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:
[X] Preliminary Proxy Statement [_] Soliciting Material Under Rule
[_] Confidential, For Use of the 14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
The South Financial Group, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
________________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
________________________________________________________________________________
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
________________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
________________________________________________________________________________
5) Total fee paid:
________________________________________________________________________________
[_] Fee paid previously with preliminary materials:
________________________________________________________________________________
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
________________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
________________________________________________________________________________
3) Filing Party:
________________________________________________________________________________
4) Date Filed:
________________________________________________________________________________
[TSFG LOGO OMITTED}
NOTICE OF 2004
ANNUAL MEETING OF SHAREHOLDERS
APRIL 27, 2004
The 2004 Annual Meeting of Shareholders of The South Financial Group,
Inc. ("TSFG") will be held at The Gunter Theatre, 300 South Main Street,
Greenville, South Carolina, on Tuesday, April 27, 2004, at 10:30 a.m. for the
following purposes:
(1) To set the number of Directors at 16 persons and elect six Directors;
(2) To amend TSFG's Amended and Restated Stock Option Plan to increase the
shares available for issuance by 1 million shares;
(3) To approve certain amendments to TSFG's 2004 Long-Term Incentive Plan;
(4) To increase TSFG's authorized common stock from 100 million shares to
200 million shares;
(5) To approve TSFG's Amended and Restated Directors Stock Option Plan;
(6) To approve an amendment to TSFG's Employee Stock Purchase Plan;
(7) To ratify the appointment of KPMG LLP as independent auditors of TSFG
for fiscal year 2004; and
(8) To transact any other business that may properly come before the Annual
Meeting and any adjournment.
Common shareholders of record at the close of business on March 1, 2004
are entitled to notice of, and to vote at, the Annual Meeting.
By order of the Board of Directors,
William P. Crawford, Jr.
Executive Vice President,
General Counsel and Secretary
Greenville, South Carolina
March 17, 2004
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SHAREHOLDERS ARE URGED TO SIGN AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY IN THE ENVELOPE PROVIDED.
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PROXY STATEMENT
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For the Annual Meeting of Shareholders to be held on April
27, 2004, at 10:30 a.m.
at The Gunter Theatre, 300 South Main Street, Greenville, SC 29601
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GENERAL INFORMATION
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This Proxy Statement and the enclosed proxy materials relate to the
Annual Meeting of Shareholders of The South Financial Group, Inc. (the "Company"
or "TSFG") to be held on April 27, 2004, at 10:30 a.m. at The Gunter Theatre,
300 South Main Street, Greenville, South Carolina. These proxy materials are
being furnished by TSFG in connection with a solicitation of proxies by TSFG's
Board of Directors (the "Board") and are being mailed on or about March 17,
2004.
WHO MAY VOTE AT THE ANNUAL MEETING
These proxy materials are provided to holders of TSFG's common stock
who were holders of record on March 1, 2004 (the "Record Date"). Only TSFG
common shareholders of record on the Record Date are entitled to vote at the
Annual Meeting. On the Record Date, 59,534,491 shares of TSFG common stock were
outstanding.
Dividend Reinvestment Plan Shares. If you are a participant in TSFG's
Dividend Reinvestment Plan, the number shown on the enclosed proxy card includes
shares held for your account in that plan.
Employee Benefit Plan Shares. If you are a participant in a TSFG
employee benefit plan that allows participant-directed voting of TSFG common
stock held in that plan, you will receive electronic notification of the
opportunity to vote the shares you hold in that plan. The trustee for each plan
will cause votes to be cast confidentially in accordance with your instructions.
Plan shares not voted by participants will be voted by the trustee in the same
proportion as the votes actually cast by participants, in accordance with the
terms of the respective plan.
VOTING AND PROXY PROCEDURES
Each share of TSFG common stock outstanding on the Record Date will be
entitled to one vote at the Annual Meeting. Proxy cards are enclosed to
facilitate voting.
If you are a shareholder whose shares are registered in your name, you
may vote your shares in person at the meeting or by one of the three following
methods indicated below. Execution of the enclosed proxy card or voting via
telephone or Internet will not affect your right to attend the Annual Meeting.
If you vote by Internet or telephone, please do not mail your proxy card.
o Vote by Proxy Card: by completing, signing, dating and mailing
the enclosed proxy card in the envelope provided;
o Vote by Internet: by going to the web address
https://www.proxyvotenow.com/tsfg and following the
instructions for Internet voting shown on the enclosed proxy
card; or
o Vote by Telephone: by dialing 1-866-855-9697 and following the
instructions for telephone voting shown on the enclosed proxy
card.
1
If your shares are held in "street name" (through a broker, bank or
other nominee), you may receive a separate voting instruction form with this
Proxy Statement, or you may need to contact your broker, bank or other nominee
to determine whether you will be able to vote electronically using the Internet
or telephone.
Shares of TSFG common stock for which instructions are received, will
be voted in accordance with the shareholder's instructions. If you send in your
proxy card or use Internet or telephone voting, but do not specify how you want
to vote your shares, we will vote them FOR each of the items being proposed by
management and in the discretion of the proxy holders as to any other business
that may properly come before the Annual Meeting and any adjournment.
REVOCATION OF PROXIES
If you are a shareholder whose shares are registered in your name, you
may revoke your proxy at any time before it is voted by one of the following
methods:
o Submitting another proper proxy with a more recent date than
that of the proxy first given by: (1) following the telephone
voting instructions, or (2) following the Internet voting
instructions, or (3) completing, signing, dating and returning
a proxy card to TSFG's Secretary.
o Sending written notice of revocation to TSFG's Corporate
Secretary.
o Attending the Annual Meeting and voting by ballot (although
attendance at the Annual Meeting will not, in and of itself,
revoke a proxy).
If you hold your shares in "street name" through a broker, bank or
other nominee, you may revoke your proxy by following instructions provided by
your broker, bank or nominee. No notice of revocation or later-dated proxy will
be effective until received by TSFG's Secretary at or prior to the Annual
Meeting.
QUORUM
Holders representing a majority of the outstanding shares of TSFG
common stock, present in person or by proxy, are necessary to constitute a
quorum. Broker non-votes (which occur when a broker or other nominee holding
shares for a beneficial owner reports those shares as present but does not vote
on a proposal) are included for purposes of determining whether or not a quorum
exists.
OTHER MATTERS TO RELATED TO THE MEETING
Only matters brought before the Annual Meeting in accordance with
TSFG's Bylaws will be considered. Aside from the seven Items listed above in the
Notice of Annual Meeting, TSFG does not know of any other matters that will be
presented at the Annual Meeting. However, if any other matters properly come
before the Annual Meeting and any adjournment, the proxy holders will vote them
in accordance with their best judgment.
Should any nominee for Director become unable or unwilling to accept
nomination or election, the persons acting under the proxy intend to vote for
the election of another person recommended by the Nominating and Corporate
Governance Committee of the Board of Directors and nominated by the Board. TSFG
has no reason to believe that any of the six nominees will be unable or
unwilling to serve if elected to office.
Because of the items being voted upon at the Annual Meeting, applicable
regulations of the Securities and Exchange Commission (the "SEC") require that
TSFG disclose a recent closing stock price. Accordingly, the closing price of
the TSFG common stock as of March 1, 2004 was $30.92.
2
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TABLE OF CONTENTS
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GENERAL INFORMATION ........................................................................................... 1
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TABLE OF CONTENTS.............................................................................................. 3
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ITEM NO. 1 - ELECTION OF DIRECTORS............................................................................. 4
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General Information Regarding Election of Directors................................................... 4
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Information on Nominees and Directors................................................................. 4
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INFORMATION ABOUT THE BOARD OF DIRECTORS....................................................................... 6
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Role and Functioning of the Board..................................................................... 6
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Policy Regarding Attendance at Annual Meetings........................................................ 6
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Code of Ethics and Code of Conduct.................................................................... 6
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Communications from Shareholders to Directors......................................................... 7
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Policy Regarding Consideration of Director Candidates Recommended by Shareholders..................... 7
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Process of Evaluating Director Candidates............................................................. 8
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Determinations with Respect to the Independence of Directors.......................................... 8
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Director Compensation................................................................................. 8
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Committee Membership.................................................................................. 9
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Standing Board Committees............................................................................. 9
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Audit Committee Report................................................................................ 10
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Audit Fees............................................................................................ 11
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Other Audit Committee Matters......................................................................... 11
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STOCK OWNERSHIP................................................................................................ 12
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Directors and Executive Officers...................................................................... 12
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5% Beneficial Owners.................................................................................. 13
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TOTAL SHAREHOLDER RETURN....................................................................................... 13
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EXECUTIVE OFFICERS............................................................................................. 13
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EXECUTIVE COMPENSATION......................................................................................... 14
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Compensation Committee Report on Executive Compensation............................................... 14
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Summary Compensation Table............................................................................ 17
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Stock Option Grants................................................................................... 18
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Stock Option Exercises................................................................................ 18
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Long-Term Incentive Plan - Awards in 2003............................................................. 19
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Equity Compensation Plan Data......................................................................... 19
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New Plan Benefits Table............................................................................... 19
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Employment and Change in Control Agreements........................................................... 20
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Supplemental Executive Retirement Plan................................................................ 24
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ITEM NO. 2 - APPROVAL OF AMENDMENT TO TSFG'S STOCK OPTION PLAN................................................. 24
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ITEM NO. 3 - APPROVAL OF CERTAIN AMENDMENTS TO TSFG'S 2004 LONG-TERM INCENTIVE PLAN............................ 26
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ITEM NO. 4 - APPROVAL OF INCREASE IN TSFG'S AUTHORIZED COMMON STOCK TO 200 MILLION............................. 32
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ITEM NO. 5 - APPROVAL OF TSFG'S DIRECTORS STOCK OPTION PLAN.................................................... 33
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ITEM NO. 6 - APPROVAL OF CERTAIN AMENDMENTS TO TSFG'S EMPLOYEE STOCK PURCHASE PLAN............................. 35
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ITEM NO. 7 - RATIFICATION OF KPMG LLP AS AUDITORS FOR 2004..................................................... 38
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RELATED PARTY TRANSACTIONS..................................................................................... 38
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MISCELLANEOUS MATTERS RELATED TO THE ANNUAL MEETING............................................................ 39
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Householding of Proxy Statement, Form 10-K and Annual Report to Shareholders.......................... 39
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Expenses of Solicitation.............................................................................. 39
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Proposals by Shareholders............................................................................. 39
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE........................................................ 40
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FINANCIAL INFORMATION.......................................................................................... 40
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APPENDIX A - Audit Committee Charter .......................................................................... A-1
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APPENDIX B - Amended and Restated Directors Stock Option Plan.................................................. B-1
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3
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ITEM NO. 1 - ELECTION OF DIRECTORS
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GENERAL INFORMATION REGARDING ELECTION OF DIRECTORS
The number of Directors is being set by the shareholders, but may be
amended by the Board between annual meetings as permitted by South Carolina law.
The number of Directors is currently set at 18 persons. Management proposes to
set the number of TSFG Directors at 16 persons, which reflects the retirement of
two persons presently serving as directors. Directors will be elected by a
plurality of votes cast at the Annual Meeting. Abstentions and broker non-votes
with respect to Nominees will not be considered to be either affirmative or
negative votes. Shareholders do not have cumulative voting rights with respect
to the election of Directors.
The Board of Directors is divided into three classes. At each annual
meeting, TSFG's shareholders elect the members of one of the three classes to
three-year terms. At this Annual Meeting, five Directors are being nominated for
re-election for terms expiring at the 2007 annual meeting. In addition, J. W.
Davis, who was appointed to the Board in connection with the TSFG's acquisition
of MountainBank Financial Corporation and whose term is slated to expire at the
2005 Annual Meeting, must be voted upon by TSFG's shareholders.
INFORMATION ON NOMINEES AND DIRECTORS
Management proposes to nominate to the Board the six persons listed as
Nominees below. Each Nominee is currently serving as a Director. Unless
authority to vote for a Nominee is withheld, the persons named in the enclosed
proxy card intend to vote for the election of these Nominees. Management
believes all such Nominees will be available to serve as Directors. However,
should any Nominee become unable to serve, the persons named in the enclosed
proxy card intend to vote for the election of such other person as management
may recommend. The following table sets forth information regarding the Nominees
and continuing Directors, including their name, age, period they have served as
a Director, and occupation over the past five years.
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NOMINEES FOR DIRECTOR TO BE ELECTED AT THE 2004 ANNUAL MEETING OF SHAREHOLDERS
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WILLIAM P. BRANT Mr. Brant is a partner in the law firm of Brant, Abraham, Reiter and McCormick
Age: 57 P.A., Jacksonville, Florida.
Director since 2001
Term expiring 2007
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J. W. DAVIS Mr. Davis is President of Carolina First Bank's North Carolina operations.
Age: 57 From June 1997 until October 2003, Mr. Davis served as President and CEO of
Director since 2003 MountainBank Financial Corporation, which was acquired by TSFG in October 2003.
Term expiring 2005
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C. CLAYMON GRIMES, JR. Mr. Grimes is an attorney in private practice in Georgetown, South Carolina.
Age: 81
Director since 1990
Term expiring 2007
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WILLIAM S. HUMMERS III Mr. Hummers joined TSFG in June 1988 in his present capacity as an executive
Age: 58 officer and chief financial officer. He is also a director of World Acceptance
Director since 1990 Corporation.
