SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Fixed by the registrant [X]
Filed by a party other than the registrant. [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
Community Bank System, 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:_____________________________________________________
(2) Form, Schedule or Registration Statement No.:_______________________________
(3) Filing Party:_______________________________________________________________
(4) Date Filed:_________________________________________________________________
[Logo]
COMMUNITY BANK SYSTEM, INC.
5790 Widewaters Parkway
DeWitt, New York 13214-1883
--------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
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April 15, 2004
TO THE SHAREHOLDERS OF COMMUNITY BANK SYSTEM, INC.:
At the direction of the Board of Directors of COMMUNITY BANK SYSTEM, INC., a
Delaware corporation (the "Company"), NOTICE IS HEREBY GIVEN that the Annual
Meeting of Shareholders of the Company (the "Meeting") will be held at 1:00 p.m.
on Wednesday, May 19, 2004 at the Wyndham Hotel in East Syracuse, New York for
the purpose of considering and voting upon the following matters:
1. The election of four directors to hold office for a term of
three years and until their successors have been duly elected.
2. The approval of the Community Bank System, Inc. 2004 Long-Term
Incentive Compensation Program.
3. The transaction of any other business which may properly be
brought before the Meeting or any adjournment thereof.
By Order of the Board of Directors
/s/ Donna J. Drengel
Donna J. Drengel
Secretary
YOUR VOTE IS IMPORTANT. YOU ARE THEREFORE REQUESTED TO SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE, EVEN IF YOU EXPECT TO BE PRESENT AT
THE MEETING. YOU MAY WITHDRAW YOUR PROXY AT ANY TIME PRIOR TO THE MEETING, OR IF
YOU DO ATTEND THE MEETING, YOU MAY WITHDRAW YOUR PROXY AT THAT TIME AND VOTE IN
PERSON IF YOU WISH.
[Logo]
COMMUNITY BANK SYSTEM, INC.
5790 Widewaters Parkway
DeWitt, New York 13214-1883
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS, MAY 19, 2004
This Proxy Statement is furnished as part of the solicitation of proxies by
the Board of Directors of Community Bank System, Inc. (the "Company"), the
holding company for Community Bank, N.A. (the "Bank"), for use at the Annual
Meeting of Shareholders of the Company (the "Meeting") to be held at 1:00 p.m.
on Wednesday, May 19, 2004, at the Wyndham Hotel in East Syracuse, New York.
This Proxy Statement and the form of Proxy are first being sent to Shareholders
on approximately April 15, 2004.
At the Meeting, the Shareholders will be asked to vote for the election of
directors. Four of the total of fourteen directors who serve on the Company's
Board of Directors will stand for re-election to the Board at the Meeting. The
Shareholders will also be asked to approve a Long-Term Incentive Compensation
Program as described on pages 13-17. In addition, voting will be conducted on
any other matters which are properly brought before the Meeting.
VOTING RIGHTS AND PROXIES
The Board of Directors of the Company has fixed the close of business on
March 31, 2004 as the record date for determining which Shareholders are
entitled to notice of and to vote at the Meeting. At the close of business on
the record date and after giving effect to the stock split described on page 2,
28,559,924 shares of common stock, no par value, were outstanding and entitled
to vote at the Meeting. This is the Company's only class of voting stock
outstanding. Each share of outstanding common stock is entitled to one vote with
respect to each item to come before the Meeting. There will be no cumulative
voting of shares for any matter voted upon at the Meeting. The Bylaws of the
Company provide that one-third of the outstanding shares of the Company,
represented in person or by proxy, shall constitute a quorum at a shareholder
meeting. The Company is not aware of any persons who beneficially own more than
5% of the outstanding voting stock of the Company as of the record date for the
Meeting.
If the enclosed form of Proxy is properly executed and returned to the
Company prior to or at the Meeting, and if the Proxy is not revoked prior to its
exercise, all shares represented thereby will be voted at the Meeting and, where
instructions have been given by a Shareholder, will be voted in accordance with
such instructions.
Any Shareholder executing a Proxy which is solicited hereby has the power to
revoke it at any time prior to its exercise. A Proxy may be revoked by giving
written notice to the Secretary of the Company at the Company's address set
forth above, by attending the Meeting and voting the shares of stock in person,
or by executing and delivering to the Secretary a later-dated Proxy.
The Company will bear all costs of soliciting Proxies. The solicitation of
Proxies will be by mail, but Proxies may also be solicited by telephone,
telegram, or in person by directors, officers, and other regular employees of
the Company or of the Bank. Should the Company, in order to solicit Proxies,
request the assistance of other financial institutions, brokerage houses, or
other custodians, nominees, or fiduciaries, the Company will reimburse such
persons for their reasonable expenses in forwarding proxy materials to
Shareholders and obtaining their Proxies.
The Annual Report of the Company for the fiscal year ended December 31,
2003, incorporating the Annual Report on Form 10-K filed by the Company with the
Securities and Exchange Commission, is being sent to Shareholders with this
Proxy Statement.
NOTE REGARDING STOCK SPLIT
On January 21, 2004, the Board of Directors authorized a two-for-one split
of the Company's common stock. At a special meeting held on March 26, 2004, the
Company's Shareholders approved amendments to the Company's Certificate of
Incorporation necessary to effectuate the stock split, and the stock split was
effectuated on April 12, 2004 in the form of a 100% stock dividend. All
information in this Proxy Statement regarding share ownership, capitalization,
and awards made during 2003 has been adjusted to reflect post-split equivalent
capitalization.
2
ITEM 1: ELECTION OF DIRECTORS AND INFORMATION WITH
RESPECT TO DIRECTORS AND EXECUTIVE OFFICERS
The first Item to be acted upon at the Meeting is the election of four
directors, each to hold office for three years and until his successor shall
have been duly elected and qualified. The nominees receiving a plurality of the
votes represented in person or by proxy at the Meeting will be elected
directors.
All Proxies in proper form which are received by the Board prior to the
election of directors at the Meeting will be voted "FOR" the nominees listed
below, unless authority is withheld in the space provided on the enclosed Proxy.
Each nominee is presently a director of the Company, and each director of the
Company is also a director of the Bank. In the event any nominee declines or is
unable to serve, it is intended that the Proxies will be voted for a successor
nominee designated by the Board. All nominees have indicated a willingness to
serve, and the Board knows of no reason to believe that any nominee will decline
or be unable to serve if elected. The fourteen members of the Board (including
the nominees for re-election at the Meeting, if elected) are expected to
continue to serve on the Board until their respective terms expire.
The information set forth below is furnished for each nominee for director
to be elected at the Meeting and each director of the Company whose term of
office continues after the Meeting. The share ownership numbers for certain
directors include shares that would be issuable upon exercise of "Offset
Options" granted to these directors in order to reduce the Company's liability
under its Stock Balance Plan. The purpose of the Offset Options, which were
approved by the Company's Shareholders at the 1998 Annual Meeting, is explained
on page 12. See footnote "(e)" on page 6 for the number of currently exercisable
stock options (including, without limitation, Offset Options) held by specific
directors.
NOMINEES FOR DIRECTOR AND DIRECTORS CONTINUING IN OFFICE
SHARES OF COMPANY COMMON
STOCK BENEFICIALLY OWNED (c)
BUSINESS AS OF MARCH 31, 2004 (d)
NAME AND DIRECTOR OF THE EXPERIENCE DURING -----------------------------------------
AGE (a) COMPANY SINCE PAST FIVE YEARS (b) NUMBER(e) PERCENT
------------------------ ------------------ ---------------------------- ----------------------- --------------
NOMINEES (FOR TERMS TO EXPIRE AT ANNUAL MEETING IN 2007):
--------------------------------------------------------
John M. Burgess 1991 Retired. Prior to 1991, 106,728 .37%
Age 67 President of Kinney Drugs,
Inc., a drug and retail
chain with stores located
throughout northern
New York.
Nicholas A. DiCerbo 1984 267,478 .93%
Age 57 Partner, law firm of
DiCerbo and Palumbo,
Olean, New York.
James A. Gabriel 1984 179,191 .62%
Age 56 Owner, law firm of
Franklin & Gabriel,
Ovid, New York
Harold Kaplan (f) 2001 290,348 1.02%
Age 70 Co-owner, M.C.F., Inc.,
and Partner, D&T Real
Estate, Scranton,
Pennsylvania. Prior to
April 2003, Co-Owner,
Montage Foods, Inc.,
Scranton, Pennsylvania.
3
SHARES OF COMPANY COMMON
STOCK BENEFICIALLY OWNED (c)
BUSINESS AS OF MARCH 31, 2004 (d)
NAME AND DIRECTOR OF THE EXPERIENCE DURING -----------------------------------------
AGE (a) COMPANY SINCE PAST FIVE YEARS (b) NUMBER(e) PERCENT
------------------------ ------------------ ---------------------------- ----------------------- --------------
DIRECTORS CONTINUING IN OFFICE
------------------------------
TERMS EXPIRING AT ANNUAL MEETING IN 2005:
Brian R. Ace (g) 2003 Owner, Laceyville 53,120 .19%
Age 49 Hardware, Laceyville,
Pennsylvania.
Paul M. Cantwell, Jr. 2001 Owner, law firm of 145,134 .51%
Age 62 Cantwell & Cantwell,
Malone, New York. Prior
to January 2001, Chairman
and President, The
Citizens National Bank of
Malone.
William M. Dempsey 1984 Retired. Prior to 2001, 108,092 .38%
Assistant to the
President, Rochester
Institute of Technology,
Rochester, New York;
President/ Dean, American
College of Management and
Technology (RIT), Dubrovnik,
Croatia (August 1997 - July
1999); prior to August 1997,
Vice President of Finance
and Administration, RIT.
Saul Kaplan (f) 2001 Co-Owner, M.C.F., Inc. and 1,052,218 3.68%
Age 78 Partner, D&T Real Estate,
Scranton, Pennsylvania.
Prior to April 2003,
Co-Owner, Montage Foods,
Inc., Scranton,
Pennsylvania.
William N. Sloan 1991 Vice President for 108,270 .38%
Age 69 Administration Emeritus,
The State University of
New York College at
Potsdam, Potsdam, New York.
TERMS EXPIRING AT ANNUAL MEETING IN 2006:
----------------------------------------
Sanford A. Belden 1992 President and Chief 95,916 .34%
Age 61 Executive Officer of
the Company.
4
SHARES OF COMPANY COMMON
STOCK BENEFICIALLY OWNED (c)
BUSINESS AS OF MARCH 31, 2004 (d)
NAME AND DIRECTOR OF THE EXPERIENCE DURING -----------------------------------------
AGE (a) COMPANY SINCE PAST FIVE YEARS (b) NUMBER(e) PERCENT
------------------------ ------------------ ---------------------------- ----------------------- --------------
Lee T. Hirschey 1991 Chairman and Chief 107,312 .37%
Age 68 Executive Officer, Climax
Manufacturing Company,
converter and manufacturer
of paper products with
facilities in Castorland,
Lowville, and West Carthage,
New York.
David C. Patterson 1991 President and owner of 123,590 .43%
Age 62 Wight and Patterson, Inc.,
manufacturer and seller of
livestock feed located in
Canton, New York.
Peter A. Sabia (f) 2001 Owner, Valley Dodge Truck 256,590 .90%
Age 72 Center, Dunmore,
Pennsylvania.
Sally A. Steele (g) 2003 Attorney, self-employed as 52,210 .18%
Age 48 general practitioner with
concentration in real
estate and elder law,
Tunkhannock, Pennsylvania.
SHARES OF COMPANY COMMON
STOCK BENEFICIALLY OWNED (c)
In addition to the information provided above, the following summarizes the AS OF MARCH 31, 2004 (d)
security ownership of the highest paid executive officers who are not also -----------------------------------
directors of the Company: NUMBER (e) PERCENT
---------------- ---------------
James A. Wears President, Banking 152,532 .53%
Age 54
Michael A. Patton President, Financial Services 137,689 .48%
Age 58
Thomas A. McCullough President, Pennsylvania Banking 93,068 .33%
Age 57
David J. Elias President, Chief Executive 26,188 .09%
Age 58 Officer and Chief Investment
Officer, Elias Asset Management,
Inc. (h)
Number of shares of Company common stock beneficially owned by all directors, 3,477,780 11.79%
persons chosen to become directors and executive officers of the Company as a group
(23 persons)
5
(a) Harold Kaplan and Saul Kaplan are brothers. No other family
relationships exist between any two or more of the current
directors or named executive officers of the Company.
(b) No nominee for director or continuing director of the Company
holds a directorship with any company (other than the Company)
which is registered pursuant to Section 12 or subject to the
requirements of Section 15(d) of the Securities Exchange Act
of 1934, or with any company which is a registered investment
company under the Investment Company Act of 1940.
(c) Represents all shares as to which named individual possessed
sole or shared voting or investment power as of March 31,
2004, adjusted to reflect two-for-one stock split effectuated
on April 12, 2004. Includes shares held by, in the name of, or
in trust for, spouse and dependent children of named
individual and other relatives living in the same household,
even if beneficial ownership has been disclaimed as to any of
these shares by the nominee or director.
(d) The listed amounts include shares as to which certain
directors and named executive officers are beneficial owners
but not the sole beneficial owners as follows: Mr. Belden is
the beneficial owner of 1,812 shares held by the Company's
401(k) plan; Mr. Burgess' wife holds 7,200 shares; Mr.
Cantwell's wife holds 10,200 shares, and Mr. Cantwell holds
21,216 shares as Trustee under a decedent's will; Mr. DiCerbo
holds 58,196 shares jointly with his wife, 83,528 shares are
held in the name of the law partnership of DiCerbo and
Palumbo, and 1,636 shares are held by his wife; Mr. Elias's
wife owns 3,288 shares; Mr. Hirschey's wife holds 2,000
shares, and Mr. Hirschey holds 26,080 shares as Trustee for
the Retirement Plan of Employees of Climax Manufacturing
Company and 700 shares as Trustee of an Internal Revenue Code
Section 2503C trust; 86,576 shares are held by a limited
partnership controlled by Mr. H. Kaplan; 84,000 shares are
held by a limited partnership controlled by Mr. S. Kaplan; Mr.
McCullough is the beneficial owner of 12,976 shares held by
the Company's 401(k) plan, he holds 108 shares jointly with
his wife, he holds 630 shares jointly with his mother, and his
children hold 1,614 shares; Mr. Patterson holds 4,760 shares
jointly with his wife, and 3,186 shares as Trustee for the
Wight and Patterson Retirement Plan; Mr. Patton is the
beneficial owner of 7,803 shares held by the Company's 401(k)
plan, and his wife holds 2,800 shares; Mr. Sabia holds 180,000
shares as Trustee for the Peter A. Sabia Trust U/A, and 52,976
shares are held in the name of Valley Dodge Truck Center, of
which Mr. Sabia is owner; Mr. Sloan holds 368 shares jointly
with his wife, and his wife holds 984 shares; and Mr. Wears is
the beneficial owner of 39,444 shares held by the Company's
401(k) plan, he holds 53,134 shares jointly with his wife, his
wife holds 1,400 shares, and his children hold 5,250 shares.
(e) Includes shares that the following individuals currently have
the right to acquire, or will have the right to acquire within
60 days of March 31, 2004, through exercise of stock options
issued by the Company: Mr. Ace, 28,818 shares; Mr. Belden,
5,138 shares; Mr. Burgess, 79,088 shares; Mr. Cantwell, 11,320
shares; Mr. Dempsey, 104,892 shares; Mr. DiCerbo, 108,478
shares; Mr. Gabriel, 113,232 shares; Mr. Hirschey, 65,848
shares; Mr. H. Kaplan, 4,520 shares; Mr. S. Kaplan, 4,520
shares; Mr. McCullough, 39,028 shares; Mr. Patterson, 101,248
shares; Mr. Patton, 49,592 shares; Mr. Sabia, 11,320 shares;
Mr. Sloan, 102,478 shares; and Mr. Wears, 44,912 shares. These
shares are included in the total number of shares outstanding
for the purpose of calculating the percentage ownership of the
foregoing individuals and of the group as a whole, but not for
the purpose of calculating the percentage ownership of other
individuals listed in the foregoing table.
6
(f) Pursuant to the terms of a Merger Agreement dated as of
November 29, 2000 providing for the merger of First Liberty
Bank Corp. ("First Liberty") with and into the Company (which
merger was consummated in May 2001), the Company agreed to
appoint three of First Liberty's former directors, Saul
Kaplan, Peter A. Sabia, and Harold Kaplan, to serve as members
of its Board of Directors for terms expiring at the 2002,
2003, and 2004 annual Shareholders meetings, respectively. The
Merger Agreement further provided that, subject to the
exercise of the Board's fiduciary duty, Messrs. Kaplan, Sabia,
and Kaplan would be nominated for at least one additional
three-year term upon expiration of these initial terms, and
that the Board would recommend that the Company's Shareholders
vote in favor of their reelection.
