions to the Company's performance and the degree to which compensation
in the form of a long-term incentive was likely to produce improved earnings,
return on equity and assets and other measures of Company performance. The terms
of the option grants are shown in the Summary Compensation Table and the table
headed "Option Grants in Last Fiscal Year."
In addition to the option grants described above, each of the Company's
common stock and executive officers purchased a significant amount of Company
stock and warrants from the Company at fair market value in February 2002 as
described in "Compensation Committee Interlocks and Insider Participation" and
"Related Party Transactions" elsewhere in this proxy statement. The Committee
believes that this investment provides a similar, but stronger, long-term
incentive toward improved Company performance, given that each officer has
already invested significant personal capital in the Company.
Benefits
In general, the benefit plans provided to key employees, such health care,
life insurance, profit sharing and 401(k), are intended to provide an adequate
retirement income as well as financial protection against illness, disability or
death. Benefits offered to executive officers were substantially the same as
those provided to all employees, with some variation.
Employment Agreements
In connection with a transition in the Company's management team in
February 2002, the Company entered into new employment agreements with certain
of its executive officers. These agreements are described in detail under
"Employment and Change in Control Agreements." The members of the Compensation
Committee reviewed and recommended the material terms of the agreements to the
full Board of Directors, with Mr. Speight abstaining from participation in any
discussions as a member of the Committee or the Board with respect to his
agreement.
Compensation of the Chief Executive Officer
In determining the compensation of the Chief Executive Officer, the
Committee is guided by the Company's compensation philosophy as described in
this report, the Company's financial and business performance and competitive
practices. In connection with his investment in the Company and assumption of
his role as Chief Executive Officer, however, Mr. Evans agreed to forego any
salary, bonus or other compensation until 2003. Instead, he invested over $1.5
million in the Company when he became Chief Executive Officer as described under
"Compensation Committee Interlocks and Insider Participation." As a result, Mr.
Evans has a significant stake in the Company's success. The Committee therefore
did not approve separate compensation for Mr. Evans for 2002 and determined that
his significant investment in the Company provided an appropriate incentive for
his performance as Chief Executive Officer during that year.
For 2003, Mr. Evans' salary has been set at $150,000 per year, with an
opportunity for an increase to a maximum of $397,500 based on the degree, if
any, to which the Bank exceeds its 2003 budgeted net income. His 2003 maximum
compensation is based on a 2004 base salary of $265,000 with
13
a 50% bonus potential, with the additional amount potentially payable for 2003
representing the difference between his 2004 combined salary and bonus potential
and his $150,000 base salary for 2003.
Mr. Speight served as Chief Executive Officer of the Company until February
2002, at which time his title changed to President of the Company and Chairman
of the Bank. In connection with this change, he entered into a new employment
agreement with the Company. The terms of this agreement are described under
"Employment and Change in Control Agreements" and the circumstances surrounding
its approval are described in the preceding section of this report.
Specifically, his salary was based on the Committee's subjective evaluation of
his individual performance, his bonus was based on the Company's performance
against budget and the options were granted as an incentive toward continued
long-term performance.
Summary
The Company's executive compensation program encourages executives to
manage the Company profitability and to increase the value of the business to
the shareholders. The emphasis on annual and long-term incentives is consistent
with the Committee's policy of linking pay to performance and increasing
shareholder value. The Committee believes this approach provides competitive
compensation and is in the best interest of the stockholders. The Committee will
continue to monitor the effectiveness of the executive compensation program and
will initiate changes as it deems appropriate.
Submitted by the following current and former members of the Benefits and
Compensation Committee of the Board of Directors of Flag Financial Corporation.
Current Members Former Members
--------------- --------------
William H. Anderson, II Joseph W. Evans
H. Speer Burdette, III John S. Holle
David B. Dunaway J. Daniel Speight
James W. Johnson
14
Performance Graph
The following Performance Graph compares the yearly percentage change in
the cumulative total shareholder return on the Company's common stock to the
cumulative total return on the Nasdaq Stock Market (U.S.) Index and the Nasdaq
Bank Stock Index for the past five years. The Performance Graph assumes
reinvestment of dividends, where applicable.