Term expiring 2007
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WILLIAM R. TIMMONS III Mr. William R. Timmons III is Executive Vice President, Secretary and
Age: 52 Treasurer of Canal Insurance Company, a nationwide insurer of commercial motor
Director since 2002 vehicles headquartered in Greenville, South Carolina. Mr. Timmons is the son
Term expiring 2007 of William R. Timmons, Jr., who is a Board member.
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DAVID C. WAKEFIELD III Mr. Wakefield has served as President of Wakefield Enterprises, LLC, a real
Age: 60 estate development and specialty products company, since 1998. From November
Director since 1997 1997 to December 1998, Mr. Wakefield served as an independent consultant to
Term expiring 2007 TSFG following TSFG's acquisition of First Southeast Financial Corporation.
Prior to its acquisition, Mr. Wakefield
served as CEO of First Southeast Financial
Corporation and its subsidiary, First
Federal Savings and Loan Association of
Anderson.
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4
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CONTINUING DIRECTORS WHOSE TERMS END AT THE 2005 ANNUAL MEETING OF SHAREHOLDERS
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GORDON W. CAMPBELL Mr. Campbell is a consultant to TSFG and Vice Chairman of Mercantile Bank. From
Age: 71 1992 until 2002, Mr. Campbell served as the President and CEO of Gulf West Banks,
Director since 2002 Inc., a bank holding company headquartered in St. Petersburg, FL that was acquired
by TSFG in 2002. Mr. Campbell presently serves as Vice Chairman of Templeton Funds
Annuity Company and as a director of Fiduciary Trust International of the South
and Opus South Corporation.
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CHARLES B. SCHOOLER Dr. Schooler is a retired optometrist in Georgetown, South Carolina and a past
Age: 75 chairman of the South Carolina State Board of Education.
Director since 1990
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EDWARD J. SEBASTIAN Mr. Sebastian is a private investor and serves in an advisory capacity for several
Age: 56 private entities. From 1986 to 1999, Mr. Sebastian served as Chairman and CEO of
Director since 2001 Resource Bancshares Corporation, a financial services company, and Chairman and
CEO of Resource Bancshares Mortgage Group, Inc., a company engaged in mortgage
banking operations.
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EUGENE E. STONE IV Mr. Stone serves as CEO of Stone International, LLC, an apparel manufacturer. He
Age: 64 formerly served as Chairman of Umbro International, Inc. (formerly Stone
Director since 1996 Manufacturing), a manufacturer of apparel and sports goods. Mr. Stone is a
director of Liberty Corporation.
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MACK I. WHITTLE, JR. Mr. Whittle has been President and CEO of TSFG since its organization in 1986.
Age: 55 From 1986 until 1991, Mr. Whittle also served
Director since 1986 as President of Carolina First Bank and is
currently Chairman of the Board of Directors of
Carolina First Bank and Mercantile Bank.
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CONTINUING DIRECTORS WHOSE TERMS END AT THE 2006 ANNUAL MEETING OF SHAREHOLDERS
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M. DEXTER HAGY Mr. Hagy is a principal of Vaxa Capital Management, LLC, an investment management
Age: 59 firm formed in 1995 and headquartered in Greenville, South Carolina.
Director since 1993
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H. EARLE RUSSELL, JR. Dr. Russell is a surgeon in Greenville, South Carolina, with Greenville Surgical
Age: 61 Associates.
Director since 1997
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JOHN C. B. SMITH, JR. Mr. Smith is owner of John C.B. Smith Real Estate and is Of Counsel and a past
Age: 59 partner in the law firm of Nexsen Pruet Jacobs
Director since 2001 & Pollard, LLP, Columbia, South Carolina.
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WILLIAM R. TIMMONS, JR. Mr. Timmons, Jr. is Chairman of Canal Insurance Company, a nationwide insurer of
Age: 79 commercial motor vehicles headquartered in Greenville, South Carolina. He
Director since 1986 currently serves as Chairman of TSFG's Board of Directors. Mr. Timmons is the
father of William R. Timmons III, who is a Board member.
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SAMUEL H. VICKERS Mr. Vickers is Chairman and CEO of Design Containers, Inc., a packaging system
Age: 67 manufacturer located in Jacksonville, Florida.
Director since 1999
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5
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INFORMATION ABOUT THE BOARD OF DIRECTORS
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ROLE AND FUNCTIONING OF THE BOARD
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The Board of Directors, which is elected by the shareholders, is the
ultimate decision-making body of TSFG, except with respect to those matters
reserved to the shareholders. It selects the senior management team, which is
charged with the conduct of TSFG's business. Having selected the senior
management team, the Board acts as an advisor and counselor to senior management
and ultimately monitors its performance.
The Board of Directors has the responsibility for overseeing the
affairs of TSFG and, thus, an obligation to keep informed about TSFG's business
and strategies. This involvement enables the Board to provide guidance to
management in formulating and developing plans and to exercise independently its
decision-making authority on matters of importance to TSFG. Acting as a full
Board and through the Board's four standing committees, the Board oversees and
approves TSFG's strategic plan.
Each year, senior management sets aside specific periods to develop,
discuss and refine TSFG's long-range operating plan and overall corporate
strategy. Specific operating priorities are developed to effectuate TSFG's
long-range plan. Some of the priorities are short-term in focus; others are
based on longer-term planning horizons. Senior management reviews the
conclusions reached at its meetings with the Board and seeks approval of the
overall corporate strategy and long-range operating plan. The Board meetings,
which usually occur in the late fall, are focused on corporate strategy and
involve both management presentations and input from the Board regarding the
assumptions, priorities and objectives that will form the basis for management's
strategies and operating plans. At subsequent Board meetings, the Board
continues to substantively review TSFG's progress against its strategic plans
and to exercise oversight and decision-making authority regarding strategic
areas of importance and associated funding authorizations.
Senior management has formulated a standing agenda for each of the
regular meetings of the Board of Directors throughout the year. This agenda is
reviewed and approved by the full Board at its first regular meeting in a
calendar year. A primary purpose of this agenda is to ensure that the Board
complies with the terms of its Corporate Governance Charter. It is understood
that additional items will be added to the agenda as necessary. Any member of
the Board may request that an item be included on the agenda. At the invitation
of the Board, members of senior management invited by the Board attend Board
meetings or portions thereof for the purpose of participating in discussions.
Executive sessions or meetings of outside Directors without management
present are held at regular intervals for both the Board and the Committees. The
Chairman of the Board or the chair of the committee generally presides at
executive sessions of non-management directors. The Board meets in executive
session a minimum of two times each year.
The Board of Directors met seven times during 2003. All members
attended at least 75% of the Board meetings and 75% of the meetings of
committees on which they served.
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ATTENDANCE AT ANNUAL MEETINGS
- -------------------------------
TSFG has not established a formal policy regarding director attendance
at its annual meetings of shareholders, but it encourages all of its directors
to attend annual meetings and reimburses out-of-pocket expenses associated with
such attendance. The Board Chairman presides at the annual meeting of
shareholders. All members of the Board at the time of TSFG's 2003 annual meeting
of shareholders attended that meeting.
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CODE OF ETHICS AND CODE OF CONDUCT
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TSFG has adopted a Code of Ethics that is specifically applicable to
senior management and financial officers, including its principal executive
officer, its principal financial officer, its principal accounting officer and
6
controllers. This Code of Ethics can be viewed on TSFG's website,
www.thesouthgroup.com, under the Investor Relations / Corporate Governance tab.
TSFG's Code of Conduct, applicable to all employees, may also be viewed on
TSFG's website under the Investor Relations / Corporate Governance tab.
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COMMUNICATIONS FROM SHAREHOLDERS TO DIRECTORS
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The Board of Directors believes that it is important that a direct and
open line of communication exist between the Board of Directors and its
shareholders and other interested parties. As a consequence, the Board of
Directors has adopted the procedures described below for communications to
Directors.
TSFG shareholders and other persons may communicate with the
chairpersons of TSFG's Nominating and Corporate Governance Committee, the Audit
Committee or the Compensation Committee or with TSFG's non-management directors
as a group by sending an email to directorcommunications@thesouthgroup.com. The
email should specify which of the foregoing is the intended recipient. All
communications received in accordance with these procedures will be reviewed
initially by TSFG's Office of General Counsel. The General Counsel will relay
all such communications to the appropriate director or directors unless the
General Counsel determines that the communication:
o does not relate to the business or affairs of TSFG or the functioning
or constitution of the Board of Directors or any of its committees;
o relates to routine or insignificant matters that do not warrant the
attention of the Board of Directors;
o is an advertisement or other commercial solicitation or communication;
o is frivolous or offensive; or
o is otherwise not appropriate for delivery to directors.
The director or directors who receive any such communication will have
discretion to determine whether the subject matter of the communication should
be brought to the attention of the full Board of Directors or one or more of its
committees and whether any response to the person sending the communication is
appropriate. Any such response will be made through TSFG's Office of General
Counsel and only in accordance with TSFG's policies and procedures and
applicable law and regulations relating to the disclosure of information. TSFG's
Office of General Counsel will retain copies of all communications received
pursuant to these procedures for a period of at least one year.
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POLICY REGARDING CONSIDERATION OF
DIRECTOR CANDIDATES RECOMMENDED BY SHAREHOLDERS
- -------------------------------------------------
It is the policy of the Nominating and Corporate Governance Committee
to consider all director candidates recommended by shareholders. Any such
recommendations should be communicated to the Chairman of the Committee in
accordance with standard Company policies, in a timely manner and otherwise in
accordance with the provisions of TSFG's Bylaws. The Committee has also
articulated the qualifications and characteristics that are deemed desirable by
this Committee when evaluating Director candidates.
Nominees for the Board of Directors recommended by the Nominating and
Corporate Governance Committee must have the following attributes:
o Have a reputation for industry, integrity, honesty, candor, fairness
and discretion;
o Have a high degree of expertise in his or her chosen field of
endeavor, which area of expertise should have some relevance to TSFG's
businesses;
o Be knowledgeable, or willing and able to become so quickly, in the
critical aspects of TSFG's businesses and operations; and
o Be experienced and skillful in serving as a competent overseer of, and
trusted advisor to, senior management of a substantial publicly-held
corporation.
Nominees for the Board of Directors recommended by the Nominating and
Corporate Governance Committee should contribute to the mix of skills, core
7
competencies and qualifications of the Board through expertise in one or more of
the following areas: banking and other financial services, accounting and
finance, mergers and acquisitions, leadership, business and management,
strategic planning, government relations, investor relations, executive
leadership development, and executive compensation. In considering nominees, the
Nominating and Corporate Governance Committee shall take into account the mix of
skills, core competencies and qualifications existing with respect to incumbent
directors.
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PROCESS OF EVALUATING DIRECTOR CANDIDATES
- -------------------------------------------
The charter for the Nominating and Corporate Governance Committee
states that the Committee's purpose is to assist the Board in promoting the best
interests of the Corporation and its shareholders through the implementation of
sound corporate governance principles and practices. Among other things, the
Charter mandates that the Committee accomplish this by assisting the Board by
identifying individuals qualified to become Board members and reviewing the
qualifications and independence of the members of the Board and its various
committees on a regular periodic basis and making any recommendations from time
to time concerning any recommended changes in the composition of the Board and
its committees.
In evaluating director candidates, the Committee takes into account the
items set forth in its "Policy Statement of the Nominating and Corporate
Governance Committee Regarding Director Qualifications," which is discussed
above in the section entitled "Policy Regarding Consideration of Director
Candidates recommended by Shareholders." A copy of this Policy may be found on
TSFG's website at www.thesouthgroup.com. There are no material differences
between the evaluation processes for director candidates based on whether such
candidates are recommended by shareholders.
Over the past several years, additions to the Board of Directors have
come largely in connection with acquisitions (where representatives of the
acquired institution have become Board members pursuant to provisions of the
merger agreement). This process does not lend itself to a rigid evaluation
process that might otherwise be the case outside of the merger context. However,
the criteria set forth in the Director Qualifications Policy described above are
utilized in determining whether to re-nominate current members of the Board of
Directors.
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DETERMINATIONS WITH RESPECT TO INDEPENDENCE OF DIRECTORS
- -----------------------------------------------------------
As noted above, the Corporate Governance Standards mandate that a
majority of TSFG's Directors meet the criteria for independence required by the
rules of the Nasdaq Stock Market and the National Association of Securities
Dealers (the "NASD"). The Board of Directors makes an annual determination
regarding the independence of each of TSFG's directors. The Board last made
these determinations for each member of the Board in February 2004, based on the
review of director questionnaires designed to elicit information regarding
independence, and on recommendations made by the Nominating and Corporate
Governance Committee.
The Board has determined that 12 of its 16 directors (assuming the
Nominees listed above are elected) will be independent as contemplated under the
rules of the Nasdaq Stock Market. The four individuals who are not independent,
Messrs. Whittle, Hummers, Campbell and Davis, are all executive officers or
consultants to TSFG. Mr. Campbell and Mr. Davis became board members in
connection with TSFG's acquisition of Gulf West Banks, Inc. and MountainBank
Financial Corporation, respectively.