(g) Pursuant to the terms of a Merger Agreement dated as of June
7, 2003 providing for the merger of Grange National Banc Corp.
("Grange") with and into the Company (which merger was
consummated in November 2003), the Company agreed to appoint
two of Grange's former directors, Brian R. Ace and Sally A.
Steele, to serve as members of its Board of Directors for
terms expiring at the 2005 and 2006 annual Shareholders
meetings, respectively.
(h) Elias Asset Management, Inc. is a wholly-owned subsidiary of
the Bank.
7
BOARD COMPOSITION, MEETINGS, COMMITTEES, AND COMPENSATION
INDEPENDENCE
------------
The Company has adopted a set of Corporate Governance Guidelines, a copy of
which is available on the Company's website at www.communitybankna.com. The
Corporate Governance Guidelines require that the Company's Board of Directors
have at all times a majority of directors who meet the criteria for independence
established by the New York Stock Exchange, and the Board currently meets this
requirement. To assist it in making determinations of independence, the Board
has determined that the following relationships are immaterial, and that a
director whose only relationships with the Company fall within these categories
is independent, provided that such relationships do not otherwise preclude him
or her from being considered independent under the New York Stock Exchange Rules
or applicable law:
o Indebtedness of the director or a member of his or her immediate family
to the Company, the Bank, or any of their respective subsidiaries, if
the loans made to such persons 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 customers, and did not involve more than the normal risk of
collectibility or present other unfavorable features.
o Receipt by a director or a member of his or her immediate family of
remuneration (other than as an officer or employee) from the Company,
the Bank, or any of their respective subsidiaries, in an amount not
exceeding $60,000 in a given year, excluding compensation payable for
services rendered as a director.
o Transactions or series of related transactions between a director or a
member of his or her immediate family and the Company, the Bank, or any
of their respective subsidiaries, in which the amount involved does not
exceed $60,000.
o Purchases of goods or services by an entity of which a director or a
member of his or her immediate family is (or has been during the last
fiscal year) an executive officer or full or partial owner, from the
Company, the Bank, or any of their respective subsidiaries, in an
aggregate amount not exceeding (i) five percent of the consolidated
gross revenues of the Company for its last full fiscal year, or (ii)
five percent of the consolidated gross revenues of such other entity
for its last full fiscal year.
o Purchases of goods or services by the Company, the Bank, or any of
their respective subsidiaries from an entity of which a director or a
member of his or her immediate family is (or has been during the last
fiscal year) an executive officer or full or partial owner, in an
aggregate amount not exceeding (i) five percent of the consolidated
gross revenues of the Company for its last full fiscal year, or (ii)
five percent of the consolidated gross revenues of such other entity
for its last full fiscal year.
o Receipt of legal or investment banking services by the Company, the
Bank, or any of their respective subsidiaries from, respectively, (i) a
law firm of which a director or a member of his or her immediate family
is (or as been during the last fiscal year) a member or to which any of
them is (or as been during the last fiscal year) of counsel, or (ii) an
investment banking firm of which a director or a member of his or her
immediate family is (or as been during the last fiscal year) a partner
or executive officer, where the fees paid to the firm do not exceed
five percent of the firm's gross revenues for the firm's last full
fiscal year.
During the course of a year, directors are expected to inform the Board of
any material changes in their circumstances or relationships that may impact
their status or designation by the Board as independent.
8
Pursuant to the Corporate Governance Guidelines, the Company's independent
directors meet in executive session at least quarterly, without the Company's
management and non-independent directors present. The director who presides at
these meetings is determined by the Board on the recommendation of the
Nominating and Corporate Governance Committee.
DIRECTOR MEETING ATTENDANCE
---------------------------
The Board of Directors held 12 regularly scheduled meetings and three
special meetings during the fiscal year ended December 31, 2003. During this
period, each director of the Company attended at least 75% of the aggregate of
the total number of meetings of the Board and the total number of meetings held
by committees of the Board on which he or she served.
The Company encourages all directors to attend each annual meeting of
Shareholders. All of the then 12 incumbent directors attended the Company's last
annual meeting of Shareholders held on May 28, 2003.
BOARD COMMITTEES
----------------
Among its standing committees, the Board of the Bank has an
Audit/Compliance/Risk Management Committee which also serves as the Company's
Audit Committee. As described more fully on page 30, the Audit/Compliance/Risk
Management Committee reviews internal and external audits of the Company and the
Bank and the adequacy of the Company's and the Bank's accounting, financial, and
compliance controls, and investigates and makes recommendations to the Company's
Board and the Bank's Board regarding the appointment of independent auditors.
During 2003, this Committee held six meetings and its present members are
Directors William M. Dempsey (Chair), John M. Burgess, Lee T. Hirschey, and
William N. Sloan.
The Bank's Board also has a Compensation Committee which reviews and makes
recommendations to the Bank's Board regarding compensation adjustments and
employee benefits to be instituted, and which also serves as the Company's
Compensation Committee. As described more fully on pages 26-28, the Compensation
Committee reviews the compensation of nonofficer employees in the aggregate, and
the salaries and performance of executive officers are reviewed individually.
The Compensation Committee held seven meetings in 2003, and its present members
are Directors William N. Sloan (Chair), Brian R. Ace, Lee T. Hirschey, David C.
Patterson, and Peter A. Sabia.
The Company has a Nominating and Corporate Governance Committee which makes
recommendations to the Board for nominees to serve as Directors. The Nominating
and Corporate Governance Committee held two meetings in 2003, and its present
members are Directors William M. Dempsey (Chair), John M. Burgess, Lee T.
Hirschey, and David C. Patterson. The Board has determined that each of the
Nominating and Corporate Governance Committee's members is "independent" as
defined by the New York Stock Exchange Rules.
The Nominating and Corporate Governance Committee will consider written
recommendations from Shareholders for nominees to serve on the Board that are
sent to the Secretary of the Company at the Company's main office. In
considering candidates for the Board, the Nominating and Corporate Governance
Committee and the Board consider the entirety of each candidate's credentials
and do not have any specific minimum qualifications that must be met by a
nominee. Factors considered include, but are not necessarily limited to,
outstanding achievement in a candidate's personal career; broad experience;
wisdom; integrity; ability to make independent, analytical inquiries;
understanding of the business environment; and willingness to devote adequate
time to Board duties. The Board believes that each director should have a basic
understanding of (i) the principal operational and financial objectives and
plans and strategies of the Company, (ii) the results of operations and
financial condition of the Company and of any significant subsidiaries or
business segments, and (iii) the relative standing of the Company and its
business segments in relation to its competitors. Prior to nominating an
existing director for re-
9
election to the Board, the Board and the Nominating and Corporate Governance
Committee consider and review, among other relevant factors, the existing
director's meeting attendance and performance, length of Board service, ability
to meet regulatory independence requirements, and the experience, skills, and
contributions that the director brings to the Board. The Nominating and
Corporate Governance Committee has adopted a written charter setting forth its
composition and responsibilities, a copy of which is available at the Company's
website at www.communitybankna.com.
The President and Chief Executive Officer of the Company serves as an ex
officio member of all Board committees except the Audit/Compliance/Risk
Management Committee, the Compensation Committee, and the Nominating and
Corporate Governance Committee, and receives no compensation for serving in this
capacity. Mr. Gabriel, as Chair of the Board, also serves as a member of all
Board Committees except the Audit/Compliance/Risk Management Committee, the
Compensation Committee, and the Nominating and Corporate Governance Committee.
COMMUNICATION WITH DIRECTORS
----------------------------
Shareholders may communicate directly with the Board of Directors of the
Company by sending correspondence to the address shown below. If a Shareholder
desires to communicate with a specific director, the correspondence should be
addressed to that director. The receipt of any such correspondence addressed to
the Board of Directors and the nature of its content will be reported at the
next Board meeting and appropriate action, if any, will be taken. Correspondence
addressed to a specific director will be delivered to the director promptly
after receipt by the Company. The director will review the correspondence
received and, if appropriate, report the receipt of the correspondence and the
nature of its content to the Board of Directors at its next meeting, so that the
appropriate action, if any, may be taken.
Correspondence should be addressed to:
Community Bank System, Inc.
Board of Directors
Attention: [Board of Directors or Specific Director]
5790 Widewaters Parkway
DeWitt, New York 13214-1883
COMPENSATION OF DIRECTORS
-------------------------
As directors of both the Company and the Bank, Board members receive an
annual retainer of $10,000, $750 for each Board meeting they attend, and $500
for each committee meeting they attend. Mr. Belden does not receive an annual
retainer or compensation for attending Board and committee meetings. The Chair
of the Board receives an all inclusive $55,000 retainer for serving in that
capacity. The Chair of the Audit/Compliance/Risk Management Committee receives
an annual retainer of $5,000; the Chairs of the Loan Committee, the Compensation
Committee, and the Strategic/Executive Committee each receive an annual retainer
of $3,500; and the Chairs of the Investment Committee, the Nominating and
Corporate Governance Committee, the Technology Committee, and the Trust
Committee each receive an annual retainer of $1,000. The Company pays the travel
expenses incurred by each director in attending meetings of the Board.
Directors may elect to defer all or a portion of their director fees
pursuant to a Deferred Compensation Plan for Directors. Directors who elect to
participate in the Plan designate the percentage of their director fees which
they wish to defer (the "deferred fees") and the date to which they wish to
defer payment of benefits under the plan (the "distribution date"). The plan
administrator establishes an account for each participating director and credits
to such account (i) on the date a participating director would have otherwise
received payment of his or her deferred fees, the number of deferred shares of
Company common stock which could have been purchased with the deferred fees, and
(ii) from time to time such additional number of deferred shares which could
have been purchased with any dividends which would
10
have been received had shares equal to the number of shares credited to the
account actually been issued and outstanding. On the distribution date, the
participating director shall be entitled to receive shares of Company common
stock equal to the number of deferred shares credited to the director's account
either in a lump sum or in annual installments over a three, five or ten year
period. The effect of the plan is to permit directors to invest deferred
director fees in stock of the Company, having the benefit of any stock price
appreciation and dividends as well as the risk of any decrease in the stock
price. To the extent that directors participate in the plan, the interests of
participating directors will be more closely associated with the interests of
Shareholders in achieving growth in the Company's stock price.
In 1995, the directors re-evaluated their total compensation arrangement, in
light of the increased responsibility associated with the changing nature of the
Company and the "Blue Ribbon Report" issued by the National Association of
Corporate Directors. Among other things, the Blue Ribbon Report suggests that
director compensation be structured so that it is specifically aligned with the
long-term interests of Shareholders. Effective January 1, 1996, the Company's
1994 Long-Term Incentive Compensation Program (the "1994 Incentive Plan") was
amended to allow for the issuance of Non-Statutory Stock Options to nonemployee
directors. The 2004 Long Term Incentive Compensation Program (the "2004
Incentive Plan"), if approved by the Shareholders, will also allow for the
issuance of Non-Statutory Stock Options to nonemployee directors. The Board
believes that providing for the grant of Non-Statutory Stock Options to
nonemployee directors is in the best interests of the Company. In the spirit of
the Blue Ribbon Report, such a provision more closely aligns the interests of
individual directors with the long-term interests of the Company's Shareholders,
and enables the Company to continue to attract qualified individuals to serve on
the Board. In particular, when directors receive equity-based compensation such
as stock options, their overall compensation is enhanced when the market price
of the Company's common stock increases and is adversely affected when the
market price of the Company's common stock decreases.
The 1994 Incentive Plan provides that each eligible nonemployee director is
to receive an option to purchase 4,000 shares (after giving effect to the stock
split effectuated on April 12, 2004) of common stock on or about January 1st of
each year. Each option granted to a nonemployee director is granted at an option
price per share equal to the market value per share of the Company's common
stock on the date of grant, and is fully exercisable on its date of grant,
provided that shares of common stock acquired pursuant to the exercise of such
options may not be sold or otherwise transferred by a director within six months
of the grant. Each option is exercisable until the earlier of (i) ten years from
the date of grant, or (ii) termination of the optionee's service on the Board
for cause (as defined in the 1994 Incentive Plan). Notwithstanding the
foregoing, to the extent that the Committee appointed by the Board to administer
the 1994 Incentive Plan determines that grants may be exempt from Section 16(b)
of the Securities Exchange Act of 1934, as amended, the Non-Statutory Stock
Options granted to eligible nonemployee directors shall relate to a number of
shares of common stock to be determined based upon the financial performance of
the Company. Such financial performance shall be determined based upon factors
including (but not limited to) the Company's growth in earnings per share, asset
quality, return on equity, and CAMELS rating (a measurement of capital, assets,
management, earnings, liquidity and sensitivity utilized by the Office of the
Comptroller of the Currency, the Bank's primary regulator). Pursuant to the 1996
amendment to the 1994 Incentive Plan, each eligible nonemployee director
received an option to purchase 4,800 (post-split) shares effective January 1,
2003. The 2004 Incentive Plan, if approved by the Shareholders, will similarly
provide for the annual issuance of options to nonemployee directors; provided,
however, that in the absence of adjustment as described above, the first such
annual grant to a director shall be to purchase 2,320 (post-split) shares, and
subsequent annual grants shall be for 4,000 (post-split) shares.
In addition, in keeping with the spirit of the Blue Ribbon Report, effective
January 1, 1996, the Board adopted a "Stock Balance Plan" for nonemployee
directors of the Company who have completed at least six months of service as
director. The plan establishes an account for each eligible director. Amounts
credited to those accounts reflect the value of 400 (post-split) shares of the
Company's common stock for each year of service between 1981 and 1995 at the
December 31, 1995 market value, plus an annual
11
amount equal to 400 additional (post-split) shares of common stock beginning in
1996, plus an annual earnings credit equal to the one-year average total return
on the Company's common stock. The crediting of additional units beginning in
1996 is subject to an adjustment factor which reflects the Company's asset
quality, return on equity, and CAMELS rating. The account balance is payable to
each director in the form of a lifetime annuity or, at the election of the
director, monthly installment payments over a three, five, or ten year period
following the later of age 55 or disassociation from the Board, is subject to a
six-year vesting schedule, and is forfeitable in the event of termination from
the Board for cause.
In 1998, amendments to the Stock Balance Plan and the 1994 Incentive Plan
were approved by the Company's Shareholders allowing the grant of "Offset
Options" to directors under the 1994 Incentive Plan. The effect of these Offset
Options is to permit the Company to reduce the grantee's Stock Balance Plan
account balance by an amount equal to the growth in value of the Offset Options
(i.e., the amount by which the aggregate fair market value of the common stock
underlying the Offset Options exceeds the aggregate exercise price of the Offset
Options) as of the date on which the director's account is valued, provided that
a director's account may not be reduced below zero. As such, the Offset Options
are not intended to materially change the level of compensation to participating
directors under the Stock Balance Plan, but are intended to reduce the cost of
director compensation to the Company. In the event that the growth in value of a
director's Offset Options is less than the value of the director's Stock Balance
Plan account as of the date that the Offset Options are exercised, the shortfall
will be paid to the director either in cash or, at the Company's option in the
case of an exercise prior to retirement, by the issuance of additional Offset
Options. In the event that the growth in value of a director's Offset Options
exceeds the value of the director's Stock Balance Plan account, no adjustment
will be made. The 2004 Incentive Plan, if approved by the Shareholders, will
likewise permit the issuance of Offset Options in connection with the Stock
Balance Plan.
The Bank has a consulting agreement with Paul M. Cantwell, Jr., a director
of the Company and the Bank and the former Chairman and President of Citizens
National Bank of Malone. Under this agreement, Mr. Cantwell will provide
consulting services to the Bank until January 26, 2006 to facilitate the
transition of Citizens National Bank's business and operations to the Bank,
develop new business opportunities in the market areas formerly served by
Citizens National Bank, and advise the Bank regarding corporate and business
matters. Mr. Cantwell will provide these services on a part-time basis (not to
exceed 250 hours per year), and will be paid $50,000 per year. This amount is to
paid on a "grossed-up" basis for any Medicare and social security taxes (but not
federal, state or local income taxes) payable by Mr. Cantwell on the amount.
This means that in effect the Company will pay his Medicare and social security
taxes. Pursuant to the agreement, the Bank has also agreed to pay the premiums
for a life insurance policy for Mr. Cantwell's beneficiaries. This policy must
provide coverage for no less than the remaining payments due under the
consulting agreement. Finally, the Bank will make available health insurance
coverage for Mr. Cantwell and his spouse on the same basis as its employees
until age 65 and, thereafter, on the same basis as other retirees of the Bank.
