<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[X] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Innes Street Financial Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
<PAGE>
Innes Street Financial Corporation
==================================
401 West Innes Street
P.O. Box 1929
Salisbury, North Carolina 28145
(704) 633-2341
----------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Date: February 1, 2000
Time: 10:00 a.m.
Place: Holiday Inn of Salisbury
520 South Jake Alexander Boulevard
Salisbury, North Carolina 28147
Matters to be Voted on at the Annual Meeting:
. Election of seven directors for one-year terms
. Ratification of appointment of Ernst & Young LLP as our independent
auditors for the fiscal year ending September 30, 2000
. Approval of the Innes Street Financial Corporation Stock Option Plan
. Approval of the Citizens Bank, FSB Management Recognition Plan and Trust
. Any other matters that may properly be brought before the Annual Meeting
The Board of Directors of Innes Street Financial Corporation has
established December 17, 1999 as the record date for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting and at any
adjournments thereof. In the event there are not sufficient shares present in
person or by proxy to constitute a quorum at the time of the Annual Meeting, the
Annual Meeting may be adjourned in order to permit further solicitation of
proxies by the Company.
By Order of the Board of Directors
Ralphelle S. Butler
Secretary
Salisbury, North Carolina
December 30, 1999
A form of proxy is enclosed to enable you to vote your shares at the Annual
Meeting. You are urged, regardless of the number of shares you hold, to
complete, sign, date and return the proxy promptly. A return envelope, which
requires no postage if mailed in the United States, is enclosed for your
convenience.
The Proxy Statement provides detailed information about the proposed
matters under consideration. We encourage you to read it carefully.
<PAGE>
INNES STREET FINANCIAL CORPORATION
================================
PROXY STATEMENT
2000 ANNUAL MEETING OF STOCKHOLDERS
February 1, 2000
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
General
"We", "our", "Innes Street", and "the Company" each refers to Innes Street
Financial Corporation. "Citizens" and "the Bank" each refers to Citizens Bank,
FSB, the Company's wholly owned federally chartered stock savings bank. These
proxy materials are delivered in connection with the solicitation by Innes
Street's Board of Directors of proxies to be voted at the 2000 Annual Meeting of
Stockholders and at any adjournment or postponement. You are invited to attend
our Annual Meeting on February 1, 2000, at 10:00 a.m., Eastern Time, at the
Holiday Inn of Salisbury at 520 South Jake Alexander Boulevard, Salisbury, North
Carolina. The Company's telephone number is (704) 633-2341.
Proxy Statements are being mailed to stockholders beginning December 30,
1999.
Revocability of Proxy
A proxy may be revoked at any time before its exercise by (1) written
notice to the Secretary of the Company, (2) timely delivery of a valid later-
dated proxy or (3) voting by ballot at the Annual Meeting. However, if you are a
beneficial owner of shares of the Company's outstanding common stock that are
not registered in your own name, you will need appropriate documentation from
the holder of record of your shares to vote personally at the Annual Meeting.
Solicitation
The Company will pay the expenses of soliciting proxies. Proxies may be
solicited on our behalf by the Company's and the Bank's directors, officers and
regular employees in person or by telephone, facsimile transmission or by
telegram. We have requested brokerage houses and nominees to forward these proxy
materials to the beneficial owners of shares held of record and, upon request,
we will reimburse them for their reasonable out-of-pocket expenses.
Voting at the Annual Meeting
Regardless of how many shares of common stock you own, your vote is
important to us. Since many of our stockholders cannot attend the Annual
Meeting, it is necessary that a large number be represented by proxy.
Accordingly, the Board of Directors has designated proxy holders to represent
those stockholders who cannot be present in person.
You are requested to vote by mail by completing, signing, dating and
returning the enclosed proxy in the postage-paid envelope provided by the
Company. You may vote for, against, or withhold authority to vote on any matter
to come before the Annual Meeting. The designated proxy holders will vote your
shares in accordance with your instructions. If you sign and return a proxy card
without giving specific voting instructions, your shares will be voted as
follows:
1
<PAGE>
. FOR the nominees for election to the Board of Directors named in this
---
Proxy Statement
. FOR approval of the Innes Street Financial Corporation Stock Option Plan
---
(the "Option Plan")
. FOR approval of the Citizens Bank, FSB Management Recognition Plan and
---
Trust (the "MRP")
. FOR ratification of the selection of Ernst & Young LLP as the Company's
---
independent auditors for the fiscal year ending September 30, 2000
If instructions are given with respect to some but not all proposals, the
proxy holders will follow the instructions given and will vote FOR the proposals
---
on which no instructions are given. If matters not described in this Proxy
Statement are presented at the meeting, the proxy holders will use their own
judgment to determine how to vote your shares. Currently, we are not aware of
any other matters to be presented except those described in the Proxy Statement.
If the Annual Meeting is adjourned, your common stock may be voted by the
proxies on the new meeting date as well, unless you have revoked your proxy
instructions.
You are entitled to vote your common stock if our records showed that you
held your shares as of December 17, 1999 (the "Record Date"). At the close of
business on December 17, 1999, a total of 2,135,838 shares of common stock were
outstanding and entitled to vote. Each share of common stock has one vote on
each matter calling for a vote of stockholders at the Annual Meeting.
The presence, in person or by proxy, of the holders of a majority of the
votes entitled to be cast by the stockholders entitled to vote at the Annual
Meeting is necessary to constitute a quorum. The Annual Meeting may be adjourned
in order to permit the further solicitation of proxies if there is an
insufficient number of stockholders present to constitute a quorum.
Vote Required for Approval
A plurality of the votes cast is required for the election of directors. As
a result, those persons nominated for election as directors who receive the
largest number of votes will be elected directors. The affirmative vote of a
majority of the votes cast is required to approve the Option Plan and the MRP
and to ratify the appointment of Ernst & Young LLP.
Absentions and broker "non-votes" are not counted as votes cast and,
therefore, will have no effect on the vote for any proposal. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting power
for that particular item and has not received instructions from the beneficial
owner.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Exchange Act requires that any person who acquires the beneficial
ownership of more than 5% of the common stock of the Company notify the SEC and
the Company. Following is certain information, as of the Record Date, regarding
all persons or "groups", as defined in the Exchange Act, who held of record or
who are known to the Company to own beneficially more than 5% of the Company's
common stock.
AMOUNT AND
NATURE OF PERCENTAGE
BENEFICIAL OF
NAME AND ADDRESS OWNERSHIP/1/ CLASS/2/
- ---------------- ------------ -----------
Harold C. Earnhardt 223,130/3/ 10.45%
210 North Hambley Street
Rockwell, NC 28138
James W. Duke 206,981/3/ 9.69%
P.O. Box 373
Salisbury, NC 27145-0373
Gordon P. Hurley 239,975/3/ 11.24%
24 Pine Tree Road
Salisbury, NC 28144
____________________________________
/1/ Unless otherwise noted, all shares are owned directly or indirectly by
the named individuals, by their spouses and minor children, or by other
entities controlled by the named individuals.
/2/ Based upon a total of 2,135,838 shares of common stock outstanding at the
Record Date.
/3/ This number includes 179,860 shares of the Company's common stock held by
the Bank's employee stock ownership plan (the "ESOP"). Mr. Earnhardt, Mr.
Duke and Mr. Hurley serve as trustees of the ESOP and, as such, share
certain voting and investment power of such shares.
Set forth below is certain information, as of the Record Date, regarding
those shares of common stock owned beneficially by each of the members of the
boards of directors of the Company and the Bank, each of the executive officers
of the Company and the Bank, and the directors and executive officers of the
Company and the Bank as a group.
3
<PAGE>
Amount and
Nature of Percentage
Beneficial of
Name and Address Ownership/1/ Class/2/
- ---------------- ------------ -----------
Ronald E. Bostian 62,372 2.92%
Chairman, CEO and President
134 Glendower Drive
Salisbury, NC 28144
Harold C. Earnhardt 223,130/3/ 10.45%
Vice Chairman
210 North Hambley Street
Rockwell, NC 28138
Malcolm B. Blankenship, Jr. 40,073 1.88%
Director
2250 Godbey Road
Woodleaf, NC 27054
James W. Duke 206,981/3/ 9.69%
Director
P.O. Box 373
Salisbury, NC 28145-0373
K. V. Epting, Jr. 10,570 0.49%
Director
1908 Sherwood Street
Salisbury, NC 28144-6830
Gordon P. Hurley 239,975/3/ 11.24%
Director
24 Pine Tree Road
Salisbury, NC 28144
Bobby A. Lomax 20,111 0.94%
Director
1653 Wiltshire Road
Salisbury, NC 28144-2272
Jeffrey C. Chisholm 17,970 0.84%
Senior Vice President/
Chief Lending Officer
1231 Maxwell Street
Salisbury, NC 28144
Dianne E. Hawkins 11,015 0.52%
Vice President, Treasurer and Controller
795 Lake Mist Drive
Stanley, NC 28164
Directors and Executive Officers as a 472,477/4/ 22.12%
Group (9 persons)
- ----------------------------------------
/1/ Unless otherwise noted, all shares are owned directly or indirectly by
the named individuals, their spouses and minor children, or other entities
controlled by the named individuals.
/2/ Based upon a total of 2,135,838 shares of common stock outstanding at the
Record Date.
4
<PAGE>
/3/ Mr. Earnhardt, Mr. Duke and Mr. Hurley serve as trustees of the ESOP which
holds 179,860 shares of the Company's common stock. The trustees of such
plan share certain voting and investment power of such shares.
/4/ The 179,860 shares held by the ESOP for which the trustees share voting and
investment power have been included only once in the total number of shares
owned beneficially by the directors and executive officers as a group.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than 10% of the Company's common stock,
to file reports of ownership and changes in ownership with the SEC. Executive
officers, directors and greater than 10% beneficial owners are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the Company's executive officers and
directors, the Company believes that during the fiscal year ended September 30,
1999, all of its executive officers and directors and greater than 10%
beneficial owners complied with all applicable Section 16(a) filing
requirements.
PROPOSAL 1
ELECTION OF DIRECTORS
Nominees
The Articles of Incorporation of the Company provide that the number of
directors of the Company shall not be less than five nor more than fifteen, with
the exact number within this range to be fixed from time to time by the Board of
Directors. The Board of Directors has currently fixed the size of the Board at
seven members.
The Articles of Incorporation and Bylaws provide that at all times that the
number of directors is less than nine each director is to be elected for a term
of ending as of the next succeeding annual meeting of stockholders or until his
or her earlier death, resignation, retirement, removal or disqualification or
until his or her successor is elected and qualified.
The Board of Directors has nominated the seven persons named below for
election as directors, to serve for the term specified, or until their earlier
death, resignation, retirement, removal or disqualification or until their
successors are elected and qualified. All nominees currently serve as directors
of the Company and the Bank.
The proxy holders named in the accompanying form of proxy intend to vote
any shares of common stock represented by valid proxies received by them to
elect these seven nominees as directors for the term expiring at the 2001 annual
meeting of stockholders, unless authority to vote is withheld or such proxies
are duly revoked. In the event that any of the nominees should become
unavailable to accept nomination or election, it is intended that the
proxyholders will vote to elect in his stead such other person as the present
Board of Directors may recommend or to reduce the number of directors to be
elected at the Annual Meeting by the number of such persons unable or unwilling
to serve (subject to the requirements of the Company's Articles of
Incorporation). The present Board of Directors has no reason to believe that any
of the nominees named herein will be unable to serve if elected to office. In
order to be elected as a director, a nominee need only receive a plurality of
the votes cast. As a result, those seven nominees who receive the largest number
of votes will be elected as directors of the Company until the next annual
meeting or until their successors are elected and qualified. Accordingly, shares
not voted for any reason with respect to any one or more nominees will not be
counted as votes against such nominees.
No stockholder has the right to cumulatively vote his or her shares in the
election of directors.
5
<PAGE>
The following table sets forth as to each nominee, his name, age, principal
occupation during the last five years, the term for which he has been nominated,
and the year he was first elected as a director of the Bank. All of the nominees
currently serve, and have served since the Company's incorporation in July 1998,
as directors of the Company.
The Board of Directors recommends a vote FOR all of the nominees for election as
---
directors.
<TABLE>
<CAPTION>
Age at Existing Director
September 30, Principal Occupation Term of Bank
Name 1999 During Last Five Years Expires Since
- ---- ------------- ---------------------- --------- --------
<S> <C> <C> <C> <C>
Malcolm B. Blankenship, Jr. 52 Law Partner - Kluttz, Reamer, 2000 1991
Blankenship, Hayes & Randolph,
L.L.P.
Ronald E. Bostian 61 President and Chief Executive 2000 1984
Officer of Citizens and the Company
James W. Duke 70 Retired manufacturer's 2000 1979
representative - M. W. Window
Corp.
Harold C. Earnhardt 67 Retired General Officer of the 2000 1984
North Carolina Air National Guard
K. V. Epting, Jr. 69 Retired Executive Director of the 2000 1992
Salisbury-Rowan Chamber of
Commerce
Gordon P. Hurley 61 President, Hurley Foundation 2000 1980
Bobby A. Lomax 71 Dentist 2000 1977
</TABLE>
Board of Directors of the Bank
The Bank also has a seven-member board of directors which is composed of
the same persons who are currently directors of the Company.
