<PAGE>
<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
1st STATE BANCORP, INC.
- ----------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- ----------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] NO FEE REQUIRED
[ ] Fee computed on table below per Exchange Act Rules
14a-6(i)(1) and 0-11.
1. Title of each class of securities to which
transaction applies:
________________________________________________________________
2. Aggregate number of securities to which transaction
applies:
________________________________________________________________
3. Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule 0-11 (set
forth the amount on which the filing fee is calculated and state
how it was determined):
________________________________________________________________
4. Proposed maximum aggregate value of transaction:
________________________________________________________________
5. Total fee paid:
________________________________________________________________
[ ] Fee paid previously with preliminary materials:
________________________________________________________________
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
1. Amount previously paid:
____________________________________________
2. Form, Schedule or Registration Statement no.:
____________________________________________
3. Filing Party:
____________________________________________
4. Date Filed:
____________________________________________
<PAGE>
<PAGE>
[LOGO]
[1ST STATE BANCORP, INC. LETTERHEAD]
April 27, 2000
Dear Stockholder:
We invite you to attend the Special Meeting of
Stockholders (the "Special Meeting") of 1st State Bancorp, Inc.
(the "Company") to be held at the main office of 1st State Bank
(the "Bank") located at 445 S. Main Street, Burlington, North
Carolina, on Tuesday, June 6, 2000, at 5:30 p.m., eastern time.
The Special Meeting has been called to consider and vote
upon approval of the Company's 2000 Stock Option and Incentive
Plan and Management Recognition Plan. Enclosed are a Notice of
Special Meeting and Proxy Statement that describe the formal
business to be transacted at the Special Meeting. Certain
directors and officers of the Company will be present at the
Special Meeting to respond to any questions that our
stockholders may have.
The Board of Directors of the Company has determined that
the matters to be considered at the Special Meeting are in the
best interests of the Company and its stockholders. For the
reasons set forth in the Proxy Statement, the Board unanimously
recommends a vote "FOR" each matter to be considered. A proxy
card is enclosed for your use.
ON BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO SIGN,
DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE,
EVEN IF YOU CURRENTLY PLAN TO ATTEND THE SPECIAL MEETING. This
will not prevent you from voting in person but will assure that
your vote is counted if you are unable to attend the Special
Meeting.
On behalf of the Board of Directors and all the employees
of the Company and the Bank, I wish to thank you for your
continued support.
Sincerely,
/s/ James C. McGill
James C. McGill
President
<PAGE>
<PAGE>
________________________________________________________________
1ST STATE BANCORP, INC.
445 S. MAIN STREET
BURLINGTON, NORTH CAROLINA 27215
________________________________________________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 6, 2000
________________________________________________________________
NOTICE IS HEREBY GIVEN that a Special Meeting of
Stockholders (the "Special Meeting") of 1st State Bancorp, Inc.
(the "Company") will be held at the main office of 1st State
Bank (the "Bank"), located at 445 S. Main Street, Burlington,
North Carolina, on Tuesday, June 6, 2000, at 5:30 p.m., eastern
time.
A Proxy Statement and Proxy Card for the Special Meeting
are enclosed.
The Special Meeting is for the purpose of considering and
acting upon the following matters:
1. Approval of the 1st State Bancorp, Inc. 2000
Stock Option and Incentive Plan;
2. Approval of the 1st State Bancorp, Inc.
Management Recognition Plan; and
3. Such other business as may properly come
before the Special Meeting or any adjournment
thereof.
The Board of Directors is not aware of any other business
to come before the Special Meeting.
Any action may be taken on any one of the foregoing pro-
posals at the Special Meeting on the date specified above or on
any date or dates to which, by original or later adjournment,
the Special Meeting may be adjourned. Stockholders of record at
the close of business on April 10, 2000, are the stockholders
entitled to notice of and to vote at the Special Meeting and any
adjournment thereof.
You are requested to fill in and sign the enclosed Proxy
Card which is solicited by the Board of Directors and to mail it
promptly in the enclosed envelope. The proxy will not be used
if you attend and vote at the Special Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ A. Christine Baker
A. Christine Baker
Secretary
Burlington, North Carolina
April 27, 2000
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE
COMPANY THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO
INSURE A QUORUM. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
<PAGE>
<PAGE>
________________________________________________________________
PROXY STATEMENT
OF
1ST STATE BANCORP, INC.
445 S. MAIN STREET
BURLINGTON, NORTH CAROLINA 27215
________________________________________________________________
SPECIAL MEETING OF STOCKHOLDERS
JUNE 6, 2000
________________________________________________________________
GENERAL
________________________________________________________________
This Proxy Statement is furnished to stockholders of 1st
State Bancorp, Inc. (the "Company") in connection with the
solicitation by the Board of Directors of the Company of proxies
to be used at the Special Meeting of Stockholders (the "Special
Meeting") which will be held at the main office of 1st State
Bank (the "Bank"), located at 445 S. Main Street, Burlington,
North Carolina, on Tuesday, June 6, 2000, at 5:30 p.m., eastern
time, and at any adjournment thereof. The accompanying Notice
of Special Meeting and Proxy Card and this Proxy Statement are
being first mailed to stockholders on or about April 27, 2000.
________________________________________________________________
VOTING AND REVOCABILITY OF PROXIES
________________________________________________________________
Regardless of the number of shares of the Company's common
stock, par value $.01 per share (the "Common Stock"), owned, it
is important that stockholders be represented by proxy or
present in person at the Special Meeting. Stockholders are
requested to vote by completing the enclosed Proxy Card and
returning it signed and dated in the enclosed postage-paid
envelope. Stockholders are urged to indicate their vote in the
spaces provided on the proxy card. PROXIES SOLICITED BY THE
BOARD OF DIRECTORS OF THE COMPANY WILL BE VOTED IN ACCORDANCE
WITH THE DIRECTIONS GIVEN THEREIN. WHERE NO INSTRUCTIONS ARE
INDICATED, PROXIES WILL BE VOTED FOR THE APPROVAL OF THE
SPECIFIC PROPOSALS PRESENTED IN THIS PROXY STATEMENT. Proxies
marked as abstentions will not be counted as votes cast. In
addition, shares held in street name which have been designated
by brokers on proxy cards as not voted will not be counted as
votes cast. Proxies marked as abstentions or as broker
nonvotes, however, will be treated as shares present for
purposes of determining whether a quorum is present.
The Board of Directors knows of no additional matters that
will be presented for consideration at the Special Meeting.
Execution of a proxy, however, confers on the designated proxy
holders discretionary authority to vote the shares in accordance
with the determination of a majority of the Board of Directors
on such other business, if any, that may properly come before
the Special Meeting or any adjournments thereof.
A proxy may be revoked at any time prior to its exercise
by the filing of a written notice of revocation with the
Secretary of the Company, by delivering a duly executed proxy
bearing a later date to the Secretary of the Company at the
address listed above, or by attending the Special Meeting and
voting in person. The presence of a stockholder at the Special
Meeting will not in itself revoke such stockholder's proxy.
<PAGE>
________________________________________________________________
VOTING SECURITIES AND SECURITY OWNERSHIP
________________________________________________________________
The securities entitled to vote at the Special Meeting
consist of the Company's Common Stock. Stockholders of record
as of the close of business on April 10, 2000 (the "Record
Date") are entitled to one vote for each share of Common Stock
then held. As of the Record Date, there were 3,163,125 shares
of Common Stock issued and out-
<PAGE>
<PAGE>
standing. The presence, in person or by proxy, of at least
one-third of the total number of shares of Common Stock
outstanding and entitled to vote will be necessary to constitute
a quorum at the Special Meeting.
Persons and groups beneficially owning more than 5% of the
Common Stock are required to file certain reports with respect
to such ownership pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The following table sets
forth information regarding the shares of Common Stock
beneficially owned as of the Record Date by persons who
beneficially own more than 5% of the Common Stock, each of the
Company's directors, the executive officers of the Company named
in the Summary Compensation Table set forth under "Management
Compensation -- Summary Compensation Table," and all of the
Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED PERCENT OF
AS OF THE RECORD DATE (1) CLASS (2)
------------------------- ----------
<S> <C> <C>
5% Stockholders
- ---------------
1st State Bancorp, Inc. 253,050 (3) 8.0%
Employee Stock Ownership Plan ("ESOP")
445 S. Main Street
Burlington, North Carolina 27215
1st State Bank Foundation, Inc. 182,000 (4) 5.8
445 S. Main Street
Burlington, North Carolina 27215
Directors
- ---------
Bernie C. Bean 18,750 0.6
James C. McGill 35,021 (5) 1.1
Virgil L. Stadler 53,615 (6) 1.7
James A. Barnwell, Jr. 43,750 1.4
James G. McClure 45,154 (7) 1.4
T. Scott Quakenbush 53,510 (8) 1.7
Richard C. Keziah 54,607 (9) 1.7
Richard H. Shirley 29,294 0.9
Executive Officers
- ------------------
A. Christine Baker 28,109 (10) 0.9
Fairfax C. Reynolds 23,027 (11) 0.7
Frank Gavigan 11,486 (12) 0.4
John D. Hansell 4,775 (13) 0.2
All directors and executive 401,098 12.7
officers of the Company
as a group (12 persons)
<FN>
_____________
(1) In accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), a
person is deemed to be the beneficial owner, for purposes
of this table, of any shares of Common Stock if he or she
has or shares voting or investment power with respect to
such Common Stock or has a right to acquire beneficial
ownership at any time within 60 days from the Record Date.
As used herein, "voting power" is the power to vote or
direct the voting of shares and "investment power" is the
power to dispose or direct the disposition of shares. The
listed amounts do not include shares with respect to which
Directors Shirley, McClure and Stadler have voting power
by virtue of their positions as trustees of the trusts
holding 253,050 shares under the ESOP and 157,226 shares
under the Bank's Deferred Compensation Plan
2
<PAGE>
<PAGE>
("DCP"). The shares held by the DCP trust are held for the
benefit of directors and executive officers of the Company
in the following amounts: Mr. Bean 5,726; Mr. McGill
57,254; Mr. Stadler 9,413; Mr. Barnwell 6,414; Mr. McClure
7,454; Mr. Quakenbush 9,520; Mr. Keziah 10,260; Mr.
Shirley 6,414; Ms. Baker 22,452; and Mr. Reynolds 22,319.
Shares held by the ESOP trust and allocated to the accounts
of participants are voted in accordance with the
participants' instructions, and unallocated shares are
voted in the same ratio as ESOP participants direct the
voting of allocated shares or, in the absence of such
direction, in the ESOP trustees' best judgment. The
shares held by the DCP trust are voted in the same
proportion as the ESOP trustees vote the shares held in
the ESOP trust. The listed amounts also do not include
shares with respect to which Directors Barnwell, Kesiah
and McGill share voting power by virtue of their positions
as directors of 1st State Bank Foundation, Inc. (the
"Foundation"), which holds 182,000 shares of Common Stock.
The shares held by the Foundation are voted in the same
ratio as all other shares of Common Stock are voted on any
given proposal submitted to stockholders.
(2) Based on a total of 3,163,125 shares of Common Stock
outstanding as of the Record Date.
(3) These shares are currently held in a suspense account for
future allocation and distribution among participants as
the loan used to purchase the shares is repaid. At the
Record Date, 22,162 shares had been allocated. See
footnote 1 above for information on how these shares are
voted.
(4) The shares held by the Foundation are voted in the same
ratio as all other shares of Common Stock are voted on any
given proposal submitted to stockholders. Does not
include shares beneficially owned by directors Barnwell,
Keziah and McGill, who serve as directors of the
Foundation.
(5) Includes 288 shares held by Mr. McGill's spouse and 1,564
shares allocated to Mr. McGill's account under the ESOP.
(6) Includes 7,760 shares owned by Mr. Stadler's spouse.
(7) Includes 15,185 shares owned by Mr. McClure's spouse,
2,551 shares owned by Mr. McClure's daughter, 2,551 shares
owned by Mr. McClure's son, and 14,075 shares owned by two
partnerships of which Mr. McClure is a partner.
(8) Includes 7,152 shares owned by Mr. Quakenbush's spouse.
(9) Includes 1,789 shares owned by Mr. Keziah's spouse.
(10) Includes 625 shares held as custodian for Ms. Baker's
minor child and 1,564 shares allocated to Ms. Baker's
account under the ESOP.
(11) Includes 200 shares held by Mr. Reynolds' spouse as
custodian for minor children and 1,564 shares allocated to
Mr. Reynold's account under the ESOP.
(12) Includes 356 shares held by Mr. Gavigan's spouse, 100
shares held by Mr. Gavigan's spouse as custodian for minor
child and 1,050 shares allocated to Mr. Gavigan's account
under the ESOP.
(13) Includes 1,127 shares allocated to Mr. Hansell's account
under the ESOP.
</FN>
</TABLE>
________________________________________________________________
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
________________________________________________________________
Overview and Philosophy
The Company's executive compensation policies are
established by the Executive Committee of the Board of Directors
(the "Committee"). The Committee is responsible for developing
the Company's executive compensation policies. The Company's
President, James C. McGill, under the direction of the
Committee, implements the Company's executive compensation
policies. Mr. McGill abstains from voting on and discussions of
matters affecting his compensation. The Committee's objectives
in designing and administering the specific elements of the
Company's executive compensation program are as follows:
. To link executive compensation rewards
to increases in shareholder value, as
measured by favorable long-term
operating results and continued
strengthening of the Company's financial
condition.