12
ITEM 2: APPROVAL OF 2004 LONG-TERM
INCENTIVE COMPENSATION PROGRAM
The Board of Directors has adopted the Community Bank System, Inc. 2004
Incentive Plan, subject to approval by the Shareholders at the 2004 Annual
Meeting. The purpose of the 2004 Incentive Plan is to promote the interests of
the Company by providing a comprehensive equity-based incentive compensation
program designed to enable the Company to attract, retain, and reward key
employees, directors, and advisors through performance based incentives. To the
extent that current and future officers, other key employees, directors, and
advisors have an equity interest in the Company, the interests of such persons
will be more closely associated with the interests of Shareholders. Further,
equity-based incentives can be used to reinforce the relationship between
Shareholder gains and compensation.
Adoption of the 2004 Incentive Plan has been recommended by the Compensation
Committee and the Board of Directors. The Company may currently grant incentive
equity-based awards to key employees and to directors pursuant to the 1994
Incentive Plan, and the 1994 Incentive Plan expires on June 30, 2004. The
proposed 2004 Incentive Plan is intended to commence on July 1, 2004 in order to
provide the continued ability to grant equity-based incentives to senior
management, key employees of the Company and its subsidiaries, directors, and
advisors as appropriate from time to time, based on the objectives set forth in
the Plan.
As noted in the Compensation Committee Report on pages 26-28, an
equity-based incentive plan is an integral component of the Company's
compensation program. Accordingly, the Board of Directors believes that adoption
of the proposed 2004 Incentive Plan is necessary if the Company is to be able to
continue to attract, retain, and motivate highly qualified and talented
individuals.
The following is a summary of the material provisions of the 2004 Incentive
Plan. This summary is qualified in its entirety by reference to the specific
provisions of the 2004 Incentive Plan, the full text of which is attached to
this Proxy Statement as Appendix A.
GENERAL FEATURES OF THE 2004 INCENTIVE PLAN
The 2004 Incentive Plan empowers the Company to award or grant to eligible
participants, from time to time, (i) Incentive Stock Options within the meaning
of Section 422 of the Internal Revenue Code, (ii) Non-Statutory Stock Options,
(iii) Retroactive Stock Appreciation Rights, (iv) Restricted Stock, (v) Deferred
Stock Awards, and any combination of such awards. The Plan is designed to
provide the Company with flexibility in the grant of equity-based incentive
compensation to achieve the overall goals of the Plan. The term of the 2004
Incentive Plan is for ten years and shall expire on June 30, 2014 if not earlier
terminated by the Board.
The 2004 Incentive Plan will be administered by the Compensation Committee
or another committee appointed by the Board of Directors (the "Committee"),
which shall consist of at least three members of the Board who each meet the
independence requirements of the New York Stock Exchange and any applicable laws
governing independence of directors, qualify as "non-employee directors" as
defined by Section 16 of the Securities Exchange Act of 1934, as amended, and
qualify as "outside directors" under Section 162(m) of the Internal Revenue
Code.
Directors, officers who are employees of the Company or its subsidiaries,
other key employees of the Company and its subsidiaries, and persons retained to
advise the Board of Directors (such as members of advisory boards created in
connection with acquisitions to provide input to the Board regarding the markets
served by the acquired institutions), shall be eligible to participate in the
2004 Incentive Plan. Participants, who may receive awards under the 2004
Incentive Plan, shall be selected by the Committee based upon such factors as
past and potential contributions to the success, profitability, and growth of
the Company. No determinations have yet been made as to any awards that may be
granted under the 2004
13
Incentive Plan to specific individuals. Whether an award may be exercised after
a participant's termination of service shall be determined by the Committee,
subject to limits set forth below with respect to different types of awards.
Subject to further adjustments as noted below, 4,000,000 shares of common
stock (equivalent to approximately 14% of the shares of common stock outstanding
as of December 31, 2003) will be available for issuance over the 10 year term of
the 2004 Incentive Plan, to be divided among the various components of the 2004
Incentive Plan in such manner as the Committee shall determine. Shares of common
stock issued under the 2004 Incentive Plan may be newly issued shares, treasury
shares, or any combination thereof. The maximum number of shares is subject to
adjustment in the event of a reorganization, stock split, stock dividend,
combination of shares, merger, consolidation, or other recapitalization of the
Company; provided, however, that the current limit of 4,000,000 shares already
reflects the two-for-one stock split effectuated on April 12, 2004.
Except to the extent provided by the Committee at the time an award is made,
no award granted under the 2004 Incentive Plan, and no right or interest
therein, shall be assignable or transferable by a participant, except that
Incentive Stock Option rights may be transferred by will or the laws of descent
and distribution. The Board of Directors may amend or terminate the 2004
Incentive Plan at any time, except that the Board of Directors may not, without
approval by the Shareholders, make any amendment that would (i) increase the
number of available shares under the 2004 Incentive Plan, or (ii) change the
definition of "eligible employees" under the 2004 Incentive Plan.
STOCK OPTIONS. Options granted under the 2004 Incentive Plan may be
designated as either Incentive Stock Options within the meaning of Section 422
of the Internal Revenue Code or Non-Statutory Stock Options. The exercise price
of an Incentive Stock Option granted to an employee shall be at least 100% of
the fair market value of the common stock on the date of grant. The number of
shares of common stock in respect of which Incentive Stock Options are first
exercisable by any optionee during any calendar year shall not have a fair
market value (determined at the date of grant) in excess of $100,000. Incentive
Stock Options shall be exercisable for such period or periods not in excess of
10 years after the date of grant as shall be determined by the Committee, except
that no Incentive Stock Option shall be exercisable earlier than one year
following the date the option is granted. Non-Statutory Stock Options granted
under the 2004 Incentive Plan will be exercisable for such period or periods and
at such price as the Committee shall determine, provided that the exercise price
shall not be below 50% of the fair market value of a share of common stock as of
the date the option is granted.
The Committee shall have the authority, in its discretion, to accelerate the
time at which a stock option becomes exercisable, provided that no Incentive
Stock Option shall be exercisable earlier than one year following the date the
option is granted. If an employee option holder's employment is terminated
within one year of a change of control for any reason other than death,
disability, voluntary resignation without good reason, or termination for cause,
all stock options held by that optionee shall become exercisable automatically
as of the later of the date of termination or one year after the date the option
was granted, and shall remain exercisable until the end of the exercise period
provided in the original grant of the stock option.
Consistent with the 1994 Incentive Plan, the 2004 Incentive Plan provides
that each eligible nonemployee director is to receive a Non-Statutory option to
purchase 4,000 (post-split) shares of common stock on or about January 1 of each
year; provided that the first such annual grant to a director shall be to
purchase 2,320 (post-split) shares. Each option granted to a nonemployee
director is to be granted at an option price per share equal to the market value
per share of the common stock on the date of grant and is to be fully
exercisable on its date of grant, provided that shares of common stock acquired
pursuant to the exercise of such options may not be sold or otherwise
transferred by a director within six months of the grant. Each option is
exercisable until the earlier of (i) ten years from the date of grant or (ii)
termination of the optionee's service on the Board for cause. Notwithstanding
the foregoing, to the extent that the Compensation Committee determines that
grants may be exempt from Section 16(b) of the
14
Securities Exchange Act of 1934, as amended, the options granted to eligible
nonemployee directors shall relate to a number of shares of common stock to be
determined based upon the financial performance of the Company. Such financial
performance shall be determined based upon factors including (but not limited
to) the Company's growth in earnings per share, asset quality, return on equity,
and CAMELS rating.
Stock options shall be exercisable only upon the payment in full to the
Company of the entire option exercise price (i) in cash, (ii) by the transfer to
the Company of shares of common stock (at the fair market value thereof on the
date of exercise), (iii) by a combination of such methods of payment, or (iv) by
any other lawful means of payment acceptable to the Committee. Payment may not
be made with common stock issued by the Company upon exercise of an option under
the 2004 Incentive Plan or other stock option plan unless the common stock has
been held for at least one year.
Each grant of stock options shall be evidenced by an agreement between the
Company and the optionee, and shall contain such terms and provisions,
consistent with the 2004 Incentive Plan, as the Committee may approve.
RETROACTIVE STOCK APPRECIATION RIGHTS. Under the 2004 Incentive Plan, the
Committee may authorize the surrender of all or a portion of an option right in
exchange for which the optionee will receive a Stock Appreciation Right ("SAR").
A SAR will entitle the holder to receive an amount payable in cash, common stock
(valued at the fair market value on the date of exercise), or a combination
thereof (as determined by the Committee) up to the excess of the fair market
value of a share of the common stock on the date of exercise over the exercise
price per share of the underlying option, multiplied by the number of shares as
to which the holder is exercising the SAR. To the extent an option right is
surrendered in exchange for an SAR, such option is canceled. Conversely, if the
optionee elects to exercise the option, the right to receive the related SAR is
canceled to the extent the option is exercised.
RESTRICTED STOCK. An award of Restricted Stock consists of a specified
number of shares of common stock that are transferred to a participant and
subject to forfeiture to the Company under such conditions and for such periods
of time as the Committee may determine. A participant may vote and receive
dividends on the shares of Restricted Stock awarded, but may not sell, assign,
transfer, pledge, or otherwise encumber such shares of Restricted Stock during
the forfeiture period. Certificates for Restricted Stock shall bear a legend
specifying the restrictions and conditions which will cause forfeiture of the
stock. The Committee may also require that the Restricted Stock be held in
escrow until all restrictions and events of forfeiture have lapsed.
If a participant's employment terminates for any reason except death or
disability prior to the expiration of the forfeiture period, all of the
participant's Restricted Stock not already vested will be forfeited and
surrendered to the Company. If a participant dies or terminates employment
because of a disability prior to the expiration of the forfeiture period, the
forfeiture period shall lapse on the date of death or date of disability
provided that such date is at least four years following the date of the award.
If a participant's employment is terminated within one year following a change
of control for any reason other than death, disability, voluntary resignation
without good reason, or termination for cause, any remaining forfeiture period
shall automatically expire on the date employment is terminated. Notwithstanding
the foregoing, the Committee shall have the authority to accelerate the time at
which any or all restrictions applying to the Restricted Stock shall lapse.
DEFERRED STOCK. The 2004 Incentive Plan authorizes the Committee to make
deferred stock awards to participants, in lieu of cash compensation for future
services, in the form of freely-transferable shares whose delivery is deferred
for later distribution in accordance with the participant's election. The most
recent distribution election pursuant to a deferred stock award shall be honored
by the Company if it was made either more than one year before the date such
participant terminated service with the Company for any reason, or more than 90
days before a change in control, as defined in the 2004 Incentive Plan.
15
FEDERAL INCOME TAX CONSEQUENCES
The anticipated federal income tax consequences relating to the different
types of awards under the 2004 Incentive Plan are as described below.
UPON GRANT OF OPTIONS AND SARs. An optionee will not recognize any taxable
income at the time a stock option or related SAR is granted and the Company will
not be entitled to a federal income tax deduction at that time.
UPON EXERCISE OF INCENTIVE STOCK OPTIONS. No ordinary income will be
recognized by the holder of an Incentive Stock Option at the time of exercise.
The excess of the fair market value of the shares at the time of exercise over
the aggregate option price will be an adjustment to alternative minimum taxable
income for purposes of the federal "alternative minimum" tax at the date of
exercise. If the optionee holds the shares for the greater of two years after
the date the option was granted and one year after the acquisition of such
shares, the difference between the aggregate option price and the amount
realized upon disposition of the shares will constitute a long term capital gain
or loss, as the case may be, and the Company will not be entitled to a federal
income tax deduction. If the shares are disposed of in a sale, exchange or other
"disqualifying disposition" within two years after the date of grant or within
one year after the date of exercise, the optionee will realize taxable ordinary
income in an amount equal to the excess of the fair market value of the shares
purchased at a time of exercise over the aggregate option price (the bargain
purchase element), and the Company will be entitled to a federal income tax
deduction equal to such amount. The amount of any gain in excess of the bargain
purchase element realized upon a "disqualifying disposition" will be recognized
as capital gain to the holder. The Company will not be entitled to a federal
income tax deduction for the capital gain amount.
UPON EXERCISE OF NON-STATUTORY STOCK OPTIONS. Upon the exercise of a
Non-Statutory Stock Option, ordinary income will be recognized by the holder in
an amount equal to the excess of the fair market value of the shares purchased
at the time of such exercise over the aggregate option price. The Company will
be entitled to a corresponding federal income tax deduction. Upon any subsequent
sale of the shares, the optionee will generally recognize a taxable capital gain
or loss based upon the difference between the per share fair market value at the
time of exercise and the per share selling price at the time of the subsequent
sale of the shares.
RETROACTIVE STOCK APPRECIATION RIGHTS. Upon the exercise of a SAR, the
holder will realize ordinary income on the amount of cash received and/or the
then current fair market value of the shares of common stock acquired, and the
Company will be entitled to a corresponding federal income tax deduction. The
holder's basis in any shares of common stock acquired will be equal to the
amount of ordinary income which he or she recognized. Upon any subsequent
disposition of acquired shares, any gain or loss realized will be a capital gain
or loss.
RESTRICTED STOCK. Unless a participant makes the election described below,
a participant receiving a grant of Restricted Stock will not recognize income
and the Company will not be allowed a deduction at the time such shares of
Restricted Stock are granted. While the restrictions on the shares are in
effect, a participant will recognize ordinary income equal to the amount of any
dividends received. When the restrictions on the shares are removed or lapse,
the excess of the fair market value of the shares as of the date of grant over
the amount paid, if any, by the participant for the shares will be ordinary
income to the participant, and will be allowed as a deduction for federal income
tax purposes to the Company. Upon disposition of the shares, the gain or loss
realized by the participant will be taxable as capital gain or loss. However, by
filing a Section 83(b) election with the Internal Revenue Service within 30 days
after the date of grant, a participant's ordinary income will be determined as
of the date of grant. In such a case, the amount of ordinary income recognized
by such a participant and deductible by the Company will be equal to the excess
of the fair market value of the shares as of the date of grant over the amount
paid, if any, by the participant for the shares. If such election is made and a
participant thereafter forfeits his or her stock, no deduction will be allowed
for the amount previously included in such participant's income.
16
DEFERRED STOCK. A participant will not recognize any taxable income at the
time deferred stock is granted, and the Company will not be entitled to a
federal income tax deduction at that time. When shares of the Company's common
stock are received by the participant in exchange for the deferred stock, the
participant will recognize ordinary income equal to the fair market value of the
shares received at that time, and the Company will be entitled to a
corresponding federal income tax deduction.
NEW PLAN BENEFITS
Because benefits under the 2004 Incentive Plan will depend on the
Committee's exercise of its discretion as administrator, the fair market value
of the Company's common stock at various future dates, and (with respect to the
annual grants to directors described above) the financial performance of the
Company, it is not possible to determine the benefits that will be received by
directors, executive officers and other employees if the 2004 Incentive Plan is
approved by the Shareholders.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of the shares of common stock
represented in person or by proxy at the Meeting is required for approval of the
2004 Incentive Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THIS PROPOSAL.
17
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning compensation paid to
those persons who served as chief executive officer (or in an equivalent
capacity) during 2003 and to the other most highly compensated executive
officers whose annual salary and bonus earned during 2003 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------------------------- --------------
Other Annual Stock All Other
Name and Compensation Options Compensation
Principal Position Year Salary($) Bonus($)(1) ($)(2) (#)(3) ($)(4)
----------------------------- ---------- -------------- -------------- -------------- -------------- --------------
Sanford A. Belden 2003 503,758 287,847 5,303 47,754 493,198
President and Chief 2002 485,550 242,775 5,055 52,680 361,997
Executive Officer 2001 468,000 187,200 4,355 59,068 227,487
James A. Wears 2003 219,988 89,557 4,676 15,114 87,546
President, Banking 2002 188,926 54,900 3,555 17,290 39,008
2001 176,500 52,950 3,822 16,960 36,104
Michael A. Patton 2003 219,988 89,557 3,512 15,114 99,679
President, Financial 2002 188,926 54,900 2,746 17,290 51,271
Services 2001 176,500 52,950 1,878 16,960 43,164
2003 17,788 430,000 0 0 294
Thomas A. McCullough
President, Pennsylvania
Banking
2003 283,500 0 3,704 13,628 19,158
David J. Elias 2002 296,827 0 1,823 15,000 15,741
President, Chief Executive 2001 315,000 31,217 2,096 23,628 3,471
Officer and Chief
Investment Officer, Elias
Asset Management, Inc.