Meetings of the Board and Committees of the Board
During fiscal 1999, the Board of Directors of the Company held 9 meetings.
All of the existing directors of the Company, including the nominees for
election listed above, attended at least 75% of the aggregate number of meetings
of the Board of Directors and committees of the Board on which they served
during the year ended September 30, 1999.
The Board of Directors of the Company has one standing committee--the Audit
Committee. The Audit Committee of the Board consists of all members of the Board
of Directors, other than Mr. Bostian. The Audit Committee is responsible for
meeting with and retaining independent auditors, overseeing the adequacy of
internal controls, insuring compliance with the Company's and the Bank's
policies and procedures and with generally accepted accounting principals. The
Audit Committee met one time during the fiscal year ended September 30, 1999.
In addition, the full Board of Directors acts as a nominating committee
each year prior to the annual meeting of stockholders to nominate persons for
election to the Board of Directors.
6
<PAGE>
The Bank's board of directors has established one other standing committee
to which certain responsibilities have been delegated -- an Audit Committee. The
members of the Company's Audit Committee also serve on the Bank's Audit
Committee. The Bank's Audit Committee met four times during the fiscal year
ended September 30, 1999.
The Board of Directors of the Company does not have a compensation
committee. The Bank's full board of directors determines the compensation of the
executive officers of the Company and the Bank. The salaries of each of the
executive officers is determined based upon the executive officer's
contributions to the Bank's overall profitability, maintenance of regulatory
compliance standards, professional leadership, and management effectiveness in
meeting the needs of day-to-day operations. The Bank's board of directors also
compares the compensation of the Bank's executive officers with compensation
paid to executives of comparable financial institutions in North Carolina and
executives of other businesses in the Bank's market area. Mr. Bostian
participates in the deliberations of the Board of Directors regarding
compensation of executive officers other than himself. He does not participate
in the discussion or decisions regarding his own compensation.
Director Compensation
Directors' Fees. Members of the Company's Board of Directors receive $200
for each monthly board meeting attended. All members of the Board of Directors
are also directors of the Bank and are compensated for that service. For their
service on the Bank's board of directors, each member of the board, including
Mr. Bostian, receives a monthly retainer of $700; $400 for each board meeting
attended and $200 for each committee meeting attended, if the committee meeting
is scheduled on a day different from the regularly scheduled board meeting.
Directors Deferred Compensation Plan. The Bank maintains two non-qualified
deferred compensation plans for all of its directors, a diversified plan and a
nondiversified plan. Under each of the plans, each director may elect to defer a
portion or all of his director's fees to the plans each year. Directors are
fully vested in all amounts they contribute to the plans.
Benefits under the plans are payable in the event of the director's
retirement, death, disability, or termination of service, in a lump sum.
Installment payments are available to a retiring director if so elected by the
director at the time of his initial deferral election. If the director dies
before receiving all of his accrued benefit under the plans, his beneficiary
will receive the remaining benefits due him under the plans in a lump sum.
Effective June 30, 1998, the Bank established two rabbi trusts for each
director to hold his accrued benefits under each of the plans.
Executive Officers
The following table presents certain information with respect to the
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age at September 30, 1999 Position Held With the Company
- ---- ------------------------- ------------------------------
<S> <C> <C>
Ronald E. Bostian 61 President and Chief Executive Officer
Dianne E. Hawkins 36 Treasurer and Controller
Ralphelle S. Butler 51 Secretary
</TABLE>
7
<PAGE>
The following table presents certain information with respect to the
executive officers of the Bank:
<TABLE>
<CAPTION>
Age at Positions and Occupations Employed By
Name September 30, 1999 During Last Five Years the Bank Since
- ---- ------------------ ------------------------- --------------
<S> <C> <C> <C>
Ronald E. Bostian 61 Chairman, President and Chief 1990
Executive Officer
Jeffrey C. Chisholm 43 Senior Vice President and 1991
Chief Lending Officer
Dianne E. Hawkins 36 Vice President, Treasurer and 1991
Controller
</TABLE>
8
<PAGE>
Executive Compensation
The following table sets forth for the fiscal years ended September 30,
1998 and 1999 certain information as to the cash compensation earned by Ronald
E. Bostian, the President and Chief Executive Officer of the Company and the
Bank and Jeff C. Chisholm, the Senior Vice President and Chief Lending Officer
of the Bank. No other executive officers of the Company or the Bank received
cash compensation exceeding $100,000 for services in all capacities.
<TABLE>
<CAPTION>
All Other
Annual Compensation Long Term Compensation Awards Compensation/4/
------------------- ----------------------------- ---------------
Restricted Securities Underlying
Name and Other Annual Stock Options/Stock Appreciation
Principal Position Year Salary Bonus Compensation/2/ Awards Rights ("SARs") (in shares)
------------------ ---- ------ ----- --------------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald E. Bostian 1999 $163,329/1/ $35,000 -- -- -- $10,885
President, Chief Executive
Officer and Chairman 1998 $164,129/3/ $14,000 -- -- -- $ 2,213
Jeff C. Chisholm 1999 $ 97,830 -- -- -- -- $ 5,843
Sr. Vice President
Chief Lending Officer 1998 $ 94,071 -- -- -- -- $ 1,432
</TABLE>
____________________
/1/ Includes $14,000 in Citizens Bank directors' fees and $1,800 in Innes
Street directors' fees paid to Mr. Bostian in the fiscal year ended
September 30, 1999.
/2/ Under the "Other Annual Compensation" category, perquisites for the fiscal
year ended September 30, 1997 did not exceed the lesser of $50,000, or
10% of salary and bonus.
/3/ Includes $16,000 in Citizens Bank directors' fees paid to Mr. Bostian in
the fiscal year ended September 30, 1998.
/4/ Consists of contributions made by the Bank to the Bank's 401(k) plan for
the benefit of the designated officer.
9
<PAGE>
Bonus Compensation
All employees, except Mr. Bostian, receive annual discretionary
holiday bonuses, which during fiscal year 1999 totaled $18,490 in the aggregate.
The Bank anticipates that discretionary bonuses will continue to be paid to its
employees in the future. However, as is the case with the Bank's compensation
arrangements in general, the Bank's bonus compensation is subject to regulatory
oversight and, therefore, could be changed in the future in response to
regulatory requirements or otherwise.
401(k) Retirement Plan
The Bank implemented a contributory savings plan for its employees
which meets the requirements of Section 401(k) of the Code, effective July 1,
1998. All employees who have completed one month of service, who are at least
21 years of age and who will work at least 1,000 hours annually may elect to
contribute a percentage of their compensation to the plan each year, subject to
certain maximums imposed by federal law. The Bank will match 50% of each
participant's contribution, up to a maximum employer contribution of 3% of the
participant's compensation. The Bank also intends to make discretionary
contributions to the plan, expected to be equal to approximately 3% of each
participant's compensation each year.
Participants will be fully vested in amounts they contribute to the
plan. Participants will be fully vested in amounts contributed to the plan on
their behalf by the Bank as employer matching contributions and as profit
sharing contributions after one year of service.
Benefits under the plan will be payable in the event of the
participant's retirement, death, disability, or termination of employment.
Normal retirement age under the plan is 65 years of age. The plan will not have
an early retirement provision.
Deferred Compensation Plan for Officers
The Bank maintains two non-qualified deferred compensation plans, a
diversified plan and a nondiversified plan, for certain officers of the Bank.
Eligible officers selected by the Bank's board of directors may elect to
contribute a percentage of their compensation to each of the plans each year.
The Bank may make supplemental contributions to the plans as well, in amounts
determined by the board of directors each year. To date, the Bank has made no
such supplemental contributions. Participants are fully vested in all amounts
contributed to the plans by them or on their behalf. Currently, four management
officers participate in the plans.
Benefits under the plans are payable in the event of the participant's
retirement, death, disability, or termination of employment, in a lump sum or in
installments if so elected by the participant at the time of his initial salary
reduction election. If the participant dies before receiving all of his accrued
benefit under the plans, his beneficiary will receive the remaining benefits due
him under the plans. Normal retirement age under the plans is 65 years of age.
Effective June 30, 1998, the Bank established two rabbi trusts for
each participant to hold the participant's accrued benefit under each of the
plans.
Employment Agreement
The Bank has entered into an employment agreement with Ronald E.
Bostian, President and Chief Executive Officer, in order to establish his duties
and compensation and to provide for his continued employment with the Bank. The
agreement provides for an initial term of employment of three years. Commencing
on the first anniversary date and continuing on each anniversary date
thereafter, following an evaluation of Mr. Bostian's performance, each agreement
may be extended for an additional year so that the remaining term shall be three
years, unless written notice of non-renewal is given by the board of directors.
The agreement also provides that the base salary shall be reviewed by the board
of directors not less often than annually. In addition, the employment
agreement provides for possible profitability and discretionary bonuses and
participation in all other pension, profit-sharing or retirement plans
maintained by the Bank or the Company for employees of the Bank, as well as
fringe
10
<PAGE>
benefits normally associated with the employee's office. The employment
agreement provides that Mr. Bostian may be terminated by the Bank for "Just
Cause" as defined in the agreement, and that he may terminate his employment for
"Good Reason" as defined in the agreement.
Severance Plan
The Bank's board of directors has adopted a Severance Plan for the
benefit of its employees. The Severance Plan provides that in the event there
is a "change in control" (as defined in the Severance Plan) of the Bank or the
Company and (i) the Bank or any successor of the Bank terminates the employment
of any full time employee of the Bank in connection with, or within 24 months
after the change in control, other than for "cause" (as defined in the Severance
Plan), or (ii) an employee terminates his or her employment with the Bank or any
successor following a decrease in the level of such employee's annual base
salary rate or a transfer of such employee to a location more than 40 miles
distant from the employee's primary work location within 24 months after a
change in control, the employee shall be entitled to a severance benefit equal
to the greater of (a) an amount equal to two weeks' salary at the employee's
existing salary rate multiplied times the employee's number of complete years of
service as a Bank employee or (b) the amount of one month's salary at the
employee's salary rate at the time of termination. Any officer of the Bank who,
at the time of a "change in control," is a party to an employment agreement is
not covered by the Severance Plan.
Employee Stock Ownership Plan
The Bank has established the ESOP for its eligible employees.
Employees with one year of service with the Bank who have attained age 21 are
eligible to participate. The ESOP used funds borrowed from the Company to
purchase 179,860 shares of the Company's common stock, which serve as collateral
for the loan. It is expected that the loan will be repaid principally from the
Bank's discretionary contributions to the ESOP within 15 years. Regular cash
dividends, if any, paid on shares held by the ESOP may also be used to reduce
the loan. Shares purchased by the ESOP and pledged as security for the loan
will be held in a suspense account for allocation among participants as the loan
is repaid.
Contributions to the ESOP and shares released from the suspense
account in an amount proportional to the repayment of the ESOP loan will be
allocated among ESOP participants on the basis of relative compensation in the
year of allocation. Benefits will vest in full upon five years of service with
credit given for years of service prior to the Bank's conversion from mutual to
stock form of ownership (the "Conversion"). Benefits are payable upon death or
disability. The Bank's contributions to the ESOP are not fixed, so benefits
payable and corresponding expenses under the ESOP cannot be determined.
In connection with the establishment of the ESOP, the Board of
Directors appointed trustees for the ESOP. The Board of Directors may instruct
the trustees regarding investment of funds contributed to the ESOP.
Participating employees may instruct the trustees as to the voting of all shares
allocated to their respective accounts and held in the ESOP. The unallocated
shares held in the suspense account, and all allocated shares for which voting
instructions are not received, will be voted by the trustees in their discretion
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended.
11
<PAGE>
PROPOSAL 2
APPROVAL OF THE INNES STREET FINANCIAL CORPORATION
STOCK OPTION PLAN
General
The Board of Directors has adopted the Option Plan which is designed to
attract and retain qualified personnel in key positions, provide directors,
officers and employees with a proprietary interest in the Company as an
incentive to contribute to the success of the Company and reward employees for
outstanding performance. The Option Plan is also designed to retain qualified
directors for the Company. The Option Plan provides for the grant of incentive
stock options intended to comply with the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") and nonqualified or
compensatory stock options. Officers and employees of the Company, the Bank and
any subsidiaries will be eligible to receive incentive stock options; directors
will be eligible to receive only nonqualified stock options. If stockholder
approval is obtained, options to acquire up to 224,825 shares of common stock
will be awarded to officers and employees of the Company and the Bank and
directors of the Company with an exercise price equal to the fair market value
of the common stock on the date of grant. No cash consideration will be paid
for the award of the options.
Description of the Option Plan
The Prospectus of the Company, dated November 17, 1998, (the "Prospectus")
delivered in connection with the Bank's Conversion and the Company's initial
public offering, contained a summary of a stock option plan and options which
could be granted to directors and employees of the Company and the Bank. The
Company anticipates awarding to its directors and executive officers the same
percentage of total options available for award under the Option Plan as was
disclosed in the Prospectus.
The following description of the Option Plan is a summary of its terms and
is qualified in its entirety by reference to the Option Plan, a copy of which is
attached hereto as Appendix A.
Administration. The Option Plan will be administered and interpreted by a
committee of the Board of Directors that is composed solely of two or more
"non-employee directors" as that term is defined by the Exchange Act rules and
regulations.