- ------------------------
DIRECTOR COMPENSATION
- ------------------------
During 2003, each non-officer Director's total compensation was valued
at approximately $38,000 to $42,000, assuming that the Director attended all
meetings and depending on the committees that the Director served on during the
year. Directors receive a retainer of $30,000, plus receive meeting fees of
$1,000 for each Board and committee meeting attended. Fees for committee
chairmen were $2,000 per committee meeting. Of the $30,000 retainer, $18,000 is
paid in the form of quarterly stock grants valued at fair market value at the
time of grant. The balance of the retainer and any additional director
compensation associated with meeting attendance was paid in cash. In addition,
on May 1 of each year, each Director receives an option to purchase 1,000 shares
of TSFG common stock, having an exercise price equal to the common stock's fair
market value on the date of grant.
8
- ------------------------------
COMMITTEE MEMBERSHIP
- ------------------------------
The following table lists the membership of the standing committees of
TSFG's Board of Directors.
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
DIRECTOR AUDIT COMPENSATION NOMINATING EXECUTIVE
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
William P. Brant X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
Gordon W. Campbell
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
J. W. Davis
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
Judd B. Farr X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
C. Claymon Grimes, Jr. X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
M. Dexter Hagy X X X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
William S. Hummers III
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
Thomas J. Rogers X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
H. Earle Russell, Jr. X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
Charles B. Schooler X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
Edward J. Sebastian X X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
John C.B. Smith, Jr. X X X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
Eugene E. Stone IV X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
William R. Timmons, Jr. X X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
William R. Timmons III X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
Samuel H. Vickers X X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
David C. Wakefield III X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
Mack I. Whittle, Jr. X
- ------------------------------------------ ------------------ ----------------- ------------------ -----------------
- ------------------------------
STANDING BOARD COMMITTEES
- ------------------------------
It is the general policy of TSFG that all major decisions be considered
by the Board as a whole. Consequently, the Board's committee structure is
limited to those committees considered to be appropriate for the operation of a
publicly-owned company. Currently these standing committees are the Compensation
Committee, the Audit Committee, the Executive Committee and Nominating and
Corporate Governance Committee, each of which has a written charter adopted by
the Board of Directors. The Audit Committee, the Compensation Committee and the
Nominating and Corporate Governance Committee are made up of only independent
directors. The current charter for each of the Board's standing committees is
available on TSFG's website at www.thesouthgroup.com.
Audit Committee. The Audit Committee assists the Board in fulfilling
its oversight responsibilities by reviewing the financial reports and other
financial information provided by TSFG to any governmental body or the public,
TSFG's systems of internal controls regarding finance, accounting, legal
compliance and ethics that management and the Board have established, and TSFG's
auditing, accounting and financial reporting processes generally. For further
information concerning the work of the Audit Committee, see "Audit Committee
Report" below and the Audit Committee Charter attached as Appendix A hereto. The
Audit Committee met five times in 2003. The Board of Directors has determined
that all members of TSFG's Audit Committee are independent, as contemplated in
the listing standards of the NASD and the Nasdaq Stock Market, and in
particular, "independent" as contemplated in Rule 4200(a)(15) of the NASD's
listing standards.
Compensation Committee. The Compensation Committee sets TSFG's
compensation policies and makes recommendations regarding senior management
compensation. The Committee met nine times in 2003. The Board of Directors has
determined that all members of TSFG's Compensation committee are independent, as
contemplated in the listing standards of the NASD and the Nasdaq Stock Market.
Executive Committee. The Executive Committee has the authority to
review, guide and take any permissible actions with respect to the business and
affairs of TSFG as usually taken by the Board of Directors when the Executive
Committee determines that it is appropriate to act prior to the next Board of
Directors' meeting. The Executive Committee met eight times in 2003. The Board
of Directors has determined that all members of TSFG's executive committee are
9
independent, as contemplated in the listing standards of the NASD and the Nasdaq
Stock Market, except for Mr. Whittle.
Nominating and Corporate Governance Committee. The Nominating and
Corporate Governance Committee recommends nominees for election to the Board and
addresses issues of corporate governance. This Committee will consider
recommendations for Director nominees from shareholders. Shareholders who wish
to recommend Director nominees proposed for election at the 2005 Annual Meeting
should comply with the procedure described in "Proposals by Shareholders" below.
In considering candidates, the Committee follows the procedures described above
in "Process of Evaluating Director Candidates" and considers other matters set
forth in TSFG's Corporate Governance Charter, a copy of which may be obtained
from TSFG's website, WWW.THESOUTHGROUP.COM. The Committee met four times in
2003. The Board of Directors has determined that all members of TSFG's
Nominating and Corporate Governance Committee are independent, as contemplated
in the listing standards of the NASD and the Nasdaq Stock Market.
- ---------------------------
AUDIT COMMITTEE REPORT
- ---------------------------
The following report does not constitute soliciting material and is not
considered filed or incorporated by reference into any other filing
by TSFG under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.
The Board's Audit Committee is responsible for providing independent,
objective oversight of TSFG's accounting functions and internal controls. The
Audit Committee is composed of eight Directors, each of whom is independent as
defined by the NASD's listing standards. The Audit Committee operates under a
written charter approved by the Board of Directors.
Management is responsible for TSFG's internal controls and financial
reporting process. The independent accountants are responsible for performing an
independent audit of TSFG's consolidated financial statements in accordance with
auditing standards generally accepted in the United States of America and to
issue a report thereon. The Audit Committee's responsibility is to monitor and
oversee these processes. In this regard, the Committee meets separately at most
regular committee meetings with management, the head of Internal Audit and
TSFG's outside independent auditors. The Committee has the authority to conduct
or authorize investigations into any matters within the scope of its
responsibilities and the authority to retain such outside counsel, experts, and
other advisors as it determines appropriate to assist it in the conduct of any
such investigation. In addition, the Committee approves, subject to shareholder
ratification, the appointment of TSFG's outside independent auditors, KPMG LLP,
and pre-approves all audit and non-audit services to be performed by the
auditor.
In connection with these responsibilities, the Audit Committee met with
management and the independent accountants and reviewed and discussed the
December 31, 2003 consolidated financial statements. The Audit Committee also
discussed with the independent accountants the matters required by Statement on
Auditing Standards No. 61 (Communication with Audit Committees). The Audit
Committee also received written disclosures from the independent accountants
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), and discussed with the independent
accountants the firm's independence. In particular, the Audit Committee
considered whether the provision of the services set forth below under "Audit
Related Fees", "Tax Fees" and "All Other Fees" is compatible with maintaining
the independence of the auditors and determined that no independence issues
arose as a result of such services.
Based upon the Audit Committee's discussions with management and the
independent accountants, and its review of the representations of management and
the independent accountants, the Audit Committee recommended to the Board that
these December 31, 2003 consolidated financial statements be included in TSFG's
Annual Report on Form 10-K for the year ended December 31, 2003, filed with the
SEC.
All members of the Audit Committee concur in this report.
William R. Timmons III, Chairman C. Claymon Grimes, Jr.
Eugene I. Stone IV H. Earle Russell, Jr.
Charles B. Schooler Edward J. Sebastian
Samuel H. Vickers David C. Wakefield III
10
- -----------------
AUDIT FEES
- -----------------
The following table presents fees paid to KPMG for professional audit
services associated with the audit of TSFG's annual financial statements for the
years ended December 31, 2002 and 2003 and fees billed for other KPMG services
in 2002 and 2003. The Audit Committee has considered whether the provision of
these services is compatible with maintaining KPMG LLP's independence.
- --------------------------------------------------------------------------------- ----------------- ----------------
2003 2002
- --------------------------------------------------------------------------------- ----------------- ----------------
Audit Fees (1) ............................................................... $ 988,750 1,238,000
Audit Related Fees (2) ....................................................... 45,000 35,000
------------ ------------
Audit Fees and Audit Related Fees........................................ 1,033,750 1,273,000
Tax Fees (3) .................................................................. 947,181 498,000
All Other Fees (4)............................................................. 111,150 461,000
------------ ------------
Total Fees.......................................................... $ 2,092,081 $ 2,232,000
============ ============
- --------------------------------------------------------------------------------- ----------------- ----------------
(1) Aggregate Fees consists of (1) audit of consolidated financial statements
and quarterly reviews - $594,000 and $679,000 in 2003 and 2002,
respectively; (2) subsidiary audits - $60,250 and $81,000 in 2003 and 2002,
respectively, (3) issuance of letters to underwriters- $140,000 and $85,000
in 2003 and 2002, respectively, (4) acquisition related services - $75,000
and $350,000 in 2003 and 2002, respectively; (5) review of registration
statements - $20,000 and $0 in 2003 and 2002, respectively, and (6) audit
related research - $99,750 and $43,000 in 2003 and 2002, respectively.
(2) Audit Related Fees consist of fees for audits of employee benefit plans.
(3) Tax Fees consists of (1) tax compliance - $245,750 and $181,000 in 2003
and 2002, respectively; (2) REIT strategies - $500,000 and $100,000 in 2003
and 2002, respectively; (3) tax consulting - $156,431 and $0 in 2003 and
2002, respectively; and (4) acquisition related work - $45,000 and $217,000
in 2003 and 202, respectively.
(4) All Other Fees consist of (1) information technology related controls
reviews - $111,150 and $0 in 2003 and 2002, respectively; (2) information
technology internal audit co-sourcing services - $0 and $243,000 in 2003
and 2002, respectively; and (3) Loan Procedures Manual - $0 and $218,000 in
2003 and 2002, respectively.
- --------------------------------
OTHER AUDIT COMMITTEE MATTERS
- --------------------------------
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that both Edward J. Sebastian and
David C. Wakefield III are "audit committee financial experts" as defined in
Item 401(h)(2) of the SEC's Regulation S-K. Both Mr. Sebastian and Mr. Wakefield
are "independent" as that term is used in Item 7(d)(3)(iv) of Schedule 14A under
the Securities Exchange Act of 1934.
AUDIT COMMITTEE CHARTER
The Board of Directors has adopted a written charter for the Audit
Committee. A copy of the charter is attached hereto as Appendix A.
AUDIT COMMITTEE PRE-APPROVAL POLICY
The Audit Committee has adopted a policy requiring that all services
from the outside independent auditors must be pre-approved by the Audit
Committee or a sub-committee comprised of the Chairman of the Audit Committee
and one other Committee member. Matters approved by the sub-committee must be
related to the Committee at the next meeting.
11
--------------------------------------
STOCK OWNERSHIP
--------------------------------------
- ----------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
- ----------------------------------
The table below sets forth as of March 1, 2004 the beneficial ownership
of TSFG common stock by (1) all Directors and nominees for Director, (2) all
Named Executive Officers of TSFG (See "Summary Compensation Table" below) and
(3) all Directors and Executive Officers of TSFG as a group. Unless otherwise
indicated, all persons listed below have sole voting and investment power over
all shares beneficially owned.
--------------------------------------------------------------
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
--------------------------------------------------------------
COMMON STOCK
BENEFICIALLY OWNED (1)
--------------------------- COMMON STOCK PERCENT OF
SHARED SUBJECT TO A RIGHT COMMON STOCK
NAME OF BENEFICIAL OWNER SOLE POWER(2) POWER(2) TO ACQUIRE(1)(3) (4)
- --------------------------------------------------------------------------------------------------------------------
William P. Brant 3,068 (4) -- 10,187 *
- --------------------------------------------------------------------------------------------------------------------
Gordon W. Campbell 500,731 -- -- *
- --------------------------------------------------------------------------------------------------------------------
Andrew B. Cheney (5) 10,599 -- 25,909 *
- --------------------------------------------------------------------------------------------------------------------
J. W. Davis 64,845 -- 11,862 *
- --------------------------------------------------------------------------------------------------------------------
John C. DuBose (6) 12,382 10,831 46,399 *
- --------------------------------------------------------------------------------------------------------------------
Judd B. Farr 138,575 -- 18,965 *
- --------------------------------------------------------------------------------------------------------------------
C. Claymon Grimes, Jr. 62,649 -- 17,705 *
- --------------------------------------------------------------------------------------------------------------------
M. Dexter Hagy 13,005 -- 18,965 *
- --------------------------------------------------------------------------------------------------------------------
William S. Hummers III (7) 66,744 10,424 96,079 *
- --------------------------------------------------------------------------------------------------------------------
Thomas J. Rogers 58,140 6,551 8,187 *
- --------------------------------------------------------------------------------------------------------------------
H. Earle Russell, Jr. 7,999 -- 16,445 *
- --------------------------------------------------------------------------------------------------------------------
Charles B. Schooler 27,125 -- 18,335 *
- --------------------------------------------------------------------------------------------------------------------
Edward J. Sebastian 1,240 72 5,483 *
- --------------------------------------------------------------------------------------------------------------------
John C.B. Smith, Jr. 65,529 7,458 11,809 *
- --------------------------------------------------------------------------------------------------------------------
Eugene E. Stone IV 1,068 -- 3,704 *
- --------------------------------------------------------------------------------------------------------------------
James W. Terry, Jr. (8) 40,135 -- 69,187 *
- --------------------------------------------------------------------------------------------------------------------
William R. Timmons, Jr. (9) 109,552 317,297 7,483 *
- --------------------------------------------------------------------------------------------------------------------
William R. Timmons III(9) 30,314 317,597 18,965 *
- --------------------------------------------------------------------------------------------------------------------
Samuel H. Vickers 2,806 10,000 12,839 *
- --------------------------------------------------------------------------------------------------------------------
David C. Wakefield III (10) 61,548 3,151 14,245 *
- --------------------------------------------------------------------------------------------------------------------
Mack I. Whittle, Jr. (11) 129,742 -- 184,370 *
- --------------------------------------------------------------------------------------------------------------------
Directors/Executive Officers as a 1,452,029 685,400 681,747 4.7%
Group (27 persons((12)
- --------------------------------------------------------------------------------------------------------------------
*Represents holdings of less than 1% of the outstanding shares of TSFG common
stock. (1) This is based on information reported to TSFG by its Directors,
nominees
and Executive Officers, and includes shares held by spouses, minor
children, affiliated companies, partnerships and trusts over which the
named person has beneficial ownership. It also includes shares allocated to
individual accounts under the TSFG's 401(k) Plan, ESOP and Deferred
Compensation Plan, voting of which is directed by the respective named
persons and group members who participate in those plans.