[GRAPH APPEARS HERE]
12/1997 12/1998 12/1999 12/2000 12/2001 12/2002
------- ------- ------- ------- ------- -------
Flag Financial Corporation 100.00 81.6 51.2 39.2 67.1 91.6
Nasdaq Stock Market 100.00 141.0 261.5 157.4 124.9 86.3
(US Companies)
Nasdaq Bank Stocks 100.00 99.4 95.5 108.9 118.0 120.6
SLC 6020-6029,
6,710-6,719
US & Foreign
15
EXECUTIVE COMPENSATION
Summary of Compensation
The following table shows information concerning annual and long term
compensation for services in all capacities to the Company and its subsidiaries
for the fiscal years indicated of the two individuals who served as our Chief
Executive Officer during 2002, the other most highly compensated executive
officers who served in such capacities as of December 31, 2002 and who earned
over $100,000 in salary and bonus during 2002, and two former executive officers
who would be within that category except that they were no longer serving as
executive officers of the Company on December 31, 2002 (the "Named Executive
Officers").
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------------------------ ------
Securities
Underlying
Name and Other Annual Options All Other
Principal Position Year Salary Bonus Compensation (2) (# of shares) Compensation (3)
------------------ ---- ------ ----- ---------------- ------------- ----------------
Joseph W. Evans 2002 -0- (4) -0- (4) -0- (4) -0- -0-(4)
---------------
Chairman, President and Chief
Executive Officer of the
Company (1)
J. Daniel Speight 2002 $250,000 $ 50,000 42,104(5) -0- $361,074
-----------------
Vice Chairman, Chief 2001 $250,000 $ 50,000 -0- 7,500 $ 11,633
Financial Officer and 2000 $215,000 $ 86,000 -0- 40,000 $ 8,907
Secretary of the Company (1)
Stephen W. Doughty 2002 $129,167 $ 62,500 -0- -0- $ 6,665
------------------
Vice Chairman and Chief Risk
Management Officer of the
Company (1)
J. Thomas Wiley, Jr 2002 $129,167 $ 62,500 -0- -0- $ 6,593
-------------------
Vice Chairman and Chief
Banking Officer of the
Company (1)
John S. Holle 2002 $143,750 $ 43,000 $26,288(5) 20,000 $1,209,382(6)
-------------
Former Chairman of the Board 2001 $215,000 $ 43,000 -0- 7,500 $ 13,041
of the Company (1) 2000 $215,000 $ 86,000 -0- 40,000 $ 15,146
Charles O. Hinely 2002 $125,000 $ 32,375 $38,869(5) -0- $792,044(6)
-----------------
Former Executive Vice 2001 $185,000 $ 32,375 -0- 7,500 $ 10,580
President and Chief Operating 2000 $160,000 $ 56,000 -0- 61,835 $ 6,584
Officer of the Company (1)
-------------------
(1) As of February 19, 2002, Joseph W. Evans replaced J. Daniel Speight as
Chief Executive Officer of the Company, Messrs. Doughty and Wiley
became executive officers of the Company and Mr. Holle resigned as an
executive officer of the Company. Mr. Hinely resigned as an executive
officer as of July 31, 2002.
16
(2) We have omitted information on "perks" and other personal benefits
with an aggregate value below the minimum amount required for
disclosure under the Securities and Exchange Commission regulations.
(3) Consists of matching contributions to the Company's Profit Sharing
Plan and 401(k) Plan and of insurance premiums for term and other life
insurance in the following amounts:
Profit Sharing/401(k) Insurance
Name Year Matching Contributions Premiums
---- ---- ---------------------- --------
Mr. Evans 2002 $ -0- $ -0-
Mr. Speight 2002 $10,000 $1,074
2001 $10,500 $1,133
2000 $7,615 $1,292
Mr. Doughty 2002 $6,458 $207
Mr. Wiley 2002 $6,458 $135
Mr. Holle 2002 $7,188 $2,194
2001 $10,500 $2,541
2000 $10,500 $4,646
Mr. Hinely 2002 $6,250 $794
2001 $9,250 $1,330
2000 $5,333 $1,251
(4) Mr. Evans volunteered to forego any salary, bonus or other
compensation as the Company's Chief Executive Officer as is more fully
described in "Benefits and Compensation Committee Report on Executive
Compensation -- Compensation of the Chief Executive Officer."
(5) Includes the value of a company car ($19,250 for Mr. Speight, $24,600
for Mr. Holle and $38,094 for Mr. Hinely) transferred to the indicated
person and the value of personal use of the car during 2002. Also
includes, in the case of Mr. Speight, $22,152 in rent paid by the
Company on a condominium available for his use in connection with
travel on behalf of the Company.