. To provide incentives for executive
officers to work towards achieving
successful annual results as a step in
achieving the Company's long-term
operating results and strategic
objectives.
3
<PAGE>
<PAGE>
. To correlate, as closely as possible,
executive officers' receipt of
compensation with the attainment of
specified performance objectives.
. To maintain a competitive mix of total
executive compensation, with particular
emphasis on awards related to increases
in long-term shareholder value.
. To attract and retain top performing
executive officers for the long-term
success of the Company.
In furtherance of these objectives, the Committee has
determined that there should be three specific components of
executive compensation: base salary, a cash bonus and stock-
based incentive plans.
Base Salary. The Committee makes recommendations to the
Board concerning executive compensation on the basis of surveys
of salaries paid to executive officers of other bank holding
companies, non-diversified banks and other financial
institutions similar in size, market capitalization and other
characteristics. The Committee's objective is to provide for
base salaries that are competitive with the average salary paid
by the Company's peers.
Bonus. The Company pays a discretionary bonus on an
annual basis based on satisfaction of a combination of
individual and Company performance objectives. Whether bonuses
are paid each year and the amount of such bonuses are determined
by the Committee, subject to ratification by the Board of
Directors, at year end based on the Company's ability to achieve
performance goals established by the Board in each year's
Business Plan. Discretionary bonuses for achieving specific
performance goals during the year are paid during the next
fiscal year.
Stock-Based Incentive Plans. The Committee believes that
stock-based award plans are an important element of compensation
since they provide executives with incentives linked to the
performance of the Common Stock. Accordingly, the Committee
recommended and the Board of Directors adopted the 1st State
Bancorp, Inc. 2000 Stock Option and Incentive Plan (the "Option
Plan") and the 1st State Bancorp, Inc. Management Recognition
Plan ("MRP"), each subject to stockholder approval at the
Special Meeting.
The Board of Directors adopted the Option Plan pursuant to
which officers and directors will be granted options to acquire
a number of shares of Common Stock equal to up to an aggregate
of 10% of the outstanding Common Stock. The Committee believes
that an option plan can serve as a means of providing key
employees with the opportunity to acquire a proprietary interest
in the Company and to link their interests with those of the
Company's stockholders.
In addition, the Board of Directors adopted the MRP
pursuant to which officers and directors would be granted awards
of restricted Common Stock, subject to vesting and forfeiture as
determined by the Committee. The maximum number of shares
available for awards under the MRP equals 4% of the outstanding
Common Stock. The purpose of the MRP is to reward and retain
personnel of experience and ability in key positions of
responsibility by providing such employees with a proprietary
interest in the Company as compensation for their past
contributions to the Company and the Bank and as an incentive to
make further contributions in the future.
<PAGE>
For information with respect to the Option Plan, see
"Proposal I -- Approval of the 1st State Bancorp, Inc. 2000
Stock Option and Incentive Plan," and for information with
respect to the MRP, see "Proposal II -- Approval of the 1st
State Bancorp, Inc. Management Recognition Plan."
Compensation of the President
Mr. McGill's base salary is established in accordance with
the terms of the employment agreement entered into between the
Bank and Mr. McGill. See " -- Executive Compensation --
Employment Agreements." The Committee determines the
President's compensation on the basis of several factors. In
determining Mr. McGill's base salary, the
4
<PAGE>
<PAGE>
Committee reviewed compensation paid to chief executive officers
of similarly situated banks and non-diversified banks and other
financial institutions of similar asset size. The Committee
believes that Mr. McGill's base salary is generally competitive
with the average salary paid to executives of similar rank and
expertise at banking institutions which the Committee considered
to be comparable and taking into account the Bank's superior
performance and complex operations relative to comparable
institutions.
Mr. McGill received bonus compensation for fiscal year
1999 pursuant to the same basic factors as described above under
" -- Bonus." In establishing Mr. McGill's bonus, the Committee
considered the Company's overall performance, record of increase
in shareholder value and success in meeting strategic objectives
and his personal leadership and accomplishments. These factors
were considered in conjunction with the Company's financial
results for fiscal 1999 in relation to the established Business
Plan and achieving certain annual performance goals, including
but not limited to return on assets and return on equity,
satisfactory results of regulatory examinations and independent
audits, and successfully completing the conversion of the Bank
from the mutual to the stock form of ownership and from a
savings bank to a commercial bank.
The Committee believes that the Company's executive
compensation program serves the Company and its shareholders by
providing a direct link between the interests of executive
officers and those of shareholders generally and by helping to
attract and retain qualified executive officers who are
dedicated to the long-term success of the Company.
Members of the Executive Committee
James A. Barnwell
Richard C. Keziah
James C. McGill
Richard H. Shirley
5
<PAGE>
<PAGE>
COMPARATIVE STOCK PERFORMANCE GRAPH
The graph and table which follow show the cumulative total
return on the Common Stock for the period from April 26, 1999
(the day trading began in the Common Stock following completion
of the Company's initial public offering) through the fiscal
year ended September 30, 1999 with (1) the total cumulative
return of all companies whose equity securities are traded on
the Nasdaq Stock Market and (2) the total cumulative return of
banking companies traded on the Nasdaq Stock Market. The
comparison assumes $100 was invested on April 26, 1999 in the
Company's Common Stock and in each of the foregoing indices and
assumes reinvestment of dividends. The stockholder returns
shown on the performance graph are not necessarily indicative of
the future performance of the Common Stock or of any particular
index.
CUMULATIVE TOTAL STOCKHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDEXES
APRIL 26, 1999 THROUGH SEPTEMBER 30, 1999
04/26/99 09/30/99
-------- --------
COMPANY $100 $103.1
NASDAQ 100 104.0
NASDAQ BANKS 100 92.3
[Line graph appears here depicting the cumulative total
shareholder return of $100 invested in the Common Stock as
compared to $100 invested in all companies whose equity
securities are traded on the Nasdaq Stock Market and $100
invested in banking companies traded on the Nasdaq Stock Market.
Line graph plots the cumulative total return from April 26, 1999
to September 30, 1999. Plot points are provided above.]
6
<PAGE>
<PAGE>
________________________________________________________________
MANAGEMENT COMPENSATION
________________________________________________________________
Summary Compensation Table. The following table sets
forth the cash and noncash compensation for the fiscal years
ended September 30, 1999 and 1998 awarded to or earned by the
President and the four other executive officers who earned
salary and bonus in fiscal 1999 and 1998 exceeding $100,000 for
services rendered in all capacities to the Company and the Bank.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------
NAME AND FISCAL OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) COMPENSATION
- ------------------ ------ ------ ----- ------------------- ------------
<S> <C> <C> <C> <C> <C>
James C. McGill 1999 $175,000 $365,000 -- $154,378 (2)
President and Chief 1998 175,000 257,000 -- 107,352
Executive Officer of
the Company and the
Bank
A. Christine Baker 1999 95,000 182,500 -- 72,630 (2)
Treasurer and 1998 95,000 128,500 -- 44,469
Secretary of the
Company and the
Bank and Executive
Vice President-
Chief Financial
Officer of the Bank
Fairfax C. Reynolds 1999 95,000 182,500 -- 75,607 (2)
Vice President and 1998 95,000 128,500 -- 47,476
Assistant Secretary
of the Company and
Executive Vice
President of the
Bank
Frank Gavigan 1999 76,000 35,000 -- 22,606 (2)
Senior Vice 1998 76,000 30,000 -- 10,260
President-Senior
Credit Officer of
the Bank
John D. Hansell 1999 42,000 72,607 (3) -- 23,076 (2)
Manager-First 1998 42,000 68,220 (3) -- 5,460
Capital Services,
LLC
<FN>
___________
(1) Executive officers receive indirect compensation in the form of certain perquisites and other
personal benefits. The amount of such benefits received by the named executive officer in fiscal
1999 did not exceed 10% of the executive officer's salary and bonus.
(2) Includes $2,280 and $1,260 in matching contributions under the Bank's 401(k) Plan for executive
officers Gavigan and Hansell, respectively. Also includes $124,378, $42,630 and $45,607 accrued
under the Company's Deferred Compensation Plan for the benefit of executive officers McGill, Baker
and Reynolds, respectively, for service as an employee during the year ended September 30, 1999.
Also includes $30,000, $30,000, $30,000, $20,326 and $21,816 in Common Stock committed to be
allocated during the year ended September 30, 1999 under the ESOP to the accounts of executive
officers McGill, Baker, Reynolds, Gavigan and Hansell, respectively.
(3) Consists of commissions.
</FN>
</TABLE>
7
<PAGE>
<PAGE>
Employment Agreements and Guaranty Agreements. The Bank
has entered into employment agreements with James C. McGill, A.
Christine Baker and Fairfax C. Reynolds (each individual is
referred to herein as an "Employee" and the three individuals
are referred to collectively as the "Employees"). The Board
believes that the employment agreements assure fair treatment of
the Employees in their careers with the Company by assuring them
of some financial security.
The employment agreements became effective on April 23,
1999 and provide for a term of three years, with an annual base
salary equal to the Employee's existing base salary rate in
effect on the date of the Bank's conversion from mutual to stock
form. On each anniversary date of the commencement of the
employment agreements, the term of the Employee's employment
will be extended for an additional one-year period beyond the
then effective expiration date upon a determination by the
Bank's Board of Directors that the performance of the Employee
has met the required performance standards and that such
employment agreements should be extended. The employment
agreements provide the Employee with a salary review by the
Board of Directors not less often than annually, as well as with
inclusion in any discretionary bonus plans, retirement and
medical plans, vacation and sick leave and any fringe benefits
that become available to senior management, including for
example, any stock option or incentive compensation plans and
any other benefits commensurate with their responsibilities.
If the Board decides not to renew an employment agreement for
any reason, and if the Employee remains an employee of the Bank
until the Agreement expires, the Bank must pay the Employee an
amount equal to two times total compensation if the Employee is
later terminated.
The employment agreements terminate upon the Employee's
death, may terminate upon the Employee's disability and are
terminable for just cause, no severance benefits are available.
If the Bank terminates the Employee without just cause, the
Employee is entitled to receive three times total compensation
as well as continued medical and dental insurance under any
group plan chosen by the Employee from the plans the Bank
maintains, unless that coverage is not permitted by the terms of
such plan, in which case the Bank will remit to the Employee,
not less frequently than monthly, the actual cost to the
Employee of equivalent insurance. These provisions are in
addition to, and not in lieu of, any other rights that the
Employee has under the employment agreement and will continue
until the Employee first becomes eligible for participation in
Medicare. If the employment agreements are terminated due to
the Employee's "disability" as defined in the employment
agreements, the Employee will be entitled to a continuation of
his or her salary and benefits through the date of termination,
including any period prior to the establishment of the
Employee's disability. In the event of the Employee's death
during the term of the employment agreements, his or her estate
will be entitled to receive three times total compensation
determined as of the date of death. Each Employee is able to
voluntarily terminate his or her employment agreement by
providing 90 days' written notice to the Board of Directors, in
which case the Employee is entitled to receive only his or her
compensation, vested rights, and benefits up to the date of
termination.
The Bank will pay a severance benefit equal to the
difference between the product of 2.99 and the Employee's "base
amount" as defined in the Internal Revenue Code Section
280G(b)(3) and the sum of any other "parachute payments" as
defined under Code Section 280G(b)(2) that the Employee receives
on account of the change in control, and (ii) provide long-term
disability and medical insurance for 18 months if any of the
following occur:
. the Employee's involuntary termination of employment
other than for "just cause" during the period
beginning six months before a change in control and
ending on the later of the first anniversary of the
change in control or the expiration date of the
employment agreements (the "Protected Period");
. the Employee's voluntary termination within 90 days
of the occurrence of certain specified events
occurring during the Protected Period which have not
been consented to by the Employee; or
. the Employee's voluntary termination of employment
for any reason within the 30-day period beginning on
the date of the change in control.
8
<PAGE>
<PAGE>
The Employee will be paid either in one lump sum within
ten days of the later of the date of the change in control and
the Employee's last day of employment or if prior to the date
which is 90 days before the date on which a change in control
occurs, the Employee filed a duly executed irrevocable written
election, payment of such amount shall be made according to the
elected schedule. "Change in control" generally refers to the
acquisition, by any person or entity, of the ownership or power
to vote more than 25% of the Company's or the Bank's voting
stock, the control of the election of a majority of the
Company's or the Bank's directors, or the exercise of a
controlling influence over the Company's or the Bank's
management or policies. In addition, under the employment
agreements, a change in control occurs when, during any
consecutive two-year period, directors of the Company or the
Bank at the beginning of such period cease to constitute two-
thirds of the Board of Directors of the Company or the Bank,
unless the election of replacement directors was approved by a
two-thirds vote of the initial directors then in office. The
employment agreements provide that within 10 business days of a
change in control, the Company must deposit in a trust an amount
equal to the Internal Revenue Code Section 280G maximum. The
payments that would be made to Mr. McGill, Ms. Baker and Mr.