Grant of Options, Vesting, Payment for Shares. Under the Option Plan, the
Board of Directors or the Committee determines which directors, officers and
employees will be granted options, whether such options will be incentive or
nonqualified options, the number of shares subject to each option, whether such
options may be exercised by delivering other shares of common stock and when
such options become exercisable. The Option Plan provides that all options will
have an option exercise price of not less than the fair market value of a share
of common stock on the date of grant. The fair market value will be equal to
the average of the high and low selling prices of the common stock on the Nasdaq
Small-Cap Market ("Nasdaq"). Based upon the average of the high and low selling
prices on December 10, 1999, if options had been granted on that day, they would
have an option price of $13.0625, the per share market value of the common stock
underlying the options on that date.
All options granted to participants under the Option Plan shall become
vested and exercisable at the rate determined by the committee when making an
award. Unvested options may not vest after a participant's employment with the
Company, the Bank or any subsidiary is terminated for any reason other than the
participant's death, disability or retirement. Unless the committee shall
specifically state otherwise at the time an option is granted, all options
granted to participants shall become vested and exercisable in full on the date
an optionee terminates his employment with or service to the Company, the Bank
or any subsidiary because of his death,
12
<PAGE>
disability or retirement. In addition, all stock options will become vested and
exercisable in full in the event that the optionee ceases to be an executive
officer, employee or director of the Bank or the Company for any reason
following a change in control of the Company, as defined in the Option Plan.
Options granted under the Option Plan will have a term of ten years.
Payment for shares purchased upon the exercise of options may be made
either in cash, by check, bank draft or money order or, if permitted by the
committee, by delivering shares of common stock (including shares acquired
pursuant to the exercise of an option) with a fair market value equal to the
total option price, or a combination of the foregoing. To the extent an
optionee already owns shares of common stock prior to the exercise of his or her
option, such shares could be used (if permitted by the committee) as payment for
the exercise price of the option. If the fair market value of a share of common
stock at the time of exercise is greater than the exercise price per share, this
feature would enable the optionee to acquire a number of shares of common stock
upon exercise of the option which is greater than the number of shares delivered
as payment for the exercise price. Because options may be exercised in part
from time to time, the ability to deliver common stock as payment of the
exercise price could enable the optionee to turn a relatively small number of
shares into a large number of shares.
Federal Income Tax Consequences. Options granted to employees under the
Option Plan may be "incentive stock options" which are designed to result in
beneficial tax treatment to the employee but no tax deduction to the Company or
the Bank. The holder of an incentive stock option generally is not taxed for
federal income tax purposes on either the grant or the exercise of the option.
However, the optionee must include in his or her federal alternative minimum tax
income any excess (the "Bargain Element") of the acquired common stock's fair
market value at the time of exercise over the exercise price paid by the
optionee. Furthermore, if the optionee sells, exchanges, gives or otherwise
disposes of such common stock (other than in certain types of transactions)
either within two years after the option was granted or within one year after
the option was exercised (an "Early Disposition"), the optionee generally must
recognize the Bargain Element as compensation income for regular federal income
tax purposes. Any gain realized on the disposition in excess of the Bargain
Element is subject to recognition under the usual rules applying to dispositions
of property. If a taxable sale or exchange is made after such holding periods
are satisfied, the difference between the exercise price and the amount realized
upon the disposition of the common stock generally will constitute a capital
gain or loss for tax purposes. If an optionee exercises an incentive stock
option and delivers shares of common stock as payment for part or all of the
exercise price of the stock purchased ("Payment Stock"), no gain or loss
generally will be recognized with respect to the Payment Stock; provided,
however, if the Payment Stock was acquired pursuant to the exercise of an
incentive stock option, the optionee will be subject to recognizing as
compensation income the Bargain Element on the Payment Stock as an Early
Disposition if the exchange for the new shares occurs prior to the expiration of
the holding periods for the Payment Stock. The Company generally would not
recognize gain or loss or be entitled to a deduction upon either the grant of an
incentive stock option or the optionee's exercise of an incentive stock option.
However, if there is an Early Disposition, the Company generally would be
entitled to deduct the Bargain Element as compensation paid the optionee.
Options granted to directors under the Option Plan would be "non-qualified
stock options." In general, the holder of a non-qualified stock option will
recognize compensation income equal to the amount by which the fair market value
of the common stock received on the date of exercise exceeds the sum of the
exercise price and any amount paid for the non-qualified stock option. If the
optionee elects to pay the exercise price in whole or in part with common stock,
the optionee generally will not recognize any gain or loss on the common stock
surrendered in payment of the exercise price. The Company would not recognize
any income or be entitled to claim any deduction upon the grant of a non-
qualified stock option. At the time the optionee is required to recognize
compensation income upon the exercise of the non-qualified stock option, the
Company would recognize a compensation expense for income tax purposes and be
entitled to claim a deduction in the amount equal to such compensation income.
Number of Shares Covered by the Option Plan. A total of 224,825 shares of
common stock has been reserved for issuance pursuant to the Option Plan, which
is 10% of the common stock issued in connection with the Conversion. In lieu of
issuing reserved unissued shares upon the exercise of options, the Company may
elect to purchase shares in the open market to fund exercises of options. To the
extent that exercised options are funded by authorized but unissued shares, the
interests of existing stockholders will be diluted. In the event of a stock
split, reverse stock split or stock dividend, the number of shares of common
stock under the Option Plan, the number of
13
<PAGE>
shares to which any option relates and the exercise price per share under any
option shall be adjusted to reflect such increase or decrease in the total
number of shares of common stock outstanding. In addition, in the event the
Company declares a special cash dividend or return of capital, the per share
exercise price of all previously granted options which remain unexercised as of
the date of such declaration may be proportionately adjusted to give effect to
such special cash dividend or return of capital as of the date of payment of
such special cash dividend or return of capital, subject to certain limitations.
Amendment and Termination of the Option Plan. Unless sooner terminated,
the Option Plan will continue in effect for a period of ten years from the date
the Option Plan is approved by stockholders and become effective by its terms.
The Board may at any time alter, suspend, terminate or discontinue the Option
Plan, subject to any applicable regulatory requirements and any required
stockholder approval or any stockholder approval which the Board may deem
advisable for any reason, such as for the purpose of obtaining or retaining any
statutory or regulatory benefits under tax, securities or other laws or
satisfying applicable stock exchange or quotation system listing requirements.
The Board may not, without the consent of the optionee, make any alteration
which would deprive the optionee of his rights with respect to any previously
granted option. Termination of the Option Plan would not affect any previously
granted options.
Stock Appreciation Rights. It is expected that options granted under the
Option Plan will be granted in tandem with stock appreciation rights, pursuant
to which optionees will have the right to surrender exercisable options in
exchange for payment by the Company of an amount equal to the excess of the
market value of shares of common stock subject to the surrendered options over
the exercise price of the surrendered options. In the discretion of the
committee, this payment may be made in cash or in shares of common stock or in
some combination of cash and common stock. Stock appreciation rights shall
terminate upon the exercise of the options to which they are attached. Stock
appreciation rights will be subject to the same vesting and termination
provisions as are applicable to the stock options to which they are attached.
Discretionary Cash Payments. The Option Plan provides that the Company's
Board of Directors has the discretionary authority to authorize cash payments to
the holders of unexercised options, both vested and unvested, equal to the
amount of dividends which would have been paid on shares subject to options if
the options had been exercised. No such payment may be made in connection with
dividends or other distributions which result in a reduction in the option
exercise price. If an optionee receives such a cash payment with respect to any
unvested option, and if such option is later forfeited, the optionee must repay
any cash payment made with respect to the forfeited option.
Stockholder Approval. No options will be granted under the Option Plan
unless the Option Plan is approved by the stockholders.
Options to be Granted. The committee intends to grant options to
directors, officers and employees of the Company and the Bank promptly after the
date of stockholder approval of the Option Plan. The Option Plan provides that
forfeited options are available for additional grants under the plan. At this
time, directors, executive officers and certain employees of the Company and the
Bank would be eligible to participate under the Option Plan. No options will be
granted to any associates of any of the directors or executive officers of the
Company or the Bank. The table on page 17 sets forth in column two information
with respect to the number of options that the Company anticipates would be
granted to directors, executive officers and other employees as a group upon
stockholder approval of the Option Plan.
It is currently anticipated that 25% of the aggregate number of options
granted to executive officers and employees of the Company and the Bank will be
vested and exercisable on the date of grant and 25% of the aggregate number of
such options granted will vest and become exercisable on each of the next three
annual anniversary dates thereafter. It is expected that nonqualified stock
options granted to the nonemployee directors of the Company and the Bank will be
immediately vested and nonforfeitable.
The Board of Directors recommends a vote FOR approval of the Innes Street
---
Financial Corporation Stock Option Plan.
14
<PAGE>
PROPOSAL 3
APPROVAL OF THE CITIZENS BANK, FSB
MANAGEMENT RECOGNITION PLAN AND TRUST
General
The boards of directors of the Company and the Bank have adopted and desire
to establish the MRP, the objective of which is recognize past service and to
encourage the continued service of directors and executive officers of the Bank.
The MRP will provide directors and executive officers with an ownership interest
in the Company in a manner designed to serve as an incentive to contribute to
the success of the Bank and the Company and to reward them for outstanding
performance. All directors and certain executive officers of the Bank are
eligible for participation in the MRP.
Description of the MRP
The Prospectus contained a summary of a management recognition plan and
trust and restricted stock awards which could be granted to directors and
executive officers of the Company and the Bank. The Bank anticipates awarding
to its directors and executive officers the same percentage of total restricted
stock awards available for award under the MRP as was disclosed in the
Prospectus.
The following description of the MRP is a summary of its terms and is
qualified in its entirety by reference to the MRP, a copy of which is attached
hereto as Appendix B.
Administration. The MRP will be administered and interpreted by a
committee of the board of directors of the Bank that is composed solely of two
or more "non-employee directors", as defined by the Exchange Act. The board of
directors of the Bank will appoint the trustees of the trust established
pursuant to the MRP (the "MRP Trust"). The trustees will have the
responsibility to invest all funds contributed by the Bank to the Trust.
Awards of Restricted Stock. Upon stockholder approval the Company and the
Bank expect to contribute sufficient funds to the MRP Trust so that the MRP
Trust can purchase 89,930 shares of the Company's common stock, which is equal
to 4% of the shares issued in the Conversion. Such shares would be provided by
the issuance of authorized but unissued shares of common stock or shares
purchased by the MRP Trust in the open market. Whether such shares will be
purchased in the open market or newly issued by the Company, and the timing of
such purchases, will depend on market and other conditions and the alternative
uses of capital available to the Company. To the extent that the MRP acquires
authorized but unissued shares of common stock after the Conversion, the
interests of existing stockholders will be diluted.
Shares of common stock granted pursuant to the MRP will be in the form of
restricted stock which will vest over a period of time as determined by the
committee as set forth below. Shares awarded under the MRP will be awarded at
no cost to the recipient. A recipient will be entitled to all voting and other
stockholder rights with respect to stocks which have been awarded under the MRP.
However, until such stocks have vested, they will be held in the MRP Trust.
Such unvested shares may not be sold, pledged or otherwise disposed of. In
addition, any cash dividends or stock dividends declared with respect to
unvested share awards will be held by the MRP Trust for the benefit of the
recipients and such dividends, including any interest thereon, will be paid out
proportionately by the MRP Trust to the recipients thereof as soon as
practicable after the stock awards become vested.
Under the terms of the MRP, if a recipient terminates employment for
reasons other than death or disability, the recipient will forfeit all rights to
the allocated shares which have not yet vested. All shares subject to an award
held by a recipient whose employment with or service to the Company, the Bank or
any subsidiary terminates due to death or disability, as defined in the MRP,
shall be vested as of the recipient's last day of employment with or
15
<PAGE>
service to the Company, the Bank or any subsidiary and such shares shall be
distributed as soon as practicable thereafter. All shares subject to an award
held by a recipient also shall be vested in the event a recipient ceases to be
an employee or a director, as applicable, following a change in control of the
Company, as defined in the MRP.
Amendment and Modification of the MRP. The board of directors of the Bank
may at any time amend or modify the MRP in any respect, subject to applicable
regulatory requirements and required stockholder approvals. However, any
amendment or modification of the MRP shall not in any manner affect any award of
shares made previously to a recipient under the Plan without the consent of such
recipient.
Federal Income Tax Consequences. Pursuant to Section 83 of the Code,
recipients of MRP awards will recognize ordinary income in an amount equal to
the fair market value of the shares of common stock granted to them at the time
that the shares vest and become transferable. A recipient of a MRP award may
also elect, however, to accelerate the recognition of income with respect to his
or her grant to the time when shares of common stock are first awarded to him or
her, notwithstanding the vesting schedule of such awards. The Company will be
entitled to deduct as a compensation expense for tax purposes the same amounts
recognized as income by recipients of MRP awards in the year in which such
amounts are included in income.
Accounting Treatment. If the MRP is approved by the stockholders, the Bank
expects to recognize a compensation expense for the MRP awards in the amount of
the fair market value of the common stock granted. The expense would be
recognized pro rata over the vesting period of the awards. The recipients of
stock grants would be required to recognize ordinary income equal to the fair
market value of the stock when the stock grants vest, unless a recipient has
made an election pursuant to Section 83 of the Code, as described above.