(6) Includes $1.2 million paid under Mr. Holle's Cancellation Agreement
and $785,000 paid under Mr. Hinely's Cancellation Agreement. See
"Employment and Change in Control Agreements."
17
Option Grants in Last Fiscal Year
The following table provides details regarding stock options granted to the
Named Executive Officers in 2002. The options described below are presently
exercisable.
Potential Realizable Value
at Assumed Annual Rate of
Stock Price Appreciation
Individual Option Grants for Option Term (2)
------------------------------------------------------------------ -----------------------------
% of Total
Options
Securities Granted to
Underlying Employees Exercise or
Date of Options in Fiscal Base Price Expiration
Name Grant Granted (#) Year (%) ($/Sh)(1) Date 5% 10%
---- ----- ----------- -------- --------- ---- -- ---
Joseph W. Evans -- 0 -- -- -- -- --
J. Daniel Speight -- 0 -- -- -- -- --
Stephen W. Doughty -- 0 -- -- -- -- --
J. Thomas Wiley, Jr. -- 0 -- -- -- -- --
John S. Holle 3/26/02 20,000 46 9.10 3/26/12 $114,459 $290,061
Charles O. Hinely -- 0 -- -- -- -- --
-------------------
(1) Option holders may pay the exercise price by delivery of already-owned
shares. Option holders can pay tax withholding obligations related to
exercise of the options by offset of the underlying shares, subject to
certain conditions.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of the price of the Company's common stock.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year-End In-the-Money Options (1)
--------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Joseph W. Evans 0 0 -- --
J. Daniel Speight 110,081 45,419 $215,180 $333,393
Stephen W. Doughty 0 0 -- --
J. Thomas Wiley, Jr. 0 0 -- --
John S. Holle 53,956 47,294 $439,761 $347,061
Charles O. Hinely 62,417 47,168 $314,211 $341,559
(1) Reflects information relating only to options held by the Named Executive
Officers with exercise prices that were less than the market value of the
Company's common stock ($11.35 per share) at December 31, 2002.
The Named Executive Officers did not exercise any options in 2002.
18
Employment and Change in Control Agreements
Mr. Speight
On February 21, 2002, the Company and Flag Bank entered into an amended and
restated employment agreement with J. Daniel Speight The Employment Agreement
was substantially the same as the employment agreement previously in effect for
Mr. Speight, except for changes in his base salary, title and responsibilities,
entitlement to certain "perks," and a provision in the amended and restated
Employment Agreement providing for a cash payment in the amount of $350,000 for
Mr. Speight in consideration of his execution of the new Employment Agreement
and the concessions contained therein.
The Employment Agreement provides for a term of three years that
automatically renews each day after the effective date so that the term remains
a three-year term until any party notifies the others that the automatic
renewals should discontinue. The Employment Agreement provides for an annual
salary that is reviewed at least annually by the Board of the Company and Flag
Bank. Mr. Speight's initial base salary under the Employment Agreement is
$250,000. The Employment Agreement also provides for Mr. Speight to participate
in any bonus, stock option or other executive compensation programs available to
senior management of the Company. Mr. Speight received title to his company car
and is entitled to various "perks" and to participate in all group employee
benefit plans. Mr. Speight is also entitled to participate in a deferred
compensation program similar to the split dollar insurance program provided by
the Company during prior years. In addition, the Employment Agreement provides
that if the Company reduces or eliminates dividends on its common stock for any
quarter during the term of the Employment Agreement, Mr. Speight will receive an
amount equal to $9,000 less the amount of any dividends he actually receives
during the quarter, with the payment to be reduced to reflect the proportionate
effect of any reduction in the number of shares of the Company's common stock he
owns during that quarter.
The Employment Agreement states that, in the event the Company or Flag Bank
terminates Mr. Speight's employment other than for "cause" (as defined in the
Employment Agreement) or Mr. Speight terminates his employment for "cause" or
due to a change in control, Mr. Speight is entitled to receive a severance
payment in a lump sum amount equal to his average monthly compensation
multiplied by the number of months remaining in the term of the Employment
Agreement. If there are less than twelve months remaining in the term of the
Employment Agreement, Mr. Speight will be entitled to receive a lump sum payment
equal to his average monthly compensation multiplied by twelve. Mr. Speight will
also be entitled to receive an amount equal to the COBRA health continuation
coverage costs for himself and his dependents for the longer of (a) twelve
months, (b) the remaining term of the Employment Agreement or (c) the period
during which Mr. Speight and his dependents are eligible to continued COBRA
coverage from the Company.