(2) Except as indicated below, if a beneficial owner is shown as having sole
power, the owner has sole voting and sole investment power, and if a
beneficial owner is shown as having shared power, the owner has shared
voting power and shared investment power.
(3) This includes common stock options that are exercisable on March 1, 2004 or
that become exercisable within 60 days thereafter.
(4) The percentages of total beneficial ownership have been calculated based
upon 59,534,491 (the shares of TSFG common stock outstanding as of March 1,
2004). In addition, under Rule 13d-3 of the Exchange Act, the percentages
have been computed on the assumption that shares of TSFG common stock that
can be acquired within 60 days of March 1, 2004, upon the exercise of
options by a given person are outstanding, but no other shares similarly
subject to acquisition by other persons are outstanding.
(5) Mr. Cheney owns 6,092 shares of restricted stock for which he has voting
power but no power of disposition.
(6) Mr. Dubose owns 6,092 shares of restricted stock for which he has voting
power but no power of disposition.
(7) Mr. Hummers owns 7,145 shares of restricted stock for which he has voting
power but no power of disposition.
(8) Mr. Terry owns 6,350 shares of restricted stock for which he has voting
power but no power of disposition.
(9) Canal Insurance Agency, of which William R. Timmons, Jr. and William R.
Timmons III are principals, holds 317,297 shares.
(10) Mr. Wakefield disclaims beneficial ownership over 3,151 of these shares
that are owned by his spouse.
(11) Mr. Whittle owns 17,154 shares of restricted stock for which he has voting
power but no power of disposition.
(12) Executive officers hold 65,413 shares of restricted stock for which the
officers have voting power but no power of disposition.
12
- -----------------------
5% BENEFICIAL OWNERS
- -----------------------
TSFG knows of no person or group that owns beneficially more than 5% of
the outstanding voting power as of March 1, 2004.
--------------------------------------------------------
TOTAL SHAREHOLDER RETURN
--------------------------------------------------------
The following graph sets forth the performance of TSFG's common stock
for the five year period ended December 31, 2003 as compared to the Standard and
Poor's SmallCap 600 Index and the SNL Southeast Bank Index. The graph assumes
$100 originally invested on December 31, 1998 and that all subsequent dividends
were reinvested in additional shares.
[Graph to Follow]
- -------------------------------- ------------- ------------- ------------- -------------- ------------- -------------
12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003
- -------------------------------- ------------- ------------- ------------- -------------- ------------- -------------
The South Financial Group 100.00 73.21 54.75 75.46 89.96 123.78
- -------------------------------- ------------- ------------- ------------- -------------- ------------- -------------
S&P SmallCap 600 100.00 112.40 125.67 133.88 114.30 158.63
- -------------------------------- ------------- ------------- ------------- -------------- ------------- -------------
SNL Southeast Bank Index 100.00 78.69 79.01 98.44 108.74 136.55
- -------------------------------- ------------- ------------- ------------- -------------- ------------- -------------
-----------------------------------------------
EXECUTIVE OFFICERS
-----------------------------------------------
TSFG's executive officers are appointed by the Board of Directors. The
following persons serve as executive officers of TSFG.
- ------------------------------ ------- -------------------------------------------------------- ---------------------
NAME AGE TSFG OFFICES CURRENTLY HELD TSFG
OFFICER SINCE
- ------------------------------ ------- -------------------------------------------------------- ---------------------
Mack I. Whittle, Jr. 55 President & Chief Executive Officer 1986
- ------------------------------ ------- -------------------------------------------------------- ---------------------
Andrew B. Cheney 54 President - Mercantile Bank 2000
- ------------------------------ ------- -------------------------------------------------------- ---------------------
William P. Crawford, Jr. 41 Executive Vice President - General Counsel & Secretary 2002
- ------------------------------ ------- -------------------------------------------------------- ---------------------
M. Alex Crotzer 50 Executive Vice President - Corporate Banking 2003
- ------------------------------ ------- -------------------------------------------------------- ---------------------
J. W. Davis 57 President - Carolina First Bank/North Carolina 2003
- ------------------------------ ------- -------------------------------------------------------- ---------------------
John C. DuBose 52 Executive Vice President - Technology 1998
- ------------------------------ ------- -------------------------------------------------------- ---------------------
William S. Hummers III 58 Vice Chairman, Executive Vice President & CFO 1988
- ------------------------------ ------- -------------------------------------------------------- ---------------------
Mary A. Jeffrey 53 Executive Vice President - Human Resources 2002
- ------------------------------ ------- -------------------------------------------------------- ---------------------
J. Stanley Ross 52 Executive Vice President - Finance 2001
- ------------------------------ ------- -------------------------------------------------------- ---------------------
Kendall L. Spencer 51 Executive Vice President - Retail Banking 2000
- ------------------------------ ------- -------------------------------------------------------- ---------------------
Michael W. Sperry 58 Executive Vice President - Credit Administration 1998
- ------------------------------ ------- -------------------------------------------------------- ---------------------
James W. Terry, Jr. 56 President - Carolina First Bank 1991
- ------------------------------ ------- -------------------------------------------------------- ---------------------
13
---------------------------------------------------
EXECUTIVE COMPENSATION
---------------------------------------------------
------------------------------------------------------------------------------
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
------------------------------------------------------------------------------
The Compensation Committee of the Board of Directors, which is composed
solely of non-employee Directors, works with TSFG management in establishing the
underlying philosophy and principles of TSFG's compensation system. These
principles and philosophy are then reviewed and approved by the full Board of
Directors. This Report discusses the philosophy, principles, and policies
underlying TSFG's compensation programs that were in effect during 2003 and
which will be applicable in 2004.
OUR GUIDING PRINCIPLES
The Compensation Committee is committed to administering a compensation
program that espouses TSFG's values, drives corporate results, and supports the
long-term and short-term goals of TSFG. Our compensation philosophy is grounded
by three principles:
o tying pay to performance,
o aligning executive and shareholder interests, and
o challenging executives through "stretch goals.
This program is intended to result in competitive compensation
packages, which we believe will attract and retain the talent needed to generate
outstanding TSFG performance.
Tying Pay to Performance
We believe that strong performance deserves higher pay than average
performance, and TSFG's fixed and variable compensation programs for executives
reflect this principle. Fixed compensation is in the form of base salaries,
which are targeted at the median of financial institutions of a comparable size.
Variable compensation has historically been paid to executive officers through
TSFG's existing Short-Term and Long-Term Incentive Plans. Both plans provide for
compensation that can be earned only by meeting or exceeding pre-determined
performance goals. At target performance approximately 60% of a typical
executive's total compensation is in the form of variable compensation.
Aligning Executive and Shareholder Interests
The Compensation Committee believes that one of the best ways to align
executive and shareholder interest is through stock ownership. The Compensation
Committee adopted the 2004-2006 Long-Term Incentive Plan that provides that the
proceeds from the plan will be in restricted stock. By holding an ownership
stake in TSFG, executives are placed in the same position as shareholders.
Challenging Executives through "Stretch Goals"
The Compensation Committee believes that by setting high performance
standards for executives, a high performance culture will be encouraged, which
will lead to sustained TSFG achievement. To challenge executives, the incentive
compensation programs emphasize "stretch goals." The plans focus on reaching and
exceeding established performance goals, which are developed to reflect what the
Committee considers superior performance for TSFG. In determining these goals,
the Committee gives significant and careful consideration to the historical and
projected performance of TSFG's peer group.
SHORT-TERM INCENTIVE PLAN
The Short-Term Incentive Plan is designed to reward executive officers
for performance contributions that impacted the overall success of TSFG or its
operating units during the fiscal year. The Short-Term Incentive Plan was
intended to motivate those employees and direct their efforts toward achievement
of key annual performance objectives. TSFG has focused on the following areas of
performance:
14
o earnings per share,
o asset quality (i.e., nonperforming assets as a percent of total loans
and net charge-offs as a percent of average loans), and
o certain strategic objectives.
The relative weighting of these measures was customized on an
individual basis to reflect specific roles, responsibilities, and objectives.
The threshold level of performance was 85% of a particular performance goal. At
this level, executive officers received only 35% of the targeted incentive for
that goal. Any performance less than the threshold level would result in no cash
incentive for that particular goal. If TSFG achieved 125% or more of a
performance goal, the cash incentive would be 150% of the targeted incentive.
In addition, a corporate profitability modifier allowed Short-Term
Incentive Plan awards to be adjusted based on overall corporate financial
performance. The modifier could reduce incentive plan awards if overall
performance fell below expectations or increase awards if overall corporate
performance exceeded expectations.
Prior to 2003, as part of the planning process, the Compensation
Committee established superior standards of performance consistent with the
"stretch goal" philosophy of the Committee. A target incentive was created for
each eligible executive. This target ranged from 35% to 50% of base salary,
depending on the executive, which was payable if 100% of the performance goals
were achieved. The Board of Directors approved each of the measures and target
incentives. TSFG communicated the threshold, target, and superior award
opportunities to each eligible executive officer. The Compensation Committee and
the Board of Directors reserved the authority to subjectively adjust award
payouts (positively or negatively) under the Short-Term Incentive Plan if
financial considerations or operating circumstances warranted such action.
At the conclusion of 2003 under the Short-Term Incentive Plan,
corporate financial statements were generated, and TSFG determined whether it
was successful in achieving its performance measures. Payouts were made
accordingly.
LONG-TERM INCENTIVE PLANS
TSFG is in the process of ending its 2001 Long-Term Incentive Plan (the
"2001 LTIP") and introducing its 2004 Long-Term Incentive Plan (the "2004
LTIP"). The application of both Plans is described below. The Compensation
Committee is proud of the fact that in both the old and the new plan, 100% of
any long-term compensation that is earned by a participant is based first on
achieving pre-determined levels of financial performance, and secondarily by
continued employment. In other words, only after compensation is earned based on
financial performance, is continued employment a factor in vesting. While the
Committee has considered the merits of continuous employment being the sole
criteria, the Committee believes that the best interest of TSFG's shareholders
are best served by having 100% of the long-term incentive compensation based on
achievement of pre-determined goals.
2001 LONG-TERM INCENTIVE PLAN
The primary objective of the 2001 LTIP was to link a significant
portion of executive compensation to TSFG performance achievements annually and
over a multi-year period. The 2001 LTIP focused on strategic financial success
factors, which were intended to align the interest of TSFG's executives and
shareholders. The 2001 LTIP consisted of two components: stock options and
performance shares. The 2001 LTIP provided for the grant of stock options to
participants perceived to have a direct impact on TSFG's success, as evaluated
annually, and for the award of performance shares based on the performance of
TSFG, as measured annually and over a three-year "performance cycle" against
targets set by the Compensation Committee each year. The stock option and
performance share awards provided a long-term incentive opportunity targeted at
the top quartile of the peer group. The 2001 LTIP was structured to provide 50%
of the total award opportunity in stock options and 50% in performance shares.
This plan ended at the end of 2003 and was replaced by the 2004 LTIP.
2004 LONG-TERM INCENTIVE PLAN
The primary objective of the 2004 LTIP is the same as the 2001 plan --
to link a significant portion of executive compensation to TSFG performance
achievements annually and over a multi-year period. Like the 2001 Plan, the 2004
15
LTIP focuses on strategic financial success factors, which align the interest of
TSFG's executives and shareholders. The 2004 Plan provides participants with a
grant of performance-based restricted stock at the start of the three year
performance period. The performance conditions can then be satisfied by
exceeding annual and three-year performance goals set by the Compensation
Committee. No shares of restricted stock can be earned by participants under
this plan unless financial performance exceeds performance thresholds set by the
Compensation Committee and approved by the Board. Once earned, shares of
restricted stock vest based on continued employment.
DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code provides that, in general,
a public company may not deduct compensation paid to its CEO or one of the other
top five executive officers to the extent the compensation exceeds $1 million
per year. TSFG's policy is to develop compensation plans that comply with
Section 162(m). However, the Compensation Committee may award compensation which
may not qualify for exemption from the deduction limit under Section 162(m) when
the Compensation Committee, in its discretion, determines such awards are
necessary for competitive business purposes, such as retaining and attracting
employees.
CEO COMPENSATION
Mr. Whittle's 2003 compensation consisted of base salary, cash
incentives, stock options, restricted stock, and certain perquisites (which did
not exceed 10% of base salary and bonus). For 2003, Mr. Whittle's base salary
was $619,000. The Committee established Mr. Whittle's base salary by analyzing
compensation levels of other chief executive officers of comparable size banks
based on targeted financial services surveys. In addition to base salary, Mr.