Reynolds assuming termination of employment under the foregoing
circumstances at September 30, 1999 would have been
approximately $1.3 million, $645,000 and $645,000, respectively.
These provisions may have an anti-takeover effect by making it
more expensive for a potential acquiror to obtain control of the
Company. In the event that the Employee prevails over the Bank,
or obtains a written settlement, in a legal dispute as to the
employment agreement, he or she will be reimbursed for legal and
other expenses.
In addition to the employment agreements, the Company has
entered into guaranty agreements with each of the Employees.
The guaranty agreements provide that the Company will perform
all covenants and honor all obligations required to be performed
or to which the Bank is subject pursuant to the employment
agreements in the event that such covenants are not performed or
obligations are not honored by the Bank, and that to the extent
permitted by law, the Company will be jointly and severally
liable with the Bank for the payment of all amounts due under
the employment agreements. The guaranty agreements provide the
Employee with a salary review by the Board of Directors not less
often than annually, as well as with inclusion in any
discretionary bonus plans, retirement and medical plans,
customary fringe benefits, vacation and sick leave.
DIRECTOR COMPENSATION
Fees. Each non-employee member of the Bank's Board of
Directors receives a monthly retainer fee based on the following
schedule:
. the Chairman of the Board - $2,000;
. members of the Executive Committee - $1,750; and
. other directors - $1,500.
In addition, non-employee members of the Company's Board of
Directors receive a monthly retainer fee of $250. Officers who
are directors are not compensated for their service as
directors.
Deferred Compensation Plan. The Bank adopted the DCP,
effective September 24, 1997, for the Bank's directors and
select executive officers. Under the DCP, before each fiscal
year begins, each non-employee director may elect to defer
receipt of all or part of his future fees and any other
participant may elect to defer receipt of up to 25% of his
salary or 100% of his bonus compensation for the year. Deferred
amounts are credited at the end of the calendar year to
bookkeeping accounts in the name of each participant.
On each September 30, the Company will credit the accounts
of directors Barnwell, Bean, Keziah, McClure, Quakenbush,
Shirley, and Stadler with $8,795, $7,852, $10,051, $7,852,
$7,852, $8,795 and $7,852, respectively, provided that such
annual credits shall not be made for the benefit of non-employee
directors after 12 years of service credits. Similarly, the
plan provides supplemental executive retirement benefits for
executive officers McGill, Baker and Reynolds through initial
credits and through annual credits on each September 30th of
$81,972, $30,789 and $33,766, respectively. Each participant is
fully vested in his or her account balance under the DCP.
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Each participant may elect to have all or part of his or
her account credited with the total return on the Company's
common stock or a rate of return equal to the highest rate of
interest paid on the Bank's one-year certificate of deposit.
Account balances will normally be distributed in five
substantially equal annual installments beginning during the
first quarter of the calendar year following the calendar year
in which the participant ceases to be a director or employee,
with any subsequent payments being made by the last day of the
first quarter of each subsequent calendar year until the
participant has received the entire amount of his or her
account. Participants may, however, elect to receive their
distributions in a lump sum or in installments paid over a
period of up to 10 years. In the event of a participant's
death, the balance of his or her plan account will be paid in a
lump sum (unless the participant elects to continue the
previously designated distribution method) to his or her
designated beneficiary, or if none, his or her estate.
The Bank has established a trust in order to hold assets
with which to pay plan benefits to participants. Trust assets
are subject to claims of general creditors. In the event a
participant prevails over the Bank in a legal dispute as to the
terms or interpretation of the DCP, he or she would be
reimbursed for his legal and other expenses.
________________________________________________________________
PROPOSAL I -- APPROVAL OF THE 1st STATE BANCORP, INC.
2000 STOCK OPTION AND INCENTIVE PLAN
________________________________________________________________
GENERAL
The Board of Directors of the Company has adopted the 1st
State Bancorp, Inc. 2000 Stock Option and Incentive Plan (the
"Option Plan"), subject to its approval by the Company's
stockholders. The initial grant of stock options under the
Option Plan will occur upon the Option Plan's receipt of
stockholder approval. The Option Plan is attached hereto as
Exhibit A and should be consulted for additional information.
All statements made herein regarding the Option Plan, which are
only intended to summarize the Option Plan, are qualified in
their entirety by reference to the Option Plan.
PURPOSE OF THE OPTION PLAN
The purpose of the Option Plan is to advance the interests
of the Company by providing directors and selected employees of
the Company, the Bank, and their affiliates with the opportunity
to acquire shares of Common Stock. By encouraging such stock
ownership, the Company seeks to attract, retain, and motivate
the best available personnel for positions of substantial
responsibility and to provide additional incentive to directors
and employees of the Company and its affiliates to promote the
success of the business of the Company.
DESCRIPTION OF THE OPTION PLAN
Effective Date. The Option Plan became effective on April
18, 2000, the date of its approval by the Company's Board of
Directors (the "Effective Date"), subject to approval by the
stockholders. No awards may or will be made prior to
stockholder approval.
Administration. The Option Plan is administered by a
committee (the "Committee"), appointed by the Board of
Directors, consisting of at least two directors of the Company
who are "Non-employee Directors" within the meaning of the
federal securities laws. The Committee has discretionary
authority (i) to select participants and grant options, (ii) to
determine the form and content of any awards granted under the
Option Plan, (iii) to interpret the Option Plan, (iv) to
prescribe, amend and rescind rules and regulations relating to
the Option Plan, and (v) to make other determinations necessary
or advisable in connection with administering the Option Plan.
All decisions, determinations, and interpretations of the
Committee are final and conclusive on all persons affected
thereby. Members of the Committee will be indemnified to the
full extent provided for under the Company's governing
instruments with respect to indemnification of Directors in
connection with any claims, suits or proceedings or other
actions relating to any action taken or failure to act under the
Option Plan. It is expected that the Committee will initially
consist of Directors Keziah, Barnwell and Shirley.
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Eligible Persons. Under the Option Plan, the Committee
has discretionary authority to grant stock options ("Options")
to such employees and directors (including members of the
Committee) as the Committee shall designate. As of the Record
Date, the Company and its subsidiaries had approximately eight
employees and seven non-employee directors who were eligible to
participate in the Option Plan.
Shares Available for Grants. The Option Plan authorizes
the issuance of Options for up to 316,312 shares of Common
Stock. Such shares may be (i) authorized but unissued shares,
(ii) shares held in treasury, or (iii) shares held in a grantor
trust created by the Company. In the event of any merger,
consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of
shares, or similar event in which the number or kind of shares
is changed without receipt or payment of consideration by the
Company, the Committee will proportionately adjust the number
and kind of shares reserved for issuance under the Option Plan
and the exercise prices of such Options. If Options should
expire, become unexercisable, or be forfeited for any reason
without having been exercised, the shares of Common Stock
subject to such Options shall, unless the Option Plan shall have
been terminated, be available for the grant of additional
Options under the Option Plan.
Options and Exercise Price. Options may be either
incentive stock options ("ISOs") as defined in Section 422 of
the Internal Revenue Code, or options that are not ISOs ("Non-
ISOs"). The exercise price as to any Option may not be less
than the fair market value (determined under the Option Plan) of
the optioned shares on the date of grant. In the case of an
employee who owns more than 10% of the outstanding Common Stock
on the date of grant, such exercise price may not be less than
110% of fair market value of the shares on the date of the
grant. As required by federal tax laws, to the extent that the
aggregate fair market value (determined when an ISO is granted)
of the Common Stock with respect to which ISOs are exercisable
by an optionee for the first time during any calendar year
(under all plans of the Company and of any affiliate) exceeds
$100,000, the Options granted in excess of $100,000 will be
treated as Non-ISOs, and not as ISOs.
Grants of Options. On June 6, 2000, provided that the
Option Plan is approved by stockholders, all directors and eight
officers of the Company and the Bank will receive one-time
grants of Options to purchase shares of Common Stock at an
exercise price per share equal to its fair market value on the
Effective Date (see "--Stock Option Grants" and "New Plan
Benefits" below).
Election to Receive Discounted Options in Lieu of Cash
Compensation. The Committee may, at the election of a
participant selected by the Committee, grant Non-ISOs to such
individual in lieu of cash compensation otherwise payable by the
Company or the Bank. An individual's election to receive Non-
ISOs in lieu of cash compensation must be made prior to the
calendar year for which such election will be deemed effective,
and in accordance with regulations prescribed by the Committee.
Pursuant to an election accepted and approved by the Committee,
a participant may elect to forego the receipt of cash
compensation otherwise expected from the Company or the Bank and
instead receive, as of the last day of the calendar year, Non-
ISOs with an aggregate difference between the market value of
the underlying shares and the exercise price (determined as of
the first day of the calendar year) equal to the amount of cash
compensation forgone by the participant pursuant to an election
covering the calendar year. Such Non-ISOs will be at all times
fully exercisable following their date of grant, and shall
otherwise be subject to the terms of the underlying Agreement
and the Option Plan. In no event however, may a Non-ISO be
granted in this fashion with an exercise price which is less
than 50% of the market value of the underlying shares on the
date of grant.
Exercise of Options. The exercise of Options will be
subject to such terms and conditions as are established under
the terms of the Option Plan and by the Committee in a written
agreement between the Committee and the optionee. In the
absence of Committee action to the contrary, an otherwise
unexpired Option shall cease to be exercisable upon (i) an
optionee's termination of employment for "just cause" (as
defined in the Option Plan), (ii) the date that is one year
after an optionee terminates service for a reason other than
just cause or death, or (iii) the date that is two years after
an optionee's death. The exercise price of shares subject to
any outstanding Option will be proportionately adjusted upon the
payment of a special large and nonrecurring dividend that has
the effect of a return of capital to the stockholders, such that
after the adjustment of each outstanding Option, the ratio of
the exercise price
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to the value of the underlying shares of Common Stock, and the
aggregate difference between the Exercise Price and the value of
underlying shares is the same before and after payment of each
such dividend.
An Option recipient may exercise Options, subject to
provisions relative to their termination and limitations on
their exercise, only by (i) written notice of intent to exercise
the Option with respect to a specified number of shares of
Common Stock, and (ii) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock owned for
more than six months, or a combination of cash and Common Stock,
of the amount of the exercise price for the number of shares
with respect to which the Option is then being exercised.
Common Stock owned for more than six months utilized in full or
partial payment of the exercise price for Options shall be
valued at its market value at the date of exercise.
Conditions on Issuance of Shares. The Committee will have
the discretionary authority to impose, in agreements, such
restrictions on shares of Common Stock issued pursuant to the
Option Plan 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. In addition, the Committee may not issue shares
unless the issuance complies with applicable securities laws,
and to that end may require that a participant make certain
representations or warranties.
Change in Control. The Option Plan provides that upon a
"Change in Control", all Options shall become fully exercisable.
For purposes of the Option Plan, the term "Change in Control"
means any one of the following events: (i) the acquisition of
ownership, holding or power to vote more than 25% of the Bank's
or the Company's voting stock, (ii) the acquisition of the
control of the election of a majority of the Bank's or the
Company's directors, (iii) the exercise of a controlling
influence over the management or policies of the Bank or the
Company by any person or by persons acting as a "group" (within
the meaning of Section 13(d) of the Exchange Act), or (iv)
during any period of two consecutive years, individuals (the
"Continuing Directors") who at the beginning of such period
constitute the Board of Directors of the Company or the Bank
(the "Existing Board") cease for any reason to constitute at
least two-thirds thereof, provided that any individual whose
election or nomination for election as a member of the Existing
Board was approved by a vote of at least two-thirds of the
Continuing Directors then in office shall be considered a
Continuing Director. For purposes of defining Change in
Control, the term "person" means an individual (other than an
employee of the Company or its affiliates), or a corporation,
partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other
form of entity not specifically listed. The decision of the
Committee as to whether a Change in Control has occurred shall
be conclusive and binding.
Although these provisions are included in the Option Plan
primarily for the protection of an employee-optionee in the
event of a Change in Control of the Company, they may be
regarded as having a takeover defensive effect, which may reduce
the Company's vulnerability to hostile takeover attempts and
certain other transactions which have not been negotiated with
and approved by the Board of Directors.
Transferability. Award recipients may transfer their
Options (but not ISOs) to family members or trusts under
specified circumstances, but Awards may not otherwise be sold,
pledged, assigned, hypothecated, transferred or disposed of in
any manner other than by will or by the laws of descent and
distribution. Awards that are transferred shall be exercisable
by the transferee according to the same terms and conditions as
applied to the optionee.
Effect of Dissolution and Related Transactions. In the
event of (i) the liquidation or dissolution of the Company, (ii)
a merger or consolidation in which the Company is not the
surviving entity, or (iii) the sale or disposition of all or
substantially all of the Company's assets (any of the foregoing
to be referred to herein as a "Transaction"), all outstanding
Options, together with the exercise prices thereof, will be
equitably adjusted for any change or exchange of shares for a
different number or kind of shares or other securities which
results from the Transaction. However, any such adjustment will
be made in such a manner as to not constitute a modification,
within the meaning of Section 424(h) of the Internal Revenue
Code, of outstanding ISOs.