Pursuant to the terms of the Employment Agreement, during the term of his
employment and for twelve months following his termination of employment, Mr.
Speight agrees not to compete with the Company or Flag Bank or solicit any of
their customers or employees. The agreement not to compete and not to solicit
customers or employees does not apply if (1) the Company or Flag Bank terminates
Mr. Speight without cause, (2) Mr. Speight terminates his employment in
connection with a change in control of the Company, or (3) Mr. Speight
terminates employment for cause.
19
Mr. Hinely
Charles O. Hinely, the former Executive Vice President and Chief Financial
Officer of the Company and Flag Bank, entered into an amended and restated
employment agreement with the Company dated as of February 21, 2002. The
Employment Agreement was substantially the same as the employment agreement
previously in effect for Mr. Hinely, except for changes in his base salary,
title and responsibilities, entitlement to certain "perks" and a provision in
the amended and restated Employment Agreement providing for a cash payment in
the amount $125,000 in consideration of his execution of the new Employment
Agreement and the concessions contained therein.
The Employment Agreement provided for a term of three years that
automatically renewed each day after the effective date so that the term
remained a three-year term until any party notified the others that the
automatic renewals should discontinue. The Employment Agreement provided for an
annual salary to be reviewed at least annually by the Board of the Company and
Flag Bank. Mr. Hinely's initial base salary under his Employment Agreement was
$185,000. The Employment Agreement also provided for Mr. Hinely to participate
in any bonus, stock option or other executive compensation programs available to
senior management of the Company. Mr. Hinely received title to his company car
and was entitled to various "perks" and to participate in all group employee
benefit plans.
The Employment Agreement provided that, in the event the Company terminated
Mr. Hinely's employment other than for "cause" (as defined in the Employment
Agreement) or Mr. Hinely terminated his employment for cause or due to a change
in control (as defined in the Employment Agreement), Mr. Hinely was entitled to
receive a severance payment in a lump sum amount equal to his average monthly
compensation multiplied by the number of months remaining in the term of the
Employment Agreement. If there were less than twelve months remaining in the
term of the Employment Agreement, Mr. Hinely would have been entitled to receive
a lump sum payment equal to his average monthly compensation multiplied by
twelve. Mr. Hinely would have also been entitled to receive an amount equal to
the COBRA health continuation coverage costs for himself and his dependents for
the longer of (a) twelve months, (b) the remaining term of the Employment
Agreement or (c) the period during which Mr. Hinely and his dependents were
eligible to continued COBRA coverage from the Company.
Pursuant to the terms of the Employment Agreement, during the term of his
employment and for twelve months following termination of his employment, Mr.
Hinely agreed not to compete with the Company or Flag Bank or solicit any of
their customers or employees. The agreement not to compete and not to solicit
customers or employees would not apply if (1) the Company terminated Mr. Hinely
without cause, (2) Mr. Hinely terminated his employment in connection with a
change in control of the Company, or (3) Mr. Hinely terminated employment for
cause.
On July 31, 2002, the Company entered into a Cancellation Agreement with
Mr. Hinely, pursuant to which the provisions of his Employment Agreement were
cancelled, except for the notice provisions, the restrictive covenants and the
enforcement provisions thereof. Under the Cancellation Agreement, Mr. Hinely
resigned from all of his positions as an officer and director of the Company and
Flag Bank. In settlement of the Company's and Flag Bank's obligations to Mr.
Holle under the Employment Agreement, the Company paid to Mr. Hinely a lump sum
cash payment equal to $785,000.
The Cancellation Agreement provides that Mr. Hinely will continue to be
employed by Flag Bank as Project Coordinator from August 1, 2002 through
December 31, 2003. The agreement provides that Mr. Hinely will receive an annual
base salary of $25,000 and will be entitled to receive an incentive bonus at the
discretion of the Board of Flag Bank. To the extent he is eligible, Mr. Hinely
will be entitled to participate in the Company's employee benefit plans
available to similarly situated employees during the term of his employment. On
December 31, 2004, Mr. Hinely will be entitled to receive a lump
20
sum payment equal to $21,888, unless Mr. Hinely's employment is terminated
earlier by Flag Bank with cause or due to his death.
Under the Cancellation Agreement, if Flag Bank terminates Mr. Hinely's
employment without "cause" (as defined in the Employment Agreement) or Mr.
Hinely terminates with cause, Mr. Hinely will be entitled to receive a lump sum
payment representing the base salary to which he would have been entitled for
the months remaining from the date of termination until December 31, 2003. Mr.