Whittle received an automobile allowance of $44,640. Mr. Whittle's cash
incentive was determined in accordance with the Short-Term Incentive Plan and
was targeted at 50% of base salary if all performance measures were achieved.
While a broad range of performance measures were examined, the Compensation
Committee used its discretion under the plan to pay Mr. Whittle $775,000 for
2003. While overall performance in 2003 was excellent, the Committee singled out
the following accomplishments in determining Mr. Whittle's incentive award:
o growth in EPS (82.7% increase from 2001-2003);
o double-digit loan and deposit growth in 2003;
o superior stock price and total market return performance;
o raising approximately $160 million in capital in the fourth quarter of
2003; and
o successful acquisition and integration of Central Bank of Tampa,
MountainBank, and American Pensions, Inc.
Based on the payout formulas established for the 2001 LTIP, Mr. Whittle
received 35,892 options and 28,750 performance shares. The stock options and
performance shares will continue to vest based on continued employment over the
next four years.
At the end of 2003, the Compensation Committee reviewed Mr. Whittle's
base salary and target annual cash compensation by analyzing compensation levels
of other chief executive officers of comparable size banks. Based on this
review, Mr. Whittle's salary for 2004 will be $750,000 and target incentive will
be 80% of base salary, which will position Mr. Whittle's annual cash
compensation at the median of the peer group.
At the beginning of 2004, the Compensation Committee determined grants
under the new 2004 LTIP. Under this plan, Mr. Whittle received 120,000 shares of
performance-based restricted stock for the 2004 to 2006 performance period. No
further grants are anticipated during the remainder of the performance period.
Earning these performance-based restricted shares requires achieving both annual
and three-year financial targets and continued employment for up to four years
after the performance conditions have been met.
Compensation Committee: John C. B. Smith, Jr., Chairman William P. Brant
Judd B. Farr Thomas J. Rogers
Edward J. Sebastian M. Dexter Hagy
16
- -----------------------------
SUMMARY COMPENSATION TABLE
- -----------------------------
The following table sets forth information concerning compensation paid
by TSFG during the fiscal years ended December 31, 2003, 2002 and 2001 to TSFG's
CEO and to each of the four most highly compensated executive officers other
than the CEO who were executive officers at December 31, 2003 (collectively, the
"Named Executive Officers") for services rendered in all capacities to TSFG and
its subsidiaries. For purposes of the table, all bonus and incentive plan award
amounts included for a particular year were actually paid or issued in the first
quarter of the following year. For example, bonus payments paid in
January/February 2004 are listed as 2003 compensation, because they were earned
as of December 31, 2003.
-------------------------------------- ---------------------------------- --------------
Annual Compensation Long-Term Compensation
------------------------ ---------
Awards Payouts
---------------------------------------------------------------------------------------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compen- Awards Options/ Payouts Compensation
Principal Position Year ($) ($) sation ($)(1) SARs (#) ($) ($)
- --------------------------------------------------------------------------------------------------------------------
Mack I. Whittle, Jr. 2003 663,640 775,000 (1) 549,999 (2) 5,204 -- 685,073 (3)
President and CEO 2002 569,640 600,000 (1) 103,159 16,402 -- 116,934
2001 467,555 301,500 (1) 81,000 30,686 -- 65,094
- --------------------------------------------------------------------------------------------------------------------
Andrew B. Cheney 2003 267,640 183,750 (1) 192,500 (2) 1,821 -- 57,643 (4)
President, Mercantile Bank 2002 242,640 187,500 (1) 41,662 6,624 -- 27,243
2001 229,880 90,000 (1) 33,336 9,004 -- 11,644
- --------------------------------------------------------------------------------------------------------------------
John C. DuBose 2003 281,800 183,750 (1) 192,500 (2) 1,821 -- 94,582 (5)
Executive Vice President 2002 256,800 200,000 (1) 41,662 6,624 -- 45,688
2001 221,800 125,000 (1) 31,662 10,585 -- 31,644
- --------------------------------------------------------------------------------------------------------------------
William S. Hummers III 2003 306,380 232,500 (1) 227,333 (2) 2,151 -- 389,427 (6)
Executive Vice President 2002 276,280 210,000 (1) 46,674 7,419 -- 70,974
2001 251,190 150,000 (1) 37,494 11,614 -- 39,144
- --------------------------------------------------------------------------------------------------------------------
James W. Terry, Jr. 2003 278,740 206,250 (1) 201,666 (2) 1,908 -- 247,501 (7)
President, Carolina First 2002 253,740 187,500 (1) 41,662 6,624 -- 41,256
Bank 2001 228,695 90,000 (1) 33,336 10,879 -- 26,644
- --------------------------------------------------------------------------------------------------------------------
(1) Certain amounts may have been expended by TSFG that may have had value as a
personal benefit to the executive officer. However, the total value of such
benefits did not exceed the lesser of $50,000 or 10% of the annual salary
and bonus of such executive officer. Of these amounts, $32,110 was expended
for each person for tax and advisory services.
(2) Restricted stock granted with respect to 2003 performance vest 20%
immediately and 20% over the four anniversaries following the date of
grant. Restricted stock granted in the previous two years vested one third
immediately and one third over each of the subsequent two anniversaries.
(3) "All Other Compensation" is comprised of (1) $12,000 contributed to its
401(k) plan on behalf of Mr. Whittle as matching contributions, all of
which was vested, (2) $3,756 contributed to TSFG's Employee Stock Ownership
Plan (the "ESOP"), (3) $22,405 in premiums paid by TSFG on behalf of Mr.
Whittle with respect to insurance not generally available to all TSFG
employees and (4) $646,912 paid in connection with TSFG Supplemental
Executive Retirement Plan (the "SERP"). At December 31, 2003, Mr. Whittle
had 4,711 shares of restricted stock which remained subject to forfeiture,
which based on TSFG's closing stock price on December 31, 2003, had an
aggregate value of $130,730. Mr. Whittle was granted 4,500, 4,816 and
19,434 shares of restricted stock in 2001, 2002, and 2003, respectively.
(4) "All Other Compensation" is comprised of (1) $12,000 contributed to its
401(k) plan on behalf of Mr. Cheney as matching contributions, 60% of which
was vested, (2) $3,756 contributed to the ESOP, (3) $568 in premiums paid
by TSFG on behalf of Mr. Cheney with respect to insurance not generally
available to all TSFG employees, (4) $9,375 paid in connection with the
Deferred Compensation Plan and (5) $31,944 paid in connection with the
SERP. At December 31, 2003, Mr. Cheney had 1,915 shares of restricted stock
which remained subject to forfeiture, which based on TSFG's closing stock
price on December 31, 2003, had an aggregate value of $53,141. Mr. Cheney
was granted 1,852, 1,945 and 6,802 restricted shares in 2001, 2002, and
2003, respectively.
(5) "All Other Compensation" is comprised of (1) $12,000 contributed to its
401(k) plan on behalf of Mr. DuBose as matching contributions, 80% of which
was vested, (2) $3,756 contributed to the ESOP, (3) $13,830 in premiums
paid by TSFG on behalf of Mr. DuBose with respect to insurance not
generally available to all TSFG employees, and (4) $64,996 paid in
connection with the SERP. At December 31, 2003, Mr. DuBose had 1,884 shares
of restricted stock which remained subject to forfeiture, which based on
TSFG's closing stock price on December 31, 2003, had an aggregate value of
$52,281. Mr. DuBose was granted 1,759, 1,945 and 6,802 restricted shares in
2001, 2002 and 2003, respectively.
(6) "All Other Compensation" is comprised of (1) $12,000 contributed to its
401(k) plan on behalf of Mr. Hummers as matching contributions, all of
which was vested, (2) $3,756 contributed to the ESOP, (3) $13,971 in
premiums paid by TSFG on behalf of Mr. Hummers with respect to insurance
not generally available to all TSFG employees, and (4) $359,700 paid in
connection with the SERP. At December 31, 2003, Mr. Hummers had 2,148
shares of restricted stock which remained subject to forfeiture, which
based on TSFG's closing stock price on December 31, 2003, had an aggregate
value of $59,607. Mr. Hummers was granted 2,083, 2,179 and 8,033 restricted
shares in 2001, 2002 and 2003, respectively.
(7) "All Other Compensation" is comprised of (1) $12,000 contributed to its
401(k) plan on behalf of Mr. Terry as matching contributions, all of which
was vested, (2) $3,756 contributed to the ESOP, (3) $4,601 in premiums paid
by TSFG on behalf of Mr. Terry with respect to insurance not generally
available to all TSFG employees, (4) $5,625 paid under the Deferred
Compensation Plan, and (5) $221,519 paid in connection with the SERP. At
December 31, 2003, Mr. Terry had 1,915 shares of restricted stock which
remained subject to forfeiture, which based on TSFG's closing stock price
on December 31, 2003, had an aggregate value of $53,141. Mr. Terry was
granted 1,852, 1,945 and 7,126 restricted shares in 2001, 2002, and 2003,
respectively.
17
- -----------------------
STOCK OPTIONS GRANTS
- -----------------------
The following table sets forth certain information regarding stock
option, which are included in the Summary Compensation Table for 2003 for the
Named Executive Officers. These stock options were awarded in January 2004 for
employment services in 2003.
OPTION GRANTS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------------
Individual Grants
- --------------------------------------------------------------------------------------------------------------------
Number of % of Total Fair Market Value
Securities Options Granted per Share of
Underlying to Employees Common Stock at Exercise Expiration Grant Date
Name Options Granted in 2003 Time of Grant (1) Price Date(2) Valuation(3)
- --------------------------------------------------------------------------------------------------------------------
Mack I. Whittle, Jr. 5,204 0.84% $ 28.30 $ 28.30 1/16/14 $ 62,500
- --------------------------------------------------------------------------------------------------------------------
Andrew B. Cheney 1,821 0.29% 28.30 28.30 1/16/14 21,870
- --------------------------------------------------------------------------------------------------------------------
John C. DuBose 1,821 0.29% 28.30 28.30 1/16/14 21,870
- --------------------------------------------------------------------------------------------------------------------
William S. Hummers III 2,151 0.35% 28.30 28.30 1/16/14 25,834
- --------------------------------------------------------------------------------------------------------------------
James W. Terry, Jr. 1,908 0.31% 28.30 28.30 1/16/14 22,915
- --------------------------------------------------------------------------------------------------------------------
(1) The number shown is the closing price of a share of TSFG common stock as
quoted on the Nasdaq National Market on the date of grant.
(2) The plan pursuant to which the options were granted sets forth certain
earlier expiration dates upon the option holder's termination of
employment.
(3) This is based on a grant valuation of $12.01 per share.
- -------------------------
STOCK OPTION EXERCISES
- -------------------------
The following table sets forth information with respect to options to
purchase shares of TSFG common stock held by the Named Executive Officers and
the number of shares covered by both exercisable and unexercisable stock options
in 2003. Also reported are the values for the "in-the-money" options which
represent the positive spread between the exercise price of any such existing
stock option and the year-end fair market value of the TSFG common stock. This
table excludes any stock option grants awarded subsequent to December 31, 2003.
Accordingly, this table does not reflect the stock options set forth in the
Stock Option Grants table immediately above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Value Options at 2003 Fiscal at 2003 Fiscal
Acquired on Realized Year-End(#) Year-End ($) (1)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------------------------------------------
Mack I. Whittle, Jr. -- -- 176,698 89,416 $1,133,214 $704,569
- --------------------------------------------------------------------------------------------------------------------
Andrew B. Cheney -- -- 18,783 21,845 229,063 214,524
- --------------------------------------------------------------------------------------------------------------------
John C. DuBose -- -- 43,347 14,562 221,520 123,550
- --------------------------------------------------------------------------------------------------------------------
William S. Hummers III -- -- 92,571 33,129 497,600 259,360
- --------------------------------------------------------------------------------------------------------------------
James W. Terry, Jr. 5,630 $57,111 66,061 14,783 325,101 125,705
- --------------------------------------------------------------------------------------------------------------------
(1) The indicated value is based on exercise prices ranging from $13.16 to
$31.26 per share and a per share value of $27.75, which was the closing
market price of a share of TSFG's common stock on December 31, 2003 as
reported by the Nasdaq National Market.
18
- -----------------------------------------------
LONG-TERM INCENTIVE PLANS - AWARDS IN 2003
- -----------------------------------------------
The following table sets forth information with respect to awards under TSFG's
2001 Long-Term Incentive Plan. These awards were paid in January 2004 with
respect to performance in 2003 and over the three year period from 2001 through
2003. Each of the stock options has an exercise price of $28.30 (the fair market
value on the date of grant) and were valued at $12.01. The options vest 25% on
each of subsequent four anniversaries of the date of grant, based on continued
employment. The shares of restricted stock vest 20% immediately and 20% over the
next four anniversaries of the date of grant.
- --------------------------------------------------------------------------------------------------------------------
Number of Shares, Units and Other Rights
--------------------------------------------------------------
Name Stock Options Restricted Stock
- --------------------------------------------------------------------------------------------------------------------
Mack I. Whittle, Jr............................. 5,204 19,434
- --------------------------------------------------------------------------------------------------------------------
Andrew B. Cheney................................ 1,821 6,802
- --------------------------------------------------------------------------------------------------------------------
John C. DuBose.................................. 1,821 6,802
- --------------------------------------------------------------------------------------------------------------------
William S. Hummers III.......................... 2,151 8,033
- --------------------------------------------------------------------------------------------------------------------
James W. Terry, Jr.............................. 1,908 7,126
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------
EQUITY COMPENSATION PLAN DATA
- --------------------------------
The following table sets forth information regarding TSFG's equity
compensation plans at January 31, 2004. The additional shares under the
Directors Stock Option Plan and the Amended and Restated Stock Option Plan, for
which authorization is sought at this Annual Meeting, are not included in this
table.