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Duration of the Option Plan and Grants. The Option Plan
has a term of 10 years from the Effective Date, after which date
no Options may be granted. The maximum term for an Option is 10
years from the date of grant, except that the maximum term of an
ISO may not exceed five years if the optionee owns more than 10%
of the Common Stock on the date of grant. The expiration of the
Option Plan, or its termination by the Committee, will not
affect any Option then outstanding.
Amendment and Termination of the Option Plan. The
Company's Board of Directors may from time to time amend the
terms of the Option Plan and, with respect to any shares at the
time not subject to Options, suspend or terminate the Option
Plan. No amendment, suspension, or termination of the Option
Plan will, without the consent of any affected recipient, alter
or impair any rights or obligations under any Option previously
granted.
Financial Effects of Awards. The Company will receive no
monetary consideration for the granting of Options under the
Option Plan. It will receive no monetary consideration other
than the exercise price for shares of Common Stock issued to
optionees upon the exercise of their Options. Under applicable
accounting standards, recognition of compensation expense is not
required when Options are granted at an exercise price equal to
or exceeding the fair market value of the Common Stock on the
date the Option is granted.
FEDERAL INCOME TAX CONSEQUENCES
ISOs. An optionee recognizes no taxable income upon the
grant of ISOs. If the optionee holds the shares purchased upon
exercise of an ISO for at least two years from the date the ISO
is granted, and for at least one year from the date the ISO is
exercised, any gain realized on the sale of the shares received
upon exercise of the ISO is taxed as long-term capital gain.
However, the difference between the fair market value of the
Common Stock on the date of exercise and the exercise price of
the ISO will be treated by the optionee as an item of tax
preference in the year of exercise for purposes of the
alternative minimum tax. If an optionee disposes of the shares
before the expiration of either of the two annual holding
periods noted above, the disposition is a "disqualifying
disposition." In this event, the optionee will be required, at
the time of the disposition of the Common Stock, to treat the
lesser of the gain realized or the difference between the
exercise price and the fair market value of the Common Stock at
the date of exercise as ordinary income and the excess, if any,
as capital gain.
The Company will not be entitled to any deduction for
federal income tax purposes as the result of the grant or
exercise of an ISO, regardless of whether or not the exercise of
the ISO results in liability to the optionee for alternative
minimum tax. However, if an optionee has ordinary income
taxable as compensation as a result of a disqualifying
disposition, the Company will be entitled to deduct an
equivalent amount.
Non-ISOs. In the case of a Non-ISO, an optionee will
recognize ordinary income upon the exercise of the Non-ISO in an
amount equal to the difference between the fair market value of
the shares on the date of exercise and the option price (or, if
the optionee is subject to certain restrictions imposed by the
federal securities laws, upon the lapse of those restrictions
unless the optionee makes a annual tax election within 30 days
after the date of exercise to have the general rule apply).
Upon a subsequent disposition of such shares, any amount
received by the optionee in excess of the fair market value of
the shares as of the exercise will be taxed as capital gain.
The Company will be entitled to a deduction for federal income
tax purposes at the same time and in the same amount as the
ordinary income recognized by the optionee in connection with
the exercise of a Non-ISO.
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STOCK OPTION GRANTS
Set forth below is certain information relating to all
Options which are to be granted to the specified individuals and
groups of individuals on the date of the Special Meeting. All
such Options (i) will be subject to the terms and conditions
described above, and are contingent on, and not exercisable
until, the Option Plan receives stockholder approval, (ii) will
be immediately exercisable, and (iii) will automatically expire
ten years after the date of their grant. The exercise price for
these Options will equal the fair market value of the Common
Stock on the date of grant. The closing sale price of the
Common Stock on April 17, 2000, as reported on the Nasdaq
National Market, was $18.00 per share.
<TABLE>
<CAPTION>
NUMBER OF SHARES
PARTICIPANT OR GROUP SUBJECT TO OPTIONS
-------------------- ------------------
<S> <C>
Non-Employee Directors:
James A. Barnwell, Jr. 15,816
Bernie C. Bean 15,816
Richard C. Keziah 15,816
James G. McClure 15,816
T. Scott Quackenbush 15,816
Richard H. Shirley 15,816
Virgil L. Stadler 15,816
Others:
James C. McGill, President of the
Company and the Bank 79,078
A. Christine Baker, Treasurer and
Secretary of the 45,000
the Company and Bank, Executive Vice
President and Chief Financial Officer
of the Bank
Fairfax C. Reynolds, Vice President and
Assistant Secretary of the Company 45,000
and Executive Vice President of the Bank
Frank Gavigan, Senior Vice President-Senior 11,250
Credit Officer of the Bank
John D. Hansell, Manager-First Capital 7,500
Services, LLC
All current executive officers as a group
(5 persons) 187,828
All current directors who are not executive
officers as a group (7 persons) 110,712
All employees, including all current officers
who are not executive officers, as a
group (3 persons) 17,772
</TABLE>
For additional information relating to proposed option
grants, see "New Plan Benefits" below.
RECOMMENDATION AND VOTE REQUIRED
The Board of Directors has determined that the Option Plan
is desirable, cost effective, and produces incentives which will
benefit the Company and its stockholders. The Board of
Directors is seeking stockholder approval of the Option Plan in
order to satisfy the requirements of the Code for favorable tax
treatment of ISOs and to exempt certain option transactions from
the short-swing trading rules of the Securities and Exchange
Commission ("SEC").
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Stockholder approval of the Option Plan requires the
affirmative vote of the holders of a majority of the votes
eligible to be cast at the Special Meeting. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE OPTION PLAN.
________________________________________________________________
PROPOSAL II -- APPROVAL OF 1ST STATE BANCORP, INC.
MANAGEMENT RECOGNITION PLAN
________________________________________________________________
GENERAL
The Board of Directors of the Company has adopted the 1st
State Bancorp, Inc. Management Recognition Plan (the "MRP"),
subject to its approval by the Company's stockholders. The
initial grant of MRP awards will occur upon the MRP's receipt of
stockholder approval. A copy of the MRP is attached hereto as
Exhibit B, and should be consulted for additional information.
All statements made herein regarding the MRP, which are only
intended to summarize the MRP, are qualified in their entirety
by reference to the MRP.
PURPOSE OF THE MRP
The purpose of the MRP is to reward and retain personnel
of experience and ability in key positions of responsibility by
providing employees and directors of the Company, the Bank and
their affiliates with a proprietary interest in the Company, and
as compensation for their past contributions to the Company and
the Bank, and as an incentive to make such contributions in the
future.
DESCRIPTION OF THE MRP
Effective Date. The MRP became effective on April 18,
2000 (the "Effective Date") upon its approval by the Board of
Directors, but is subject to approval by the Company's
stockholders. No awards will be made under the MRP unless and
until stockholder approval is received.
Administration. The MRP will be administered by an MRP
Committee consisting of not less than two members of the
Company's Board of Directors who are "Non-employee Directors"
within the meaning of the federal securities laws. Except as
limited by the express provisions of the MRP or by resolutions
adopted by the Board, the MRP Committee has sole and complete
authority and discretion (i) to grant MRP awards to such
employees as the MRP Committee may select, (ii) to determine the
form and content of MRP awards to be issued under the MRP, (iii)
to interpret the MRP, (iv) to prescribe, amend, and rescind
rules and regulations relating to the MRP, and (v) to make other
determinations necessary or advisable for the administration of
the MRP. The MRP provides that members of the MRP Committee
shall be indemnified for actions taken under the MRP in good
faith and in a manner reasonably believed to be in the best
interests of the Company and its affiliates. The MRP Committee
consists of Directors Keziah, Barnwell and Shirley.
Number of Shares. Up to 126,525 shares of Common Stock
are available for awards under the MRP. The shares may be newly
issued shares, treasury shares or shares purchased in the open
market. In the event the Company purchases shares in the open
market to fund MRP awards, such shares may be held in a grantor
trust.
The Company anticipates that the initial awards under the
MRP will be made with newly issued shares and that the Company
will contribute to a grantor trust (the "MRP Trust") sufficient
shares to fund the initial awards. The trustees of the MRP
Trust will be directors Keziah, Shirley and Barnwell. Any
unvested shares of Common Stock held by the MRP Trust would be
voted by the trustees in the same proportion as the trustee of
the Company's Employee Stock Ownership Plan trust votes Common
Stock held therein, and in the absence of any such voting, shall
be voted in the manner directed by the Company's Board of
Directors.
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Adjustments for Capital Changes. In the event of any
merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of
shares, or similar event in which the number or kind of shares
is changed without receipt or payment of consideration by the
Company, the MRP Committee will proportionately adjust both the
number and kind of shares of stock which may be purchased under
the MRP and the number and kind of shares of stock subject to
outstanding MRP awards. In the event of (i) the liquidation or
dissolution of the Company, (ii) a merger or consolidation in
which the Company is not the surviving entity, or (iii) the sale
or disposition of all or substantially all of the Company's
assets, all outstanding MRP awards shall be adjusted for any
change or exchange of shares of Common Stock for a different
number or kind of shares or other securities which results from
the transaction.
Types of Awards; Eligible Persons. The MRP Committee may
make MRP awards, in the form of restricted stock. The MRP
Committee has the discretion to select employees and directors
of the Company and/or of the Bank who will receive MRP awards.
In selecting those employees and directors to whom MRP awards
will be granted and the number of shares covered by such awards,
the MRP Committee will consider the position, duties and
responsibilities of eligible employees, the value of their
services to the Company, the Bank and its affiliates and any
other factors the MRP Committee may deem relevant.
Proposed MRP Awards. For information relating to proposed
MRP awards, see "New Plan Benefits" below.
Vesting. Pursuant to the MRP, freely transferable shares
of Common Stock will be transferred to participants as they
become vested in their MRP awards. The MRP awards that will be
granted on June 6, 2000, assuming stockholders approve the MRP
at the Special Meeting, will become 33 1/3% vested upon receipt
of the award and will be 33 1/3% vested on each of the next two
anniversary dates of the award, provided, with respect to each
vesting date, that the participant is an employee or director of
the Company or an affiliate on such date. All shares of Common
Stock subject to outstanding awards will be immediately 100%
earned and nonforfeitable upon a participant's death or
disability (as defined in the MRP). If a participant terminates
employment for reasons other than death or disability, the
participant forfeits all rights to the shares then under
restriction. Vesting upon retirement may be provided by the MRP
committee in an agreement with participants on an individual
basis.
Change in Control. The MRP provides that notwithstanding
the general rule with respect to vesting of awards: (i) all
shares subject to an award under the MRP held by a participant
whose service with the Company or an affiliate terminates due to
the participant's death or disability, shall be deemed earned
and 100% vested as of the participant's last day of service with
the Company or an affiliate, and (ii) all shares subject to an
award held by a participant shall be deemed earned and 100%
vested as of a "change in control." For purposes of the MRP,
the term "change in control" is defined to mean any one of the
following events: (i) the acquisition of ownership, holding or
power to vote more than 25% of the Bank's or the Company's
voting stock, (ii) the acquisition of the control of the
election of a majority of the Bank's or the Company's directors,
(iii) the exercise of controlling influence over the management
or policies of the Bank or the Company by any person or by
persons acting as a "group" (within the meaning of Section 13(d)
of the Exchange Act), or (iv) during any period of two
consecutive years, individuals (the "Continuing Directors") who
at the beginning of such period constitute the Board of
Directors of the Company or the Bank (the "Company Board") cease
for any reason to constitute at least two-thirds thereof,
provided that any individual whose election or nomination for
election as a member of the Company Board was approved by a vote
of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. For purposes
of the definition of change in control, the term "person" means
an individual (other than an employee employed by the Company or
an affiliate), or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of
entity not specifically listed. The decision of the MRP
Committee as to whether a change in control has occurred shall
be conclusive and binding.
Distributions of Shares; Dividends. The MRP Trustees
shall distribute all shares, together with any shares
representing stock dividends, in the form of Common Stock. One
share of Common Stock shall be given for each share earned.
Payments representing cash dividends (and earnings thereon) will
be made in cash.
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Whenever shares previously awarded become vested and are
distributed to a participant, such participant will also be
entitled to receive, with respect to each share distributed, an
amount equal to any cash dividends (including special large and
nonrecurring dividends, including one that has the effect of a
return of capital to the Company's stockholders) and a number of
shares of Common Stock equal to any stock dividends, declared
and paid with respect to a share of Common Stock between the
date the relevant award was initially granted to such
participant and the date the shares are distributed. There will
also be distributed an appropriate amount of net earnings, if
any, of the MRP Trust with respect to any cash dividends so paid
out. No award recipient shall have any dividend rights in any
shares he or she has been awarded until such time as shares are
vested and distributed to the participant.
No shares may be distributed from the MRP Trust prior to
the date which is three years from the date of the Bank's
conversion from mutual to stock form to the extent the award
recipient or beneficiary thereof would after receipt of such
shares own in excess of 10% of the issued and outstanding shares
of Common Stock, unless such action is approved in advance by a
majority vote of the non-employee directors of the Company's
Board of Directors. To the extent this limitation would delay
the date on which a participant receives Common Stock, the
participant may elect to receive from the Trust, in lieu of
Common Stock, the cash equivalent thereof. Any shares remaining
undistributed solely by reason of the operation of this rule
shall be distributed to the award recipient on the date which is
three years from the date of the Bank's conversion to stock
form.