Hinely will be subject to the non-compete and non-solicitation provisions in his
original Employment Agreement if he voluntarily terminates his employment with
Flag Bank. Under those provisions, Mr. Hinely agrees not to compete with the
Company or Flag Bank or to solicit any of their customers or employees during
his employment and for twelve months following termination.
Mr. Holle
John S. Holle, the former Chairman of the Company and Regional President of
Flag Bank, was a party to an employment agreement with the Company dated as of
January 1, 2001. Mr. Holle's Employment Agreement provided for a term of three
years that automatically renewed each day after the effective date so that the
term remained a three-year term until any party notified the others that the
automatic renewals should discontinue. The Employment Agreement provided for an
annual salary to be reviewed at least annually by the Board of Directors of the
Company and Flag Bank. Mr. Holle's initial base salary under his agreement was
$215,000. The Employment Agreement also provided for Mr. Holle to participate in
any bonus, stock option or other executive compensation programs available to
senior management of the Company. The Employment Agreement provided Mr. Holle
with an automobile to be used by him for business and personal purposes. Mr.
Holle was also entitled to various "perks" and to participate in all group
employee benefit plans.
The Employment Agreement provided that, in the event the Company terminated
Mr. Holle's employment other than for "cause" (as defined in the Employment
Agreement) or Mr. Holle terminated his employment for cause or due to a "change
in control" (as defined in the Employment Agreement), Mr. Holle was entitled to
receive a severance payment in a lump sum amount equal to his average monthly
compensation multiplied by the number of months remaining in the term of the
Employment Agreement. If there were less than twelve months remaining in the
term of the Employment Agreement, Mr. Holle would have been entitled to receive
a lump sum payment equal to his average monthly compensation multiplied by
twelve. Mr. Holle would have also been entitled to receive an amount equal to
the COBRA health continuation coverage costs for himself and his dependents for
the longer of (a) twelve months, (b) the remaining term of his Employment
Agreement or (c) the period during which Mr. Holle and his dependents were
eligible to continued COBRA coverage from the Company.
Pursuant to the terms of the Employment Agreement, during the term of his
employment and for twelve months following the termination of his employment,
Mr. Holle agreed not to compete with the Company or Flag Bank or solicit any of
their customers or employees. The agreement not to compete and not to solicit
customers or employees would not apply if (1) the Company terminated Mr. Holle
without cause, (2) Mr. Holle terminated his employment in connection with a
change in control of the Company, or (3) Mr. Holle terminated employment for
cause.
On February 20, 2002, the Company entered into a Cancellation Agreement
with Mr. Holle, pursuant to which the provisions of his Employment Agreement
were cancelled, except for the notice provisions, the restrictive covenants and
the enforcement provisions thereof. The Cancellation Agreement was amended on
March 26, 2002. In settlement of the Company's and Flag Bank's obligations to
Mr. Holle under his Employment Agreement, the Company: (i) paid to Mr. Holle a
lump sum cash payment equal to $950,000; (ii) transferred to Mr. Holle the title
to his company car; (iii)
21
granted Mr. Holle new options to purchase 20,000 shares of the Company's common
stock at an exercise price of $9.10 per share; and (iv) contributed to a grantor
trust established for Mr. Holle's benefit a $250,000 success fee for his
cooperation with the Company's transition to a new management team and efforts
toward developing the Company's business in the LaGrange, Georgia market.
The Cancellation Agreement provides that Mr. Holle will continue to be
employed by Flag Bank as the Chairman of its LaGrange, Georgia Advisory Board
and will continue to serve as a director of Flag Bank. The Cancellation
Agreement provides for a one-year term that automatically renews each day after
the effective date so that the term remains a one-year term until any party
notifies the others that the automatic renewals should discontinue. The
agreement provides for an annual base salary of $120,000 and Mr. Holle will be
entitled to receive an incentive bonus at the discretion of the Board of Flag
Bank. Mr. Holle will be entitled to continue to participate in the Company's
deferred compensation program, to receive club dues for a period of two years
and to participate in employee benefit plans available to similarly situated
employees during the term of his employment.
Under the Cancellation Agreement, if Flag Bank terminates Mr. Holle's
employment without "cause" (as defined in the Employment Agreement) or if Mr.