- ---------------------------------------- --------------------- ------------------ ----------------------------------
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance
exercise of oustanding under equity compensation plans
outstanding options, options, warrants (excluding securities reflected
Plan Category warrants and rights and rights in the first column of numbers)
- ---------------------------------------- --------------------- ------------------ ----------------------------------
Equity compensation plans
approved by security holder (1) 4,339,534(2) $18.12 2,441,614
- ---------------------------------------- --------------------- ------------------ ----------------------------------
Equity compensation plans not
approved by security holders (3) -- -- --
- ---------------------------------------- --------------------- ------------------ ----------------------------------
Total 4,339,534 (2) $18.12 2,441,614
- ---------------------------------------- --------------------- ------------------ ----------------------------------
(1) These plans (as defined in the applicable SEC rules) are as follows: The
TSFG Stock Option Plan, the TSFG Restricted Stock Agreement Plan, the
Director Stock Option Plan, the Amended and Restated Fortune 50 Plan, the
2004 Long-Term Incentive Plan, and option plans assumed by TSFG as a result
of acquisitions of other companies.
(2) Of this amount, 699,540 options have been issued pursuant to non-TSFG
Plans.
(3) TSFG has adopted no "equity compensation plans" as defined in the
applicable SEC rules, which have not been approved by its shareholders.
TSFG believes that all equity compensation plans to which it succeeded in
connection with mergers and acquisitions were approved by such acquired
entities' shareholders.
- --------------------------
NEW PLAN BENEFITS TABLE
- --------------------------
The information below is being provided with respect to the Amended and
Restated Stock Option Plan, the Amended and Restated Directors Stock Option Plan
and the Employee Stock Purchase Plan, amendments to which are being submitted to
shareholders for approval at the Annual Meeting. Among the amendments being
submitted for shareholder approval, are an increase of 1,000,000 shares pursuant
to the Amended and Restated Stock Option Plan, and an increase of 150,000 shares
available for issuance pursuant to the Amended and Restated Directors Stock
Option Plan.
19
With respect to the Amended and Restated Stock Option Plan, it is
impossible at the present time to indicate specifically the names of persons to
whom future options will be granted or the amounts of such options. Similarly,
with respect to the Employee Stock Purchase Plan, shares to be purchased are
subject to an employee's discretion, including an employee's decision not to
participate in the Employee Stock Purchase Plan, and therefore, shares will may
be issued under the Employee Stock Purchase Plan are not determinable. No
options or shares have been granted or purchased with respect to these
additional shares for which approval is requested.
Since the options and shares to be issued cannot be estimated, the
following table shows the number of shares of options and stock issued or
purchased pursuant to the Amended and Restated Stock Option Plan and the
Employee Stock Purchase Plan by each of the individuals and groups listed for
the fiscal year ended December 31, 2003. The table includes grants in 2004 for
2003 employment services, and excludes grants in 2003 for 2002 employment
services.
With respect to the Amended and Restated Directors Stock Option Plan,
TSFG expects to issue 1,000 options per year to each of the non-executive
Directors, including to Directors of TSFG's banking subsidiaries. This is
reflected in the table below.
- --------------------------------------------------------------------------------------------------------------------
Amended and Restated Employee
Amended and Restated Directors Stock Stock 2004 Long-Term
Stock Option Plan Option Plan Purchase Plan Incentive Plan
------------------------------------------------------------------------------------
$$ # of $$ # of $$ # of
Value Options Value Options # of Shares Value Shares
- --------------------------------------------------------------------------------------------------------------------
Mack I. Whittle, Jr. $ 62,500 5,204 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Andrew B. Cheney 21,870 1,821 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
John C. DuBose 21,870 1,821 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
William S. Hummers III 25,834 2,151 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
James W. Terry, Jr. 22,915 1,908 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Current Executive 341,665 31,171 -- -- -- -- --
Officers as a Group (1)
- --------------------------------------------------------------------------------------------------------------------
Non-Executive -- -- $801,866 124,000 (3) -- $343,524 13,590
Directors as a Group (2)
- --------------------------------------------------------------------------------------------------------------------
All Employees, Excluding $5,268,471 591,189 -- -- 12,327 -- --
Executive Officers, as a Group
- --------------------------------------------------------------------------------------------------------------------
(1) Includes options granted to the five named executive officers above.
(2) This includes non-employee directors of TSFG's banking subsidiaries.
(3) This includes a one time grant of 90,000 options to MountainBank Financial
Corporation's directors in connection with TSFG's acquisition of that
entity.
- ----------------------------------------------
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
- ----------------------------------------------
TSFG has entered into Noncompetition, Severance and Employment
agreements with certain executive officers of TSFG, including Andrew B. Cheney,
John C. DuBose, William S. Hummers III, James W. Terry, Jr. and Mack I. Whittle,
Jr. The agreements are summarized below. However, this summary is qualified in
its entirety by reference to the agreements themselves, copies of which are
available from TSFG or from TSFG's public filings with the Securities and
Exchange Commission. Defined terms in the various agreements are substantially
similar but vary in certain respects from agreement to agreement. An
"Involuntary Termination" generally occurs when the executive terminates his
employment due to (1) a change in his responsibilities, position or authority,
(2) a change in the terms or status of the agreement, (3) a reduction in his
compensation or benefits, (4) his forced relocation outside his area, or (v) a
significant increase in his travel requirements. A "Voluntary Termination"
occurs when the executive terminates his employment following a "change in
control" not the result of items constituting an Involuntary Termination.
Non-capitalized terms that are in quotes and used in the descriptions below are
as defined in the respective agreements. "Legitimate TSFG Reasons" generally
means (1) "cause," (2) if the executive becomes "disabled," or (3) upon the
executive's death. "Legitimate Executive Reasons" generally means (1) TSFG's
uncured breach of the agreement, (2) a Voluntary Termination, or (3) an
Involuntary Termination.
20
ANDREW B. CHENEY. Under his agreement, TSFG is obligated to pay him an
annual salary determined by the Board. In addition, the Board may pay Mr. Cheney
an additional incentive cash bonus pursuant to TSFG's incentive compensation
plans and certain other typical executive benefits. Mr. Cheney's agreement has a
rolling term of three years. Either party may give written notice to the other,
at which point the term is fixed at three years from the date of notice,
terminating on the expiration of such term. Mr. Cheney may terminate the
agreement for Legitimate Executive Reasons. If Mr. Cheney terminates his
employment other than for Legitimate Executive Reasons, TSFG's obligations under
the agreement cease as of the date of such termination. If Mr. Cheney terminates
his employment as a result of clauses (i) or (iii) of the Legitimate Executive
Reasons and there has been a change in control, he is entitled to receive a lump
sum amount equal to three times his annual total compensation. If Mr. Cheney
terminates his employment pursuant to clause (i) of the Legitimate Executive
Reasons in the absence of a change in control, he is entitled to receive a lump
sum amount equal to one times his annual total compensation. If Mr. Cheney
terminates his employment pursuant to clause (ii) of the Legitimate Executive
Reasons, he is entitled to receive a lump sum amount equal to one times his
annual compensation and will also be entitled to receive his base salary and
other benefits due to him through his termination date. TSFG may terminate the
agreement at any time for Legitimate TSFG Reasons or without cause. If TSFG
terminates Mr. Cheney's employment for Legitimate TSFG Reasons, TSFG's
obligations under the agreement cease as of the date of termination. However, if
Mr. Cheney is terminated for cause after a change in control, then such
termination shall be treated as a Voluntary Termination. If TSFG terminates Mr.
Cheney without cause, and there has been a change in control, he will be
entitled to receive as severance a lump sum payment equal to three times his
total annual compensation. If TSFG terminates Mr. Cheney without cause in the
absence of a change in control, he will be entitled to receive as severance a
lump sum payment equal to the compensation and benefits that would be provided
to him for the remaining term of the contract. In the event of termination by
Mr. Cheney for a Legitimate Executive Reason, or in the event of termination by
TSFG without cause, he will become vested in all TSFG share grants or options,
and be deemed to be retired and credited with TSFG service for the remaining
term of the agreement for the purposes of TSFG's benefit plans. In the event
that Mr. Cheney's employment is terminated by him as a result of clauses (i) or
(iii) of the Legitimate Executive Reasons or by TSFG without cause or by TSFG as
a result of clause (i) of the Legitimate TSFG Reasons, then he may not, for a
period of three years following such termination of employment, compete against
TSFG as provided in the agreement. If Mr. Cheney's employment is terminated for
any reason following a change in control, there will be no limitation on any
activity of Mr. Cheney. If the covenant not to compete is triggered, Mr. Cheney
will receive, in addition to any other payments, a total of three times his
annual cash compensation. All amounts paid to Mr. Cheney will be grossed up by
the taxes payable by him in respect of such amounts.
JOHN C. DUBOSE. Under his agreement, TSFG is obligated to pay him an
annual salary determined by the Board. In addition, the Board may pay Mr. DuBose
an additional incentive cash bonus pursuant to TSFG's incentive compensation
plans and certain other typical executive benefits. Mr. DuBose's agreement has a
rolling term of five years and extends automatically until he turns 60, at which
point the term is converted into a five year fixed term which terminates upon
its expiration. Either party may give written notice to the other, at which
point the term is fixed at five years from the date of notice, terminating on
the expiration of such term. Mr. DuBose may terminate the agreement for
Legitimate Executive Reasons. If Mr. DuBose terminates his employment other than
for Legitimate Executive Reasons, TSFG's obligations under the agreement cease
as of the date of such termination. If Mr. DuBose terminates his employment as a
result of clauses (i) or (iii) of the Legitimate Executive Reasons, he is
entitled to receive a lump sum amount equal to three times his annual total
compensation and will also be entitled to receive his base salary, bonus, and
other benefits and allowances due to him through his termination date. If Mr.
DuBose terminates his employment pursuant to clause (ii) of the Legitimate
Executive Reasons following a change of control, he is entitled to receive a
lump sum amount equal to one times his annual compensation and will also be
entitled to receive his base salary and other benefits due to him through his
termination date. TSFG may terminate the agreement at any time for Legitimate
TSFG Reasons or without cause. If TSFG terminates Mr. DuBose's employment for
cause, TSFG's obligations under the agreement cease as of the date of
termination. However, if Mr. DuBose is terminated for cause after a change in
control, then such termination shall be treated as a Voluntary Termination,
except that all his rights pursuant to share grants or options granted by TSFG
do not become vested or released from all conditions and restrictions and Mr.
DuBose is not deemed to be retired or credited with TSFG service for the
remaining term of the agreement for the purposes of TSFG's benefit plans. If
TSFG terminates Mr. DuBose pursuant to clauses (ii) or (iii) of the Legitimate
Business Reasons, TSFG's obligations under the agreement generally cease as of
the date of termination. If TSFG terminates Mr. DuBose without cause, he will be
entitled to receive as severance a lump sum payment equal to three times his
total annual compensation. In the event of termination by Mr. DuBose for a
Legitimate Executive Reason, or in the event of termination by TSFG without
21
cause, he will become vested in all TSFG share grants or options, and be deemed
to be retired and credited with TSFG service for the remaining term of the
agreement for the purposes of TSFG's benefit plans. In the event that Mr.
DuBose's employment is terminated by him as a result of clauses (i) or (iii) of
the Legitimate Executive Reasons or by TSFG without cause, then he may not, for
a period of five years following such termination of employment compete against
TSFG as provided in the agreement. If the covenant not to compete is triggered,
Mr. DuBose will receive, in addition to any other payments, a total of five
times his annual cash compensation. TSFG will also continue to provide certain
other benefits for five years following the commencement of the non-compete
period. The amount paid to Mr. DuBose under this covenant not to compete will be
grossed up for taxes payable by him. If Mr. DuBose terminates his employment for
other than a Legitimate Executive Reason or as a result of clause (ii) of the
Legitimate Executive Reasons, he may not, for a period of one year following
such termination of employment, compete against or interfere with TSFG as
provided in the agreement and receives no additional compensation as detailed
above. Notwithstanding the foregoing, if Mr. DuBose voluntarily or involuntarily
terminates the agreement after a change in control, he shall not enter into any
employment or consulting relationship for general banking activities with a
Competitor during the Noncompete Period, but may enter into a consulting
relationship limited to information and technology services with a Competitor
outside the State of South Carolina.
WILLIAM S. HUMMERS III. Under his agreement, TSFG is obligated to pay
Mr. Hummers an annual salary determined by the Board, such incentive
compensation as may become payable to him under TSFG's incentive compensation
plans, and certain other typical executive benefits. Mr. Hummers' agreement has
a rolling term of five years and extends automatically until he turns 60, at
which point the term is converted into a 5 year fixed term, which terminates
upon its expiration. Either party may give written notice to the other, at which
point the term is fixed at five years from the date of notice, terminating on
the expiration of such term. Mr. Hummers may terminate the agreement for
Legitimate Executive Reasons. If Mr. Hummers terminates his employment other
than for Legitimate Executive Reasons, TSFG's obligations under the agreement
cease as of the date of such termination. If Mr. Hummers terminates his
employment as a result of clauses (i) or (iii) of the Legitimate Executive
Reasons, he is entitled to receive a lump sum amount equal to three times his
annual total compensation, and he will also be entitled to receive his base
salary and other benefits and allowances due him through his termination date.