(1) The amounts shown in this column for Messrs. Belden, Wears, and Patton
reflect payments under the Company's Management Incentive Plan, an annual cash
award plan based on performance and designed to provide incentives for
employees. The amount shown in this column for Mr. McCullough reflects payment
of a signing bonus to Mr. McCullough in satisfaction of obligations to him under
his former employment agreement with Grange. The amount shown in this column for
Mr. Elias reflects payments under Mr. Elias's Employment Agreement.
(2) The amounts disclosed in this column include the reportable value of the
personal use of Company-owned vehicles for Messrs. Belden, Wears, Patton, and
Elias.
(3) The numbers of shares underlying options shown in this column have been
adjusted to reflect the two-for-one stock split effectuated on April 12, 2004.
(4) The amounts in this column include: (a) the value of group term life
insurance benefits in excess of $50,000 under a plan available to all full-time
employees for which Messrs. Belden, Wears, Patton, McCullough, and Elias
received $4,357, $922, $1,724, $294, and $1,290 in 2003, respectively; (b)
Company contributions to the Employee Savings and Retirement Plan, a defined
contribution plan, amounting to $7,000 for Mr. Belden, $5,404 for Mr. Wears,
$6,148 for Mr. Patton, and $5,528 for Mr. Elias in 2003; (c) Company
contributions under the Company's Deferred Compensation Plan, amounting to
$28,457 for Mr. Belden, $11,966 for Mr. Wears, $11,966 for Mr. Patton, and
$12,340 for Mr. Elias in 2003; and (d) the expense associated with supplemental
retirement plans, amounting to $453,384 for Mr. Belden, $69,254 for Mr. Wears,
and $79,841 for Mr. Patton in 2003. The Company does not maintain any
"split-dollar" arrangements for the named executive officers.
18
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides further information on grants of stock options
pursuant to the 1994 Incentive Plan in fiscal year 2003 to the named executives
as reflected in the Summary Compensation Table on page 18. All information has
been adjusted to reflect the two-for-one stock split effectuated on April 12,
2004.
Potential Realizable Value
at Assumed Annual Rates of
% of Total Stock Price Appreciation
Options for Option Term
Granted to Exercise ----------------------------
Options Employees or Base Market
Granted in Fiscal Price Expiration Value on
Name (#) Year ($/Sh) Date Grant Date 5% 10%
-------------------------- ----------- ----------- ----------- ---------- ------------ ------------- --------------
Sanford A. Belden 47,774 5.69% 15.675 1/1/13 15.675 470,953 1,193,486
James A. Wears 15,114 1.80% 15.675 1/1/13 15.675 148,992 377,577
Michael A. Patton 15,114 1.80% 15.675 1/1/13 15.675 148,992 377,577
Thomas A. McCullough 0 (1) 0% 0 0 0 0 0
David J. Elias 13,628 1.62% 15.675 1/1/13 15.675 134,344 340,454
(1) Does not reflect stock options held by Mr. McCullough as a result of
his former employment with Grange, which were converted into options to
acquire Company common stock as of November 21, 2003 pursuant to the
terms of the Merger Agreement between the Company and Grange.
Effective January 1, 2003, the Board of Directors issued incentive stock
options to Messrs. Belden, Wears, Patton, and Elias at the then current
post-split equivalent market price of $15.675 per share. Such options become
exercisable over the course of five years, with one-fifth of the options
becoming exercisable on January 1, 2004, 2005, 2006, 2007, and 2008.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table provides information for the named executive officers,
with respect to (i) stock options exercised in fiscal year 2003, (ii) the number
of stock options held at the end of fiscal year 2003, and (iii) the value of
in-the-money stock options at the end of fiscal year 2003. All information has
been adjusted to reflect the two-for-one stock split effectuated on April 12,
2004.
Number of Unexercised Value of Unexercised
Options In-the-Money Options
at 12/31/03 (#) at 12/31/03 ($) (1)
Shares ----------------------------- --------------------------------
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
-------------------------- ------------- -------------- ----------------------------- --------------------------------
Sanford A. Belden 87,016 404,616 4,230 151,294 45,267 1,644,388
James A. Wears 28,280 341,839 45,638 47,416 539,529 513,868
Michael A. Patton 32,400 388,174 40,318 47,416 433,189 513,868
Thomas A. McCullough 0 0 77,028 0 1,606,386 428,975
David J. Elias 12,450 40,840 0 39,806 0
(1) Based on the post-split equivalent closing price of the Company's
common stock on December 31, 2003 of $24.50 per share.
19
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about shares of the Company's
common stock that may be issued upon the exercise of options, warrants, and
rights under the Company's existing equity compensation plans as of December 31,
2003. All information has been adjusted to reflect the two-for-one stock split
effectuated on April 12, 2004
(b) (c)
(a)
Weighted average Number of securities remaining
Number of securities to exercise price of available for future issuance
be issued upon exercise outstanding under equity compensation
of outstanding options, options, warrants plans (excluding securities
Plan Category warrants and rights and rights reflected in column (a))
----------------------------- ------------------------- -------------------- ----------------------------------
Equity compensation
plans approved by security
holders (1) 2,423,474 (3) $12.76 1,516,158 (4)
Equity compensation plans
not approved by security
holders (2) N/A N/A N/A
TOTAL 2,423,474 $12.76 1,516,158
(1) Consists of the 1994 Incentive Plan.
(2) The Company does not maintain any equity compensation plans that were
not approved by security holders.
(3) Consists of options to purchase 2,423,474 shares of common stock issued
under the 1994 Incentive Plan.
(4) Consists of shares available for future issuance under the 1994
Incentive Plan.
PENSION PLAN TABLE
YEARS OF SERVICE
Highest Five
Year Average
Compensation (1) 15 20 25 30 35
--------------------- ------------------- ------------------- ------------------- ------------------- -------------------
100,000 18,980 25,306 31,633 37,959 44,286
150,000 30,605 40,806 51,008 61,209 71,411
200,000 42,230 56,306 70,383 84,459 98,536
250,000 42,230 56,306 70,383 84,459 98,536
300,000 42,230 56,306 70,383 84,459 98,536
350,000 42,230 56,306 70,383 84,459 98,536
400,000 42,230 56,306 70,383 84,459 98,536
450,000 42,230 56,306 70,383 84,459 98,536
500,000 42,230 56,306 70,383 84,459 98,536
550,000 42,230 56,306 70,383 84,459 98,536
(1) For 2003, the Internal Revenue Code limits the total compensation that
may be taken into account in calculating benefits to $200,000.
The table above sets forth the estimated annual benefits under the formula
adopted for post-1988 years of service, payable upon retirement at age 65 in the
form of a single life annuity. Benefits are computed based on the average annual
compensation for the highest consecutive five years of plan participation. The
amounts are not subject to any deduction for Social Security. For purposes of
calculating the benefit,
20
an employee may not be credited with more than 35 years of service.
Notwithstanding the basic formula, the pension plan also provides specific
minimum benefits for participants. The base salary and cash award amounts in the
Summary Compensation Table on page 18 reflect the covered compensation under the
plan for Messrs. Belden, Wears, Patton, McCullough, and Elias. Messrs. Belden,
Wears, and Patton have been credited with 11, 33, and years of service,
respectively, under the plan. Mr. McCullough has been credited with 26 years of
service under the plan for purposes of eligibility and vesting, and 0 years of
service for purposes of benefit calculation. Mr. Elias has been credited with 23
years of service under the plan for purposes of eligibility and vesting, and 4
years of service for purposes of benefit calculation.
The pension plan maintained by the Company is a noncontributory defined
benefit plan which is funded by the Company and administered by a retirement
committee which consists of persons appointed by the Board of Directors. The
plan covers all employees of the Company who have completed one full year of
continuous service. The Company first entered into a nonqualified supplemental
retirement plan agreement with Mr. Belden in January 1995 and with Messrs. Wears
and Patton in January 2001, and assumed Grange's responsibilities under a
nonqualified supplemental retirement plan agreement with Mr. McCullough upon
consummation of the merger between the Company and Grange in 2003. As described
on pages 24-25, benefits paid to these executive officers under the pension plan
serve to partially offset the Company's obligations to them under their
respective supplemental retirement plan agreements. The Company does not
currently maintain a nonqualified retirement plan for Mr. Elias.
EMPLOYMENT AGREEMENTS
---------------------
SANFORD A. BELDEN. The Company has an employment agreement with Mr. Belden
providing for his employment as the Company's President and Chief Executive
Officer until December 31, 2007. The agreement, which was amended as of March 1,
2004, provides that during the period from March 1, 2004 through December 31,
2004, the Company shall pay Mr. Belden a base salary at the annual rate in
effect on February 29, 2004, which was $522,648. Mr. Belden's base salary for
calendar years after 2004 shall be increased at the same rate as the rate
applied by the Company in its merit pool for salary increases to be paid for the
applicable calendar year. The agreement may be terminated by the Board for cause
at any time, and shall terminate upon Mr. Belden's death, or disability. If Mr.
Belden's employment is terminated by the Company prior to December 31, 2007 for
reasons other than cause, death or disability, Mr. Belden will be entitled to
severance pay equal to the greater of (i) the sum of Mr. Belden's annual base
salary at the time of the termination and the most recent payment to Mr. Belden
under the Company's Management Incentive Plan, or (ii) amounts of base salary
and expected Management Incentive Plan payments that otherwise would have been
payable to Mr. Belden through the unexpired term of his employment (provided
that in the event that Mr. Belden's involuntary termination without cause occurs
under circumstances entitling him to the change in control benefits described in
the following paragraph, the foregoing severance pay shall be reduced by the
consulting fee payments to be made to Mr. Belden as described below). In
addition, Mr. Belden will be permitted to dispose of any restricted stock
previously granted to him, all of his stock options will become fully
exercisable, and the Company will cover Mr. Belden and his eligible dependents
under all benefit plans and programs available to its retired employees. In the
event Mr. Belden voluntarily retires prior to December 31, 2007 (other than in
connection with a change in control as described below), or in the event Mr.
Belden remains employed pursuant to his agreement through December 31, 2007 and
retires on that date, the Company will enter into a separate consulting
agreement with him, pursuant to which the Company will retain him as a
consultant for a period of 36 months at a compensation rate of $4,000 per month.
If Mr. Belden's employment is terminated for reasons other than cause,
death, or disability within two years following a change of control, or if Mr.
Belden voluntarily resigns during this period based upon an involuntary and
material adverse change in his title, duties, responsibilities, working
conditions, total remuneration, or the geographic location of his assignment,
the Company will retain him as a consultant for three years at an annual
consulting fee equal to his base salary plus the award to Mr. Belden under the
Management Incentive Plan for the year immediately preceding the change in
control, will reimburse him for any loss incurred on the sale of his home, will
permit him to dispose of any restricted stock previously
21
granted to him, and all of his stock options will become fully exercisable. As
an alternative to retaining Mr. Belden as a consultant for a three-year period
following a change of control, the Board of Directors may elect, in its sole
discretion, to pay all benefits due to Mr. Belden in a single lump sum payment
within 90 days following the change of control and Mr. Belden's termination of
employment. The agreement provides that the amount of any lump sum change in
control payment made to Mr. Belden will be "grossed up" to hold Mr. Belden
harmless from all income and excise tax liability attributable to the payment.
JAMES A. WEARS. The Company has an employment agreement with Mr. Wears
providing for his continued employment until December 31, 2007. The agreement
provides for severance pay, in the event of a termination for reasons other than
cause, death, or disability, equal to the greater of (i) the sum of Mr. Wears's
annual base salary at the time of termination and the most recent payment to him
under the Company's Management Incentive Plan, or (ii) amounts of base salary
and expected Management Incentive Plan payments payable to Mr. Wears through the
unexpired term of his employment. In addition, if the agreement is not renewed
at the end of its term (other than by reason of Mr. Wears's refusal to negotiate
or rejection of a bona fide offer from the Company), Mr. Wears is entitled to
severance pay equal to 175% of the sum of his then current base salary plus the
most recent payment to him under the Management Incentive Plan.
If Mr. Wears's employment is terminated for reasons other than cause, death,
or disability within two years following a change of control, or if Mr. Wears
voluntarily resigns during this period based upon an involuntary and material
adverse change in his title, duties, responsibilities, working conditions, total
remuneration, or the geographic location of his assignment, the Company will
retain him as a consultant for three years at an annual consulting fee equal to
his base salary plus the award to Mr. Wears under the Management Incentive Plan
for the year immediately preceding the change in control, will permit him to
dispose of any restricted stock previously granted to him, and all of his stock
options will become fully exercisable. As an alternative to paying change of
control benefits to Mr. Wears over a three-year period, the Board of Directors
may elect, in its sole discretion, to pay all benefits due to Mr. Wears in a
single lump sum payment within 90 days following the change of control and Mr.
Wears's termination of employment. In such event, the amount of the lump sum
payment will be increased to hold Mr. Wears harmless from all income and excise
tax liability attributable to the lump sum payment.
MICHAEL A. PATTON. The Company has an employment agreement with Mr. Patton
providing for his continued employment until December 31, 2007. The agreement
provides for severance pay, in the event of a termination for reasons other than
cause, death, or disability, equal to the greater of (i) the sum of Mr. Patton's
annual base salary at the time of termination and the most recent payment to him
under the Company's Management Incentive Plan, or (ii) amounts of base salary
and expected Management Incentive Plan payments payable to Mr. Patton through
the unexpired term of his employment. If Mr. Patton's employment is terminated
for reasons other than cause, death, or disability within two years following a
change of control, or if Mr. Patton voluntarily resigns during this period based
upon an involuntary and material adverse change in his title, duties,
responsibilities, working conditions, total remuneration, or the geographic
location of his assignment, the Company will retain him as a consultant for
three years at an annual consulting fee equal to his base salary plus the award
to Mr. Patton under the Management Incentive Plan for the year immediately
preceding the change in control, will permit him to dispose of any restricted
stock previously granted to him, and all of his stock options will become fully
exercisable. As an alternative to paying change of control benefits to Mr.
Patton over a three-year period, the Board of Directors may elect, in its sole
discretion, to pay all benefits due to Mr. Patton in a single lump sum payment
within 90 days following the change of control and Mr. Patton's termination of
employment. In such event, the amount of the lump sum payment will be increased
to hold Mr. Patton harmless from all income and excise tax liability
attributable to the lump sum payment.
THOMAS A. MCCULLOUGH. The Company has an agreement with Mr. McCullough
providing for his employment as President, Pennsylvania Banking for the Company
until December 31, 2007. The agreement provides that during the period from
November 21, 2003 through December 31, 2004, the
22
Company shall pay Mr. McCullough a base salary at an annual rate of at least
$185,000. Mr. McCullough's base salary for calendar years after 2004 shall be
adjusted in accordance with the Company's regular payroll practices for
executive employees. Mr. McCullough is also entitled to an incentive
compensation payment, pursuant to the Management Incentive Plan, of at least
$45,000 per year for 2003 and 2004 (prorated for 2003 based on the number of
weeks served). In addition, Mr. McCullough received a $430,000 signing bonus for
2003 in satisfaction of obligations to him under his former employment agreement
with Grange.
The Company's agreement with Mr. McCullough may be terminated by the Board
for cause at any time, and shall terminate upon Mr. McCullough's death or
disability. If Mr. McCullough's employment is terminated by the Company prior to
December 31, 2007 for reasons other than cause, death, or disability, or if Mr.
McCullough is involuntarily replaced as President, Pennsylvania Banking prior to
such date for reasons other than cause, Mr. McCullough will be entitled to
severance pay equal to the greater of (i) the sum of his annual base salary at
the time of termination and the most recent payment to him under the Company's
Management Incentive Plan or (ii) amounts of base salary and expected Management
Incentive Plan payments that otherwise would have been payable to him through
the unexpired term of his employment agreement (provided that in the event that
Mr. McCullough's involuntary termination without cause occurs under
circumstances entitling him to the change in control benefits described in the
following paragraph, the foregoing severance pay shall be reduced by the
consulting fee payments to be made to Mr. McCullough as described below). In
addition, Mr. McCullough will be entitled to dispose of any restricted stock
previously granted to him, all of his stock options will become fully
exercisable, and the Company will cover Mr. McCullough and his eligible
dependents under all benefit plans and programs available to its retired
employees. In the event that Mr. McCullough's agreement is not renewed at the
end of its term for reasons other than cause, Mr. McCullough is entitled to a
severance benefit equal to 175% of his annual base salary in effect at the time
of expiration of the agreement, plus the most recent payment to him under the
Management Incentive Plan.
If Mr. McCullough's employment is terminated for reasons other than cause,
death, or disability within two years following a change of control, or if Mr.