Deferral of Awards Election. The MRP provides that at any
time prior to December 31st of any year prior to the date on
which a participant becomes vested in any shares subject to
his or her award, a participant who is a member of a select
group of management or highly compensated employees (within the
meaning of the Employees' Retirement Income Security Act of
1974) may irrevocably elect to defer the receipt of all or a
percentage of the shares and/or cash that would otherwise be
transferred to the participant upon the vesting of such award
(the "Deferred Shares"). Each September 30th MRP participants
shall receive earnings on dividends paid on Deferred Shares at a
rate equal to the dividend-adjusted total return on the Common
Stock, as determined from time to time by the MRP Committee in
its sole discretion. The MRP Trustees shall hold each
Participant's Deferred Shares and deferred earnings in the MRP
Trust until distribution is required pursuant to the
participant's election.
Nontransferability. 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.
However, participants may transfer their MRP awards to family
members or trusts under specified circumstances. MRP awards and
rights to shares held in the MRP Trust are not otherwise
transferable by participants in the MRP.
Taxation. Participants will recognize compensation income
when their interest vests, or at an earlier date pursuant to a
participant's election to accelerate recognition pursuant to
Section 83(b) of the Internal Revenue Code.
Financial Effects of Awards. Neither the Company nor the
Bank will receive any monetary consideration for the granting of
awards under the MRP. Under applicable accounting standards,
when MRP awards are granted, the Company must recognize
compensation expense based on the fair market value of the
Common Stock on the date the MRP awards are granted, with such
amount being amortized over the expected vesting period for the
award.
Amendment and Termination of the MRP. The Company's Board
of Directors may, by resolution, amend or terminate the MRP at
any time, provided that no amendment or termination of the MRP
will, without the written consent of any affected holders of an
MRP award, impair any rights or obligations under any MRP award
previously granted.
The power to amend or terminate the MRP includes the power
to direct the MRP Trustees to return to the Company all or any
part of the assets of the MRP Trust, including shares of Common
Stock held in the plan share reserve of the MRP. However, the
termination of the MRP Trust will not affect a participant's
right to earn outstanding MRP awards and to receive Common Stock
relating thereto, including earnings thereon, in accordance with
the terms of the MRP and the particular MRP award made to the
participant.
17
<PAGE>
<PAGE>
Duration of the MRP. The MRP and MRP Trust will remain in
effect until the earlier of (i) termination by the Company's
Board of Directors, or (ii) the distribution of all assets of
the MRP Trust. Termination of the MRP will not affect any MRP
awards previously granted, and such MRP awards will remain valid
and in effect until they have been earned and distributed from
the MRP Trust, or by their terms expire or are forfeited.
RECOMMENDATION AND VOTE REQUIRED
The Board of Directors has determined that the MRP is
desirable, cost effective, and produces incentives which will
benefit the Company and its stockholders. The Board of
Directors is seeking stockholder approval of the MRP to exempt
certain transactions from the short-swing trading rules of the
SEC.
Approval of the MRP requires the affirmative vote of the
holders of at least a majority of the votes eligible to be cast
at the Special Meeting. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE "FOR" APPROVAL OF THE MRP.
________________________________________________________________
NEW PLAN BENEFITS
________________________________________________________________
The following tables sets forth certain information
regarding the benefits to be received under the Option Plan and
the MRP.
<TABLE>
<CAPTION>
OPTION PLAN MRP
---------------------- ----------------------
DOLLAR NUMBER DOLLAR NUMBER
NAME AND POSITION VALUE ($)(1) OF UNITS VALUE ($)(2) OF UNITS
- ----------------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C>
James C. McGill, President $ -- $79,078 $567,000 31,500
of the Company and the Bank
A. Christine Baker, Treasurer
and Secretary of the -- 45,000 324,000 18,000
the Company and Bank,
Executive Vice President
and Chief Financial Officer
of the Bank
Fairfax C. Reynolds, Vice
President and Assistant -- 45,000 324,000 18,000
Secretary of the Company
and Executive Vice
President of the Bank
Frank Gavigan, Senior Vice
President-Senior -- 11,250 81,000 4,500
Credit Officer of the Bank
John D. Hansell, Manager-First
Capital Services, LLC -- 7,500 54,000 3,000
All current executive officers
as a group (5 persons) -- 187,828 1,350,000 75,000
All current directors who are
not executive officers -- 110,712 797,076 44,282
as a group (7 persons)
All employees, including all
current officers who -- 17,772 130,374 7,243
are not executive officers,
as a group 3 persons)
<PAGE>
<FN>
___________
(1) Based on the fair market value of the Common Stock on the date of grant
less the exercise price. All Options will be granted at an exercise
price equal to the fair market value of the underlying shares of Common
Stock on the date of the grant, which will occur upon receipt of
stockholder approval at the Special Meeting.
(2) Based on the closing price of the underlying Common Stock of $18.00 per
share as quoted on the Nasdaq National Market on April 17, 2000.
</FN>
</TABLE>
18
<PAGE>
<PAGE>
________________________________________________________________
OTHER MATTERS
________________________________________________________________
The Board of Directors is not aware of any business to
come before the Special Meeting other than those matters
described above in this Proxy Statement and matters incident to
the conduct of the Special Meeting. However, if any other
matters should properly come before the Special Meeting, it is
intended that proxies in the accompanying form will be voted in
respect thereof in accordance with the determination of a
majority of the Board of Directors.
________________________________________________________________
MISCELLANEOUS
________________________________________________________________
The cost of soliciting proxies will be borne by the
Company. The Company will reimburse brokerage firms and other
custodians, nominees and fiduciaries for reasonable expenses
incurred by them in sending proxy materials to the beneficial
owners of Common Stock. In addition to solicitations by mail,
directors, officers and regular employees of the Company may
solicit proxies personally or by telegraph or telephone without
additional compensation.
________________________________________________________________
STOCKHOLDER PROPOSALS
________________________________________________________________
In order to be eligible for inclusion in the proxy
materials of the Company for the Annual Meeting of Stockholders
for the year ending September 30, 2000, any stockholder proposal
to take action at such meeting must be received at the Company's
executive offices at 445 S. Main Street, Burlington, North
Carolina 27215 by no later than August 22, 2000. Any such
proposals shall be subject to the requirements of the proxy
rules adopted under the Exchange Act.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ A. Christine Baker
A. Christine Baker
Secretary
April 27, 2000
Burlington, North Carolina
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN
PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
YOU ARE REQUESTED TO SIGN AND PROMPTLY RETURN THE ACCOMPANYING
PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
19
<PAGE>
<PAGE>
EXHIBIT A
1ST STATE BANCORP, INC.
2000 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE OF THE PLAN.
The purpose of this Plan is to advance the interests of the
Company through providing select key Employees and Directors of
the Bank, the Company, and their Affiliates with the opportunity
to acquire Shares. By encouraging such stock ownership, the
Company seeks to attract, retain and motivate the best available
personnel for positions of substantial responsibility and to
provide additional incentives to Directors and key Employees of
the Company or any Affiliate to promote the success of the
business.
2. DEFINITIONS.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or
"subsidiary corporation" of the Company, as such terms are
defined in Section 424(e) and (f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered
into in accordance with Paragraph 5(c).
(c) "Awards" shall mean Options, unless the context
clearly indicates a different meaning.
(d) "Bank" shall mean 1st State Bank.
(e) "Board" shall mean the Board of Directors of the
Company.
(f) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(g) "Committee" shall mean the Stock Option Committee
consisting of at least two Non-Employee Directors appointed by
the Board in accordance with Paragraph 5(a) hereof, the Board.
(h) "Common Stock" shall mean the common stock of the
Company.
(i) "Company" shall mean 1st State Bancorp, Inc.
(j) "Continuous Service" shall mean the absence of any
interruption or termination of service as an Employee or
Director of the Company or an Affiliate. Continuous Service
shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the
Company, in the case of transfers between payroll locations of
the Company or between the Company, an Affiliate or a successor,
or in the case of a Director's performance of services in an
emeritus or advisory capacity.
(k) "Date of Conversion" shall mean the date of the
conversion of the Bank from mutual to stock form.
(l) "Director" shall mean any member of the Board, and any
member of the board of directors of any Affiliate that the Board
has by resolution designated as being eligible for participation
in this Plan.
(m) "Disability" shall mean a physical or mental
condition, which in the sole and absolute discretion of the
Committee, is reasonably expected to be of indefinite duration
and to substantially prevent a Participant from fulfilling his
or her duties or responsibilities to the Company or an
Affiliate.
A-1
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<PAGE>
(n) "Effective Date" shall mean the date specified in
Paragraph 12 hereof.
(o) "Employee" shall mean any person employed by the
Company, the Bank, or an Affiliate.
(p) "Exercise Price" shall mean the price per Optioned
Share at which an Option may be exercised.
(q) "ISO" shall mean an option to purchase Common Stock
which meets the requirements set forth in the Plan, and which is
intended to be and is identified as an "incentive stock option"
within the meaning of Section 422 of the Code.
(r) "Market Value" shall mean the fair market value of the
Common Stock, as determined under Paragraph 8(b) hereof.
(s) "Non-Employee Director" shall have the meaning
provided in Rule 16b-3.
(t) "Non-ISO" means an option to purchase Common Stock
which meets the requirements set forth in the Plan but which is
not intended to be and is not identified as an ISO.
(u) "Option" means an ISO and/or a Non-ISO.
(v) "Optioned Shares" shall mean Shares subject to an
Award granted pursuant to this Plan.
(w) [reserved]
(x) "Participant" shall mean any person who receives an
Award pursuant to the Plan.
(y) "Plan" shall mean this 1st State Bancorp, Inc. 2000
Stock Option and Incentive Plan.
(z) "Rule 16b-3" shall mean Rule 16b-3 of the General
Rules and Regulations under the Securities Exchange Act of 1934,
as amended.
(aa) "Share" shall mean one share of Common Stock.
(bb) [reserved]
(cc) "Year of Service" shall mean a full twelve-month
period, measured from the date of an Award and each annual
anniversary of that date, during which a Participant has not
terminated Continuous Service for any reason.
3. TERM OF THE PLAN AND AWARDS.
(a) Term of the Plan. The Plan shall continue in effect
for a term of ten years from the Effective Date, unless sooner
terminated pursuant to Paragraph 14 hereof. No Award shall be
granted under the Plan after ten years from the Effective Date.
(b) Term of Awards. The term of each Award granted under
the Plan shall be established by the Committee, but shall not
exceed ten years; provided, however, that in the case of an
Employee who owns Shares representing more than 10% of the
outstanding Common Stock at the time an ISO is granted, the term
of such ISO shall not exceed five years.
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<PAGE>
4. SHARES SUBJECT TO THE PLAN.
General Rule. Except as otherwise required under
Paragraph 9, the aggregate number of Shares deliverable pursuant
to Awards shall not exceed 316,312 Shares, which equals 10% of
the Shares issued by the Company in connection with the Bank's
conversion from mutual to stock form ("Conversion"). Such
Shares may either be authorized but unissued Shares, Shares held
in treasury or Shares held in a grantor trust created by the
Company. If any Awards should expire, become unexercisable, or
be forfeited for any reason without having been exercised, the
Optioned Shares shall, unless the Plan shall have been
terminated, be available for the grant of additional Awards
under the Plan.
5. ADMINISTRATION OF THE PLAN.
(a) Appointment of the Committee. The Plan shall be
administered by the Committee. Members of the Committee shall
serve at the pleasure of the Board. In the absence at any time
of a duly appointed Committee, the Plan shall be administered by
the Board.
(b) Powers of the Committee. Except as limited by the
express provisions of the Plan or by resolutions adopted by the
Board, the Committee shall have sole and complete authority and
discretion (i) to select Participants and grant Awards, (ii) to
determine the form and content of Awards to be issued in the
form of Agreements under the Plan, (iii) to interpret the Plan,
(iv) to prescribe, amend and rescind rules and regulations
relating to the Plan, and (v) to make other determinations
necessary or advisable for the administration of the Plan. The
Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to
time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at
any meeting at which a quorum is present, or acts approved in
writing by a majority of the Committee without a meeting, shall
be deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written
agreement containing such provisions as may be approved by the
Committee. Each such Agreement shall constitute a binding
contract between the Company and the Participant, and every
Participant, upon acceptance of such Agreement, shall be bound
by the terms and restrictions of the Plan and of such Agreement.
The terms of each such Agreement shall be in accordance with
the Plan, but each Agreement may include such additional
provisions and restrictions determined by the Committee, in its
discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan.
In particular, the Committee shall set forth in each Agreement
(i) the Exercise Price of an Option, (ii) the number of Shares
subject to the Award, and its expiration date, (iii) the manner,
time, and rate (cumulative or otherwise) of exercise or vesting
of such Award, and (iv) the restrictions, if any, to be placed
upon such Award, or upon Shares which may be issued upon
exercise of such Award. The Chairman of the Committee and such
other Directors and officers as shall be designated by the
Committee are hereby authorized to execute Agreements on behalf
of the Company and to cause them to be delivered to the
recipients of Awards.