Stockholder Approval. No shares will be granted under the MRP unless it is
approved by the stockholders.
Shares to be Granted. The committee intends to grant awards of restricted
stock to directors and certain executive officers of the Bank promptly after the
date of stockholder approval of the MRP. It is has been determined that 20% of
the aggregate number of shares granted to directors and officers will be vested
on the date of grant promptly after shareholder approval of the MRP and that 20%
of the aggregate number of shares granted will vest on each of the next four
annual anniversary dates thereafter. The committee, in its sole and absolute
discretion, may provide for an accelerated vesting schedule for directors and
executive officers who are eligible for retirement before the expiration of the
anticipated four-year vesting schedule.
The following table sets forth certain information with respect to awards
the Company and the Bank anticipate would be made upon stockholder approval of
the Option Plan and the MRP. Column two lists the options that the Company
anticipates would be granted to directors, executive officers and other
employees as a group under the Option Plan; column three lists the number of
shares of common stock the Bank anticipates would be awarded to directors and
certain executive officers under the MRP. Column four sets forth the dollar
value of the stock awards assuming a value per share of common stock equal to
$13.00, which was the closing market price of the common stock on Nasdaq on
December 10, 1999. This valuation is without regard to the restrictions on the
shares of common stock awarded under the MRP.
16
<PAGE>
<TABLE>
<CAPTION>
Stock Option Plan Management Recognition Plan
----------------- ---------------------------
Number of Shares
Subject to Number
Name and Position/1/ Stock Options of Shares Dollar Value
-------------------- ------------- --------- ------------
<S> <C> <C> <C>
Malcolm B. Blankenship, Jr. 6,745 8,993 $ 116,909
Director of the Company and
the Bank
James W. Duke 6,745 8,993 $ 116,909
Director of the Company and
the Bank
Harold C. Earnhardt 6,745 8,993 $ 116,909
Vice Chairman of the Company and
the Bank
K. V. Epting, Jr. 6,745 8,993 $ 116,909
Director of the Company and
the Bank
Gordon P. Hurley 6,745 4,497 $ 58,461
Director of the Company and
the Bank
Bobby A. Lomax 6,745 8,993 $ 116,909
Director of the Company and
the Bank
Ronald E. Bostian 44,965 17,986 $ 233,818
Chairman, President and
Chief Executive Officer of
the Bank and the Company
Jeffrey C. Chisholm 22,482 11,241 $ 146,133
Senior Vice President and
Chief Lending Officer of the
Bank
Dianne E. Hawkins 22,482 11,241 $ 146,133
Vice President, Treasurer
and Controller of the Bank,
Treasurer and Controller of
the Company
Other Employees 94,426 --- ---
------- ------ ----------
Total 224,825 89,930 $1,690,090
======= ====== ==========
</TABLE>
The Board of Directors recommends a vote FOR approval of the Citizens Bank,
---
FSB Management Recognition Plan and Trust.
17
<PAGE>
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Stockholders are being asked to approve the Option Plan and MRP. As set
forth above, the Option Plan and MRP will not be effective without the required
stockholder approval. Members of management and the boards of directors of the
Company and the Bank, all of whom are stockholders and who, as a group, have
voting control over 472,477 shares (22.12%) of the common stock, will be
participants of these plans. See "PROPOSAL 2 - APPROVAL OF THE INNES STREET
FINANCIAL CORPORATION STOCK OPTION PLAN" and "PROPOSAL 3 -APPROVAL OF THE
CITIZENS BANK, FSB MANAGEMENT RECOGNITION PLAN."
PROPOSAL 4
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
Ernst & Young LLP, the Company's independent auditors for the year ended
September 30, 1999, has been selected as the Company's independent auditors for
the 2000 fiscal year. Such selection is being submitted to the Company's
stockholders for ratification. A representative of Ernst & Young LLP will
attend the Annual Meeting and will be afforded an opportunity to make a
statement, if he so desires, and to respond to appropriate questions from
stockholders.
The Board of Directors recommends that the stockholders vote FOR this
---
proposal.
DATE FOR RECEIPT OF STOCKHOLDER PROPOSALS
It is presently anticipated that the 2001 Annual Meeting of Stockholders
will be held in February of 2001. If the meeting is held, in order for
stockholder proposals to be included in the proxy material for that meeting,
such proposals must be received by the Secretary of the Company at the Company's
principal executive office not later than October 2, 2000, and meet all other
applicable requirements for inclusion therein.
In the alternative, if a stockholder follows the SEC's proxy solicitation
rules, the stockholder may commence his own proxy solicitation and present a
proposal from the floor at the 2001 annual meeting of stockholders of the
Company. In order to do so, the stockholder must notify the Secretary of the
Company in writing, at the Company's principal executive office no later than
November 16, 2000, of his proposal. If the stockholder does not notify the
Secretary of the Company by November 16, 2000, the Company may vote proxies
under the discretionary authority granted by the proxies solicited by the board
of directors for such annual meeting.
The Company's Bylaws provide that, in order to be eligible for
consideration at an annual meeting of stockholders, all nominations of
directors, other than those made by the Company's Board of Directors, must be
made in writing and must be delivered to the Secretary of the Company not less
than 30 days nor more than 50 days prior to the meeting at which such
nominations will be made; provided, however, if less than 21 days notice of the
meeting is given to stockholders, such nominations must be delivered to the
Secretary of the Company not later than the close of business on the seventh day
following the day on which the notice of meeting was mailed.
OTHER MATTERS
Management knows of no other matters to be presented for consideration at
the Annual Meeting or any adjournments thereof. If any other matters shall
properly come before the Annual Meeting, it is intended that the proxyholders
named in the enclosed form of proxy will vote the shares represented thereby in
accordance with their judgment, pursuant to the discretionary authority granted
therein.
18
<PAGE>
MISCELLANEOUS
The Company's Annual Report for the year ended September 30, 1999, which
includes condensed consolidated financial statements audited and reported upon
by the Company's independent auditors, is being mailed along with this Proxy
Statement; however, it is not intended that the Annual Report be deemed a part
of this Proxy Statement or a solicitation of proxies.
THE FORM 10-KSB FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING THE FINANCIAL STATEMENTS AND SCHEDULES THERETO, WILL BE
PROVIDED FREE OF CHARGE TO THE COMPANY'S STOCKHOLDERS UPON WRITTEN REQUEST
DIRECTED TO: INNES STREET FINANCIAL CORPORATION, P.O. BOX 1929, 401 WEST INNES
STREET, SALISBURY, NORTH CAROLINA 28145-1929, ATTENTION: RONALD E. BOSTIAN.
By Order of the Board of Directors,
____________________________
Ralphelle S. Butler, Secretary
Salisbury, North Carolina
December 30, 1999
19
<PAGE>
APPENDIX A
----------
INNES STREET FINANCIAL CORPORATION
STOCK OPTION PLAN
THIS IS THE STOCK OPTION PLAN ("Plan") of Innes Street Financial
Corporation (the "Corporation"), a North Carolina corporation, with its
principal office in Salisbury, Rowan County, North Carolina, adopted by the
Board of Directors of the Corporation and effective upon the approval of the
Plan by the shareholders of the Corporation, under which options may be granted
from time to time to eligible directors and employees of the Corporation,
Citizens Bank, FSB (the "Bank") and of any corporation or other entity of which
either the Corporation or the Bank owns, directly or indirectly, not less than
fifty percent (50%) of any class of equity securities (a "Subsidiary"), to
purchase shares of common stock of the Corporation ("Common Stock"), subject to
the provisions set forth below:
1. PURPOSE OF THE PLAN. The purpose of the Plan is to aid the
-------------------
Corporation, the Bank and any Subsidiary in attracting and retaining capable
directors and employees and to provide a long range incentive for directors,
employees and others to remain in the management and service of the Corporation,
the Bank or any Subsidiary, to perform at increasing levels of effectiveness and
to acquire a permanent stake in the Corporation with the interest and outlook of
an owner. These objectives will be promoted through the granting of options to
acquire shares of Common Stock pursuant to the terms of this Plan.
2. ADMINISTRATION. The Plan shall be administered by a committee (the
--------------
"Committee"), which shall consist of not less than two members of the Board of
Directors of the Corporation (the "Board") who are "Non-Employee Directors" as
defined in Rule 16b-3(b)(3) of the Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Members of the Committee
shall serve at the pleasure of the Board. In the absence at any time of a duly
appointed Committee, this Plan shall be administered by the Board. The Committee
may designate any officers or employees of the Corporation, the Bank or any
Subsidiary to assist in the administration of the Plan and to execute documents
on behalf of the Committee and perform such other ministerial duties as may be
delegated to them by the Committee.
Subject to the provisions of the Plan, the determinations or the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive upon all persons affected thereby. By way of
illustration and not of limitation, the Committee shall have the discretion (a)
to construe and interpret the Plan and all options granted hereunder and to
determine the terms and provisions (and amendments thereof) of the options
granted under the Plan (which need not be identical); (b) to define the terms
used in the Plan and in the options granted hereunder; (c) to prescribe, amend
and rescind the rules and regulations relating to the Plan; (d) to determine the
individuals to whom and the time or times at which such options shall be
granted, the number of shares to be subject to each option, the option price,
and the determination of leaves of absence which may be granted to participants
without constituting a termination of their employment for the purposes of the
Plan; and (e) to make all other determinations necessary or advisable for the
administration of the Plan.
<PAGE>
It shall be in the discretion of the Committee to grant options which
qualify as "incentive stock options," as that term is defined in Section 422 of
the Internal Revenue Code of 1986, as amended ("Incentive Stock Options") or
which do not qualify as Incentive Stock Options ("Nonqualified Stock Options")
(herein referred to collectively as "Options;" however, whenever reference is
specifically made only to "Incentive Stock Options" or "Nonqualified Stock
Options," such reference shall be deemed to be made to the exclusion of the
other). Any options granted which fail to satisfy the requirements for
Incentive Stock Options shall become Nonqualified Stock Options.
3. STOCK AVAILABLE FOR OPTIONS. In the discretion of the Committee, the
---------------------------
stock to be subject to Options under the Plan shall be authorized but unissued
shares of Common Stock which are issued directly to optionees upon exercise of
options and/or shares of Common Stock which are acquired by the Plan or the
Corporation in the open market. The total number of shares of Common Stock for
which Options may be granted under the Plan is 224,825 shares, which is ten
percent (10%) of the total number of shares of Common Stock issued by the
Corporation in connection with the conversion of the Bank from a federally-
chartered mutual savings bank to a federally-chartered stock savings bank on
December 28, 1998 (the "Conversion"). Such number of shares is subject to any
capital adjustments as provided in Section 16. In the event that an Option
granted under the Plan is forfeited, released, expires or is terminated
unexercised as to any shares covered thereby, such shares thereafter shall be
available for the granting of Options under the Plan; however, if the
forfeiture, expiration, release or termination date of an Option is beyond the
term of existence of the Plan as described in Section 21, then any shares
covered by forfeited, unexercised, released or terminated options shall not
reactivate the existence of the Plan and therefore may not be available for
additional grants under the Plan. The Corporation, during the term of the Plan,
will reserve and keep available a number of shares of Common Stock sufficient to
satisfy the requirements of the Plan. In the discretion of the Committee, the
shares of Common Stock necessary to be delivered to satisfy exercised options
may be from authorized and unissued shares of Common Stock or may be purchased
in the open market.
4. ELIGIBILITY. Options shall be granted only to individuals who meet
-----------
all of the following eligibility requirements:
(a) Such individual must be an employee or a member of the Board of
Directors of the Corporation, the Bank or a Subsidiary. For this purpose,
an individual shall be considered to be an "employee" only if there exists
between the Corporation, the Bank or a Subsidiary and the individual the
legal and bona fide relationship of employer and employee. In determining
whether such relationship exists, the regulations of the United States
Treasury Department relating to the determination of such relationship for
the purpose of collection of income tax at the source on wages shall be
applied.
(b) Such individual must have such knowledge and experience in
financial and business matters that he or she is capable of evaluating the
merits and risks of the investment involved in the exercise of the Options.
2
<PAGE>
(c) Such individual, being otherwise eligible under this Section 4,
shall have been selected by the Committee as a person to whom an Option
shall be granted under the Plan.
In determining the directors and employees to whom Options shall be granted
and the number of shares to be covered by each Option, the Committee shall take
into account the nature of the services rendered by respective directors and
employees, their present and potential contributions to the success of the
Corporation, the Bank and any Subsidiary and such other factors as the Committee
shall deem relevant. A director or employee who has been granted an Option
under the Plan may be granted an additional Option or Options under the Plan if
the Committee shall so determine.
If, pursuant to the terms of the Plan, it is necessary that the percentage
of stock ownership of any individual be determined, stock ownership in the
Corporation or of a related corporation which is owned (directly or indirectly)
by or for such individual's brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants or by or for any corporation,
partnership, estate or trust of which such employee is a shareholder, partner or
beneficiary shall be considered as owned by such director or employee.