McCullough voluntarily resigns during this period based upon an involuntary and
material adverse change in his title, duties, responsibilities, working
conditions, total remuneration, or the geographic location of his assignment,
the Company will retain him as a consultant for three years at an annual
consulting fee equal to his base salary plus the award to Mr. McCullough under
the Management Incentive Plan for the year immediately preceding the change in
control, will permit him to dispose of any restricted stock previously granted
to him, and all of his stock options will become fully exercisable. As an
alternative to paying change of control benefits to Mr. McCullough over a
three-year period, the Board of Directors may elect, in its sole discretion, to
pay all benefits due to Mr. McCullough in a single lump sum payment within 90
days following the change of control and Mr. McCullough's termination of
employment. In such event, the amount of the lump sum payment will be increased
to hold Mr. McCullough harmless from all income and excise tax liability
attributable to the lump sum payment.
DAVID J. ELIAS. The Bank has an agreement with Mr. Elias and Elias Asset
Management, Inc., a wholly-owned subsidiary of the Bank ("EAM"), providing for
Mr. Elias's employment as EAM's president, chief executive officer and chief
investment officer until April 3, 2007. The agreement requires that Mr. Elias
perform his duties to the best of his abilities and devote his full working time
and attention to the business and affairs of EAM. In addition to his base
salary, Mr. Elias is entitled to an annual incentive bonus based upon a
percentage of EAM's annual adjusted net income, calculated pursuant to a formula
set forth in the agreement. The agreement may be terminated by EAM for "cause"
(as defined in the agreement) at any time. If Mr. Elias's employment is
terminated by EAM without cause, or if Mr. Elias terminates his employment for
"good reason" (as defined in the agreement), EAM must, at its option, either (i)
pay Mr. Elias a severance benefit equal to the base salary and estimated
incentive bonuses that he would otherwise have received during the remaining
term of the agreement, or (ii) unconditionally release Mr. Elias from
post-termination non-compete provisions that would otherwise
23
apply under the terms of the agreement. The agreement provides that if Mr.
Elias's employment is terminated within two years following a change of control,
EAM shall pay him, in a lump sum as soon as practicable following termination,
2.9 times his base salary in effect at the time of termination plus 2.9 times
his annual incentive bonus earned during the term of the agreement; provide him
with fringe benefits, or the cash equivalent of such benefits, for a period of
24 months following termination; and treat as immediately vested and exercisable
all unexpired stock options.
SUPPLEMENTAL RETIREMENT PLAN AGREEMENTS
---------------------------------------
The Company has Supplemental Retirement Plan Agreements with Messrs.
Belden, Wears, Patton, and Mr. McCullough.
SANFORD A. BELDEN. Under Mr. Belden's Supplemental Retirement Plan
Agreement, the Company must provide Mr. Belden with an annual supplemental
retirement benefit equal to the product of (i) 5% times Mr. Belden's number of
years of service, considering only the first ten years of service, plus 2% times
Mr. Belden's number of years of service in excess of ten years, times (ii) his
final average salary and cash incentive payment. Unless Mr. Belden voluntarily
terminates his employment prior to July 1, 2006, the amount of Mr. Belden's
annual supplemental retirement benefits shall not be less than what would be
calculated if he remained employed pursuant to his employment agreement through
December 31, 2007 and received the base salary, including increases, and
Management Incentive Plan payments (assuming a minimum incentive payment equal
to 50% of base salary under the Company's Management Incentive Plan)
contemplated by the employment agreement. The supplemental retirement benefit is
reduced by the benefit payable under the Company's pension plan, 50% of Mr.
Belden's Social Security benefit, and Company contributions on Mr. Belden's
behalf and earnings attributable thereto under the Company's 401(k) Employee
Stock Ownership Plan and Deferred Compensation Plan for Certain Executive
Employees. The supplemental retirement benefit is payable upon the later of Mr.
Belden's cessation of employment with the Company or his receipt of the final
payment due under his employment agreement, generally in the form of an
actuarially reduced joint and 100% survivor benefit. Benefits payable in another
form are subject to the same actuarial adjustments as benefits under the
Company's pension plan.
Notwithstanding the foregoing, if Mr. Belden's employment is terminated for
reasons other than cause, death or disability within two years following a
change of control, or if Mr. Belden voluntarily resigns during this period based
upon an involuntary and material adverse change in his title, duties,
responsibilities, working conditions, total remuneration, or the geographic
location of his assignment, the Company must (for purposes of determining his
supplemental retirement benefit described above) (i) credit Mr. Belden with
additional years of service equal to the greater of three years of service or
the years of service he is retained as a consultant under the terms of his
employment agreement, (ii) credit Mr. Belden with two additional years of
service, and (iii) determine Mr. Belden's final five year average compensation
as described above by considering the years he is retained as a consultant under
the terms of the employment agreement as service that precedes his termination
and considering amounts paid to him during that period as salary and cash
incentive payments. If the Board of Directors elects to pay Mr. Belden's change
in control benefit under his employment agreement in a lump sum, the Company
will pay his supplemental retirement benefit in an actuarial equivalent single
lump sum payment within 90 days following the change of control and his
termination of employment. The amount of any lump sum change in control payment
made to Mr. Belden will be "grossed up" to hold Mr. Belden harmless from all
income and excise tax liability attributable to the payment.
JAMES A. WEARS AND MICHAEL A. PATTON. Under the Supplemental Retirement Plan
Agreements for Mr. Wears and Mr. Patton, the Company shall pay the employee an
annual supplemental retirement benefit equal to the excess (if any) of (i) the
annual benefit that the employee would have earned pursuant to the Company's
pension plan if (a) 100% of the employee's annual compensation that is
disregarded for pension plan purposes solely because of the limit imposed by
Internal Revenue Code Section 401(a)(17) is added to the amount of the
employee's annual compensation actually taken into account pursuant to the
24
pension plan and (b) Internal Revenue Code Section 415 is disregarded, minus
(ii) the annual benefit actually payable to the employee pursuant to the pension
plan. The benefit described in the preceding sentence is payable in the form of
an actuarially reduced joint and 50% survivor benefit, provided that benefits
payable in another form are subject to the same actuarial adjustments as
benefits under the Company's pension plan.
THOMAS A. MCCULLOUGH. Under Mr. McCullough's Supplemental Retirement Plan
Agreement, which was assumed by the Company upon consummation of the merger
between the Company and Grange, if Mr. McCullough retires on or after his 62nd
birthday, the Company must provide him with an annual supplemental retirement
benefit equal to 85% of his average compensation during the last five years of
his employment reduced by the benefit payable under the Company's pension plan,
50% of his Social Security benefit, and Company contributions on Mr.
McCullough's behalf and earnings attributable thereto under the Company's 401(k)
Employee Stock Ownership Plan and Deferred Compensation Plan for Certain
Executive Employees. The supplemental retirement benefit is payable over the
course of 180 months beginning on the first day of the month following the later
of Mr. McCullough's 62nd birthday or the cessation of his employment with the
Company. If Mr. McCullough's employment is terminated before his 62nd birthday,
the Company must provide him with an early retirement benefit equal to the
liability accrued on the Company's books for its obligations for the normal
retirement benefit described above. This amount shall be amortized and paid over
a 180 month period beginning the first day of the month following Mr.
McCullough's termination.
Notwithstanding the foregoing, if Mr. McCullough's employment is terminated
for reasons other than cause, death, disability, or after he attains the age of
62, in each case following a change of control, the Company must provide him
with a change of control payment equal to 85% of his average compensation during
the last five years of his employment reduced by the benefit payable under the
Company's pension plan, 50% of his Social Security benefit, and Company
contributions on Mr. McCullough's behalf and earnings attributable thereto under
the Company's 401(k) Employee Stock Ownership Plan and Deferred Compensation
Plan for Certain Executive Employees. However, if this change of control payment
would cause the sum of other payments to Mr. McCullough from the Company and the
change of control benefits to constitute a "parachute payment" as defined by the
Internal Revenue Code, the Company shall pay a change of control benefit equal
to the liability accrued on the Company's books for its obligations for the
normal retirement benefit described above, amortized over 180 months. If Mr.
McCullough dies while an active employee of the Company, the Company must pay
his beneficiaries as follows: For the first year following death, 100% of his
total compensation, for each of the second through fifth years following death,
75% of his total compensation, and for each of the sixth through fifteenth years
following death, 50% of his total compensation.
25
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Company has adopted a multi-faceted approach towards compensating all of
its employees, including senior management. The underlying philosophy and
description of major components of the total compensation program are described
below.
PHILOSOPHY
----------
The total compensation program is intended to align compensation with
business objectives and enable the Company to attract and retain individuals who
are contributing to the long-term success of the Company. Towards this end:
THE COMPANY PAYS COMPETITIVELY. The Company regularly compares its
cash, equity and benefits based compensation practices with those of other
companies of similar size, operating in similar geographic market areas, many of
which are represented in the stock performance graph included on page 29, and
establishes compensation parameters based on that review.
THE COMPANY ENCOURAGES TEAMWORK. The Company recognizes that its
long-term success results from the coordinated efforts of employees working
towards common, well established objectives. While individual accomplishments
are encouraged and rewarded, the performance of the Company is a determining
factor in total compensation opportunities.
THE COMPANY STRIVES FOR FAIRNESS IN THE ADMINISTRATION OF PAY. The
Company strives to ensure that compensation levels accurately reflect the level
of accountability that each individual has within the Company; employees are
informed of the total compensation program; decisions made regarding individual
performance which affect compensation matters are based upon an objective
assessment of performance; and all employees have equal access to positions
within the Company which provide for increased levels of total compensation.
The process of assessing performance involves the following:
1. Prior to the beginning of each fiscal year, the Chief Executive
Officer establishes and distributes written goals, which must be approved by the
full Board. Those goals include specific financial targets relative to earnings
and asset quality. The Company strives to achieve financial results which are in
the upper third of the results published by its peer group.
2. Individuals at each successive level of management establish written
goals, which must be approved by their respective managers.
3. All goals are reviewed on an ongoing basis to ensure that the
Company is responding to changes in the marketplace and economic climate, and
that accomplishment of retained goals is ensured.
4. At the end of the fiscal year, performance is evaluated against
goals and other key position responsibilities. Such evaluations affect decisions
on salary, cash incentive, and stock option matters.
COMPENSATION PROGRAMS
---------------------
The Company defines itself as a super-community bank which provides products
of a more comprehensive and advanced nature than those offered by smaller
institutions, while simultaneously providing a level of service which exceeds
the service quality delivered by larger regional and money center organizations.
The delivery of those products and services, in ways that enhance Shareholder
26
value, requires that the Company attract key people, promote teamwork, and
reward results. In furtherance of those requirements, the Company maintains the
following compensation programs.
CASH-BASED COMPENSATION
-----------------------
SALARY. The Company sets base salaries for employees by
reviewing the total cash compensation opportunities for competitive positions in
the market. In order to more closely align employee compensation to the
Company's performance, the Company uses a combination of competitive base
salaries and performance incentive opportunities to provide for total
compensation that may exceed those in comparable companies which do not generate
comparable financial results.
MANAGEMENT INCENTIVE PLAN. The Company maintains an annual
incentive plan in which 26% of its employees participate. The Company's
performance to targeted asset quality, growth in earnings per share, and CAMELS
rating, which targets are approved by the Board, triggers the payment of cash
awards for all employees in this group. Award levels, which amount to a
percentage of salary, have been established for different organizational levels
within the Company. For Mr. Belden, 100% of his award is determined by the
Company's performance relative to the financial targets described above. For
Messrs. Wears, Patton, and McCullough (subject to the terms of his employment
agreement described on pages 22-23), 80% of their respective award opportunities
reflect the Company's performance relative to the financial targets, and 20% of
their respective award opportunities reflect performance to other quantitative
and qualitative goals specific to their areas of responsibility. 100% of Mr.
Elias's award opportunity reflects the performance of Elias Asset Management,
Inc. relative to certain financial targets as provided in his employment
agreement.
EQUITY-BASED COMPENSATION
-------------------------
STOCK OPTION PROGRAM. The purpose of this program is to
provide additional incentives to employees to work to maximize Shareholder
value. The option program serves as an effective tool in recruiting key
individuals and utilizes vesting periods to encourage these individuals to
continue in the employ of the Company. The Board frequently awards options in
years during which the Company has achieved its financial targets. The number of
stock options issued generally reflects a percentage of salary; and various
percentages have been established for different organizational levels within the
Company.
RESTRICTED STOCK. The Company has, on occasion, issued limited
amounts of restricted stock to individuals to support a variety of business
objectives. Examples include: performance unit shares have been issued in
start-up and turnaround assignments, with vesting schedules tied to specific
performance criteria; and restricted shares have been issued to newly promoted
and hired individuals who received initial stock option awards with no
in-the-money exercisable value.
The Company believes that the use of equity-based compensation such as stock
options and restricted stock is important in that it aligns the interests of key
personnel with those of the Shareholders. In particular, when personnel receive
equity-based compensation, their overall compensation is enhanced when the
market price of the Company's common stock increases and is adversely affected
when the market price of the Company's common stock decreases.
CEO COMPENSATION
----------------
In December 2003, the full Board formally reviewed Mr. Belden's performance
for fiscal year 2003, his eleventh full year as the Company's President and CEO.
Having determined that the Company's level of performance relative to the
majority of its previously approved annual and long-term financial targets had
been surpassed, the Board, operating under the terms of the Management Incentive
Plan disclosed in this Report, authorized the payment of Mr. Belden's cash award
for 2003, which amounted to $287,847. Mr. Belden's $503,758 base salary level
for 2003 is well supported by competitive wage survey data, and
27
the increase over his 2002 base salary level is well supported by the Company's
strategic accomplishments and financial performance during the 2002 evaluation
period.
The foregoing report has been provided by William N. Sloan (Chair), Brian R.
Ace, Lee T. Hirschey, David C. Patterson, and Peter A. Sabia, members of the
Compensation Committee. The Board has determined that each of the Compensation
Committee's members is "independent" as defined by the New York Stock Exchange
Rules. The Compensation Committee has adopted a written charter setting forth
its composition and responsibilities, a copy of which is available at the
Company's website at www.communitybankna.com.
28
STOCK PERFORMANCE GRAPH
-----------------------
The following graph compares cumulative total Shareholder returns on the
Company's common stock over the last five fiscal years to the Russell 2000 Index
(of which the Company became a member during 2003), the Standard & Poor's Small
Capitalization Bank Stocks Index, and the Nasdaq Bank Stocks Index. Total return
values were calculated as of December 31 of each indicated year assuming $100
investment on December 31, 1998 and reinvestment of dividends. Based on the
evolution of the Company over the past several years, the Company believes that
the Standard & Poor's Small Capitalization Bank Stocks Index provides a more
meaningful comparison to the performance of the Company's stock than does the
Nasdaq Bank Stocks Index. Accordingly, the Company intends to discontinue use of
the Nasdaq Bank Stocks Index in the performance graph beginning next year.
[Graphic Depiction of the Values Set Forth Below]
1998 1999 2000 2001 2002 2003
------ ------ ------ ------ ------ ------
Community Bank System, Inc. 100.00 82.17 91.64 101.00 125.17 200.52
Russell 2000 Index 100.00 121.11 108.48 106.45 99.02 107.14
S&P Small Cap. Commercial Bank Index 100.00 88.19 110.08 111.45 110.36 114.65
Nasdaq Bank Index 100.00 94.28 105.12 107.52 107.39 112.01
29
AUDIT COMMITTEE REPORT
In accordance with its written charter adopted by the Board of Directors, a
copy of which is attached as Appendix B, the Bank's Audit/Compliance/Risk
Management Committee (which also serves as the Company's Audit Committee)
assists the Board in fulfilling its responsibility for oversight of the quality
and integrity of the accounting, auditing, and financial reporting practices of
the Company and the Bank. The Committee reviews internal and external audits of
the Company and the Bank and the adequacy of the Company's and the Bank's
accounting, financial, and compliance controls, and investigates and makes
recommendations to the Board regarding the appointment of independent auditors.
The Audit/Compliance/Risk Management Committee is comprised of four
directors, each of whom the Board has determined to be "independent" as defined
by the Sarbanes-Oxley Act and the New York Stock Exchange Rules. Committee
members may not serve simultaneously on the audit committees of more than two
other public companies without approval of the full Board. To date, no such
approval has been granted.
The Board has determined that none of the members of the
Audit/Compliance/Risk Management Committee meet the definition of "audit
committee financial expert" as defined in Item 401(h) of Regulation S-K
promulgated by the Securities and Exchange Commission. The Audit/Compliance/Risk
Management Committee receives directly or has access to extensive information
from reviews and examinations by the Company's internal auditor, independent
auditor and the various banking regulatory agencies having jurisdiction over the
Company and its subsidiaries. The Company has not retained an audit committee
financial expert to serve on its Board and the Audit/Compliance/Risk Management
Committee because the Board believes that the present members of the Committee
have sufficient knowledge and experience in financial affairs to effectively
perform their duties.