(d) Effect of the Committee's Decisions. All decisions,
determinations and interpretations of the Committee shall be
final and conclusive on all persons affected thereby.
(e) Indemnification. In addition to such other rights of
indemnification as they may have, the members of the Committee
shall be indemnified by the Company in connection with any
claim, action, suit or proceeding relating to any action taken
or failure to act under or in connection with the Plan or any
Award, granted hereunder to the full extent provided for under
the Company's governing instruments with respect to the
indemnification of Directors.
6. GRANT OF OPTIONS.
(a) General Rule. Only Employees and Directors shall be
eligible to receive Awards. In selecting those Employees and
Directors to whom Awards will be granted and the number of
shares covered by such Awards, the Committee shall consider the
position, duties and responsibilities of the eligible Employees
and Directors, the value
A-3
<PAGE>
<PAGE>
of their services to the Company and its Affiliates, and any
other factors the Committee may deem relevant. Awards shall be
made at the discretion of the Committee.
(b) Special Rules for ISOs. The aggregate Market Value,
as of the date the Option is granted, of the Shares with respect
to which ISOs are exercisable for the first time by an Employee
during any calendar year (under all incentive stock option
plans, as defined in Section 422 of the Code, of the Company or
any present or future Affiliate of the Company) shall not exceed
$100,000. Notwithstanding the foregoing, the Committee may
grant Options in excess of the foregoing limitations, in which
case Options granted in excess of such limitation shall be
Non-ISOs.
(c) Discounted Non-ISOs. Notwithstanding any provision of
this Plan to the contrary, the Committee may, at the election of
a Director or Employee selected by the Committee, grant Non-ISOs
to such individual in lieu of cash compensation otherwise
payable by the Company or the Bank. An individual's election
pursuant to this Paragraph 6(c) shall be made prior to the
calendar year for which such election will be deemed effective,
and in accordance with regulations prescribed by the Committee.
Elections shall be approved or disapproved in the discretion of
the Committee and in accordance with the terms of the Plan.
Changes to a Participant's election pursuant to this Paragraph
6(c) shall be prospective only. Pursuant to an election
accepted and approved by the Committee, a Participant may elect
to forego the receipt of cash compensation otherwise expected
from the Company or the Bank and instead receive, as of the last
day of the calendar year, Non-ISOs with an aggregate difference
between the Market Value of the underlying shares and the
Exercise Price (determined as of the first day of the calendar
year) equal to the amount of cash compensation forgone by the
Participant pursuant to an election covering the calendar
year. Such Non-ISOs will be at all times fully exercisable
following their date of grant, and shall otherwise be subject to
the terms of the underlying Agreement and this Plan. In no
event however, may a Non-ISO be granted pursuant to this
Paragraph 6(c) with an Exercise Price which is less than 50% of
the Market Value of the underlying shares on the date of grant.
7. EXERCISE PRICE FOR OPTIONS.
(a) Limits on Committee Discretion. The Exercise Price as
to any particular Option shall not be less than 100% of the
Market Value of the Optioned Shares on the date of grant. In
the case of an Employee who owns Shares representing more than
10% of the Company's outstanding Shares of Common Stock at the
time an ISO is granted, the Exercise Price shall not be less
than 110% of the Market Value of the Optioned Shares at the time
the ISO is granted.
(b) Standards for Determining Exercise Price. If the
Common Stock is listed on a national securities exchange
(including the NASDAQ National Market System) on the date in
question, then the Market Value per Share shall be 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 Exercise
Price shall be the mean between the bid and asked price on such
date. If the Common Stock is traded otherwise than on a
national securities exchange on the date in question, then the
Market Value per Share shall be the mean 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.
<PAGE>
8. EXERCISE OF OPTIONS.
(a) Generally. Options will vest as provided by the
Committee in an Agreement. An Option shall become fully (100%)
exercisable immediately upon termination of the Participant's
Continuous Service due to the Participant's Disability or death.
Vesting will accelerate to 100% upon a change in control. For
this purpose, "change in control" shall mean (1) acquisition of
the ownership, holding or power to vote more than 25% of the
voting stock of the Bank or the Company, (2) acquisition of the
control of the election of a majority of the Bank or the
Company's directors, (3) the exercise of a controlling influence
over the management or policies of the Bank or the Company by
any person or by person acting as a "group" (within the meaning
of Section 13(d) of the Securities Exchange Act of 1934), or (4)
during any period of two consecutive years, individuals who at
the beginning of such
A-4
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<PAGE>
period constitute the Board of Directors of the Bank or the
Company (the "Company Board" and the "Continuing Directors")
cease for any reason to constitute at least two-thirds thereof,
provided that any individual whose election or nomination for
election as a member of the Company Board was approved by a vote
of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. The term
"person" means an individual other than the Employee, or a
corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed
herein.
(b) Procedure for Exercise. A Participant may exercise an
Option, subject to provisions relative to its termination and
limitations on its exercise, only by (1) written notice of
intent to exercise the Option with respect to a specified number
of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock owned for
more than six months, or a combination of cash and Common Stock
owned for more than six months, of the amount of the Exercise
Price for the number of Shares with respect to which the Option
is then being exercised. Each such notice (and payment where
required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at its
executive offices. Common Stock owned for more than six months
utilized in full or partial payment of the Exercise Price for
Options shall be valued at its Market Value at the date of
exercise. An Option may not be exercised for a Fractional
Share.
(c) Period of Exercisability. Except to the extent
otherwise provided in the terms of an Agreement, an Option may
be exercised by a Participant only while he is an Employee and
has maintained Continuous Service from the date of the grant of
the Option, or within one year after termination of such
Continuous Service or Disability (but not later than the date on
which the Option would otherwise expire), except if the
Employee's Continuous Service terminates by reason of --
(1) "Just Cause" which for purposes hereof shall have
the meaning set forth in any unexpired employment or
severance agreement between the Participant and the Bank
and/or the Company (and, in the absence of any such
agreement, shall mean termination because of the Employee's
personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final
cease-and-desist order), then the Participant's rights to
exercise such Option shall expire on the date of such
termination; or
(2) death, then to the extent that the Participant
would have been entitled to exercise the Option immediately
prior to his death, such Option of the deceased Participant
may be exercised within two years from the date of his
death (but not later than the date on which the Option
would otherwise expire) by the personal representatives of
his estate or person or persons to whom his rights under
such Option shall have passed by will or by laws of descent
and distribution.
(d) Effect of the Committee's Decisions. The Committee's
determination whether a Participant's Continuous Service has
ceased, and the effective date thereof, shall be final and
conclusive on all persons affected thereby.
(e) Mandatory Six-Month Holding Period. Notwithstanding
any other provision of this Plan to the contrary, common stock
of the Company that is purchased upon exercise of an Option may
not be sold within the six-month period following the grant of
that Option, except in the event of the Participant's death or
Disability, or such other event as the Board may specifically
deem appropriate.
9. EFFECT OF CHANGES IN COMMON STOCK SUBJECT TO THE PLAN.
(a) Recapitalizations; Stock Splits, Etc. The number and
kind of shares reserved for issuance under the Plan, and the
number and kind of shares subject to outstanding Awards, and the
Exercise Price thereof, shall be proportionately adjusted for
any increase, decrease, change or exchange of Shares for a
different number or kind of shares or other securities of the
Company which results from a merger, consolidation,
recapitalization, reorganization, reclassification, stock
dividend, split-up, combination of shares, or similar event in
which the number or kind of shares is changed without the
receipt or payment of consideration by the Company.
A-5
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<PAGE>
(b) Transactions in which the Company is Not the Surviving
Entity. In the event of (i) the liquidation or dissolution of
the Company, (ii) a merger or consolidation in which the Company
is not the surviving entity, or (iii) the sale or disposition of
all or substantially all of the Company's assets (any of the
foregoing to be referred to herein as a "Transaction"), all
outstanding Awards, together with the Exercise Prices thereof,
shall be equitably adjusted for any change or exchange of Shares
for a different number or kind of shares or other securities
which results from the Transaction.
(c) Special Rule for ISOs. Any adjustment made pursuant
to subparagraphs (a) or (b) hereof shall be made in such a
manner as not to constitute a modification, within the meaning
of Section 424(h) of the Code, of outstanding ISOs.
(d) Conditions and Restrictions on New, Additional, or
Different Shares or Securities. If, by reason of any adjustment
made pursuant to this Paragraph, a Participant becomes entitled
to new, additional, or different shares of stock or securities,
such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and
restrictions which were applicable to the Shares pursuant to the
Award before the adjustment was made.
(e) Other Issuances. Except as expressly provided in this
Paragraph, the issuance by the Company or an Affiliate of shares
of stock of any class, or of securities convertible into Shares
or stock of another class, for cash or property or for labor or
services either upon direct sale or upon the exercise of rights
or warrants to subscribe therefor, shall not affect, and no
adjustment shall be made with respect to, the number, class, or
Exercise Price of Shares then subject to Awards or reserved for
issuance under the Plan.
(f) Certain Special Dividends. The Exercise Price and
number of shares subject to outstanding Awards shall be
proportionately adjusted upon the payment of a special large and
nonrecurring dividend that has the effect of a return of capital
to the stockholders, such that after the adjustment of each
outstanding Award, the ratio of the Exercise Price to the value
of the underlying Shares, and the aggregate difference between
the Exercise Price and the value of the underlying Shares, is
the same before and after payment of each such dividend.
10. NON-TRANSFERABILITY OF AWARDS.
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 Awards may transfer such Awards (but not ISOs) 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. Awards so transferred 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 Paragraph
10. Awards which are transferred pursuant to this Paragraph 10
shall be exercisable by the transferee according to the same
terms and conditions as applied to the Participant.
11. TIME OF GRANTING AWARDS.
The date of grant of an Award shall, for all purposes, be
the later of the date on which the Committee makes the
determination of granting such Award, and the Effective Date.
Notice of the determination shall be given to each Participant
to whom an Award is so granted within a reasonable time after
the date of such grant.
12. EFFECTIVE DATE.
The Plan shall become effective immediately upon its
approval by the Board, subject to approval by a favorable vote
of stockholders owning at least a majority of the total votes
eligible to be cast at a duly called meeting of the Company's
stockholders held in accordance with applicable laws. No Awards
may be made prior to approval
A-6
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<PAGE>
of the Plan by the stockholders of the Company.
13. MODIFICATION OF AWARDS.
At any time, and from time to time, the Board may authorize
the Committee to direct execution of an instrument providing for
the modification of any outstanding Award, provided no such
modification shall confer on the holder of said Award any right
or benefit which could not be conferred on him by the grant of a
new Award at such time, or impair the Award without the consent
of the holder of the Award.
14. AMENDMENT AND TERMINATION OF THE PLAN.
The Board may from time to time amend the terms of the Plan
and, with respect to any Shares at the time not subject to
Awards, suspend or terminate the Plan. No amendment, suspension
or termination of the Plan shall, without the consent of any
affected holders of an Award, alter or impair any rights or
obligations under any Award theretofore granted.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Compliance with Securities Laws. Shares of Common
Stock shall not be issued with respect to any Award unless the
issuance and delivery of such Shares shall comply with all
relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law, and
the requirements of any stock exchange upon which the Shares may
then be listed.
(b) Special Circumstances. The inability of the Company
to obtain approval from any regulatory body or authority deemed
by the Company's counsel to be necessary to the lawful issuance
and sale of any Shares hereunder shall relieve the Company of
any liability in respect of the non-issuance or sale of such
Shares. As a condition to the exercise of an Option, the
Company 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 law.
(c) Committee Discretion. The Committee shall have the
discretionary authority to impose in Agreements such
restrictions on Shares 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.
16. RESERVATION OF SHARES.
The Company, during the term of the Plan, will reserve and
keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
17. WITHHOLDING TAX.
The Company's obligation to deliver Shares upon exercise of
Options shall be subject to the Participant's satisfaction of
all applicable federal, state and local income and employment
tax withholding obligations. The Committee, in its discretion,
may permit the Participant to satisfy the obligation, in whole
or in part, by irrevocably electing to have the Company withhold
Shares, or to deliver to the Company Shares that he already
owns, having a value equal to the amount required to be
withheld. The value of the Shares to be withheld, or delivered
to the Company, shall be based on the Market Value of the Shares
on the date the amount of tax to be withheld is to be
determined. The amount of the withholding requirement shall be
the applicable statutory minimum federal, state or local income
tax with respect to the award on the date that the amount of tax
is to be withheld. As an alternative, the Company may retain,
or sell without notice, a number of such Shares sufficient to
cover the amount required to be withheld.
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18. NO EMPLOYMENT OR OTHER RIGHTS.
In no event shall an Employee's or Director's eligibility
to participate or participation in the Plan create or be deemed
to create any legal or equitable right of the Employee,
Director, or any other party to continue service with the
Company, the Bank, or any Affiliate of such corporations. No
Employee or Director shall have a right to be granted an Award
or, having received an Award, the right to again be granted an
Award. However, an Employee or Director who has been granted an
Award may, if otherwise eligible, be granted an additional Award
or Awards.
19. GOVERNING LAW.
The Plan shall be governed by and construed in accordance
with the laws of the State of North Carolina, except to the
extent that federal law shall be deemed to apply.