If Mr. Hummers terminates his employment pursuant to clause (ii) of the
Legitimate Executive Reasons following a change in control, he is entitled to
receive an amount generally equal to one year's total compensation, and he will
also be entitled to receive his base salary and other benefits due him through
his termination date. If TSFG terminates Mr. Hummers' employment for cause,
TSFG's obligations under the agreement cease as of the date of termination.
However, if Mr. Hummers is terminated for cause after a change in control, then
such termination shall be treated as a Voluntary Termination, except that all
his rights pursuant to share grants or options granted by TSFG do not become
vested or released from all conditions and restrictions, and Mr. Hummers is not
deemed to be retired or credited with TSFG service for the remaining term of the
agreement for the purposes of TSFG's benefit plans. If TSFG terminates Mr.
Hummers pursuant to clauses (ii) or (iii) of the Legitimate TSFG Reasons, TSFG's
obligations under the agreement generally cease as of the date of termination.
If TSFG terminates Mr. Hummers without cause, he will be entitled to receive as
severance a lump sum payment equal to three times his total annual compensation.
In the event of termination by Mr. Hummers for a Legitimate Executive Reason, or
in the event of termination by TSFG without cause, he will become vested in all
TSFG share grants or options, and be deemed to be retired and credited with TSFG
service for the remaining term of the agreement for the purposes of TSFG's
benefit plans. In the event that Mr. Hummers' employment is terminated
voluntarily by him as a result of a Legitimate Executive Reason or by TSFG
without cause, then he may not, for a period of five years following such
termination of employment compete against TSFG as provided in the agreement. If
the covenant not to compete is triggered, Mr. Hummers will receive, in addition
to any other payments, a total of five times his annual cash compensation. The
amount paid to Mr. Hummers under this covenant not to compete will be grossed up
for taxes payable by him. However, if Mr. Hummers terminates his employment for
other than a Legitimate Executive Reason or voluntarily under clause (ii) of the
Legitimate Executive Reasons, TSFG's obligations under the agreement cease as of
his termination date and he may not, for a period of one year following such
termination of employment, compete against or interfere with TSFG as provided in
the agreement, and receives no additional compensation as detailed above.
22
JAMES W. TERRY, JR. Under his agreement, TSFG is obligated to pay him
an annual salary determined by the Board, such incentive compensation as may
become payable to him under TSFG's incentive compensation plans and certain
other typical executive benefits. Mr. Terry's agreement has a rolling term of
three years and extends automatically until either party gives written notice to
the other, at which point the term is fixed at three years from the date of
notice, terminating on the expiration of such term. Mr. Terry may terminate the
agreement for Legitimate Executive Reasons. If Mr. Terry terminates his
employment other than for Legitimate Executive Reasons, TSFG's obligations under
the agreement cease as of the date of such termination. If Mr. Terry terminates
his employment as a result of clause (i) and there has been a change in control,
or clause (iii) of the Legitimate Executive Reasons, he is entitled to receive a
lump sum amount equal to three times his total annual compensation and benefits,
and he will also be entitled to receive his base salary and other benefits due
him through his termination date. If Mr. Terry terminates his employment as a
result of clause (i) of the Legitimate Executive Reasons in absence of a change
in control, he is entitled to receive a lump sum amount equal to one times his
total annual compensation. If Mr. Terry terminates his employment pursuant to
clause (ii) of the Legitimate Executive Reasons following a change in control,
he is entitled to receive an amount generally equal to one year's compensation
and benefits, and he will also be entitled to receive his base salary and other
benefits due him through his termination date. If TSFG terminates Mr. Terry's
employment as a result of the Legitimate TSFG Reasons, TSFG's obligations under
the agreement cease as of the date of termination, except that if he is
terminated for cause after a change in control, then such termination shall be
treated as a Voluntary Termination. If TSFG terminates Mr. Terry without cause
and there has been a change of control, he will be entitled to receive as
severance a lump sum payment equal to three times his total annual compensation
and benefits. If TSFG terminates him without cause in the absence of a change of
control, he will be entitled to receive as severance his compensation and
benefits for the remaining term of the agreement. In the event of termination by
Mr. Terry for a Legitimate Executive Reason, or in the event of termination by
TSFG without cause, he will become vested in all TSFG share grants or options,
and credited with TSFG service for the remaining term of the agreement for the
purposes of TSFG's benefit plans. In the event that Mr. Terry's employment is
terminated by him as a result of clause (i) or by TSFG without cause, then he
may not, for a period of three years following such termination of employment,
compete against TSFG as described in the agreement. If for any reason Mr.
Terry's employment is terminated following a change in control, there will be no
limitation on any activity of Mr. Terry.
MACK I. WHITTLE, JR. Under his agreement, TSFG is obligated to pay him
an annual salary determined by the Board, such incentive compensation as may
become payable to him under TSFG's incentive compensation plans, and certain
other typical executive benefits. Mr. Whittle's agreement has a rolling term of
ten years and extends automatically until he turns 55, at which point the term
is converted into a fixed term of 10 years, expiring on his 65th birthday.
Either party may give written notice to the other, at which point the term is
fixed at ten years from the date of notice, terminating on the expiration of
such term. Mr. Whittle may terminate the agreement for Legitimate Executive
Reasons. If Mr. Whittle terminates his employment other than for Legitimate
Executive Reasons, TSFG's obligations under the agreement cease as of the date
of such termination. If Mr. Whittle terminates his employment as a result of
clauses (i) or (iii) of the Legitimate Executive Reasons, he is entitled to
receive a lump sum amount equal to three times his total annual compensation and
benefits, and he will also be entitled to receive his base salary and other
benefits due him through the termination date of the agreement. If Mr. Whittle
terminates his employment pursuant to clause (ii) of the Legitimate Executive
Reasons following a change in control, he is entitled to receive an amount
generally equal to one year's compensation, and he will also be entitled to
receive his base salary and other benefits due him through his termination date.
If TSFG terminates Mr. Whittle for Legitimate TSFG Reasons, TSFG's obligations
under the agreement generally cease as of the date of termination. However, if
Mr. Whittle is terminated for cause after a change in control, then such
termination shall be treated as a Voluntary Termination, but he will not become
vested in TSFG share grants or options, nor will he be deemed to be retired or
credited with TSFG service for the remaining term of the agreement for purposes
of TSFG's benefit plans. If TSFG terminates Mr. Whittle without cause, he will
be entitled to receive as severance a lump sum payment equal to three times his
total annual compensation. In the event of termination by Mr. Whittle for a
Legitimate Executive Reason, or in the event of termination by TSFG without
cause, Mr. Whittle will become vested in all TSFG share grants or options, and
be deemed to be retired and credited with TSFG service for the remaining term of
the agreement for the purposes of TSFG's benefit plans. In the event that Mr.
Whittle's employment is terminated before a change in control voluntarily by Mr.
Whittle as a result of clauses (i) or (iii) of the Legitimate Executive Reasons
or by TSFG without cause, then Mr. Whittle may not, for a period of five years
following such termination of employment, compete against TSFG as described in
the agreement. If the covenant not to compete is triggered, Mr. Whittle will
receive, in addition to any other payments, a total of ten times his annual cash
compensation. TSFG will also continue to provide certain other benefits for ten
years following the commencement of the non-compete period. The amount paid to
Mr. Whittle under this covenant not to compete will be grossed up for taxes
23
payable by him. However, if Mr. Whittle terminates his employment for other than
a Legitimate Executive Reason or voluntarily under clause (ii) of the Legitimate
Executive Reasons, TSFG's obligations under the agreement cease as of his
termination date and he may not, for a period of one year following his date of
termination, compete against TSFG as described in the agreement and receives no
additional compensation as detailed above.
- -------------------------------------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
- -------------------------------------------
TSFG has instituted a Supplemental Executive Retirement Plan ("SERP"),
which is a non-qualified executive benefit plan in which TSFG agrees to pay the
executive additional benefits in the future, usually at retirement, in return
for continued satisfactory performance by the executive. TSFG selects the key
executives who participate in the SERP. The SERP is an unfunded plan, which
means there are no specific assets set aside by TSFG in connection with the
plan. The executive has no rights under the agreement beyond those of a general
creditor of the bank. TSFG has currently entered into SERP contracts with
approximately 12 senior level managers, five of whom are Named Executive
Officers. The benefits associated with such persons are as follows:
- -------------------------------------- ---------------- -------------- ---------------------- ----------------------
Retirement Annual Duration of
Name Year of Birth Age Retirement Benefit Retirement Benefit
- -------------------------------------- ---------------- -------------- ---------------------- ----------------------
Mack I. Whittle, Jr. 1948 65 $1,135,542 15 years
- -------------------------------------- ---------------- -------------- ---------------------- ----------------------
Andrew B. Cheney 1950 65 299,547 15 years
- -------------------------------------- ---------------- -------------- ---------------------- ----------------------
John C. DuBose 1951 65 485,266 15 years
- -------------------------------------- ---------------- -------------- ---------------------- ----------------------
William S. Hummers III 1945 65 394,301 15 years
- -------------------------------------- ---------------- -------------- ---------------------- ----------------------
James W. Terry, Jr. 1948 65 407,547 15 years
- -------------------------------------- ---------------- -------------- ---------------------- ----------------------
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ITEM NO. 2 - APPROVAL OF AMENDMENT TO
AMENDED AND RESTATED STOCK OPTION PLAN
--------------------------------------------------------------------------
SUMMARY OF PROPOSED AMENDMENT
We are seeking shareholder approval of an amendment to the Amended and
Restated Stock Option Plan (the "Option Plan") which increases the number of
shares of TSFG common stock that may be issued thereunder from an aggregate of
3,700,000 to an aggregate of 4,700,000. The Board recommends approval of the
proposed amendment because it believes that the Option Plan is an effective
component of management compensation. Except as set forth above, the Option Plan
would remain unaltered in all material respects.
There are currently approximately 3,475,000 shares which have been
issued pursuant to exercised options or which are subject to outstanding
options. Although members of senior management are able to receive options under
the Option Plan, the Board of Directors expects that most options granted to
senior management will be made under TSFG's Long-Term Incentive Plans. However,
the Board believes that it is necessary from time to time to grant options
outside of the Long-Term Incentive Plan context (as an inducement upon initial
employment, for example) and that this Option Plan meets that need.
MATERIAL FEATURES OF THE OPTION PLAN
The Option Plan is summarized below. However, this summary is qualified
in its entirety by reference to the text of the Option Plan, a copy of which may
be obtained, without charge, by written request to The South Financial Group,
24
104 South Main Street, Greenville, South Carolina 29601, Attention: Angie
Merriman.
ADMINISTRATION AND ELIGIBILITY. The Option Plan generally provides that
a committee of the Board (the "Committee") comprised solely of members thereof
who are "disinterested persons" within the meaning of Section 16 of the Exchange
Act may grant either incentive stock options or nonqualified options to such
employees as the Committee has determined to have the greatest impact on TSFG's
long-term performance. Non-employee Board members are not eligible to acquire
stock under the Option Plan. The Committee is also empowered to administer the
Option Plan and to take all such actions as may be necessary thereunder.
In making any determination as to the employees to whom options shall
be granted thereunder and as to the number of shares to be subject thereto, the
Committee must take into account the level and responsibility of the person's
position, the level of the person's performance, the person's level of
compensation, the assessed potential of the person and such additional factors
as the Committee shall deem relevant to the accomplishment of the purposes of
the Option Plan. The Committee may also utilize guidelines set forth in other
compensation plans of TSFG, including the Long-Term Incentive Plan, in
determining any matters related to the grant of options under the Option Plan.
The stock option awards are generally but not exclusively made to officers
(including nonexecutive officers) of TSFG. For 2003 performance, 496 persons
received options under the Option Plan.
EXERCISE AND DURATION OF OPTIONS. The exercise price of such options is
equal to the fair market value per share (as defined in the Option Plan) of TSFG
common stock on the date the option is granted. Unless the Committee expressly
states otherwise, options are exercisable on a cumulative basis for 20% of the
shares covered thereby on each of the first five anniversaries of the grant
thereof. Option periods are generally ten years from the date of grant, except
that options may not be exercised after 90 days following an optionee's
termination of employment (except in certain instances involving death,
disability, voluntary retirement, or if the Committee expressly states
otherwise, at the time of grant). Subject to certain limited exceptions, options
granted under the Option Plan may generally be exercised, if otherwise timely,
within three months after retirement resulting from disability or retirement for
any reason after age 60. Subject to certain exceptions in cases of disability or
death (where options become fully exercisable), the option may not be exercised
for more than the number of shares, if any, as to which it was exercisable by
the optionee immediately before such retirement. In general, if an optionee dies
while employed by TSFG or within three months after retirement, such option may
be exercised to the extent that the optionee would have been entitled to do so
at the date of his death by the legatees or personal representatives within one
year of the optionee's death.