In discharging its oversight responsibility as to the audit process, the
Audit/Compliance/Risk Management Committee obtained from the Company's
independent auditors a formal written statement describing all relationships
between the auditors and the Company that might bear on the auditors'
independence consistent with Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees," discussed with the auditors
any relationships that may impact their objectivity and independence and
satisfied itself as to the auditors' independence. The Committee also discussed
with management and the independent auditors the quality and adequacy of the
Company's internal controls. The Committee reviewed with the independent
auditors their audit plans, audit scope, and identification of audit risks.
The Committee discussed and reviewed with the independent auditors all
communications required by generally accepted auditing standards, including
those described in Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees," and, with and without management present,
discussed and reviewed the results of the independent auditors' examination of
the financial statements. The Committee also reviewed with management and the
independent auditors the audited financial statements of the Company as of and
for the fiscal year ended December 31, 2003.
Based on the above-mentioned reviews and discussions with management and the
independent auditors, the Committee recommended to the Board of Directors that
the Company's audited financial statements be included in its Annual Report on
Form 10-K for the fiscal year ended December 31, 2003, for filing with the
Securities and Exchange Commission.
The foregoing report has been provided by William M. Dempsey (Chair), John
M. Burgess, Lee T. Hirschey, and William N. Sloan, members of the
Audit/Compliance/Risk Management Committee.
30
AUDIT FEES
The following table sets forth the aggregate fees billed to the Company by
PricewaterhouseCoopers LLP for professional services rendered for the fiscal
years ended December 31, 2003 and 2002.
2003 2002
---- ----
Audit Fees $200,000 $191,500
Audit Related Fees (1) 103,645 115,420
Tax Fees (2) 336,901 304,350
All Other Fees (3) 5,000 1,700
-----------------------------
(1) For 2003, includes audit of the Company's pension plan, internal audit
assistance, and internal control reviews. For 2002, includes audit of
the Company's pension plan, internal audit assistance, separate audits
of two of the Bank's subsidiaries, and acquisition assistance.
(2) For 2003 and 2002, includes consulting services in connection with
preparation of Company and subsidiary tax returns, routine tax advice,
actuarial and benefit consulting, and acquisition tax consulting.
(3) For 2003, includes loan participation/preferred funding consultation.
For 2002, includes miscellaneous consulting services.
Pursuant to the Audit Committee Charter, the Company is required to obtain
pre-approval by the Audit/Compliance/Risk Management Committee for all audit and
permissible non-audit services obtained from its independent auditors to the
extent required by applicable law. In accordance with this pre-approval policy,
the Audit/Compliance/Risk Management Committee pre-approved 100% of the Audit
Fees, 100% of the Audit Related Fees, 100% of the Tax Consulting Fees, and 100%
of the "All Other" Fees for fiscal 2003. None of the fiscal 2002 fees were
pre-approved because the pre-approval policy did not exist during fiscal 2002.
TRANSACTIONS WITH MANAGEMENT
Some of the directors and executive officers of the Company and the Bank
(and the members of their immediate families and corporations, organizations,
trusts, and estates with which these individuals are associated) are indebted to
the Bank. However, all such loans were made in the ordinary course of business,
do not involve more than the normal risk of collectibility or present other
unfavorable features, and were made on substantially the same terms, including
interest rate and collateral requirements, as those prevailing at the same time
for comparable loan transactions with unaffiliated persons. No such loan is
nonperforming at present. The Company expects that the Bank will continue to
have banking transactions in the ordinary course of business with the Company's
executive officers and directors and their associates on substantially the same
terms, including interest rates and collateral, as those then prevailing for
comparable transactions with others.
Outside of these normal customer relationships, none of the directors or
executive officers of the Company or the Bank and no 5% Shareholders of the
Company (or members of the immediate families of any of the above or any
corporations, organizations, or trusts with which such persons are associated)
maintains any significant business or personal relationship with the Company or
the Bank, other than as arises by virtue of his ownership interest in the
Company or his position with the Company or the Bank. The law firms of (i)
Franklin & Gabriel, owned by Director Gabriel, provided legal services to the
Bank's operations in its Finger Lakes Markets, (ii) DiCerbo and Palumbo, of
which Director DiCerbo is a partner, provided legal services to the Bank's
operations in its Southern Region Markets, and (iii) Cantwell & Cantwell, owned
by Director Cantwell, provided legal services to the Bank's operations
31
in its Northern Region Markets. For services rendered during 2003 and for
related out-of-pocket disbursements, DiCerbo and Palumbo received $187,655 from
the Bank, Franklin and Gabriel received $38,394 from the Bank, and Cantwell &
Cantwell received $66,749 from the Bank.
Pursuant to the terms of its written charter, the Audit/Compliance/Risk
Management Committee is responsible for reviewing and approving all
related-party transactions involving the Company or the Bank. Consistent with
this responsibility, the Committee has reviewed and approved the foregoing
relationships as being consistent with the best interests of the Company and the
Bank.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and holders of more than 10% of the Company's
common stock (collectively, "Reporting Persons") to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of the common stock. Such persons are required by regulations of the
Securities and Exchange Commission to furnish the Company with copies of all
such filings. Based solely on its review of the copies of such filings received
by it and written representations of Reporting Persons with respect to the
fiscal year ended December 31, 2003, the Company believes that all Reporting
Persons complied with all Section 16(a) filing requirements in the fiscal year
ended December 31, 2003.
SHAREHOLDER PROPOSALS
If Shareholder proposals are to be considered by the Company for inclusion
in a proxy statement for a future meeting of the Company's Shareholders, such
proposals must be submitted on a timely basis and must meet the requirements
established by the Securities and Exchange Commission for shareholder proposals.
Shareholder proposals for the Company's 2005 Annual Meeting of Shareholders will
not be deemed to be timely submitted unless they are received by the Company at
its principal executive offices by December 15, 2004. Such Shareholder
proposals, together with any supporting statements, should be directed to the
Secretary of the Company. Shareholders submitting proposals are urged to submit
their proposals by certified mail, return receipt requested.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP, Independent Certified Public Accountants, were
retained by the Company at the direction of the Board of Directors. The
independent auditors have audited the financial statements of the Company for
the fiscal year ended December 31, 2003 and performed such other nonaudit
services as the Board requested.
A representative of PricewaterhouseCoopers LLP will be present at the
Meeting. This representative will have the opportunity to make a statement, if
he or she so desires, and will be available to respond to appropriate questions
from Shareholders.
OTHER MATTERS
The Board of Directors of the Company is not aware of any other matters that
may come before the Meeting. However, the Proxies may be voted with
discretionary authority with respect to any other matters that may properly come
before the Meeting.
Date: April 15, 2004 By Order of the Board of Directors
/s/ Donna J. Drengel
Donna J. Drengel
Secretary
32
APPENDIX A
COMMUNITY BANK SYSTEM, INC.
2004 LONG-TERM INCENTIVE COMPENSATION PROGRAM
---------------------------------------------
1. PREAMBLE. Effective as of July 1, 1984, the Board of Directors of
Community Bank System, Inc. adopted the Community Bank System, Inc. Long Term
Incentive Compensation Program ("1984 Program"). The 1984 Program provided for
the granting of incentive stock options, non-statutory stock options,
retroactive stock appreciation rights, and restricted stock awards. The 1984
Program also provided that no option could be granted under that program after
June 30, 1994. The 1984 Program was replaced with the Community Bank System,
Inc. 1994 Long-Term Incentive Compensation Program which became effective July
1, 1994.
This document sets forth the terms of the Community Bank System, Inc.
2004 Long Term Compensation Program ("2004 Program"), which shall become
effective as of July 1, 2004, contingent upon the approval of the 2004 Program
by the shareholders of Community Bank System, Inc. Options and other rights
described in this 2004 Program document shall be granted after June 30, 2004 in
accordance with the terms of this 2004 Program document.
2. PURPOSE. The purpose of the 2004 Program is to promote the interests
of the Bank by providing current and future directors, officers, key employees
and advisors with an equity or equity-based interest in the Bank, so that the
interests of such directors, officers, employees and advisors will be closely
associated with the interest of shareholders by reinforcing the relationship
between shareholder gains and compensation.
3. ELIGIBILITY. Directors and officers of the Bank or its Subsidiaries,
key employees of the Bank or its Subsidiaries, and Advisors to the Board of
Directors shall be eligible to participate in the 2004 Program. Employee
participants shall be selected by the Committee based upon such factors as the
employee's past and potential contributions to the success, profitability, and
growth of the Bank.
4. DEFINITIONS. As used in this 2004 Program,
(a) "Advisor" shall mean any natural person who is engaged to
render bona fide consulting or advisory services to the Board
of Directors, other than a person who provides such services in
connection with the offer or sale of securities in a
capital-raising transaction.
(b) "Bank" shall mean Community Bank System, Inc.
(c) "Board of Directors" shall mean the Board of Directors of the
Bank.
(d) "Committee" shall mean the committee appointed by the Board of
Directors to administer the 2004 Program in accordance with
Paragraph 16.
(e) "Common Stock" shall mean the Common Stock, no par value, of
the Bank.
(f) "Deferred Stock Award" shall mean an award of Common Stock to
an Eligible Employee, Director or Advisor that is subject to
the restrictions described in Paragraph 11.
(g) "Director" shall mean a member of the Board of Directors.
(h) "Eligible Employees" shall mean persons treated by the Bank for
payroll and employment tax purposes as common law employees of
the Bank and described in Paragraph 3.
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(i) "Incentive Stock Option" shall mean the right granted to an
Eligible Employee to purchase Common Stock under this 2004
Program, the grant, exercise and disposition of which are
intended to comply with, and to be governed by, Internal
Revenue Code Section 422.
(j) "Market Value per Share" shall mean, at any date, the fair
market value per share of the shares of Common Stock, as
described in good faith by the Committee.
(k) "Non-Statutory Stock Option" shall mean the right granted to an
Eligible Employee, Director or Advisor to purchase Common Stock
under this 2004 Program, the grant, exercise and disposition of
which are not intended to be subject to the requirements and
limitations of Internal Revenue Code Section 422.
(l) "Optionee" shall mean the Eligible Employee, Director or
Advisor to whom an Option Right is granted pursuant to an
agreement evidencing an outstanding Incentive Stock Option or
Non-Statutory Stock Option.
(m) "Option Right" shall mean the right to purchase a share of
Common Stock upon exercise of an outstanding Incentive Stock
Option or Non-Statutory Stock Option.
(n) "Restricted Stock Award" shall mean an award of Common Stock to
an Eligible Employee or Advisor that is subject to the
restrictions described in Paragraph 10 and subject to tax under
Internal Revenue Code Section 83.
(o) "Retroactive Stock Appreciation Rights" shall mean an Eligible
Employee's right to receive payments described in Paragraph 9.
(p) "Subsidiary" shall mean any corporation in which (at the time
of determination) the Bank owns or controls, directly or
indirectly, 50 percent or more of the total combined voting
power of all classes of stock issued by the corporation.
5. SHARES AVAILABLE UNDER THE 2004 PROGRAM.
(a) The shares of Common Stock which may be made the subject of
Option Rights, Restricted Stock Awards or Deferred Stock Awards
pursuant to this 2004 Program may be either (i) shares of
original issue, (ii) treasury shares, (iii) shares held in a
grantor trust maintained by the Bank, or (iv) a combination of
the foregoing.
(b) Subject to adjustments in accordance with Paragraph 13 of this
2004 Program, the maximum number of shares of Common Stock that
may be the subject of Option Rights, Retroactive Stock
Appreciation Rights, Restricted Stock Awards or Deferred Stock
Awards granted pursuant to this 2004 Program shall be 4,000,000
shares of Common Stock which are made available by virtue of
this 2004 Program.
6. GRANTS OF OPTION RIGHTS GENERALLY. The Committee, or the full Board
of Directors, may, from time to time and upon such terms and conditions as it
may determine, authorize the granting of Option Rights to Directors, Eligible
Employees or Advisors. Each such grant may utilize any or all of the
authorizations, and shall be subject to all of the limitations, contained in the
following provisions:
(a) Each grant shall specify whether it is intended as a grant of
Incentive Stock Options or Non-Statutory Stock Options.
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(b) Each grant shall specify the number of shares of Common Stock
to which it pertains.
(c) Each grant shall specify an option price not less than 50
percent of the Market Value per Share on the date the Option
Right is granted.
(d) Successive grants may be made to the same Optionee whether or
not any Option Rights previously granted to such Optionee
remain unexercised.
(e) Upon exercise of an Option Right, the entire option price shall
be payable (i) in cash, (ii) by the transfer to the Bank by the
Optionee of shares of Common Stock with a value (Market Value
per Share times the number of shares) equal to the total option
price, (iii) by a combination of such methods of payment
described in (i) and (ii) above, or (iv) any other lawful means
of payment acceptable to the Committee. Payment may not be made
with Common Stock issued to the Optionee by the Bank upon his
or her prior exercise of an incentive stock option under this
2004 Program or any other option plan unless the Common Stock
received upon that prior exercise shall have been held by the
Optionee for at least one year.
(f) Each grant of Option Rights shall be evidenced by an agreement
executed on behalf of the Bank by any officer designated by the
Committee for this purpose and delivered to and accepted by the
Optionee and shall contain such terms and provisions,
consistent with this 2004 Program, as the Committee may
approve.
(g) As soon as practicable after each January 1, each non-employee
member of the Board of Directors (or of the board of directors
of a Subsidiary whom the Board of Directors has specifically
selected, in a written resolution, for participation in this
2004 Program) who has (i) attended at least 75 percent of the
Board of Directors or Board committee meetings he or she was
scheduled to attend during the immediately preceding calendar
year, (ii) served as a director of the Bank or a Subsidiary on
the last day of such calendar year, and (iii) completed at
least six months of service on the Board of Directors (or on
the board of directors of a Subsidiary) shall be granted a
Non-Statutory Stock Option, provided that the first such annual
grant of a Non-Statutory Stock Option to an individual director
shall be to purchase 2,320 shares of Common Stock, and each
subsequent annual grant of a Non-Statutory Stock Option to the
director shall be to purchase 4,000 shares of Common Stock.
Notwithstanding the foregoing, to the extent that the Committee
determines that grants may be exempt from Section 16(b) of the
Securities Exchange Act of 1934, as amended ("Rule 16b-3"),
each Non-Statutory Stock Option granted pursuant to the
preceding sentence shall relate to a number of shares of Common
Stock which shall be determined based on the financial
performance of the Bank. Such financial performance of the Bank
shall be determined based on factors including but not limited
to the Bank's return on assets, measures of the Bank's asset
quality, the growth in the Bank's earnings per share, and the
Bank's CAMELS rating. Each Non-Statutory Stock Option granted
pursuant to this paragraph shall be granted at an option price
per share equal to the Market Value per Share on the date of
grant and shall be fully exercisable upon its date of grant,
provided that shares of Common Stock acquired pursuant to the
exercise of such a Non-Statutory Stock Option may not be sold
or otherwise transferred by a director within six months of
such grant.
7. SPECIAL RULES FOR GRANTS OF INCENTIVE STOCK OPTIONS.
(a) Notwithstanding Paragraph 6(c), the option price per share of
an Incentive Stock Option shall not be less than 100 percent of
the Market Value per Share on the date of the grant of the
option; provided, however, that, if an Incentive Stock Option
is granted to any Eligible Employee who, immediately after such
option is granted, is considered to own stock possessing more
than ten percent of the combined voting power of all classes of
stock of the Bank, or any of its
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subsidiaries, the option price per share shall be not less than
110 percent of the Market Value per Share on the date of the
grant of the option, and such option may be exercised only
within five years of the date of the grant.
(b) The period of each Incentive Stock Option by its terms shall be
not more than ten years from the date the option is granted as
specified by the Committee.
(c) The Committee shall establish the time or times within the
option period when the Incentive Stock Option may be exercised
in whole or in such parts as may be specified from time to time
by the Committee, except that Incentive Stock Options shall not
be exercisable earlier than one year, nor later than ten years,
following the date the option is granted. The date of grant of
each Option Right shall be the date of its authorization by the
Committee.
(d) Except as provided in Paragraph 14, or as may be provided by
the Committee at the time of grant, (i) in the event of the
Optionee's termination of employment due to any cause,
including death or retirement, rights to exercise Incentive
Stock Options shall cease, except for those which are
exercisable as of the date of termination, and (ii) rights that
are exercisable as of the date of termination shall remain
exercisable for a period of three months following a
termination of employment for any cause other than death or
disability, and for a period of one year following a
termination due to death or disability. However, no Incentive
Stock Option shall, in any event, be exercised after the
expiration of ten years from the date such option is granted,
or such earlier date as may be specified in the option.