Holle terminates his employment for cause on or before March 31, 2003, Mr. Holle
will be entitled to receive a lump sum payment equal to the base salary to which
he would have been entitled for the months remaining from the date of
termination until March 31, 2004. If Flag Bank terminates Mr. Holle's employment
without cause on or after April 1, 2003, Mr. Holle will be entitled to receive a
lump sum payment equal to the base salary that he would have received over the
remaining term of the Cancellation Agreement. Mr. Holle will be subject to the
non-compete and non-solicitation provisions in his original Employment Agreement
if he voluntarily terminates his employment with Flag Bank. Under those
provisions, Mr. Holle agrees not to compete with the Company or Flag Bank or to
solicit any of their customers or employees during his employment and for twelve
months following termination.
Mr. Doughty and Mr. Wiley
On January 13, 2003, the Company entered into Change in Control Agreements
with Stephen W. Doughty and J. Thomas Wiley, Jr. Each Change in Control
Agreement provides for a term of three years that automatically renews each day
after the effective date so that the term remains a three-year term until either
party notifies the other that the automatic renewals should discontinue.
Irrespective of the three-year term, the term of each Change in Control
Agreement will expire twelve months following a change in control.
Each Change in Control Agreement provides for payment of benefits in
different amounts depending upon whether the change in control is "satisfactory"
or "unsatisfactory." An "unsatisfactory" change in control is one in which the
employee is not offered a commensurate position with the surviving entity. A
"satisfactory" change in control is one in which the employee is offered a
commensurate position with the surviving entity.
In the event of an "unsatisfactory" change in control, if the employee is
terminated by the employer without "cause" (as defined in the Change in Control
Agreement) or terminates with "good reason" (as defined in the Change in Control
Agreement) within twelve months following the change in control, the employee is
entitled to receive a severance payment in a lump sum amount equal to three
times the sum of his annual base salary and largest annual bonus paid in the
three preceding years. The employee will also be entitled to a payment equal to
the COBRA health continuation coverage costs for the employee and his dependents
during the period in which they are eligible to continue COBRA coverage from the
Company.
22
In the event of a "satisfactory" change in control, the employee will be
eligible to receive a success fee equal to one times his base salary and bonus
if the fair market value of the Company's stock increases by twenty-five percent
of its pre-change in control value. The success fee will be payable regardless
of whether or not the employee accepts the position with the surviving entity.
In the event of a satisfactory change in control in which the employee accepts
the position with the surviving entity, the employee may terminate employment
for any reason within twelve months following the change in control and will be
entitled to receive a severance benefit in a lump sum amount equal to two times
his base salary and bonus. However, if the success fee described above is
payable to the employee, the employee's severance benefit payable upon such a
termination following a "satisfactory" change in control will only be equal to
one times his base salary and bonus. In addition, the employee will also be
entitled to receive a payment equal to the COBRA health continuation coverage
costs for the employee and his dependents during the period in which they are
eligible to continue COBRA coverage from the Company.
Pursuant to the terms of each Change in Control Agreement, if the employee
receives payment of benefits upon a change in control, for twelve months
following the employee's termination of employment, the employee agrees not to
compete with the Company or solicit any of its customers and employees.
Each Change in Control Agreement provides that any payments made under the
agreement or otherwise paid in connection with a change in control are subject
to cutback in the event that the amount of those payments trigger the
application of the golden parachute rules under the Internal Revenue Code.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and any persons who beneficially own more than
10% of the Company's common stock, as well as various affiliates of these
persons, to file initial reports of ownership and reports of changes in their
ownership of the Company's common stock with the Securities and Exchange
Commission. Directors, executive officers and persons beneficially owning more
than 10% of the Company's common stock are required by applicable regulations to
furnish the Company with copies of all Section 16(a) reports they filed. To the
Company's knowledge, no person beneficially owned more than 10% of the Company's
common stock during 2002. Based solely on its review of the copies of reports
received by it and written representations received by it that no other reports
were required, the Company believes that during 2002, all of its directors and
executive officers complied with applicable Section 16(a) filing requirements,
except that Mr. Anderson filed one late report covering one transaction.
RELATED PARTY TRANSACTIONS
In February 2002, certain of the current and former directors and executive
officers of the Company purchased shares of Company common stock and warrants to
purchase Company common stock at an exercise price of $9.10 per share in a
private placement. In accordance with Securities and Exchange Commission
regulations, information regarding purchases by persons who served as members of
the Benefits and Compensation Committee during 2002 is set forth under
"Compensation Committee Interlocks and Insider Participation." For all other
directors and executive officers, the date of purchase, number of securities
purchased and purchase price are indicated below. Each person listed below paid
the full amount of the purchase price by means of a promissory note in favor of
the Company. Each note bore interest at 4.75% per annum and was payable in 30
days. Each note was repaid in full in March 2002.