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EXHIBIT B
1ST STATE BANCORP, INC.
MANAGEMENT RECOGNITION PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.01 The Company hereby establishes this Plan upon the
terms and conditions hereinafter stated.
1.02 Through acceptance of their appointment to the
Committee, each member of the Committee hereby accepts his or
her appointment hereunder upon the terms and conditions
hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and retain
personnel of experience and ability in key positions of
responsibility by providing Employees and Directors of the
Company, the Bank, and their Affiliates with a proprietary
interest in the Company, and as compensation for their past
contributions to the Bank, and as an incentive to make such
contributions in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with
an initial capital letter, shall have the meanings set forth
below unless the context clearly indicates otherwise. Wherever
appropriate, the masculine pronoun shall include the feminine
pronoun and the singular shall include the plural.
3.01 "Affiliate" shall mean any "parent corporation" or
"subsidiary corporation" of the Company, as such terms are
defined in Section 424(e) and (f), respectively, of the Internal
Revenue Code of 1986, as amended.
3.02 "Bank" means 1st State Bank.
3.03 "Beneficiary" means the person or persons designated
by a Participant to receive any benefits payable under the Plan
in the event of such Participant's death. Such person or
persons shall be designated in writing on forms provided for
this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence
of a written designation, the Beneficiary shall be the
Participant's surviving spouse, if any, or if none, his estate.
3.04 "Board" means the Board of Directors of the Company.
3.05 "Committee" means the Management Recognition Plan
Committee appointed by the Board pursuant to Article IV hereof.
3.06 "Common Stock" means shares of the common stock of the
Company.
3.07 "Company" means 1st State Bancorp, Inc.
3.08 "Continuous Service" shall mean the absence of any
interruption or termination of service as an Employee or
Director of the Company or an Affiliate. Continuous Service
shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the
Company in the case of transfers
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between payroll locations of the Company or between the Company,
an Affiliate or a successor, or in the case of a Director's
performance of services in an emeritus or advisory capacity.
3.09 "Date of Conversion" means the date of the conversion
of the Bank from mutual to stock form.
3.10 "Director" means a member of the Board, and any member
of the board of directors of an Affiliate whose members the
Board has by resolution designated as being eligible for
participation in this Plan.
3.11 "Disability" shall mean a physical or mental
condition, which in the sole and absolute discretion of the
Committee, is reasonably expected to be of indefinite duration
and to substantially prevent a Participant from fulfilling his
or her duties or responsibilities to the Company or an
Affiliate.
3.12 "Effective Date" means the date on which the Plan
first becomes effective, as determined under Section 8.07
hereof.
3.13 "Employee" means any person who is employed by the
Company or an Affiliate.
3.14 "Non-Employee Director" shall have the meaning
provided in Rule 16b-3 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended.
3.15 [reserved]
3.16 "Participant" means an Employee or Director who holds
a Plan Share Award.
3.17 "Plan" means this 1st State Bancorp, Inc. Management
Recognition Plan.
3.18 "Plan Shares" means shares of Common Stock which are
awarded or issuable to a Participant pursuant to the Plan.
3.19 "Plan Share Award" means a right granted under this
Plan to receive Plan Shares.
3.20 "Plan Share Reserve" means the shares of Common Stock
reserved for issuance pursuant to Sections 5.02 and 5.03.
3.21 "Trust" and "Trust Agreement" mean that agreement
entered into pursuant to the terms hereof between the Company
and the Trustee, and "Trust" means the trust created thereunder.
3.22 "Trustee" means that person(s) or entity appointed by
the Board pursuant to the Trust Agreement to hold legal title to
the Plan assets for the purposes set forth herein.
3.23 "Year of Service" shall mean a full twelve-month
period, measured from the date of a Plan Share Award and each
annual anniversary of that date, during which a Participant's
Continuous Service has not terminated for any reason.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE AND POWERS OF THE COMMITTEE. The Plan shall be
administered and interpreted by the Committee, which shall
consist of not less than two members of the Board who are
Non-Employee Directors. In the absence at any time of a duly
appointed Committee, the Plan shall be administered by those
members of the Board who are Non-Employee Directors, and by the
Board if there are less than two Non-Employee Directors.
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The Committee shall have all of the powers allocated to it
in this and other Sections of the Plan. Except as limited by
the express provisions of the Plan or by resolutions adopted by
the Board, the Committee shall have sole and complete authority
and discretion (i) to make Plan Share Awards to such Employees
as the Committee may select, (ii) to determine the form and
content of Plan Share Awards to be issued under the Plan, (iii)
to interpret the Plan, (iv) to prescribe, amend and rescind
rules and regulations relating to the Plan, and (v) to make
other determinations necessary or advisable for the
administration of the Plan. The Committee shall have and may
exercise such other power and authority as may be delegated to
it by the Board from time to time. Subject to Section 4.02, the
interpretation and construction by the Committee of any
provisions of the Plan or of any Plan Share Award granted
hereunder shall be final and binding. The Committee shall act
by vote or written consent of a majority of its members,
and shall report its actions and decisions with respect to the
Plan to the Board at appropriate times, but in no event less
than one time per calendar year. The Committee may recommend to
the Board one or more persons or entity to act as Trustee(s) in
accordance with the provisions of this Plan and the Trust.
4.02 ROLE OF THE BOARD. The members of the Committee shall
be appointed or approved by, and will serve at the pleasure of,
the Board. The Board may in its discretion from time to time
remove members from, or add members to, the Committee. The
Board shall have all of the powers allocated to it in this and
other Sections of the Plan, may take any action under or with
respect to the Plan which the Committee is authorized to take,
and may reverse or override any action taken or decision made by
the Committee under or with respect to the Plan, provided,
however, that the Board may not revoke any Plan Share Award
already made or impair a participant's vested rights under a
Plan Share Award. Further, with respect to all actions taken by
the Board in regard to the Plan, such action shall be taken by a
majority of the Board where such a majority of the directors
acting in the matter are Non-Employee Directors.
4.03 LIMITATION ON LIABILITY. No member of the Board or
the Committee or the Trustee(s) shall be liable for any
determination made in good faith with respect to the Plan or any
Plan Shares or Plan Share Awards granted under it. If a member
of the Board or the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of anything done or
not done by him in such capacity under or with respect to the
Plan, the Company shall indemnify such member against expenses
(including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding if he or she
acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the Company and its
Affiliates and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall
determine the amounts (or the method of computing the amounts)
to be contributed by the Company to the Trust, provided that the
Bank may also make contributions to the Trust. Such amounts
shall be paid to the Trustee at the time of contribution. No
contributions to the Trust by Employees shall be permitted.
5.02 RESERVATION OF PLAN SHARES; INVESTMENT OF TRUST
ASSETS. Shares will be reserved to permit Plan Share Awards
regarding up to 4% of the number of Shares issued on the Date of
Conversion. Shares issued with regard to Plan Share Awards may
be newly issued by the Company, treasury Shares or Shares held
in the Trust. The Trustee shall invest Trust assets only in
accordance with the Trust Agreement.
5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON
PLAN SHARE RESERVES. Upon the allocation of Plan Share Awards
under Section 6.02, the Plan Share Reserve shall be reduced by
the number of Shares subject
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to the Awards so allocated. Any Shares subject or attributable
to an Award that are not earned because of a forfeiture by the
Participant pursuant to Section 7.01 shall be added to the Plan
Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Except as otherwise provided in Section
6.04 hereof, the Committee shall make Plan Share Awards only to
Employees and Directors. In selecting those Employees and
Directors to whom Plan Share Awards will be granted and the
number of shares covered by such Awards, the Committee shall
consider the position, duties and responsibilities of the
eligible Employees and Directors, the value of their services to
the Company and its Affiliates, and any other factors the
Committee may deem relevant. Plan Share Awards shall be granted
at the discretion of the Committee.
6.02 ALLOCATIONS. The Committee will determine which
Employees and Directors will be granted discretionary Plan Share
Awards, and the number of Shares covered by each Plan Share
Award, provided that in no event shall any Awards be made that
will violate the governing instruments of the Bank or its
Affiliates or any applicable federal or state law or regulation.
In the event Plan Shares are forfeited for any reason or
additional shares of Common Stock are purchased by the Trustee,
the Committee may, from time to time, determine which of the
Participants referenced in Section 6.01 above will be granted
additional Plan Share Awards to be awarded from the forfeited or
acquired Plan Shares.
6.03 FORM OF ALLOCATION. As promptly as practicable after
a determination is made pursuant to Section 6.02 that a Plan
Share Award 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 may be earned. The date on
which the Committee so notifies the Participant shall be
considered the date of grant of the Plan Share Awards. The
Committee shall maintain records as to all grants of Plan Share
Awards under the Plan.
6.04 ALLOCATIONS NOT REQUIRED. Notwithstanding anything to
the contrary in Sections 6.01 and 6.02, no Employee or Director
shall have any right or entitlement to receive a Plan Share
Award hereunder, such Awards being at the total discretion of
the Committee, nor shall any Employees or Directors as a group
have such a right. The Committee may, with the approval of the
Board (or, if so directed by the Board) return all Common Stock
in the Plan Share Reserve to the Company at any time, and cease
issuing Plan Share Awards.
ARTICLE VII
EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Except as otherwise provided by
the Committee, Plan Shares subject to a Plan Share Award shall
be earned and become non-forfeitable by a Participant as
follows:
Years of Continuous Service Percentage of
after the Date of Grant of Plan Shares Plan Shares Vested
- -------------------------------------- ------------------
Immediate; upon receipt of Plan Share Award 33 1/3%
1 year 66 2/3%
2 years 100%
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(b) EXCEPTION FOR TERMINATIONS DUE TO DEATH,
DISABILITY, RETIREMENT OR CHANGE IN CONTROL. Notwithstanding
the general rule contained in Section 7.01(a) above, all Plan
Shares subject to a Plan Share Award held by a Participant whose
service with the Company or an Affiliate terminates due to the
Participant's death
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or Disability shall be deemed earned as of the Participant's
last day of service with the Company or an Affiliate and shall
be distributed as soon as practicable thereafter. Vesting upon
retirement will be as provided by the Committee in an Agreement.
Vesting will accelerate to 100% upon a change in control. For
this purpose, "change in control" shall mean (1) acquisition of
the ownership, holding or power to vote more than 25% of the
voting stock of the Bank or the Company, (2) acquisition
of the control of the election of a majority of the Bank or the
Company's directors, (3) the exercise of controlling influence
over the management or policies of the Bank or the Company by
any person or by persons acting as a "group" (within the meaning
of Section 13(d) of the Securities Exchange Act of 1934), or (4)
during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors
of the Bank or the Company (the"Company Board") (the "Continuing
Directors") cease for any reason to constitute at least
two-thirds thereof, provided that any individual whose election
or nomination for election as a member of the Company Board was
approved by a vote of at least two-thirds of the Continuing
Directors then in office shall be considered a Continuing
Director. The term "person" means an individual other than the
Employee, or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship,
unincorporated organization or any other form of entity not
specifically listed herein.
7.02 ACCRUAL OF DIVIDENDS. Whenever Plan Shares become
vested and are paid to a Participant or Beneficiary under
Section 7.03, such Participant or Beneficiary shall also be
entitled to receive, with respect to each Plan Share paid, an
amount equal to any cash dividends (including special large and
nonrecurring dividends, including one that has the effect of a
return of capital to the Company's stockholders) and a number of
shares of Common Stock equal to any stock dividends, declared
and paid with respect to a share of Common Stock between the
date the relevant Plan Share Award was initially granted to such
Participant and the date the Plan Shares are being distributed.
There shall also be distributed an appropriate amount of net
earnings, if any, of the Trust with respect to any cash
dividends so paid out.
7.03 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except
as provided in subsections (c), and (d) below, the Company or
the Trustee, as applicable, shall distribute Plan Shares and
accumulated cash from dividends and interest to the Participant
or his Beneficiary, as the case may be, as soon as practicable
after they have been earned. No fractional shares shall be
distributed.
(b) FORM OF DISTRIBUTION. The Company or the
Trustee, as applicable, shall distribute all Plan Shares,
together with any shares representing stock dividends, in the
form of Common Stock. One share of Common Stock shall be given
for each Plan Share earned. Payments representing cash
dividends (and earnings thereon) shall be made in cash.
(c) WITHHOLDING. The Company or the Trustee, as
applicable, shall withhold from any cash payment made under this
Plan sufficient amounts to cover any applicable withholding and
employment taxes, and if the amount of such cash payment is not
sufficient, the Company or the Trustee shall require the
Participant or Beneficiary to pay to the Company the amount
required to be withheld as a condition of delivering the Plan
Shares. The Trustee shall pay over to the Company or Affiliate
which employs or employed such Participant any such amount
withheld from or paid by the Participant or Beneficiary.
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(d) TIMING: EXCEPTION FOR 10% SHAREHOLDERS.