(e) No Incentive Stock Options shall be granted hereunder to any
Optionee that would allow the aggregate fair market value
(determined at the time the option is granted) of the stock
subject of all post-1986 incentive stock options, including the
Incentive Stock Option in question, which such Optionee may
exercise for the first time during any calendar year, to exceed
$100,000. The term "post-1986 incentive stock options" shall
mean all rights, which are intended to be "incentive stock
options" under the Internal Revenue Code, granted on or after
January 1, 1987 under any stock option plan of the Bank or its
Subsidiaries. If the Bank shall ever be deemed to have a
"parent", as such term is used for purposes of Section 422 of
the Internal Revenue Code, then rights intended to be
"incentive stock options" under the Internal Revenue Code,
granted after January 1, 1987 under such parent's stock option
plans, shall be included with the terms of the definition of
"post-1986 incentive stock options".
8. SPECIAL RULES FOR GRANTS OF NON-STATUTORY STOCK OPTIONS.
(a) Except as provided in Paragraph 14, or as may be provided by
the Committee at the time of grant, (i) in the event of the
Optionee's termination of employment due to death or
disability, rights to exercise Non-Statutory Stock Options that
are exercisable as of the date of termination shall remain
exercisable for two years following termination, (ii) in the
event of the Optionee's termination of employment due to any
other reason, the rights to exercise Non-Statutory Stock
Options that are exercisable as of the date of termination
shall remain exercisable for three months following
termination, and (iii) the right to exercise Non-Statutory
Stock Options that are not exercisable as of the date of
termination shall be forfeited.
(b) The Bank shall not issue stock certificates to an Optionee who
exercises a Non-Statutory Stock Option, unless payment of the
required lawful withholding taxes has been made to the Bank by
check, payroll deduction or other arrangements satisfactory to
the Committee.
(c) Notwithstanding any other provision of this 2004 Program to the
contrary and except as provided in Paragraph 14 hereof,
Non-Statutory Stock Options issued pursuant to Paragraph 6(g)
shall be
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exercisable until the earlier of (i) the expiration date that
the Committee specifies in the grant of the Non-Statutory Stock
Options, or (ii) termination of the Optionee's service on the
Board of Directors for Just Cause, or (iii) an earlier date
designated by the Committee. For purposes of this Paragraph
8(c), "Just Cause" shall mean, in the good faith determination
of the Committee, the Optionee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform
stated duties, or willful violation of any law, rule or
regulation (other than traffic violations or similar offenses)
or final cease and desist order. Additionally, in the event
that the Committee, in its sole discretion, determines that an
Optionee who has left service with the Bank or Subsidiary
engaged in misconduct which would have constituted Just Cause
for dismissal if the Optionee were then serving with the Bank
or a Subsidiary, then the Committee may rescind, without the
consent of the Optionee, any or all unexercised Option Rights
held by the Optionee.
9. RETROACTIVE STOCK APPRECIATION RIGHTS.
Upon such conditions and limitations it deems advisable, the Committee
may authorize (a) the surrender of the right to exercise all or a portion of an
Option Right granted under the 2004 Program that is exercisable at the time of
surrender, and (b) the payment in exchange for the surrender of an amount of up
to the excess of the Market Value per Share at the time of surrender of the
shares covered by the option, or portion thereof, surrendered over the option
price of such shares. Such payment may be made in shares of Common Stock valued
at fair market value or in cash or partly in cash and partly in shares of Common
Stock, at the Committee's sole discretion. The shares of Common Stock covered by
any Option Right, or portion thereof, as to which the right to purchase has been
so surrendered shall not again be available for purposes of Option Rights under
the 2004 Program.
10. RESTRICTED STOCK AWARDS.
(a) Shares of Common Stock granted pursuant to a Restricted Stock
Award issued under the 2004 Program (except as otherwise
provided in the 2004 Program) shall not be sold, exchanged,
transferred, assigned, pledged, hypothecated, or otherwise
disposed of, for the period of time determined by the Committee
in its absolute discretion (the "Forfeiture Period"). Except as
provided in Paragraph 14, or as may be provided by the
Committee at the time of grant, if the recipient's employment
with the Bank or any of its Subsidiaries terminates prior to
the expiration of the Forfeiture Period for any reason other
than death or disability, the recipient shall, on the date
employment terminates, forfeit and surrender to the Bank the
number of shares of Common Stock with respect to which the
Forfeiture Period has not expired as of the date employment
terminates. If Common Stock is forfeited, dividends paid on
those shares during the Forfeiture Period may be retained by
the recipient.
(b) Upon each grant of a Restricted Stock Award, the Committee
shall fix the Forfeiture Period. The Committee also shall
determine whether to (i) issue certificates for the awarded
shares of Common Stock to the grantee prior to the expiration
of the Forfeiture Period, or (ii) transfer certificates for the
awarded shares of Common Stock to an escrow agent, which agent
shall hold the certificates until the expiration of the
Forfeiture Period. Each certificate of Common Stock issued to
the grantee pursuant to the Restricted Stock Award prior to the
expiration of the Forfeiture Period shall bear a legend to
reflect the Forfeiture Period until the Forfeiture Period
expires. As a condition to issuance of Common Stock, the
Committee may require the recipient to enter into an agreement
providing for the Forfeiture Period and such other terms and
conditions that it prescribes, including, but not limited to, a
provision that Common Stock issued to the recipient may be held
by an escrow agent until the Forfeiture Period lapses. The
Committee also may require a written representation by the
recipient that he or she is acquiring the shares for
investment.
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(c) When the Forfeiture Period with respect to shares of Common
Stock held in escrow lapses, a certificate for such shares
shall be issued, free of any escrow; such certificate shall not
bear a legend relating to the Forfeiture Period.
(d) Each recipient shall agree, at the time he or she receives a
Restricted Stock Award and as a condition thereof, to pay or
make arrangements satisfactory to the Committee regarding the
payment to the Bank of any federal, state or local taxes of any
kind required by law to be withheld with respect to any award
or with respect to the lapse of any restrictions on shares of
restricted Common Stock awarded under this 2004 Program, or the
waiver of any forfeiture hereunder, and also shall agree that
the Bank may, to the extent permitted by law, deduct such taxes
from any payments of any kind due or to become due to such
recipient from the Bank, sell by public or private sale, with
ten days notice or such longer notice as may be required by
applicable law, a sufficient number of shares of Common Stock
so awarded in order to cover all or part of the amount required
to be withheld, or pursue any other remedy at law or in equity.
In the event that the recipient of shares of Common Stock under
this 2004 Program shall fail to pay to the Bank all such
federal, state and local taxes, or to make arrangements
satisfactory to the Committee regarding the payment of such
taxes, the shares to which such taxes relate shall be forfeited
and returned to the Bank.
(e) The Committee shall have the authority at any time to
accelerate the time at which any or all or the restrictions set
forth in this 2004 Program with respect to any or all shares of
restricted Common Stock awarded hereunder shall lapse.
(f) If a recipient dies, or terminates employment with the Bank
because of disability before the expiration of a Forfeiture
Period, the Forfeiture Period on any Common Stock owned by the
recipient shall lapse on the date of death or on the date that
employment terminates because of disability, provided such date
is not less than four years subsequent to the date of the
award. If the date of death or disability is within four years
of the date of the awards, the Committee, in its sole
discretion, can waive the Forfeiture Period as to any or all of
the stock.
11. DEFERRED STOCK AWARDS. The Committee may make awards to Directors,
Eligible Employees or Advisors, in lieu of cash compensation for future
services, in the form of freely-transferable shares of Common Stock whose
delivery is deferred for later distribution in accordance with the Director's,
Eligible Employee's or Advisor's election. A Director's, Eligible Employee's or
Advisor's most recent distribution election pursuant to this paragraph shall be
honored if made either (a) more than one year before the date on which the
Director, Eligible Employee or Advisor terminates service for any reason, or (b)
more than 90 days before a Change in Control. Nevertheless, beneficiary
designations made pursuant to executed Distribution Election Forms shall be
revocable during the Director's, Eligible Employee's or Advisor's lifetime and
the Director, Eligible Employee or Advisor may, by submitting an effective
superseding distribution election form at any time or from time to time,
prospectively change the designated beneficiary and the manner of payment to a
beneficiary.
12. TRANSFERABILITY. No Incentive Stock Option shall be transferable by
an Optionee other than by will or the laws of descent and distribution.
Incentive Stock Options shall be exercisable during the Optionee's lifetime only
by the Optionee. Other rights granted pursuant to this 2004 Program also shall
not be subject to assignment, alienation, lien, transfer, sale or exchange,
except to the extent provided otherwise by the Committee at the time the right
is granted.
13. ADJUSTMENTS. The Committee may make or provide for such adjustments
in the maximum number of shares of Common Stock specified in Paragraph 5 of this
2004 Program, in the numbers of shares of Common Stock covered by other rights
granted hereunder, and in the prices per share applicable under all such rights,
as the Committee in its sole discretion, exercised in good faith, may determine
is equitably required to prevent dilution or enlargement of the rights of
Optionees that otherwise would result from any stock dividend, stock split,
combination of shares, recapitalization or other change in the capital structure
of the Bank, merger, consolidation, spin-off, reorganization, partial
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or complete liquidation, issuance of rights or warrants to purchase securities,
or any other transaction or event having an effect similar to any of the
foregoing.
14. CHANGE IN CONTROL.
(a) Notwithstanding any other term or provision of this 2004
Program, in the event the employment of an Eligible Employee is
terminated for any reason, including the Eligible Employee's
voluntary termination for "good reason" (as defined in (c)
below), but not including the Eligible Employee's voluntary
termination without "good reason" or the Eligible Employee's
termination for "cause" (as defined in (d) below), within one
year following a "Change in Control" (as defined in (b) below):
(i) all Option Rights granted to the Eligible Employee under
this 2004 Program prior to the date of termination, but
not exercisable as of such date, shall become exercisable
automatically as of the later of the date of termination
or one year after the date the Option Right was granted;
(ii) any Option Right that is exercisable as of the date of
termination, or that becomes exercisable pursuant to (i)
above, shall remain exercisable until the end of the
exercise period provided in the original grant of the
Option Right (determined without regard to the Eligible
Employee's termination of employment); and
(iii) any Forfeiture Period (with respect to a Restricted Stock
Award) that shall be unexpired as of the date of
termination shall expire automatically as of such date.
(b) For purpose of this 2004 Program, a "Change of Control" shall
mean the occurrence of any one of the following events: (1) any
"person" including a "group" as determined in accordance with
the Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act"), is or becomes the beneficial owner, directly
or indirectly, of securities of the Bank representing 30
percent or more of the combined voting power of the Bank's then
outstanding securities; (2) as a result of, or in connection
with, any tender offer or exchange offer, merger or other
business combination (a "Transaction"), the persons who were
directors of the Bank before the Transaction shall cease to
constitute a majority of the Board of Directors of the Bank or
any successor to the Bank; (3) the Bank is merged or
consolidated with another corporation and as a result of the
merger or consolidation less than 70 percent of the outstanding
voting securities of the surviving or resulting corporation
shall be owned in the aggregate by the former stockholders of
the Bank, other than (A) affiliates within the meaning of the
Exchange Act, or (B) any party to the merger or consolidation;
(4) a tender offer or exchange offer is made and consummated
for the ownership of securities of the Bank representing 30
percent or more of the combined voting power of the Bank's then
outstanding voting securities; or (5) the Bank transfers
substantially all of its assets to another corporation which is
not controlled by the Bank. The following events shall also
constitute a "Change in Control" for purposes of this Plan: (i)
the election of a director of the Bank who is not nominated by
its Board of Directors; (ii) the approval, by the Bank's
stockholders, of a proposal to pursue a transaction in which
the Bank would not be the surviving or controlling entity.
(c) For purposes of this Paragraph 14, "good reason" shall mean
action taken by the Bank that results in: (1) an involuntary
and material adverse change in the Eligible Employee's title,
duties, responsibilities, or total remuneration; (2) an
involuntary and material relocation of the office from which
the Eligible Employee is expected to perform the Eligible
Employee's duties; or (3) an involuntary and material adverse
change in the general working conditions (including travel
requirements) applicable to the Eligible Employee.
A-7
(d) Termination "for cause" for purposes of this Paragraph 14 shall
include, but not be limited to, any of the following: (1) any
act of dishonesty, misconduct or fraud, acts of moral
turpitude, or the commission of a felony; (2) unreasonable
neglect or refusal to perform the duties assigned to the
Eligible Employee, unless cured with in 30 days; (3) breach of
duty or obligation to the Bank or receipt of financial or other
economic profit or gain as a result of or in any way arising
out of the Eligible Employee's position with the Bank and
failure to account to the Bank for such profits or other gains;
or (4) disclosure of confidential or private Bank information
or aiding a competitor of the Bank (or any affiliate of the
Bank) to the detriment of the Bank (or any affiliate of the
Bank).
15. FRACTIONAL SHARES. The Bank shall not be required to issue any
fractional shares of Common Stock pursuant to this 2004 Program. The Committee
may provide for the elimination of fractions or for the settlement of fractions
in cash.
16. ADMINISTRATION OF THE 2004 PROGRAM.
(a) This 2004 Program shall be administered by the Committee, which
shall consist of at least three members of the Board of
Directors each of whom shall (1) meet the independence
requirements of the New York Stock Exchange listing standards
and any other applicable laws, rules and regulations governing
independence, as determined by the Board of Directors; (2)
qualify as "non-employee directors" as defined under Section 16
of the Securities Exchange Act of 1934, as amended; and (3)
qualify as "outside directors" under Section 162(m) of the
Internal Revenue Code. Members of the Committee and the Chair
of the Committee shall be appointed by the Board of Directors
and may be replaced at any time by the Board of Directors. At
any time deemed necessary or appropriate by the Board of
Directors, the full Board of Directors may act as the
Committee.
(b) The Committee shall have the power to interpret and construe
any provision of this 2004 Program. The interpretation and
construction by the Committee of any provision of this 2004
Program or of any agreement evidencing the grant of rights
hereunder, and any determination by the Committee pursuant to
any provision of this 2004 Program or of any such agreement,
shall be final and binding. No member of the Committee shall be
liable for any such action or determination made in good faith.
(c) Notwithstanding any other provision of this Plan, the Committee
may impose such conditions on the exercise of any right granted
hereunder (including, without limitation, the right of the
Committee to limit the time of exercise to specified periods)
as may be required to satisfy the requirements of Section 16
(or any successor rule) of the Securities Exchange Act of 1934,
as may be amended from time to time, or any successor statute.
17. AMENDMENTS, TERMINATION, ETC.
(a) This 2004 Program may be amended from time to time by
resolutions of the Board of Directors, provided that no such
amendment shall (i) increase the maximum numbers of shares of
Common Stock specified in Paragraph 5 of this 2004 Program
(except that adjustments authorized by Paragraph 13 of this
2004 Program shall not be limited by this provision), or (ii)
change the definition of "Eligible Employees", without further
approval by the stockholders of the Bank.
(b) The Committee may, with the concurrence of the affected
Optionee, cancel any agreement evidencing Option Rights granted
under this 2004 Program. In the event of such cancellation, the
Committee may authorize the granting of new Option Rights
(which may or may not cover the same number of shares which had
been the subject of the prior agreement) in such manner, at
A-8
such option price and subject to the same terms and conditions
as, under this 2004 Program, would have been applicable had the
canceled Option Rights not been granted.
(c) In the case of any Option Right not immediately exercisable in
full, the Committee in its discretion may accelerate the time
at which the Option Right may be exercised, subject to the
limitation described in Paragraph 7(c).
(d) Notwithstanding any other provision of the 2004 Program to the
contrary, (i) the 2004 Program may be terminated at any time by
resolutions of the Board of Directors, and (ii) no rights shall
be granted pursuant to this 2004 Program after June 30, 2014.
A-9
APPENDIX B
COMMUNITY BANK SYSTEM, INC.
AUDIT COMMITTEE CHARTER
PURPOSE
The Committee is appointed by the Board of Directors to assist the Board in
monitoring (a) the integrity of the financial reporting process, systems of
internal controls and financial statements and reports of the Company, (b) the
performance of the Company's internal audit function, and (c) the compliance by
the Company with legal and regulatory requirements. The Committee shall be
directly responsible for the appointment, compensation and oversight of the
Company's independent auditor employed by the Company for the purpose of
preparing or issuing an audit report or related work (the "Outside Auditor").
COMMITTEE MEMBERSHIP AND MEETINGS
The Committee shall consist of no fewer than three members, as determined
annually by the Board. The members of the Committee shall meet the independence
requirements of the New York Stock Exchange, any other exchange on which the
Company's securities are traded, Section 10A(m)(3) of the Securities Exchange
Act of 1934 (the "Exchange Act") and the rules and regulations of the Securities
and Exchange Commission (the "Commission"). Committee members shall not serve
simultaneously on the audit committees of more than two other public companies
without the approval of the full Board.