23
Total
No. of Price Per No. of Price Per Purchase
Name Date Shares Share Warrants Warrant Price
---- ---- ------ ----- -------- ------- -----
James A. Brett 2/19/02 6,000 $9.10 6,000 $1.00 $ 60,600
Patti S. Davis 2/19/02 24,000 $9.10 24,000 $1.00 $ 242,400
Stephen W. Doughty 2/19/02 150,000 $9.10 150,000 $1.00 $ 1,515,000
Charles O. Hinely 2/19/02 48,000 $9.10 48,000 $1.00 $ 484,800
J. Preston Martin 2/19/02 12,000 $9.10 12,000 $1.00 $ 121,200
Thomas L. Redding 2/19/02 18,000 $9.10 18,000 $1.00 $ 181,800
J. Thomas Wiley, Jr. 2/19/02 150,000 $9.10 150,000 $1.00 $ 1,515,000
24
On November 12, 2002, Flag acquired the assets of Bankers Capital Group,
LLC ("BCG"), a specialized real estate loan origination business based in
Atlanta, Georgia. BCG's principals included Flag's Chairman and Chief Executive
Officer, Joseph W. Evans, director William H. Anderson, II and directors and
executive officers Stephen W. Doughty and J. Thomas Wiley, Jr. None of these
individuals participated in Flag's evaluation or approval of the transactions in
view of their positions as principals of BCG. The aggregate purchase price was
$1,405,000 in cash paid at closing and an additional $1,500,000 that is
contingently payable based on BCG's future performance. Flag's board obtained an
independent valuation of BCG's assets and determined that the purchase price
represented the price it would pay for such assets to an unaffiliated third
party.
Directors, executive officers, principal shareholders of the Company and
their affiliates have been customers of Flag Bank and predecessors from time to
time in the ordinary course of business, and additional transactions may be
expected to take place in the future. In accordance with applicable federal laws
and regulations, all loans by Flag Bank to these persons are made (1) on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, (2) do
not involve more than the normal risk of collectibility or embody other
unfavorable features, and (3) comply with specified quantitative limits imposed
by federal laws and regulations. At December 31, 2002, the aggregate amount of
loans and extensions of credit outstanding to these persons was approximately
$2,721,000, which represented approximately 4.48% of the total equity capital of
the Company.
None of the loans outstanding at the Flag Bank or any predecessor of Flag
Bank to directors, executive officers or principal shareholders of the Company
at any time during or subsequent to 2002 was or has been on past due or
non-accrual status, has been restructured, or is considered by Flag Bank to be a
problem loan.
PROPOSAL 2: RATIFICATION OF
INDEPENDENT ACCOUNTANTS
The Audit and Exam Committee of the Board of Directors has appointed the
firm of Porter Keadle Moore, LLP to serve as independent accountants of the
Company for the fiscal year ending December 31, 2003, and the Board has directed
that the appointment be submitted to our shareholders for ratification at the
Annual Meeting. If the shareholders do not ratify the appointment of Porter
Keadle Moore, LLP, the appointment will be reconsidered.
Audit Fees. In connection with services rendered in connection with the
audit of the Company's annual financial statements and the review of the
Company's interim financial statements, the Company has estimated that its total
audit fees for fiscal year 2002 were approximately $159,000. This figure is
24
based on an estimate provided by our accountants, Porter Keadle Moore, LLP, and
includes fees for services that were billed to the Company in fiscal year 2003
in connection with the 2002 fiscal year audit.
Financial Information Systems Design and Implementation Fees. Porter Keadle
Moore, LLP did not perform Financial Information Systems Design or
Implementation services in fiscal year 2002.
Other Fees. During fiscal year 2002, the Company was billed $174,000 by its
principal accountants for services not described above. These "other fees" were
for services including tax compliance and consulting, merger and acquisition
consulting services and outsourced internal audit procedures.
The Audit and Exam Committee has considered the provision of non-audit
services by our principal accountants and has determined that the provision of
such services were consistent with maintaining the independence of the Company's
principal accountants.
Representatives of Porter Keadle Moore, LLP will be present at the Annual
Meeting. They will have an opportunity to make a statement if they desire to do
so and will be available to respond to appropriate questions from shareholders.