Notwithstanding Subsections (a) and (b) above, no Plan Shares
may be distributed prior to the date which is three (3) years
from the Date of Conversion to the extent the Participant or
Beneficiary, as the case may be, would after receipt of such
Shares own in excess of ten percent (10%) of the issued and
outstanding shares of Common Stock unless such action is
approved in advance by a majority vote of non-employee Directors
of the Board. To the extent this limitation would delay the
date on which a Participant receives Plan Shares, the
Participant may elect to receive from the Trust, in lieu of such
Plan Shares, the cash equivalent thereof. Any Plan Shares
remaining undistributed solely by reason of the operation of
this Subsection (d) shall be distributed to the Participant or
his Beneficiary on the date which is three years from the Date
of Conversion.
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(e) REGULATORY EXCEPTIONS. No Plan Shares shall be
distributed unless and until all of the requirements of all
applicable law and regulation shall have been fully complied
with, including the receipt of approval of the Plan by the
stockholders of the Company by such vote, if any, as may be
required by applicable law and regulations.
7.04 VOTING OF PLAN SHARES. All shares of Common Stock
held by the Trust (whether or not subject to a Plan Share Award)
shall be voted by the Trustee in the same proportion as the
trustee of the Company's Employee Stock Ownership Plan votes
Common Stock held in the trust associated therewith, and in the
absence of any such voting, shall be voted in the manner
directed by the Board.
7.05 DEFERRAL ELECTIONS BY PARTICIPANTS.
(a) ELECTIONS TO DEFER. At any time on or before
December 31st of the year prior to the next date on which a
Participant is scheduled to become vested in his or her Plan
Share Award, a Participant who is a member of a select group of
management or highly compensated employees (within the meaning
of the Employees' Retirement Income Security Act of 1974), may
irrevocably elect, on the form attached hereto as Exhibit "A"
(the "Election Form"), to defer the receipt of all or a
percentage of the Plan Shares and/or cash that would otherwise
be transferred to the Participant upon the future vesting of
such award (the "Deferred Shares").
(b) RECORDKEEPING; HOLDING OF DEFERRED SHARES. The
MRP Committee shall establish and maintain an individual account
in the name of each Participant who files an Election Form for
the purpose of tracking deferred earnings attributable to cash
dividends paid on Deferred Shares (the "Cash Account"). On the
last day of each fiscal year of the Company, the Committee shall
credit to the Participant's Cash Account earnings on the balance
of the Cash Account at a rate equal to the dividend-adjusted
total return on Common Stock, as determined from time to time by
the MRP Committee in its sole discretion. The Trustee shall
hold each Participant's Deferred Shares and Deferred Earnings in
the Trust until distribution is required pursuant to the
election set forth in the Participant's Election Form.
(c) DISTRIBUTIONS OF DEFERRED SHARES. The Trustee
shall distribute a Participant's Deferred Shares and Deferred
Earnings in accordance with the Participant's Election Form.
All distributions made by the Company and/or the Trustees
pursuant to elections made hereunder shall be subject to
applicable federal, state, and local tax withholding and to such
other deductions as shall at the time of such payment be
required under any income tax or other law, whether of the
United States or any other jurisdiction, and, in the case of
payments to a beneficiary, the delivery to the Committee and/or
Trustees of all necessary waivers, qualifications and other
documentation. Within 90 days after receiving notice of a
Participant's death, the Trustee shall distribute any balance of
the Participant's Deferred Shares and Deferred Earnings to the
Participant's designated beneficiary, if living, or if such
designated beneficiary is deceased or the Participant failed to
designate a beneficiary, to the Participant's estate. If, on
the other hand, a Participant's Continuous Service terminates
for a reason other than the Participant's death, Disability,
early retirement, or normal retirement, the Participant's
Deferred Shares and Deferred Earnings shall be distributed to
the Participant in a lump sum occurring as soon as reasonably
practicable. The distribution provisions of a Participant's
Election Form shall become irrevocable on the date that occurs
(i) one year before the Participant's termination of Continuous
Service for a reason other than death, and (ii) on the
Participant's death if that terminates the Participant's
Continuous Service.
(d) HARDSHIP WITHDRAWALS. Notwithstanding any other
provision of the Plan or a Participant's Election Form, in the
event the Participant suffers an unforeseeable emergency
hardship within the contemplation of this paragraph, the
Participant may apply to the Committee for an immediate
distribution of all or a portion of his Deferred Shares and
Deferred Earnings. The hardship must result from a sudden and
unexpected illness or accident of the Participant or a dependent
of the Participant, casualty loss of property, or other similar
conditions beyond the control of the Participant. Examples of
purposes which are not considered hardships include
post-secondary school expenses or the desire to purchase a
residence. In no event will a distribution be made to
the extent the hardship could
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be relieved through reimbursement or compensation by insurance
or otherwise, or by liquidation of the Participant's
nonessential assets to the extent such liquidation would not
itself cause a severe financial hardship. The amount of
any distribution hereunder shall be limited to the amount
necessary to relieve the Participant's financial hardship. The
determination of whether a Participant has a qualifying hardship
and the amount which qualifies for distribution, if any, shall
be made by the Committee in its sole discretion. The Committee
may require evidence of the purpose and amount of the need, and
may establish such application or other procedures as it deems
appropriate.
(e) RIGHTS TO DEFERRED SHARES AND EARNINGS. A
Participant may not assign his or her claim to Deferred Shares
and Deferred Earnings during his or her lifetime, except in
accordance with Section 8.03 of this Plan. A Participant's right
to Deferred Shares and Deferred Earnings shall at all times
constitute an unsecured promise of the Company to pay benefits
as they come due. The right of the Participant or his or her
beneficiary to receive benefits hereunder shall be solely an
unsecured claim against the general assets of the Company.
Neither the Participant nor his or her beneficiary shall have
any claim against or rights in any specific assets or other fund
of the Company, and any assets in the Trust shall be deemed
general assets of the Company.
ARTICLE VIII
MISCELLANEOUS
8.01 ADJUSTMENTS FOR CAPITAL CHANGES.
(a) RECAPITALIZATIONS; STOCK SPLITS, ETC. The number
and kind of shares which may be purchased under the Plan, and
the number and kind of shares subject to outstanding Plan Share
Awards, shall be proportionately adjusted for any increase,
decrease, change or exchange of shares of Common Stock for a
different number or kind of shares or other securities of the
Company which results from a merger, consolidation,
recapitalization, reorganization, reclassification, stock
dividend, split-up, combination of shares, or similar event in
which the number or kind of shares is changed without the
receipt or payment of consideration by the Company.
(b) TRANSACTIONS IN WHICH THE COMPANY IS NOT THE
SURVIVING ENTITY. In the event of (i) the liquidation or
dissolution of the Company, (ii) a merger or consolidation in
which the Company is not the surviving entity, or (iii) the sale
or disposition of all or substantially all of the Company's
assets (any of the foregoing to be referred to herein as a
"Transaction"), all outstanding Plan Share Awards shall be
adjusted for any change or exchange of shares of Common Stock
for a different number or kind of shares or other securities
which results from the Transaction.
(c) CONDITIONS AND RESTRICTIONS ON NEW, ADDITIONAL,
OR DIFFERENT SHARES OR SECURITIES. If, by reason of any
adjustment made pursuant to this Section, a Participant becomes
entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock
or securities shall thereupon be subject to all of the
conditions and restrictions which were applicable to the shares
pursuant to the Plan Share Award before the adjustment was made.
In addition, the Committee shall have the discretionary
authority to impose on the Shares subject to Plan Share Awards
to Employees such restrictions as the Committee may deem
appropriate or desirable, including but not limited to a right
of first refusal, or repurchase option, or both of these
restrictions.
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(d) OTHER ISSUANCES. Except as expressly provided
in this Section, the issuance by the Company or an Affiliate of
shares of stock of any class, or of securities convertible into
shares of Common Stock or stock of another class, for cash or
property or for labor or services either upon direct sale or
upon the exercise of rights or warrants to subscribe therefor,
shall not affect, and no adjustment shall be made with respect
to, the number or class of shares of Common Stock then subject
to Plan Share Awards or reserved for issuance under the Plan.
8.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by
resolution, at any time amend or terminate the Plan; provided
that no amendment or termination of the Plan shall, without the
written consent of a Participant, impair any rights or
obligations under a Plan Share Award theretofore granted to the
Participant.
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The power to amend or terminate the Plan in accordance with
this Section 8.02 shall include the power to direct the Trustee
to return to the Company all or any part of the assets of the
Trust, including shares of Common Stock held in the Plan Share
Reserve. However, the termination of the Trust shall not affect
a Participant's right to earn Plan Share Awards and to receive a
distribution of Common Stock relating thereto, including
earnings thereon, in accordance with the terms of this Plan and
the grant by the Committee or the Board.
8.03 NONTRANSFERABILITY. 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 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 8.03. Plan
Share Awards which are transferred pursuant to this Section 8.03
shall be exercisable by the transferee according to the same
terms and conditions as applied to the Participant.
8.04 NO EMPLOYMENT OR OTHER RIGHTS. Neither the Plan nor
any grant of a Plan Share Award or Plan Shares hereunder nor any
action taken by the Trustee, the Committee or the Board in
connection with the Plan shall create any right, either express
or implied, on the part of any Employee or Director to continue
in the service of the Company, the Bank, or an Affiliate
thereof.
8.05 VOTING AND DIVIDEND RIGHTS. No Participant shall have
any voting or dividend rights or other rights of a stockholder
in respect of any Plan Shares covered by a Plan Share Award
prior to the time said Plan Shares are actually distributed to
him.
8.06 GOVERNING LAW. The Plan and Trust shall be governed
and construed under the laws of the State of North Carolina to
the extent not preempted by Federal law.
8.07 EFFECTIVE DATE. The Plan shall become effective
immediately on its approval by the Board, subject to approval by
a favorable vote of stockholders of the Company who own at least
a majority of the total votes eligible to be cast at a duly
called meeting of the Company's stockholders held in accordance
with applicable laws. In no event shall Plan Share Awards be
made prior to the Effective Date.
8.08 TERM OF PLAN. This Plan shall remain in effect until
the earlier of (i) termination by the Board, or (ii) the
distribution of all assets of the Trust. Termination of the
Plan shall not affect any Plan Share Awards previously granted,
and such Awards shall remain valid and in effect until they have
been earned and paid, or by their terms expire or are forfeited.
8.09 TAX STATUS OF TRUST. It is intended that (i) the
Trust associated with the Plan be treated as a grantor trust of
the Company under the provisions of Section 671 et seq. of the
Code, as the same may be amended from time to time, and (ii)
that in accordance with Revenue Procedure 92-65 (as the same may
be amended from time to time), Participants have the status of
general unsecured creditors of the Company, the Plan constitutes
a mere unfunded promise to make benefit payments in the future,
the Plan is unfunded for tax purposes and for purposes of Title
I of the Employee Retirement Income Security Act of 1974, as
amended, and the Trust has been and will continue to be
maintained in conformity with Revenue Procedure 92-64 (as the
same may be amended from time to time).
B-8
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REVOCABLE PROXY
________________________________________________________________
1ST STATE BANCORP, INC.
BURLINGTON, NORTH CAROLINA
________________________________________________________________
SPECIAL MEETING OF STOCKHOLDERS
JUNE 6, 2000
The undersigned hereby appoints Richard H. Shirley, James
G. McClure and T. Scott Quakenbush with full powers of
substitution, to act as attorneys and proxies for the
undersigned, to vote all shares of the common stock of 1st State
Bancorp, Inc. which the undersigned is entitled to vote at the
Special Meeting of Stockholders, to be held at the main office
of 1st State Bank (the "Bank") located at 445 S. Main Street,
Burlington, North Carolina, on Tuesday, June 6, 2000, at 5:30
p.m. (the "Special Meeting"), and at any and all adjournments
thereof, as follows:
FOR AGAINST
1. Approval of the 1st State Bancorp, Inc.
2000 Stock Option and Incentive Plan [ ] [ ]
2. Approval of the 1st State Bancorp, Inc.
Management Recognition Plan [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE
LISTED PROPOSITIONS.
________________________________________________________________
________________________________________________________________
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS
STATED. IF ANY OTHER BUSINESS IS PRESENTED AT THE SPECIAL
MEETING, INCLUDING MATTERS RELATING TO THE CONDUCT OF THE
SPECIAL MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS
PROXY IN ACCORDANCE WITH THE DETERMINATION OF A MAJORITY OF THE
BOARD OF DIRECTORS. AT THE PRESENT TIME, THE BOARD OF DIRECTORS
KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE SPECIAL
MEETING.
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THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the
Special Meeting or at any adjournment thereof, then the power of
said attorneys and prior proxies shall be deemed terminated and
of no further force and effect. The undersigned other may also
revoke his or her proxy by filing a subsequent proxy or
notifying the Secretary of his or her decision to terminate his
or her proxy.
The undersigned acknowledges receipt from the Company
prior to the execution of this proxy of a Notice of Special
Meeting and a Proxy Statement dated April 27, 2000.
Dated: ________________, 2000
______________________________ ______________________________
PRINT NAME OF STOCKHOLDER PRINT NAME OF STOCKHOLDER
______________________________ ______________________________
SIGNATURES OF STOCKHOLDER SIGNATURE OF STOCKHOLDER
Please sign exactly as your name appears on the enclosed
card. When signing as attorney, executor, administrator,
trustee or guardian, please give your full title. Corporation
proxies should be signed in corporate name by an authorized
officer. If shares are held jointly, each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE.