The members of the Committee shall be appointed annually by the Board. Committee
members may be replaced by the Board at any time. The Board shall designate the
Chair of the Committee.
The Committee shall meet as often as it determines necessary or appropriate but
not less frequently than quarterly. The Chair shall preside at each meeting and,
in the absence of the Chair, one of the other members of the Committee shall be
designated as the acting chair of the meeting. Any background materials,
together with the agenda, should be distributed to the Committee members in
advance of the meeting. Reports of meetings of the Committee shall be made to
the Board at its next regularly scheduled meeting following the Committee
meeting accompanied by any recommendations to the Board approved by the
Committee.
COMMITTEE AUTHORITY AND RESPONSIBILITIES
The basic responsibility of the members of the Committee is to exercise their
business judgment to act in what they reasonably believe to be in the best
interests of the Company and its shareholders.
The Committee shall prepare the report required by the rules of the Commission
to be included in the Company's annual proxy statement.
The Committee shall be responsible directly for the appointment retention,
termination, compensation and terms of engagement, evaluation, and oversight of
the work of the Outside Auditor (including resolution of disagreements between
management and the Outside Auditor regarding financial reporting). The Outside
Auditor shall report directly to the Committee.
B-1
The Committee shall oversee the integrity of the audit process, financial
reporting and internal accounting controls of the Company, oversee the work of
the Company's management, internal auditors (the "Internal Auditors") and the
Outside Auditor in these areas, oversee management's development of, and
adherence to, a sound system of internal accounting and financial controls,
review whether the Internal Auditors and the Outside Auditor objectively assess
the Company's financial reporting, accounting practices and internal controls,
oversee internal risk management functions as determined by the Board ("Risk
Management"), and provide an open avenue of communication among the Outside
Auditor, the Internal Auditors, Risk Management and the Board. It is the
responsibility of: (i) management of the Company and the Outside Auditor, under
the oversight of the Committee and the Board, to plan and conduct financial
audits and to determine that the Company's financial statements and disclosures
are complete and accurate in accordance with generally accepted accounting
principles ("GAAP") and applicable rules and regulations and fairly present, in
all material respects, the financial condition of the Company; (ii) management
of the Company, under the oversight of the Committee and the Board, to assure
compliance by the Company with applicable legal and regulatory requirements;
(iii) the Risk Management, under the oversight of the Committee and the Board,
to monitor the risks and management's actions to mitigate these risks; and (iv)
the Internal Auditors, under the oversight of the Committee and the Board, to
review the Company's internal transactions and accounting which do not require
involvement in the detailed presentation of the Company's financial statements.
The Committee shall pre-approve all audit services and non-audit services
(including the fees and terms thereof) to be performed for the Company by the
Outside Auditor to the extent required by and in a manner consistent with
applicable law.
The Committee may form and delegate authority to subcommittees consisting of one
or more members when appropriate.
The Committee shall have the authority, to the extent it deems necessary or
appropriate, to retain independent legal, accounting or other advisers. The
Company shall provide for appropriate funding, as determined by the Committee,
for payment of compensation to the Outside Auditor for the purpose of rendering
or issuing an audit report and to any advisers employed by the Committee,
subject only to any limitations imposed by applicable rules and regulations. The
Committee may request any officer or employee of the Company or the Company's
outside counsel or Outside Auditor to attend a meeting of the Committee or to
meet with any members of, or consultants to, the Committee. The Committee shall
meet with management, the Internal Auditors, Risk Management and the Outside
Auditor in separate executive sessions at least quarterly to discuss matters for
which the Committee has responsibility.
The Committee shall make regular reports to the Board. The Committee shall
review and reassess the adequacy of this Charter annually and recommend any
proposed changes to the Board for approval. The Committee shall annually review
its own performance.
In performing its functions, the Committee shall undertake those tasks and
responsibilities that, in its judgment, would contribute most effectively to and
implement the purposes of the Committee.
In addition to the general tasks and responsibilities noted above, the following
are the specific functions of the Committee:
FINANCIAL STATEMENT AND DISCLOSURE MATTERS
------------------------------------------
1. Review and discuss with management, and to the extent the Committee
deems necessary or appropriate, the Internal Auditors and the Outside
Auditor, the Company's disclosure controls and procedures that are
designed to ensure that the reports the Company files with the
Commission comply with the Commission's rules and forms.
2. Review and discuss with management, the Internal Auditors and the
Outside Auditor the annual audited financial statements, including
disclosures made in management's discussion and analysis, and recommend
to the Board whether the audited financial statements should be
included in the Company's Form 10-K.
B-2
3. Review and discuss with management, the Internal Auditors and the
Outside Auditor the Company's quarterly financial statements, including
disclosures made in management's discussion and analysis, prior to the
filing of its Form 10-Q, including the results of the Outside Auditor's
reviews of the quarterly financial statements.
4. Review and discuss quarterly reports from the Outside Auditor on:
(a) All critical accounting policies and practices to be used;
(b) All alternative treatments within GAAP for policies and
practices related to material items that have been discussed
with management, including ramifications of the use of such
alternative disclosures and treatments, and the treatment
preferred by the Outside Auditor;
(c) The internal controls adhered to by the Company, management,
and the Company's financial, accounting and internal auditing
personnel, and the impact of each on the quality and
reliability of the Company's financial reporting; and
(d) Other material written communications between the Outside
Auditor and management, such as any management letter or
schedule of unadjusted differences.
5. Review and discuss in advance with management the Company's practice
with respect to the types of information to be disclosed and the types
of presentations to be made in earnings press releases, including the
use, if any, of "pro forma" or "adjusted" non-GAAP information, as well
as financial information and earnings guidance provided to analysts and
rating agencies.
6. Review and discuss as appropriate with management, the Internal
Auditors, Risk Management and the Outside Auditor:
(a) Significant financial reporting issues and judgments made in
connection with the preparation of the Company's financial
statements;
(b) The clarity of the financial disclosures made by the Company;
(c) The development, selection and disclosure of critical
accounting estimates and the analyses of alternative
assumptions or estimates, and the effect of such estimates on
the Company's financial statements;
(d) Potential changes in GAAP and the effect such changes would
have on the Company's financial statements;
(e) Significant changes in accounting principles, financial
reporting policies and internal controls implemented by the
Company;
(f) Significant litigation, contingencies and claims against the
Company and material accounting issues that require disclosure
in the Company's financial statements;
(g) Information regarding any "second" opinions sought by
management from an independent auditor with respect to the
accounting treatment of a particular event or transaction;
(h) Management's compliance with the Company's processes,
procedures and internal controls;
B-3
(i) The adequacy and effectiveness of the Company's internal
accounting and financial controls and the recommendations of
management, the Internal Auditors and the Outside Auditor for
the improvement of accounting practices and internal controls;
and
(j) Any difficulties encountered by the Outside Auditor or the
Internal Auditors in the course of their audit work, including
any restrictions on the scope of activities or access to
requested information, and any significant disagreements with
management.
7. Discuss with management and the Outside Auditor the effect of
regulatory and accounting initiatives as well as off-balance sheet
structures and aggregate contractual obligations on the Company's
financial statements.
8. Discuss with management, including Risk Management, the major financial
risk exposures and other relevant risk exposures face by the Company,
as well as the steps management has taken to monitor and control such
exposures, including the Company's risk assessment and risk management
policies.
9. Discuss with the Outside Auditor the matters required to be discussed
by Statement on Auditing Standards ("SAS") No. 61, as amended, relating
to the conduct of the audit. In particular, discuss:
(a) The adoption of, or changes to, the Company's significant
internal auditing and accounting principles and practices as
suggested by the Outside Auditor, Internal Auditors or
management: and
(b) The management letter provided by the Outside Auditor and the
Company's response to that letter.
10. Receive and review disclosures made to the Committee by the Company's
Chief Executive Officer and Chief Financial Officer during their
certification process for the Company's Form 10-K and Form 10-Q about
(a) any significant deficiencies in the design or operation of internal
controls or material weakness therein, (b) any fraud involving
management or other associates who have a significant role in the
Company's internal controls and (c) any significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation.
OVERSIGHT OF THE COMPANY'S RELATIONSHIP WITH THE OUTSIDE AUDITOR
----------------------------------------------------------------
11. Review the experience and qualifications of the senior members of the
Outside Auditor team.
12. Obtain and review a report from the Outside Auditor at least annually
regarding (a) the Outside Auditor's internal quality-control
procedures, (b) any material issues raised by the most recent internal
quality-control review, or peer review, of the firm, or by any inquiry
or investigation by governmental or professional authorities, within
the preceding five years respecting one or more independent audits
carried out by the firm, (c) any steps taken to deal with any such
issues, and (d) all relationships between the Outside Auditor and the
Company, including the written disclosures and the letter required by
Independence Standards Board Standard 1, as that standard may be
modified or supplemented from time to time.
13. Evaluate the qualifications, performance and independence of the
Outside Auditor, including considering whether the Outside Auditor's
quality controls are adequate and the provision of non-audit services
is compatible with maintaining the Outside Auditor's independence, and
taking into account the opinions of management and the Internal
Auditor. The Committee shall present its conclusions to the Board.
14. Oversee the rotation of the lead (or coordinating) audit partner having
primary responsibility for the audit and the audit partner responsible
for reviewing the audit at least once every five years, and oversee the
rotation of other audit partners, in accordance with the rules of the
Commission.
B-4
15. Review and determine policies regarding the hiring of present and
former associates of the Outside Auditor who have participated in any
capacity in the audit of the Company, in accordance with the rules of
the Commission.
16. To the extent the Committee deems necessary or appropriate, discuss
with the national office of the Outside Auditor issues on which they
were consulted by the Company's audit team and matters of audit quality
and consistency.
17. Discuss with management, the Internal Auditors and the Outside Auditor
any accounting adjustments that were noted or proposed by the Outside
Auditor, but were not adopted, recorded or reflected.
18. Meet with management, the Internal Auditors and the Outside Auditor
prior to the audit to discuss and review the scope, planning and
staffing of the audit.
19. Obtain from the Outside Auditor the information required to be
disclosed to the Company by generally accepted auditing standards in
connection with the conduct of an audit, including topics covered by
SAS 54, 60, 61 and 82.
20. Require the Outside Auditor to review the financial information
included in the Company's Form 10-Q in accordance with Rule 10-01(d) of
Regulation S-X of the Commission prior to the Company filing such
reports with the Commission and to provide to the Company for inclusion
in the Company's Form 10-Q any reports of the Outside Auditor required
by Rule 10-01(d).
OVERSIGHT OF THE COMPANY'S INTERNAL AUDIT FUNCTION
--------------------------------------------------
21. Ensure that the Company has an internal audit function.
22. Review and concur in the appointment, replacement, reassignment or
dismissal of the chief risk officer and the senior internal auditing
executive, and the compensation package for such persons.
23. Review the significant reports to management prepared by the internal
auditing department and management's responses.
24. Communicate with management and the Internal Auditors to obtain
information concerning internal audits, accounting principles adopted
by the Company, internal controls of the Company, management, and the
Company's financial and accounting personnel, and review the impact of
each on the quality and reliability of the Company's financial
statements.
25. Evaluate the internal auditing department and its impact on the
accounting practices, internal controls and financial reporting of the
Company.
26. Discuss with the Outside Auditor the internal audit department's
responsibilities, budget and staffing and any recommended changes in
the planned scope of the internal audit.
27. Obtain from the Outside Auditor the reports required to be furnished to
the Committee under Section 10A of the Exchange Act and obtain from the
Outside Auditor any information with respect to illegal acts in
accordance with Section 10A.
28. Obtain reports from management, the Company's senior internal auditing
executive and the Outside Auditor concerning whether the Company and
its subsidiary entities are in compliance with applicable legal
requirements and the Code of Ethics. Obtain and review reports and
disclosures of insider and affiliated party transactions. Advise the
Board with respect to the Company's policies and procedures regarding
compliance with applicable laws and regulations and the Code of Ethics.
B-5
29. Establish procedure for (a) the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and (b) the confidential,
anonymous submission by employees of the Company of concerns regarding
questionable accounting or auditing matters.
30. Discuss with management and the Outside Auditor any correspondence
between the Company and regulators or governmental agencies and any
employee complaints or published reports that raise material issues
regarding the Company's financial statements or accounting policies.
31. Discuss with the Company's chief risk management and compliance
officers and the Company's legal counsel, any legal matters that may
have a material impact on the financial statements or the Company's
compliance policies.
ADDITIONAL RESPONSIBILITIES
---------------------------
32. Prepare annually a report for inclusion in the Company's proxy
statement relating to its annual shareholders meeting. In that report,
the Committee will state whether it has: (a) reviewed and discussed the
audited financial statements with management; (b) discussed with the
Outside Auditor the matters required to be discussed by SAS No. 61, as
that statement may be modified or supplemented from time to time; (c)
received from the Outside Auditor the written disclosures and the
letter required by Independence Standards Board Standard 1, as that
standard may be modified or supplemented from time to time, and has
discussed with the Outside Auditor, the Outside Auditor's independence;
and (d) based on the review and discussions referred to in clauses (a),
(b) and (c) above, recommended to the Board that the audited financial
statements be included in the Company's Annual Report on Form 10-K for
the last fiscal year for filing with the Commission.
33. Conduct or authorize investigations into any matters within the
Committee's scope of responsibilities.
34. Review the Company's codes of ethics and conduct (and any similar are
related policies) and recommend any changes, modifications or waivers
to such policies to the Board for approval.
B-6
[FORM OF PROXY]
PROXY
COMMUNITY BANK SYSTEM, INC.
5790 WIDEWATERS PARKWAY
DEWITT, NEW YORK 13214-1883
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Charles M. Ertel and Donna J. Drengel,
proxies, with power to act without the other and with power of substitution, and
hereby authorizes them to represent and vote, as designated on the other side,
all the shares of stock of Community Bank System, Inc. standing in the name of
the undersigned with all powers which the undersigned would possess if present
at the Annual Meeting of Shareholders of the Company to be held May 19, 2004 or
any adjournment thereof.
(CONTINUED, AND TO BE MARKED, SIGNED AND DATED ON THE REVERSE SIDE)
------------------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE |X|
------------------------------------------------------------------------------------------------------------------------------------
1. ELECTION OF DIRECTORS In their discretion, such attorneys-in-fact and proxies are
NOMINEES authorized to vote upon such other business as may properly come
[ ] FOR ALL NOMINEES [ ] John M. Burgess before the meeting.
[ ] Nicholas A. DiCerbo
[ ] WITHHOLD AUTHORITY [ ] James A. Gabriel This Proxy, when properly executed, will be voted in the manner
FOR ALL NOMINEES [ ] Harold S. Kaplan directed herein by the undersigned.
[ ] FOR ALL EXCEPT IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTE "FOR"
(See instructions below) PROPOSALS 1 AND 2.
INSTRUCTION: To withhold authority to vote for any individual
nominee(s), mark "FOR ALL EXCEPT" and fill in the
circle next to each nominee you wish to withhold,
as shown here: o
2. The approval of the Community Bank System, Inc. 2004
Long-Term Incentive Compensation Program
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
-----------------------------------------------------------------
To change the address on your account, please check the
box at right and indicate your new address space above. [ ] Please check here if you plan to attend the meeting. [ ]
Please note that changes to the registered name(s) on
the account may not be submitted via this method.
------------------------------------------------------------------------------------------------------------------------------------
Signature of Shareholder __________________________ Date: ________ Signature of Shareholder __________________________ Date: _______
NOTE: Please sign exactly as your name or names appear on this
Proxy. When shares are held jointly, each holder should sign.
When signing as executor, administrator, attorney, trustee or
guardian, please give fill title as such. If the signer is a
corporation, please sign full corporate name by duly
authorized officer, giving full title as such. If signer is a
partnership, please sign in partnership name by authorized
person.
ANNUAL MEETING OF SHAREHOLDERS OF
COMMUNITY BANK SYSTEM, INC.
May 19, 2004
-----------------------------
PROXY VOTING INSTRUCTIONS
-----------------------------
MAIL - Date, sign and mail your proxy card in the
envelope provided as soon as possible.
-OR-
TELEPHONE - Call toll-free 1-800-PROXIES -------------------- --------------------
(1-800-776-9437) from any touch-tone telephone and COMPANY NUMBER
follow the instructions. Have your proxy card
available when youcall. -------------------- --------------------
ACCOUNT NUMBER
-OR-
-------------------- --------------------
INTERNET - ACCESS "www.voteproxy.com" and follow
the on-screen instructions. Have your proxy card
available when you access the web page. -------------------- --------------------