5. OPTION AGREEMENT Subject to the provisions of this Plan, Options
----------------
shall be awarded to the directors and employees in such amounts as are
determined by the Committee. The proper officers on behalf of the Corporation
and each Optionee shall execute a Stock Option Grant and Agreement (the "Option
Agreement") which shall set forth the total number of shares of Common Stock to
which it pertains, the exercise price, whether it is a Nonqualified Stock Option
or an Incentive Stock Option, and such other terms, conditions, restrictions and
privileges as the Committee in each instance shall deem appropriate, provided
they are not inconsistent with the terms, conditions and provisions of this
Plan. Each Optionee shall receive a copy of his executed Option Agreement. Any
Option granted with the intention that it will be an Incentive Stock Option but
which fails to satisfy a requirement for Incentive Stock Options shall continue
to be valid and shall be treated as a Nonqualified Stock Option.
6. OPTION PRICE.
------------
(a) The option price of each Option granted under the Plan shall be
not less than one hundred percent (100%) of the market value of the stock
on the date of grant of the Option. In the case of incentive stock options
granted to a shareholder who owns stock possessing more than 10 percent
(10%) of the total combined voting power of all classes of stock of the
Corporation, the Bank or a Subsidiary (a "ten percent shareholder"), the
option price of each Option granted under the Plan shall not be less than
one hundred and ten percent (110%) of the market value of the stock on the
date of grant of the Option. If the Common Stock is listed on a national
securities exchange (including for this purpose the Nasdaq Stock Market,
Inc. National Market) on the date in question, then the market value per
share shall be not less than the average of the highest and lowest selling
price on such exchange on such date, or if there were no sales on such
date, then the market price per share shall be equal to the average between
the bid and asked price on such date. If the Common Stock is traded
otherwise than on a national securities exchange (including for this
purpose the Nasdaq Stock Market, Inc.
3
<PAGE>
National Market) on the date in question, then the market price per share
shall be equal to the average between the bid and asked price on such date,
or, if there is no bid and asked price on such date, then on the next prior
business day on which there was a bid and asked price. If no such bid and
asked price is available, then the market value per share shall be its fair
market value as determined by the Committee, in its sole and absolute
discretion. The Committee shall maintain a written record of its method of
determining such value.
(b) The option price shall be payable to the Corporation either (i) in
cash or by check, bank draft or money order payable to the order of the
Corporation, or (ii) at the discretion of the Committee, through the
delivery of shares of the common stock of the Corporation owned by the
optionee with a market value (determined in a manner consistent with (i)
above) equal to the option price, or (iii) at the discretion of the
Committee by a combination of (i) and (ii) above. No shares shall be
delivered until full payment has been made.
7. EXPIRATION OF OPTIONS. The Committee shall determine the expiration
---------------------
date or dates of each Option, but such expiration date shall be not later than
ten (10) years after the date such Option is granted. In the event an Incentive
Stock Option is granted to a ten percent shareholder, the expiration date or
dates of each Option shall be not later than five (5) years after the date such
Option is granted. The Committee, in its discretion, may extend the expiration
date or dates of an Option after such date was originally set; however, such
expiration date may not exceed the maximum expiration date described in this
Section 7.
8. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
(a) All Options must be granted within ten (10) years of the Effective
Date of this Plan as defined in Section 20.
(b) The Committee may grant Options which are intended to be Incentive
Stock Options and Nonqualified Stock Options, either separately or jointly,
to an eligible employee.
(c) The grant of Options shall be evidenced by a written instrument
(an Option Agreement) containing terms and conditions established by the
Committee consistent with the provisions of this Plan.
(d) Not less than 100 shares may be purchased at any one time unless
the number purchased is the total number at that time purchasable under the
Plan.
(e) The recipient of an Option shall have no rights as a shareholder
with respect to any shares covered by his Option until payment in full by
him for the shares being purchased. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is
prior to the date such stock is fully paid for, except as provided in
Section 16.
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<PAGE>
(f) The aggregate fair market value of the stock (determined as of the
time the Option is granted) with respect to which Incentive Stock Options
are exercisable for the first time by any participant during any calendar
year (under all benefit plans of the Corporation, the Bank or any
Subsidiary, if applicable) shall not exceed $100,000; provided, however,
that such $100,000 limit of this subsection (f) shall not apply to the
grant of Nonqualified Stock Options. The Committee may grant Options which
are exercisable in excess of the foregoing limitations, in which case
Options granted which are exercisable in excess of such limitation shall be
Nonqualified Stock Options.
(g) All stock obtained pursuant to an option which qualifies as an
Incentive Stock Option shall be held in escrow for a period which ends on
the later of (i) two (2) years from the date of the granting of the Option
or (ii) one (1) year after the transfer of the stock pursuant to the
exercise of the Option. The stock shall be held by the Corporation or its
designee. The employee who has exercised the Option shall during such
holding period have all rights of a shareholder, including but not limited
to the rights to vote, receive dividends and sell the stock. The sole
purpose of the escrow is to inform the Corporation of a disqualifying
disposition of the stock within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and it shall be administered solely for
that purpose.
9. EXERCISE OF OPTIONS.
-------------------
(a) Unless otherwise set forth in the Option Agreement, all Options
granted to an optionee by virtue of his position as a nonemployee director
of the Corporation or the Bank (as stated in the Option Agreement) shall be
fully vested, exercisable and nonforfeitable immediately at the time of the
grant.
(b) Options granted to an optionee by virtue of his position as an
employee (as stated in the Option Agreement) shall become vested and
exercisable at the times, at the rate and subject to such limitations as
may be set forth in the Option Agreement executed in connection therewith;
provided, however, that all outstanding and nonforfeited options shall be
exercisable, if not sooner, on the day prior to the expiration date
thereof.
(c) Notwithstanding the foregoing, Options shall become exercisable
with respect to all of the shares subject thereto upon the optionee's
death, retirement or disability within the meaning of Section 22(e)(3) of
the Internal Revenue Code of 1986, as amended, and in the event of a change
in control as set forth in Section 13 of this Plan.
(d) Any right to exercise Options in annual installments shall be
cumulative and any vested installments may be exercised, in whole or in
part, at the election of the optionee. The exercise of any Option must be
evidenced by written notice to the Corporation that the optionee intends to
exercise his Option.
(e) In no event shall an Option be deemed granted by the Corporation
or exercisable by a recipient prior to the mutual execution by the
Corporation and the
5
<PAGE>
recipient of an Option Agreement which comports with the requirements of
Section 5 and Section 8(c).
(f) The inability of the Corporation or Bank to obtain approval from
any regulatory body or authority deemed by counsel to be necessary to the
lawful issuance and sale of any shares of Common Stock hereunder shall
relieve the Corporation and the Bank of any liability in respect of the
non-issuance or sale of such shares. As a condition to the exercise of an
option, the Corporation may require the person exercising the Option to
make such representations and warranties as may be necessary to assure the
availability of an exemption from the registration requirements of federal
or state securities laws.
(g) The Committee shall have the discretionary authority to impose in
the Option Agreements such restrictions on shares of Common Stock as it may
deem appropriate or desirable, including but not limited to the authority
to impose a right of first refusal or to establish repurchase rights or
both of these restrictions.
(h) Notwithstanding anything to the contrary herein, an optionee
receiving the grant of an Option by virtue of his or her position as a
director or as an employee of the Corporation, the Bank or a Subsidiary (as
stated in the Option Agreement), shall be required to exercise his or her
Options within the periods set forth in Sections 10, 11 and 12 below.
10. TERMINATION OF EMPLOYMENT - EXCEPT BY DISABILITY, RETIREMENT OR DEATH.
---------------------------------------------------------------------
If any optionee receiving the grant of an Option by virtue of his position as a
director (as stated in the Option Agreement) ceases to be a director of at least
one of the Corporation, the Bank or any Subsidiary for any reason other than
death, retirement (as defined in Section 11) or disability (as defined in
Section 11) or if any optionee receiving the grant of an Option by virtue of his
position as an employee (as stated in the Option Agreement) ceases to be an
employee of at least one of the Corporation, the Bank and any Subsidiary for any
reason other than death, retirement (as defined in Section 11) or disability (as
defined in Section 11), he may, (i) at any time within three (3) months after
his date of termination, but not later than the date of expiration of the
Option, exercise any Option designated in the Option Agreement as an Incentive
Stock Option and (ii) at any time prior to the date of expiration of the Option,
exercise any option designated in the Option Agreement as a Nonqualified Stock
Option. However, in either such event the optionee may exercise any Option only
to the extent it was vested and he or she was entitled to exercise the Option on
the date of termination. Any Options or portions of Options of terminated
optionees not so exercised shall terminate and be forfeited.
11. TERMINATION OF EMPLOYMENT - DISABILITY OR RETIREMENT. If any optionee
----------------------------------------------------
receiving the grant of an Option by virtue of his position as a director (as
stated in the Option Agreement) ceases to be a director of at least one of the
Corporation, the Bank or any Subsidiary due to his becoming disabled within the
meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended, or
if any employee receiving the grant of an Option by virtue of his position as an
employee (as stated in the Option Agreement) ceases to be employed by at least
one of the Corporation, the Bank and any Subsidiary due to his becoming disabled
within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
6
<PAGE>
amended, all unvested and forfeitable Options of such optionee shall immediately
become vested and nonforfeitable and he may, (i) at any time within 12 months
after his date of termination, but not later than the date of expiration of the
Option, exercise any option designated in the Option Agreement as an Incentive
Stock Option with respect to all shares subject thereto and (ii) at any time
prior to the date of expiration of the Option, exercise any Option designated in
the Option Agreement as a Nonqualified Stock Option with respect to all shares
subject thereto. Any portions of Options of optionees who are terminated
because they become disabled which are not so exercised shall terminate.
If any optionee receiving the grant of an Option by virtue of his position
as a director (as stated in the Option Agreement) ceases to be a director of at
least one of the Corporation, the Bank or any Subsidiary due to his retirement,
or if any employee receiving the grant of an Option by virtue of his position as
an employee (as stated in the Option Agreement) ceases to be employed by at
least one of the Corporation, the Bank and any Subsidiary due to his retirement,
all unvested and forfeitable Options of such optionee shall immediately become
vested and nonforfeitable and he may, at any time prior to the date of
expiration of the Option, exercise such Option; provided, however, that if the
Option is exercised more than three months after such retirement, the Option may
be treated as a Nonqualified Stock Option. Any portions of Options of retired
directors or employees not so exercised shall terminate. For purposes of this
Plan, the term "retirement," as it relates to any optionee receiving a grant of
an Option as a result of his or her position as an employee of the Corporation,
the Bank or any Subsidiary, shall mean (i) the termination of the optionee's
employment under conditions which would constitute retirement under any tax
qualified retirement plan maintained by the Corporation, the Bank or a
Subsidiary, or (ii) termination of employment after attaining age 65. The term
"retirement," as it relates to any optionee receiving a grant of an Option as a
result of his or her position as a director shall mean the cessation of
membership on such board of directors (i) with the approval of such board of
directors, at any time after such optionee reaches age 65, or (ii) at the
election of the optionee at any time after not less than 25 years of service as
a member of the such board of directors, as applicable.
12. TERMINATION OF EMPLOYMENT - DEATH. If an optionee receiving the grant
---------------------------------
of an option by virtue of his position as a director (as stated in the Option
Agreement) dies while a director of the Corporation, the Bank or any Subsidiary
or if any employee receiving the grant of an option by virtue of his position as
an employee (as stated in the Option Agreement) dies while in the employment of
the Corporation, the Bank or a Subsidiary, all unvested and forfeitable Options
of such optionee shall immediately become vested and nonforfeitable and the
person or persons to whom the Option is transferred by will or by the laws of
descent and distribution may exercise the Option at any time until the term of
the Option has expired, with respect to all shares subject thereto, to the same
extent and upon the same terms and conditions the optionee would have been
entitled to do so had he lived. Any Options or portions of options of deceased
directors or employees not so exercised shall terminate.
13. CHANGE IN CONTROL. In the event that an optionee ceases to be an
-----------------
employee, a director of the Corporation, the Bank or a Subsidiary (which
position resulted in his or her receipt of an option pursuant to this Plan) for
any reason after the occurrence of a "change in control" and prior to the time
that all shares allocated to him or her would be 100% vested, nonforfeitable and
exercisable in accordance with Sections 9 and 10 above, then,
7
<PAGE>
notwithstanding Sections 9 and 10 above, all Options granted to such optionee
shall immediately become fully vested and nonforfeitable. For purposes of this
Plan, a "change in control" shall mean (i) a change in control of a nature that
would be required to be reported by the Corporation in response to Item 1 of the
Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section
13 or 15(d) of the Exchange Act; (ii) such time as any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Corporation or Bank representing 25 percent
or more of the combined voting power of the outstanding Common Stock of the
Corporation or outstanding common stock of the Bank, as applicable; or (iii)
individuals who constitute the Board or the board of directors of the Bank on
the date hereof (the "Incumbent Board" and "Incumbent Bank Board," respectively)
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board or Incumbent Bank Board, as applicable, or whose nomination for
election by the Corporation's or Bank's shareholders was approved by the
Corporation's or Bank's Board of Directors or Nominating Committee, shall be
considered as though he or she were a member of the Incumbent Board or Incumbent
Bank Board, as applicable; or (iv) either the Corporation or the Bank
consolidates or merges with or into another corporation, association or entity
or is otherwise reorganized, where neither the Corporation nor the Bank,
respectively, is the surviving corporation in such transaction; or (v) all or
substantially all of the assets of either the Corporation or the Bank are sold
or otherwise transferred to or are acquired by any other entity or group.