The Board of Directors unanimously recommends that shareholders vote
FOR Proposal 2.
SHAREHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
Shareholder proposals submitted for consideration at the next Annual
Meeting of Shareholders must be received by the Company no later than December
15, 2003, to be included in the 2004 proxy materials. A shareholder must notify
the Company before January 15, 2004 of a proposal for the 2004 Annual Meeting
that the shareholder intends to present other than by inclusion in the Company's
proxy material. If the Company does not receive such notice prior to January 15,
2004, proxies solicited by the management of the Company will confer
discretionary authority upon the management of the Company to vote upon any such
matter.
OTHER MATTERS THAT MAY COME BEFORE THE ANNUAL MEETING
The Board of Directors of the Company knows of no matters other than those
referred to in the accompanying Notice of Annual Meeting of Shareholders which
may properly come before the Annual Meeting. However, if any other matter should
be properly presented for consideration and voting at the Annual Meeting or any
adjournments thereof, it is the intention of the persons named as proxies on the
enclosed form of proxy card to vote the shares represented by all valid proxy
cards in accordance with their judgment of what is in the best interest of the
Company.
Atlanta, Georgia
March 7, 2003
-----------
The Company's 2002 Annual Report to Shareholders, which include audited
financial statements for the Company, has been mailed to shareholders of the
Company with these proxy materials. The Annual Report to Shareholders does not
form any part of the material for the solicitation of proxies.
25
Form of Revocable Proxy
FLAG FINANCIAL CORPORATION
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE 2003
ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Joseph W. Evans and J. Daniel Speight, and each
of them, proxies, with full power of substitution, to act for and in the name of
the undersigned to vote all shares of Common Stock of Flag Financial Corporation
(the "Company"), which the undersigned is entitled to vote at the 2003 Annual
Meeting of Shareholders of the Company, to be held at 3475 Piedmont Road, N.E.,
Suite 550, Atlanta, Georgia on Tuesday, April 15, 2003, at 2:00 p.m., local
time, and at any adjournments thereof, as indicated below.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS.
1. Election of Directors: Authority for the election of William H. Anderson, II,
H. Speer Burdette, III and J. Thomas Wiley, Jr. as Class III directors, each to
serve until the 2006 Annual Meeting of Shareholders or until their successors
are elected and qualified.
|_| FOR ALL NOMINEES listed above |_| WITHHOLD AUTHORITY to vote for
(except as marked to the Nominees listed above
contrary below).
.
INSTRUCTION: To withhold authority to vote for any individual nominee, mark
"FOR" above, and write the nominee's name in this space:
-------------------------------------------------------------------------------
2. Ratification of Appointment of Independent Accountants: Authority to ratify
the appointment of Porter Keadle Moore, LLP as independent accountants of the
Company for the fiscal year ending December 31, 2003.
|_| FOR |_| AGAINST |_| ABSTAIN
THIS PROXY CARD WILL BE VOTED AS DIRECTED. IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY CARD WILL BE VOTED IN THE DISCRETION OF THE PROXIES "FOR"
THE ELECTION OF THE NOMINEES IN PROPOSAL 1 AND `FOR' PROPOSAL 2. If any other
business is presented to a vote of the shareholders at the Annual Meeting, this
proxy card will be voted by the proxies in their best judgment. At the present
time, the Board of Directors knows of no other business to be presented to a
vote of the shareholders at the Annual Meeting.
If the undersigned elects to withdraw this proxy on or before the time of
the Annual Meeting or any adjournments of the Annual Meeting and notifies the
Secretary of the Company at or prior to the Annual Meeting of the decision of
the undersigned to withdraw this proxy, then the power of the proxies shall be
terminated and of no further force and effect. If the undersigned withdraws this
proxy in the manner described above and prior to the Annual Meeting does not
submit a duly executed and subsequently dated proxy card to the Company, the
undersigned may vote in person at the Annual Meeting all shares of Common Stock
of the Company owned by the undersigned as of the record date for the Annual
Meeting.
Please mark, date and sign exactly as your name appears on this proxy card.
When shares are held jointly, both holders must sign. When signing as an
attorney, executor, administrator, trustee or guardian, please give your full
title. If the holder is a corporation or a partnership, the full corporate or
partnership name should be signed by a duly authorized officer.
---------------------------------------------------,2003
Date
--------------------------------------------------------
Signature
--------------------------------------------------------
Signature, if shares held jointly
Do you plan to attend the Annual Meeting? |_| YES |_| NO