As set forth in Section 10, in the event of such a termination after a
change in control, the Optionee must exercise any Incentive Stock Options within
three (3) months after his date of termination and may exercise any Nonqualified
Stock Options at any time prior to the date of expiration of the Option.
14. STOCK APPRECIATION RIGHTS.
-------------------------
(a) General Terms and Conditions. The Committee may, but shall not be
obligated to, grant rights to optionees to surrender an exercisable Option,
or any portion thereof, in consideration for the payment by the Corporation
of an amount equal to the excess of the market value (determined as set
forth in Section 6 above) of the shares of Common Stock subject to the
Option, or portion thereof, surrendered over the exercise price of the
Option with respect to such shares (any such authorized surrender and
payment being hereinafter referred to as a "Stock Appreciation Right").
Such payment, at the discretion of the Committee, may be made in shares of
Common Stock valued at the then market value thereof (determined as set
forth in Section 6 above), or in cash, or partly in cash and partly in
shares of Common Stock.
The terms and conditions set with respect to a Stock Appreciation
Right may include (without limitation), subject to other provisions of this
Section 14 and this Plan, the period during which, date by which or event
upon which the Stock Appreciation Right may be exercised (which shall be on
the same terms as the Option to which is related); the method for valuing
shares of Common Stock for purposes of this Section 14; a ceiling on the
amount of consideration which the Corporation may pay in
8
<PAGE>
connection with exercise of the Stock Appreciation Right; and arrangements
for income tax withholding. The Committee shall have complete discretion to
determine whether, when and to whom Stock Appreciation Rights may be
granted.
(b) Time Limitations. A Stock Appreciation Right may be exercised
only within the period, if any, within which the Option to which it relates
may be exercised. Notwithstanding the foregoing, any election by an
optionee to exercise Stock Appreciation Rights shall be made during the
period beginning on the third business day following the release for
publication of quarterly or annual financial information required to be
prepared and disseminated by the Corporation pursuant to the requirements
of the Exchange Act and ending on the twelfth business day following such
date. The required release of information shall be deemed to have been
satisfied when the specified financial data appears on or in a wire
service, financial news service or newspaper of general circulation or is
otherwise first made publicly available.
(c) Effects of Exercise of Stock Appreciation Rights or Options. Upon
the exercise of a Stock Appreciation Right, the number of shares of Common
Stock available under the Option to which it relates shall decrease by a
number equal to the number of shares for which the Stock Appreciation Right
was exercised. Upon the exercise of an Option, any related Stock
Appreciation Right shall terminate as to any number of shares of Common
Stock subject to the Stock Appreciation Right that exceeds the total number
of shares for which the Option remains unexercised.
(d) Time of Grant. A Stock Appreciation Right granted in connection
with an Incentive Stock Option must be granted concurrently with the Option
to which is relates, while a Stock Appreciation Right granted in connection
with a Nonqualified Stock Option may be granted concurrently with the
Option to which it relates or at any time thereafter prior to the exercise
or expiration of such Option. No optionee shall have any Stock
Appreciation Rights unless (i) in the case of Incentive Stock Options and
Nonqualified Stock Options, the Stock Option Agreement shall so state or
(ii) in the case of Nonqualified Stock Options, the Committee shall have
executed an amendment to the Stock Option Agreement so stating.
(e) Non-Transferable. A Stock Appreciation Right may not be
transferred or assigned except in connection with a transfer of the Option
to which it relates.
15. RESTRICTIONS ON TRANSFER. An Option granted under this Plan may not
------------------------
be transferred except by will or the laws of descent and distribution and,
during the lifetime of the optionee to whom it was granted, may be exercised
only by such optionee.
16. CAPITAL ADJUSTMENTS AFFECTING COMMON STOCK.
------------------------------------------
(a) If the outstanding shares of Common Stock of the Corporation are
increased, decreased, changed into or exchanged for a different number or
kind of shares or other securities of the Corporation or another entity as
a result of a recapitalization, reclassification, stock dividend, stock
split, amendment to the Corporation's Certificate of Incorporation, reverse
stock split, merger or consolidation, an appropriate adjustment
9
<PAGE>
shall be made in the number and/or kind of securities allocated to the
Options and Stock Appreciation Rights previously and subsequently granted
under the Plan, without change in the aggregate purchase price applicable
to the unexercised portion of the outstanding Options but with a
corresponding adjustment in the price for each share or other unit of any
security covered by the Options.
(b) In the event that the Corporation shall declare and pay any
dividend with respect to the Common Stock (other than a dividend payable in
shares of the Corporation's Common Stock or a regular quarterly cash
dividend), including a dividend which results in a nontaxable return of
capital to the holders of shares of Common Stock for federal income tax
purposes, or otherwise than by dividend makes distribution of property to
the holders of its shares of Common Stock, the Committee, in its discretion
applied uniformly to all outstanding Options, may adjust the exercise price
per share of outstanding Options in such a manner as the Committee may
determine to be necessary to reflect the effect of the dividend or other
distribution on the fair market value of a share of Common Stock.
(c) To the extent that the foregoing adjustments described in Sections
16(a) and (b) above relate to particular Options or to particular stock or
securities of the Corporation subject to Option under this Plan, such
adjustments shall be made by the Committee, whose determination in that
respect shall be final and conclusive.
(d) The grant of an Option or Stock Appreciation Right pursuant to
this Plan shall not affect in any way the right or power of the Corporation
to make adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge or to consolidate or to dissolve,
liquidate or sell, or transfer all or any part of its business or assets.
(e) No fractional shares of stock shall be issued under the Plan for
any such adjustment.
(f) Any adjustment made pursuant to this Section 16, shall be made, to
the extent practicable, in such manner as not to constitute a modification
of any outstanding Incentive Stock Options within the meaning of Section
424(h) of the Internal Revenue Code of 1986, as amended.
17. INVESTMENT PURPOSE. At the discretion of the Committee, any Option
------------------
Agreement may provide that the optionee shall, by accepting the Option,
represent and agree, for himself and his transferees by will or the laws of
descent and distribution, that all shares of stock purchased upon the exercise
of the Option will be acquired for investment and not for resale or
distribution, and that upon each exercise of any portion of an Option, the
person entitled to exercise the same shall furnish evidence of such facts which
is satisfactory to the Corporation. Certificates for shares of stock acquired
under the Plan may be issued bearing such restrictive legends as the Corporation
and its counsel may deem necessary to ensure that the optionee is not an
"underwriter" within the meaning of the regulations of the Securities Exchange
Commission.
10
<PAGE>
18. APPLICATION OF FUNDS. The proceeds received by the Corporation from
--------------------
the sale of Common Stock pursuant to Options will be used for general corporate
purposes.
19. NO OBLIGATION TO EXERCISE. The granting of an Option or Stock
-------------------------
Appreciation Right shall impose no obligation upon the optionee to exercise such
Option or Stock Appreciation Right.
20. EFFECTIVE DATE OF PLAN. The Plan will become effective upon the
----------------------
approval of the Plan by the shareholders of the Corporation and receipt of any
necessary regulatory approvals.
21. TERM OF PLAN. Options and Stock Appreciation Rights may be granted
------------
pursuant to this Plan from time to time within ten (10) years from the effective
date of the Plan.
22. TIME OF GRANTING OF OPTIONS. Nothing contained in the Plan or in any
---------------------------
resolution adopted or to be adopted by the Committee or the shareholders of the
Corporation and no action taken by the Committee shall constitute the granting
of any Option or Stock Appreciation Right hereunder. The granting of an Option
and Stock Appreciation Right pursuant to the Plan shall take place only when an
Option Agreement shall have been duly executed and delivered by and on behalf of
the Corporation at the direction of the Committee.
23. CASH PAYMENTS. At the time of the payment of any dividend or other
-------------
distribution with respect to the Common Stock, in the absolute discretion of,
and upon direction of the Board, the Corporation shall cause to be paid to
existing directors and employees of the Corporation, the Bank or any Subsidiary
who hold nonforfeited, unexercised Options under this Plan, regardless of
whether or not such Options are vested and nonforfeitable, a cash amount equal
to the number of shares of Common Stock subject to nonforfeited, unexercised
options held by such optionee multiplied by the amount of any dividends or other
distributions paid per share of Common Stock outstanding. The Board shall have
the discretion to approve cash payments at the time of some dividends or
distributions but not others. Notwithstanding the foregoing, no amounts shall
be paid to optionees pursuant to this Section 23 with respect to any dividend or
distribution if at the time of such dividend or distribution, the exercise price
of the Options shall have been reduced pursuant to Section 16(b) above.
If any director or employee of the Corporation, the Board or any Subsidiary
shall receive any cash payment from the Company, the Board or any Subsidiary
pursuant to this Section 23 with respect to an Option which is not vested and
exercisable, and if such Option shall be forfeited, then within 30 days after
the effective date of such forfeiture, the optionee shall pay to the
Corporation, the Bank or the Subsidiary (as applicable) an amount equal to the
cash payment received by such optionee with respect to such forfeited Option.
In the alternative, at the option of the Corporation, the Bank or the Subsidiary
(as applicable) the amount to be repaid may be withheld from the final
compensation payable to the optionee.
24. WITHHOLDING TAXES. Whenever the Corporation proposes or is required
-----------------
to cause to be issued or transferred shares of stock, cash or other assets
pursuant to this Plan, the Corporation shall have the right to require the
optionee to remit to the Corporation an amount sufficient to satisfy any
federal, state and/or local withholding tax requirements prior to the
11
<PAGE>
issuance of any certificate or certificates for such shares or delivery of such
cash or other assets. Alternatively, the Corporation may issue or transfer such
shares of stock or make other distributions of cash or other assets net of the
number of shares or other amounts sufficient to satisfy the withholding tax
requirements. For withholding tax purposes, the shares of stock, cash and other
assets to be distributed shall be valued on the date the withholding obligation
is incurred.
25. TERMINATION AND AMENDMENT. The Board may at any time alter, suspend,
-------------------------
terminate or discontinue the Plan, subject to any applicable regulatory
requirements and any required stockholder approval or any stockholder approval
which the Board may deem advisable for any reason, such as for the purpose of
obtaining or retaining any statutory or regulatory benefits under tax,
securities or other laws or satisfying applicable stock exchange or quotation
system listing requirements. The Board may not, without the consent of the
holder of an Option or Stock Appreciation Right previously granted, make any
alteration which would deprive the optionee of his rights with respect thereto.
26. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph
----------------------------------------
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part, and shall not serve as a basis
for interpretation or construction of, this Plan. As used herein, the masculine
gender shall include the feminine and neuter, and the singular number shall
include the plural, and vice versa, whenever such meanings are appropriate.
27. COST OF PLAN; EXCULPATION AND INDEMNIFICATION. All costs and expenses
---------------------------------------------
incurred in the operation and administration of the Plan shall be borne by the
Corporation, the Bank and the Subsidiaries. In connection with this Plan, no
member of the Board, no member of the Board of Directors of the Bank, and no
member of the Board of Directors of any Subsidiary, and no member of the
Committee shall be personally liable for any act or omission to act, nor for any
mistake in judgment made in good faith, unless arising out of, or resulting
from, such person's own bad faith, willful misconduct or criminal acts. To the
extent permitted by applicable law and regulation, the Corporation shall
indemnify, defend and hold harmless the members of the Board, the members of the
Board of Directors of the Bank and the members of the Board of Directors of any
Subsidiary, and members of the Committee, and each other officer or employee of
the Bank, the Corporation or of any Subsidiary to whom any power or duty
relating to the administration or interpretation of this Plan may be assigned or
delegated, from and against any and all liabilities (including any amount paid
in settlement of a claim with the approval of the Board), and any costs or
expenses (including counsel fees) incurred by such persons arising out of or as
a result of, any act or omission to act, in connection with the performance of
such person's duties, responsibilities and obligations under this Plan, other
than such liabilities, costs, and expenses as may arise out of, or result from
the bad faith, willful misconduct or criminal acts of such persons.
28. GOVERNING LAW. Without regard to the principles of conflicts of laws,
-------------
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Plan.
12
<PAGE>
29. INSPECTION OF PLAN. A copy of this Plan, and any amendments thereto,
------------------
shall be maintained by the Secretary of the Corporation and shall be shown to
any proper person making inquiry about it.
30. OTHER PROVISIONS. The Option Agreements authorized under this Plan
----------------
shall contain such other provisions not inconsistent with the foregoing,
including, without limitation, increased restrictions upon the exercise of
options, as the Committee may deem advisable.
13
<PAGE>
APPENDIX B
----------
CITIZENS BANK, FSB
MANAGEMENT RECOGNITION PLAN AND TRUST AGREEMENT
Citizens Bank, FSB, a federally-chartered savings bank (the "Bank"), does
herein set forth the terms of its Management Recognition Plan (the "Plan") and
Trust (the "Trust") and the Trustees hereby accept this Trust and agree to hold
the Trust assets existing on the date of the Agreement and all additions and
accretions thereto upon the terms and conditions hereinafter stated.
Section 1. Purpose of this Plan. The purpose of this Plan is to provide
---------- --------------------
to the directors, officers and employees (the "Participants") of the Bank and of
any corporation or other entity of which the Bank owns, directly or indirectly,
not less than fifty percent (50%) of any class of the equity securities thereof
(a "Subsidiary"), an ownership interest in the Bank's parent holding company,
Innes Street Financial Corporation (the "Corporation") by making awards
(hereinafter referred to as "Awards" or singularly, "Award") of shares of common
stock of the Corporation (the "Common Stock"). The Board of Directors of the
Bank (the "Board") and the board of directors of the Corporation believe that
participation in the ownership of the Corporation will induce Participants to
continue to serve the Bank or any Subsidiary as directors, officers and/or
employees and encourage them to contribute to the future growth and profits of
the Bank and the Corporation. In addition, the existence of this Plan will make
it possible for the Bank and its Subsidiaries to attract capable individuals to
serve as directors or officers of the Bank and its Subsidiaries. The Board
believes that the existence of this Plan will provide incentives to the
directors, officers and employees of the Bank and any Subsidiaries which will
contribute materially to the success of such companies.
Section 2. Administration of this Plan.
---------- ---------------------------
(a) This Plan shall be administered by a committee of the Board (the
"Committee") which shall consist of not less than two members of the Board who
are "Non-Employee Directors" as defined in Rule 16 b-3(b)(3) of the Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In the absence of a duly appointed Committee, the Plan shall be
administered by the Board. The Committee shall have full power and authority to
construe, interpret and administer this Plan. All actions, decisions,
determinations, or interpretations of the Committee shall be final, conclusive,
and binding upon all parties. Members of the Committee shall serve at the
pleasure of the Board.
(b) The Committee shall decide (i) to whom Awards shall be made under
this Plan, (ii) the number of shares of Common Stock subject to each award,
(iii) the number of additional shares, if any, to be purchased or allocated for
the purposes of this Plan, (iv) the determination of leaves of absence which may
be granted to Participants without constituting a termination of their
employment for purposes of the Plan and (v) such additional terms and conditions
for Awards as the Committee shall deem appropriate, including, without
limitation, any determinations as to the restrictions or conditions on transfer
of shares of Common Stock that are necessary or appropriate to satisfy all
applicable securities laws, rules, regulations, and listing requirements.
(c) The Committee may designate any officers or employees of the Bank
or of any Subsidiary to assist in the administration of this Plan. The
Committee may authorize such individuals to execute documents on its behalf and
may delegate to them such other ministerial and limited discretionary duties as
the Committee may see fit.
<PAGE>
(d) Any shares of Common Stock held under this Plan, including
without limitation unallocated, undistributed and forfeited shares, shall be
held by the Trust.
(e) The Trustees shall be appointed by the Board.
Section 3. Contributions to Trust.
---------- ----------------------
(a) The Board shall determine the amount (or the method of
computing the amount) and timing of any contributions by the Bank and any
Subsidiaries to the Trust established under this Plan. Such amounts may be paid
in cash or in shares of Common Stock and shall be paid to the Trust at the
designated time of contribution. No contributions by Participants shall be
permitted.
(b) Subject to Section 9 hereof, the Trustees shall invest all of
the Trust's assets primarily in Common Stock. The Trust shall acquire, in the
aggregate, 89,930 shares of Common Stock, which is equal to four percent (4%) of
the shares of Common Stock issued in connection with the conversion of the Bank
from a federally-chartered mutual savings bank to a federally-chartered stock
savings bank on December 28, 1998 (the "Conversion"). Such shares of Common
Stock may be purchased by the Trust in the open market, or, subject to approval
of the board of directors of the Corporation, may be acquired through the
issuance by the Corporation to the Trust of authorized but unissued shares of
Common Stock on such terms as may be approved by the Committee and the board of
directors of the Corporation. Such shares (the "Plan Shares") shall be held by
the Trust until they have been awarded and distributed pursuant to the terms of
this Plan. In the event that the Trust receives cash pursuant to receipt of
dividends on Common Stock held by the Trust which has not been awarded to
participants, including the receipt of a special cash dividend or return of
capital with respect to such shares, the Trustees may distribute such cash
received by the Trust along with the Common Stock upon which it was earned upon
the award of such previously unallocated shares.
(c) The principal of the Trust, and any earnings thereon, shall be
held separate and apart from other funds of the Bank and shall be used
exclusively for the uses and purposes of Participants and general creditors as
herein set forth. Participants and their beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plan and the Trust shall be mere unsecured contractual
rights of Participants and their beneficiaries against the Bank. Any assets held
by the Trust will be subject to the claims of the Bank's general creditors under
federal and state law in the event of insolvency or bankruptcy, as defined in
Section 9(e) herein.
Section 4. Eligibility and Award of Plan Shares.
---------- ------------------------------------
(a) The Participants in this Plan to whom Awards may be made shall
be the following: members of the Board, members of the board of directors of any
Subsidiary, and such officers and employees of the Bank and/or of any Subsidiary
as may be designated by the Committee. Notwithstanding the foregoing, no member
of the Committee is eligible to receive any grants or any Awards under this Plan
during the one-year period prior to serving on the Committee or during such
2
<PAGE>
service, except for the initial Awards of Plan Shares which will be distributed
after the Plan is approved by a majority of the shareholders of the Corporation.
Such initial Awards shall be made pursuant to the provisions of Section 4(b).
(b) As promptly as practicable after a determination is made that
an Award of Plan Shares is to be made, the Committee shall notify the
Participant in writing of the grant of the Award, the number of Plan Shares
covered by the Award, and the terms upon which the Plan Shares subject to the
Award shall vest and be distributed to the Participant. Awards of Plan Shares
under this Plan shall be effective upon execution and delivery of the Stock
Grant Agreement which sets forth the terms and conditions of the Award of Plan
Shares (the "Stock Grant Agreement").
(c) Notwithstanding anything to the contrary contained in Sections
4(a) and 4(b) above, no Participant shall have any right or entitlement to
receive a Plan Share Award hereunder, such awards being at the total discretion
of the Committee.
Section 5. Vesting and Distribution of Plan Shares.
---------- ---------------------------------------
(a) Shares granted under this Plan shall vest and the right of a
Participant to the Plan Shares shall be nonforfeitable as determined by the
Committee and as set forth in the Stock Grant Agreement.
(b) In determining the number of shares vested under any applicable
vesting schedule, a Participant shall not receive fractional shares. If the
product resulting from multiplying the vested percentage times the allocated
shares results in a fractional share, then a Participant's vested right shall be
rounded down to the nearest whole number of shares.
(c) In the event any Participant shall no longer be either a
director or an employee of the Bank or any Subsidiary for any reason (whichever
position resulted in the award, as set forth in the Stock Grant Agreement),
other than as provided in Sections 5(d) and 5(e) below, and such Participant
does not have a 100% vested interest in his or her shares under the Plan, then
any shares which are not vested based upon the applicable schedule set forth in
the Stock Grant Agreement shall be forfeited and, provided this Plan has not
terminated pursuant to Section 16 below, shall be available again for Awards to
Participants as may be determined by the Committee.
(d) In the event that a Participant shall no longer be an employee
or a director of the Bank or any Subsidiary (whichever position resulted in the
award, as set forth in the Stock Grant Agreement), because of such Participant's
disability or death, prior to the date when all shares allocated to him or her
would be 100% vested in accordance with the schedule set forth in the Stock
Grant Agreement, then, notwithstanding such vesting schedule, all shares
allocated to such Participant shall immediately become fully vested and
nonforfeitable. For purposes of this Plan, the term "disability" shall be
defined in the same manner as such term is defined in Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended (the "Code").
3
<PAGE>
(e) In the event that a Participant ceases to be an employee or a
director of the Bank or a Subsidiary (whichever position resulted in the award,
as set forth in the Stock Grant Agreement), for any reason after the occurrence
of a "change in control" and prior to the time that all shares allocated to him
or her would be 100% vested in accordance with the schedule set forth in the
Stock Grant Agreement, then, notwithstanding such vesting schedule, all shares
allocated to such Participant shall immediately become fully vested and
nonforfeitable. For purposes of this Plan, a "change in control" shall mean (i)
a change in control of a nature that would be required to be reported by the
Corporation in response to Item 1 of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act;
(ii) such time as any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) other than the Corporation is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation or Bank representing 25 percent or
more of the combined voting power of the outstanding Common Stock of the
Corporation or outstanding common stock of the Bank, as applicable; or (iii)
individuals who constitute the board of directors of the Corporation or the
Board on the date hereof (the "Incumbent Board" and "Incumbent Bank Board,"
respectively) cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent Bank Board, as applicable, or whose
nomination for election by the Corporation's or Bank's shareholders was approved
by the Corporation's or Bank's Board of Directors or Nominating Committee, shall
be considered as though he or she were a member of the Incumbent Board or
Incumbent Bank Board, as applicable; or (iv) either the Corporation or the Bank
consolidates or merges with or into another corporation, association or entity
or is otherwise reorganized, where neither the Corporation nor the Bank,
respectively, is the surviving corporation in such transaction; or (v) all or
substantially all of the assets of either the Corporation or the Bank are sold
or otherwise transferred to or are acquired by any other entity or group.
(f) Plan Shares which have vested shall be distributed to the
Participant or any transferee permitted by Section 11 (a "Permitted
Transferee"), as the case may be, as soon as practicable after such Plan Shares
have vested in accordance with the schedule contained in the Stock Grant
Agreement.
(g) The Trustees, the Corporation, the Bank and any Subsidiary
shall have the right to require any Participant or Permitted Transferee to remit
to the Corporation, the Bank or any Subsidiary an amount sufficient to satisfy
any federal, state and/or local withholding tax requirements prior to the
delivery or release of any certificate or certificates for Plan Shares or
delivery of any cash or other assets with respect to Plan Shares or otherwise
pursuant to this Plan. Alternatively, the Trustees, Corporation, Bank and any
Subsidiary may deliver or release Shares or make other distributions of cash or
other assets net of the number of shares or cash sufficient to satisfy the
withholding tax requirements. For withholding tax purposes, the shares of stock,
cash and other assets to be distributed shall be valued on the date the
withholding obligation is incurred.
(h) Each Participant receiving an Award of Plan Shares under this
Plan shall deliver to the Bank a Stock Grant Agreement, which shall be signed by
such Participant.
4
<PAGE>
Section 6. Restrictions on Selling of Plan Shares. Plan Share Awards may
---------- --------------------------------------
not be sold, assigned, pledged or otherwise disposed of prior to the time that
they are vested and distributed pursuant to the terms of this Plan. The Board or
the Committee may require the Participant or his Permitted Transferee, as the
case may be, to agree not to sell or otherwise dispose of his distributed Plan
Shares except in accordance with all then applicable federal and state
securities laws, and the Board or the Committee may cause a legend to be placed
on the stock certificate(s) representing the distributed Plan Shares in order to
restrict the transfer of the distributed Plan Shares for such period of time or
under such circumstances as the Board or the Committee, upon the advice of
counsel, may deem appropriate.
Section 7. Effect of Award on Status of Participant. The fact that an
---------- ----------------------------------------
Award is made to a Participant under this Plan shall not confer on such
Participant any right to continued service on the Board or on the board of
directors of any Subsidiary, nor any right to continued employment with the Bank
or any Subsidiary; nor shall it limit the right of the Bank, the Corporation, or
any Subsidiary to remove such Participant from any such boards, or to terminate
his or her employment at any time.
Section 8. Voting Rights; Dividends; Other Distributions. After an Award
---------- ---------------------------------------------
of Plan Shares has been made, the Participant or Permitted Transferee shall be
entitled to direct the Trustees as to the voting of the Plan Shares which are
covered by the Award and which are not yet vested and distributed to him,
subject to rules and procedures adopted by the Committee for this purpose. All
shares of Common Stock held by the Trust which have not been awarded under an
Award of Plan Shares and shares which have been awarded as to which Participants
or Permitted Transferees have not directed the voting shall be voted by the
Trustees in the same proportion as the trustees of the Bank's Employee Stock
Ownership Plan votes Common Stock held in trust associated therewith, and in the
absence of any such voting, shall be voted in the manner directed by the Board.
Any cash dividends or other cash or noncash distributions (including
special large and nonrecurring dividends and including one that has the effect
of a return of capital to the Corporation's stockholders) or stock dividends
declared in respect of each unvested Plan Share will be held by the Trustees for
the benefit of the Participant or Permitted Transferee on whose behalf such
Award is then held by the Trust and such dividends, including any interest
thereon, will be paid out proportionately by the Trust to the Participant or
Permitted Transferee thereof as soon as practicable after the Plan Shares become
vested in accordance with the Stock Grant Agreement, or otherwise. Any cash
dividends, cash or noncash distributions or stock dividends declared in respect
of each vested Plan Share held by the Trust will be paid by the Trust, as soon
as practicable after the Trust's receipt thereof, to the Participant or
Permitted Transferee on whose behalf such Plan Share is then held by the Trust.
In the event that the Trust receives cash pursuant to receipt of dividends or
other distributions on Common Stock held by the Trust and unallocated to
participants (including the receipt of a special cash dividend or return of
capital) then such funds may be used by the Trust to purchase additional shares
of Common Stock available for future award under this Plan, or the Committee or
Board may distribute such cash received by the Trust along with the Common Stock
upon which it was earned upon the award of such previously unallocated shares.
5
<PAGE>
Section 9. Trust.
---------- -----
(a) The Trustees shall receive, hold, administer, invest and make
distributions and disbursements from the Trust in accordance with the provisions
of this Plan and Trust and the applicable directions, rules, regulations,
procedures and policies established by the Board or the Committee pursuant to
the Plan.
(b) It is the intent of this Plan and Trust that the Trustees shall
have complete authority and discretion with respect to the arrangement, control
and investment of the Trust, and that the Trustees shall invest all assets of
the Trust in Common Stock to the fullest extent practicable, except to the
extent that the Trustees determine that the holding of monies in cash or cash
equivalents is necessary to meet the obligations of the Trust. In performing
their duties, the Trustees shall have the power to do all things and execute
such instruments as may be deemed necessary or proper, including the following
powers;
(i) To invest up to one hundred percent (100%) of all Trust
assets in Common Stock without regard to any law now or hereafter in force
limiting investments for trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and in
making such investment, the Trustees are authorized to purchase Common
Stock from the Corporation or from any other source, and such Common Stock
so purchased may be outstanding, newly issued, or treasury shares.
(ii) To invest any Trust assets not otherwise invested in
accordance with (i) above, in deposit accounts and certificates of deposit
at the Bank or in obligations of the United States Government or its
agencies or such other investments as shall be considered the equivalent of
cash.
(iii) To sell, exchange or otherwise dispose of any property
at any time held or acquired by the Trust.
(iv) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of the
Trust).
(v) To hold cash without interest in such amounts as may in
the opinion of the Trustees be reasonable for the proper operation of the
Plan and Trust.
(vi) To employ brokers, agents, custodians, consultants and
accountants.
(vii) To hire counsel to render advice with respect to their
rights, duties and obligations hereunder, and such other legal services or
representation as the Trustees deem desirable.
6
<PAGE>
(viii) To hold funds and securities representing the amounts to
be distributed to a Recipient or his Permitted Transferee as a consequence
of a dispute as to the disposition thereof, whether in a segregated account
or held in common with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustees
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of any court for the exercise of any power
herein contained, or give bond.
(c) The Trustees shall maintain accurate and detailed records and
accounts of all transactions of the Trust, which shall be available at all
reasonable times for inspection by any legally entitled person or entity to the
extent required by applicable law, or by any other person determined by the
Board or the Committee.
(d) Notwithstanding anything to the contrary in this Plan or Trust,
the assets of the Plan and Trust are subject to the payment of the claims of
creditors of the Bank in the event of its insolvency or bankruptcy. The Bank is
insolvent or bankrupt if it is the subject of a proceeding under the Bankruptcy
Code, 11 U.S.C. Section 101 et seq. or is unable to pay its debts. The Board or
the chief executive officer of the Bank must give written notice to the Trustees
of the Bank's bankruptcy or insolvency as soon as practicable following the
occurrence of such event. Upon receipt of such notice or other written
allegations of the Bank's bankruptcy or insolvency, or in the case of the
Trustees' actual knowledge of or determination of the Bank's bankruptcy or
insolvency, the Trustees shall discontinue delivery of Trust assets to the
Participants or the Bank and shall hold the assets of the Trust for the benefit
of the Bank's general creditors and, upon a determination that the Bank is
bankrupt or insolvent, shall distribute such assets to or for the benefit of the
general creditors. The Trustees shall resume delivery of Trust assets to the
Participants or the Bank only after it is determined that the Bank is no longer
bankrupt or insolvent. Determination of the bankruptcy or insolvency shall be
determined by a court of competent jurisdiction or by an arbitrator selected by
and pursuant to rules of the American Arbitration Association upon petition by
an interested party.
Section 10. Adjustment Upon Changes in Capitalization; Dissolution or
----------- ---------------------------------------------------------
Liquidation. In the event of a change in the number or type of shares of Common
- -----------
Stock outstanding, or in the event shares of Common Stock are decreased, changed
into or exchanged for securities of a different entity, by reason of a
reclassification, recapitalization, reorganization, other similar capital
adjustment; by reason of a merger or consolidation of the Corporation; by reason
of the sale by the Corporation of all or a substantial portion of its assets; or
by reason of the occurrence of any other event which could affect the
implementation of this Plan and the realization of its objectives, the number or
kind of shares subject to Awards which have occurred, or could occur, under this
Plan shall be proportionately and equitably adjusted by the Committee.
Section 11. Non-Transferability. Prior to the time Plan Share Awards
----------- -------------------
become vested and are distributed by the Trustees, Plan Share Awards may not be
sold, pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent and distribution. Notwithstanding
the foregoing, or any other provision of this Plan, a Participant who holds Plan
Share Awards may transfer such awards to his or her spouse, lineal ascendants,
lineal descendants, or to a duly established trust for the benefit of one or
more of these individuals. Plan Share Awards so transferred
7
<PAGE>
may thereafter be transferred only to the Participant who originally received
the grant or to an individual or trust to whom the Participant could have
initially transferred the awards pursuant to this Section 11. Plan Share Awards
which are transferred pursuant to this Section 11 shall be subject to the same
terms and conditions as applied to the Participant. In addition, such shares may
be tendered in response to a tender offer for or a request or invitation to
tenders of greater than fifty percent (50%) of the outstanding Common Stock and
may be surrendered in a merger, consolidation or share exchange involving the
Corporation; provided, however, in each case, that except as otherwise provided
herein, the securities or other consideration received in exchange therefor
shall thereafter be subject to the restrictions and conditions set forth in this
Plan.
Section 12. Impact of Award on Other Benefits of Participant. The value
----------- ------------------------------------------------
of any Award, either on the date of the Award or at the time such shares become
vested, shall not be includable as compensation or earnings for purposes of any
other benefit plan offered by the Bank, the Corporation or any Subsidiary other
than any qualified employee benefit plan which provides that such value shall be
included as compensation or earnings for purposes of such plan.
Section 13. Corporate Action. The making of an Award under this Plan
----------- ----------------
shall not affect in any way the right or power of the Corporation or its
shareholders or the Bank or its shareholders or any Subsidiary or its
shareholders to make or authorize any adjustment, recapitalization,
reorganization, or other change in the Corporation's, the Bank's or any
Subsidiary's capital structure or its business, or any merger or consolidation
of the Corporation, the Bank or any Subsidiary, or the issuance of any bonds,
debentures, preferred or other capital stock or rights with respect thereto, or
the dissolution or liquidation of the Corporation, the Bank or any Subsidiary,
or any sale or transfer of all or any part of the Corporation's, the Bank's or
any Subsidiary's assets or business.
Section 14. Exculpation and Indemnification. In connection with this
----------- -------------------------------
Plan, no member of the Board, no member of the board of directors of the
Corporation, no member of the Committee and no Trustee shall be personally
liable for any act or omission to act in his capacity as a member of the Board,
the board of directors of the Corporation or the Committee or as Trustees, nor
for any mistake in judgment made in good faith, unless arising out of, or
resulting from, such person's own bad faith, willful misconduct, or criminal
acts. To the extent permitted by applicable law and regulation, the Bank shall
indemnify, defend and hold harmless the members of the Board, the members of the
board of directors of the Corporation, the members of the board of directors of
any Subsidiary, the Committee and each Trustee and each other officer or
employee of the Bank, the Corporation or of any Subsidiary to whom any duty or
power relating to the administration or interpretation of this Plan may be
assigned or delegated, from and against any and all liabilities (including any
amount paid in settlement of a claim with the approval of the Board) and any
costs or expenses (including counsel fees) incurred by such persons arising out
of, or as a result of, any act or omission to act in connection with the
performance of such person's duties, responsibilities, and obligations under
this Plan, other than such liabilities, costs, and expenses as may arise out of,
or result from, the bad faith, willful misconduct, or criminal acts of such
persons.
Section 15. Amendment and Modification of this Plan. The Board may at
----------- ---------------------------------------
any time, and from time to time, amend or modify this Plan (including the form
of Stock Grant Agreement) in any respect, subject to any applicable regulatory
requirements and any required stockholder approval or any
8
<PAGE>
stockholder approval which the Board may deem advisable for any reason, such as
for the purpose of obtaining or retaining any statutory or regulatory benefits
under tax, securities or other laws or satisfying applicable stock exchange or
quotation system listing requirements. However, any amendment or modification of
this Plan shall not in any manner affect any Award of shares theretofore made to
a Participant under this Plan without the consent of such Participant or any
Permitted Transferee of such Participant.
Section 16. Termination and Expiration of this Plan. This Plan may be
----------- ---------------------------------------
abandoned, suspended, or terminated, in whole or in part, at any time by the
Board; provided, however, that abandonment, suspension, or termination of this
Plan shall not affect any Award theretofore made under this Plan. Unless sooner
terminated, this Plan shall terminate at the close of business on the day that
is the tenth (10th) anniversary of the date of approval of the Plan by the
shareholders of the Corporation; and no Award of shares may be made under this
Plan thereafter. Such termination shall not effect any Award of shares
theretofore made. In the event that the Board terminates this Plan in whole, any
shares held by the Trust which have not been allocated to eligible Participants,
together with any other assets held by the Trust, shall revert to the Bank.
17. Tax Status of Trust. It is intended that the trust established
-------------------
hereby be treated as a Grantor Trust of the Corporation under the provisions of
Section 671 et seq. of the Code, as the same may be amended from time to time.
-- ---
18. Miscellaneous.
-------------
(a) This Plan has been adopted by the Board to be effective as of the date
of approval of the Plan by the shareholders of the Corporation.
(b) Captions and paragraph headings used herein are for convenience only,
do not modify or affect the meaning of any provision herein, are not a part
hereof, and shall not serve as a basis for interpretation or construction of
this Plan or Trust. As used herein, the masculine gender shall include the
feminine and neuter, and the singular number shall include the plural, and vice
versa, whenever such meanings are appropriate.
(c) All costs and expenses incurred in the operation and administration of
this Plan shall be borne by the Bank or by a Subsidiary, or in the discretion of
the Bank, the Trust.
(d) Without regard to the principles of conflicts of laws, the laws of the
State of North Carolina shall govern and control the validity, interpretation,
performance, and enforcement of this Plan and Trust.
(e) A copy of this Plan, and any amendments thereto, shall be maintained
by the Secretary of the Bank and shall be shown to any proper person making
inquiry about it.
9
<PAGE>
INNES STREET FINANCIAL CORPORATION
REVOCABLE PROXY
ANNUAL MEETING OF STOCKHOLDERS
February 1, 2000 10:00 a.m.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints the official proxy committee of Innes Street
Financial Corporation (the "Company") comprised of all of the members of the
Board of Directors of the Company, each with full power of substitution, to act
as attorneys and proxies for the undersigned, and to vote all shares of common
stock of the Company which the undersigned is entitled to vote only at the
Annual Meeting of Stockholders, to be held on February 1, 2000 at the Holiday
Inn of Salisbury, 520 South Jake Alexander Boulevard, Salisbury, North Carolina
at 10:00 a.m. and at any and all adjournments thereof, as follows:
1. The approval of the election of the following named directors:
Malcolm B. Blankenship, Jr., Ronald E. Bostian, James W. Duke, Harold C.
Earnhardt, K. V. Epting, Jr., Gordon P. Hurley and Bobby A. Lomax, who
will serve as directors until the 2001 Annual Meeting of Stockholders or
until their successors are duly elected and qualify.
For [_]Withhold [_]
For All Except [_]
INSTRUCTION: To withhold authority to vote for any individual nominee,
mark "For All Except" and write that nominee's name in the space provided
below.
---------------------------------------------------------------------------
2.The approval of the Innes Street Financial Corporation Stock Option Plan.
For [_]Against [_]
Abstain [_]
3.The approval of the Citizens Bank, FSB Management Recognition Plan and
Trust.
For [_]Against [_]
Abstain [_]
4.The ratification of Ernst & Young LLP as the Company's independent
auditor.
For [_]Against [_]
Abstain [_]
PLEASE CHECK BOX IF YOU PLAN TO ATTEND THE ANNUAL MEETING: [_]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS.
(Continued and to be signed on the other side)
<PAGE>
(Continued from other side)
If a proxy is returned and no instructions are given, the proxy will be voted
for the election of the proposed nominees, the ratification of the independent
auditor, and the approval of the Innes Street Financial Corporation Stock Op-
tion Plan and the Citizens Bank, FSB Management Recognition Plan and Trust. If
instructions are given with respect to one but not all proposals, (i) such in-
structions as are given will be followed and, (ii) the proxy will be voted FOR
any proposal for which no instructions are given. If any other business that
falls within the purposes set forth in the Notice of Annual Meeting is pre-
sented at the Annual Meeting, this proxy shall be voted in accordance with the
proxy committee's best judgment.
Date ...............................
....................................
Stockholder sign above
....................................
Co-Holder (if any) sign above
The above signed acknowledges
receipt from the Company, prior to
the election of this Proxy, of a
Notice of Annual Meeting and a
Proxy Statement dated December 30,
1999. Please sign exactly as your
name appears hereon. When signing
as attorney, executor,
administrator, trustee or guardian,
please give your full title. If
shares are held jointly, each
holder may sign, but only one
signature is required.
PLEASE ACT PROMPTLY SIGN, DATE AND MAIL YOUR PROXY CARD TODAY