In the event that TSFG experiences a "change in control," the
expiration date and the dates on which any part of the option is exercisable for
all of the shares covered thereby may be accelerated. A "change in control" is
generally deemed to occur as a result of any of the following transactions: (i)
the shareholders of TSFG immediately prior to such event hold less than 50% of
the outstanding voting securities of TSFG or its survivor or successor after
such event, (ii) persons holding less than 20% of TSFG's stock immediately prior
to such event own more than 50% of the outstanding voting securities of TSFG or
its survivor or successor after such event, or (iii) persons constituting a
majority of the Board were not directors for at least the 24 preceding months.
ASSIGNABILITY. Options granted under the Option Plan are assignable
only in limited instances in accordance with applicable law.
AMENDMENT. The Committee may modify and amend the Option Plan subject
to any shareholder approval required by applicable law, TSFG's articles of
incorporation, or the Bylaws of the NASD.
EFFECTIVE DATE. The original effective date of the Option Plan was the
date of its adoption by the Board in 1986. The effective date of the amendment
to the Option Plan is February 18, 2004, assuming shareholder approval is
received at the Annual Meeting. If such approval is not received, the Option
Plan will continue in effect, unchanged by the proposed amendment.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a brief summary of the
federal income tax rules relevant to stock options. The laws governing the tax
aspects of awards are highly technical, and such laws are subject to change.
25
NON-INCENTIVE STOCK OPTIONS. The grant of a non-incentive stock option
will not by itself result in taxable income to the participant; however, upon
exercise of the option, a participant will be deemed to have received ordinary
income in an amount equal to the excess of (a) the value of the shares received
upon exercise of the option over (b) the purchase price of the shares received
upon exercise of the option. Subject to certain exceptions relating to
"cashless/same day sale" exercises, the value of the shares received upon
exercise of the option will be the fair market value of the shares on the date
of exercise of the option. Generally, TSFG does not receive a deduction at the
time of grant, but receives a deduction for the amount the participant reports
as ordinary income arising from the exercise of the option.
INCENTIVE STOCK OPTIONS. TSFG is not allowed a deduction at any time in
connection with, and the participant is not taxed upon either the grant or the
exercise of, an incentive stock option. The difference between the exercise
price of the option and the market value of the shares of common stock at the
date of exercise, however, constitutes a tax preference item for the participant
in the year of exercise for alternative minimum tax purposes. Among other
requirements, the stock acquired by the participant must be held for at least
two years after the option is granted and for at least one year after the option
is exercised for the option to qualify as an incentive stock option. If the
participant satisfies these holding period requirements, the participant will be
taxed only upon any gain realized upon disposition of the stock. The
participant's gain will be equal to the difference between the sales price of
the stock and the exercise price. If the participant disposes of the shares of
stock acquired pursuant to the exercise of an option before meeting the
requirements for treatment as an incentive stock option, the participant
recognizes ordinary income in the taxable year of the disposition equal to the
excess of (i) the lower of the fair market value at date of exercise or such
value at the time of disposition over (ii) the exercise price, and TSFG receives
a deduction in an equal amount.
STOCK OPTION PLAN DATA
It is impossible at the present time to indicate specifically the names
of persons to whom future options will be granted, or the aggregate number of
shares, within the limitations of the Option Plan. Please refer to the
information above under the caption "New Plan Benefits Table" for information
regarding the issuance of options under the Option Plan during the 2003 year.
VOTE REQUIRED
Approval of the amendment to the Amended and Restated Option Plan by
holders of a majority of the total votes cast on the proposal. Abstentions and
broker non-votes will have no effect upon the vote on this matter.
RECOMMENDATION
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF
THE AMENDMENT TO THE AMENDED AND RESTATED STOCK OPTION PLAN.
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ITEM NO. 3 - APPROVAL OF CERTAIN AMENDMENTS
TO TSFG'S 2004 LONG-TERM INCENTIVE PLAN
--------------------------------------------------------------------------
SUMMARY OF PROPOSED AMENDMENTS
We are seeking shareholder approval for two amendments to our 2004
Long-Term Incentive Plan (the "2004 LTIP"):
(1) to increase the total number of restricted shares that may
be issued under the 2004 LTIP from 600,000 to 1,200,000 (although the
maximum shares subject to awards under the 2004 LTIP would not increase
26
from the 2,000,000 currently authorized); and
(2) to increase the maximum amount of restricted shares that
may be granted to any participant from 25,000 shares to 250,000 shares.
REASONS FOR AMENDMENTS
We are seeking approval for the amendments referenced above because of
the Compensation Committee's determination that restricted stock will play a
more important role than was initially contemplated at the time of adoption of
the 2004 LTIP. This is consistent with recent public company trends of greater
utilization of restricted stock instead of stock options as a form of incentive
compensation.
MATERIAL FEATURES OF THE 2004 LTIP
The following description of the material terms of the 2004 LTIP is
qualified in its entirety by reference to the terms of the 2004 LTIP, a copy of
which has been included in TSFG's filings with the SEC and may be obtained from
TSFG by writing to Investor Relations, 104 South Main Street, Greenville, SC
29601.
PURPOSE AND ELIGIBLE INDIVIDUALS. The purpose of the 2004 LTIP is to
give TSFG a competitive advantage in attracting, retaining and motivating
officers, employees, directors and consultants and to provide TSFG and its
subsidiaries and affiliates with a stock plan providing incentives directly
linked to the profitability of TSFG's businesses and increases in TSFG'S
shareholder value. Directors, officers, employees and consultants of, and
prospective employees and consultants of, TSFG and its subsidiaries and
affiliates are eligible to participate in the 2004 LTIP. As of March 1, 2004,
there were (approximately) 56 persons eligible to participate in the 2004 LTIP.
ADMINISTRATION. The 2004 LTIP is administered by the Compensation
Committee of the Board, except with respect to grants to non-employee Directors,
which will be administered by the Nominating Committee. The Committee
administering the plan will be referred to in this description as the
"Committee". The Committee is authorized to delegate certain administrative
responsibilities to individuals selected by it in its discretion. The Committee
will determine the eligible individuals to whom and the time or times at which
awards will be granted, the number of shares subject to awards to be granted to
any eligible individual, the duration of any award cycle, and any other terms
and conditions of the grant, in addition to those contained in the 2004 LTIP.
Each grant under the 2004 LTIP will be confirmed by and subject to the terms of
an award agreement.
AUTHORIZED SHARES. The maximum number of shares of common stock that
may be delivered to participants and their beneficiaries under the 2004 LTIP is
2,000,000. No participant may be granted awards covering in excess of 100,000
shares of common stock in any calendar year. Shares subject to an award under
the 2004 LTIP shall be TSFG's authorized and unissued shares. Currently, no more
than 600,000 shares of restricted stock may be issued during the term of the
2004 LTIP. However, TSFG proposes to amend this provision to increase the number
of shares of restricted stock that may be issued to 1,200,000.
If any award is forfeited, or if any option (or SAR, if any)
terminates, expires or lapses without being exercised, or if any SAR is
exercised for cash, shares of common stock subject to such awards will again be
available for distribution in connection with awards under the 2004 LTIP. If the
option price of any option or the strike price of any freestanding SAR is
satisfied by delivering shares of common stock to TSFG (by either actual
delivery or by attestation), only the number of shares of common stock delivered
to the participant net of the shares of common stock delivered to TSFG or
attested to will be deemed delivered for purposes of determining the maximum
numbers of shares of common stock available for delivery under the 2004 LTIP. To
the extent any shares of common stock subject to an award are not delivered to a
participant because such shares are used to satisfy an applicable
tax-withholding obligation, such shares will not be deemed to have been
delivered for purposes of determining the maximum number of shares of common
stock available for delivery under the 2004 LTIP. The maximum number of shares
of common stock that may be issued pursuant to options intended to be incentive
stock options is 1,400,000 shares.
27
In the event of certain types of corporate transactions or
restructurings, such as stock splits, mergers, consolidations, separations,
spin-offs, reorganizations, liquidations, reorganizations, or other
distributions of stock or property of TSFG (including an extraordinary stock or
cash dividend), the Committee or the Board may make adjustments in the aggregate
number and kind of shares reserved for issuance under the 2004 LTIP, in the
maximum share limitations upon stock options, incentive stock options, stock
appreciation rights and other awards to be granted to any individual, in the
number, kind and option price or strike price of outstanding stock options and
stock appreciation rights, in the number and kind of shares subject to other
outstanding awards granted under the 2004 LTIP, and any other equitable
substitutions or adjustments that Committee or the Board determine to be
appropriate in their sole discretion.
STOCK OPTIONS. Stock options may be granted alone or in addition to
other awards. Stock options may be "incentive stock options" (within the meaning
of Section 422 of the Internal Revenue Code) or nonqualified stock options, as
designated by the Committee and specified in the option agreement setting forth
the terms and provisions of the options. The term of each stock option will be
fixed by the Committee but no incentive stock option may be exercised more than
10 years after the date it is granted. The exercise price per share of common
stock purchasable under a stock option will be determined by the Committee but,
except in the case of stock options granted in lieu of foregone compensation,
may not be less than the fair market value of the common stock on the date of
grant. Options granted under the 2004 LTIP cannot be repriced without
shareholder approval.
Except as otherwise provided in the 2004 LTIP, stock options will be
exercisable at the time or times and subject to the terms and conditions
determined by the Committee, and the Committee may at any time accelerate the
exercisability of a stock option. A participant exercising an option may pay the
exercise price in cash or, if approved by the Committee, with previously
acquired shares of common stock or a combination of cash and stock. The
Committee, in its discretion, may allow the cashless exercise of options through
the use of a broker-dealer, to the extent permitted by applicable law, or for
payment of the exercise price by withholding from the shares issuable upon
exercise a number of shares having a fair market value on the date of exercise
equal to the aggregate exercise price. The 2004 LTIP contains provisions, which
apply unless otherwise determined by the Committee, regarding the vesting and
post-termination exercisability of options held by optionees whose employment
with TSFG terminates by reason of death, disability, retirement, or otherwise.
The 2004 LTIP provides that the Committee may establish procedures permitting an
optionee to elect to defer to a later time the receipt of shares issuable upon
the exercise of a stock option and/or to receive cash at such later time in lieu
of the deferred shares.
STOCK APPRECIATION RIGHTS. Stock appreciation rights may be granted
separately or in tandem with all or part of any stock option granted under the
2004 LTIP. A stock appreciation right granted separately from any stock option
under the 2004 LTIP is called a freestanding SAR. A stock appreciation right
granted in tandem with a stock option under the 2004 LTIP is called a tandem
SAR. A tandem SAR will terminate and will no longer be exercisable upon the
termination or exercise of the related stock option. A tandem SAR may be
exercised by an optionee, at the time or times and to the extent the related
stock option is exercisable, by surrendering the applicable portion of the
related stock option in accordance with procedures established by the Committee.
Upon exercise, a tandem SAR permits the optionee to receive cash, shares of
common stock, or a combination of cash or stock, as determined by the Committee.
The amount of cash or the value of the shares is equal to the excess of the fair
market value of a share of common stock on the date of exercise over the per
share exercise price of the related stock option, multiplied by the number of
shares with respect to which the tandem SAR is exercised.
A freestanding SAR may have a term of up to ten years. Except in the
case of freestanding SARs granted in lieu of compensation, the strike price
cannot be lower than the fair market value of the stock on the grant date. The
strike price cannot be repriced without shareholder approval. The Committee can
determine exercisability restrictions on freestanding SARs at the time of grant.
Upon exercise, a freestanding SAR permits the holder to receive cash, shares of
common stock, or a combination of cash or stock, as determined by the Committee.
The amount of cash or the value of the shares is equal to the excess of the fair
market value of a share of common stock on the date of exercise over the strike
price, multiplied by the number of shares with respect to which the freestanding
SAR is exercised. The 2004 LTIP contains provisions, which apply unless
otherwise determined by the Committee, regarding the vesting and
post-termination exercisability of freestanding SARs held by an individual whose
employment with TSFG terminates by reason of death, disability, retirement or
28
otherwise. The Committee may also establish procedures permitting the holder of
a freestanding SAR to defer to a later time the receipt of shares issuable upon
the exercise of a freestanding SAR and/or to receive cash at such later time in
lieu of the deferred shares.
RESTRICTED STOCK. The 2004 LTIP authorizes the Committee to grant
restricted stock to individuals with such restriction periods as the Committee
may designate. The Committee may also provide at the time of grant that
restricted stock cannot vest unless applicable performance goals are satisfied.
If the grant is intended to be a "qualified performance based award,"
these goals must be based on the attainment of specified levels of one or more
of the following measures: revenue growth; earnings before interest, taxes,
depreciation, and amortization; earnings before interest and taxes; operating
income; pre- or after- tax income; earnings per share; cash flow; cash flow per
share; return on equity; return on invested capital; return on assets; economic
value added (or an equivalent metric); share price performance; total
shareholder return; improvement in or attainment of expense levels; improvement
in or attainment of working capital levels. These goals may be established on a
corporate-wide basis or with respect to one or more business units, divisions,
or subsidiaries. Measurement of performance against goals may exclude impact of
charges for restructurings, discontinued operations, extraordinary items, and
other unusual or non-recurring items, and the cumulative effects of accounting
changes, each as defined by generally accepted accounting principles and as
identified in the financial statements, notes to the financial statements, or
management's discussion and analysis within TSFG's annual report.
A "qualified performance-based award" is a grant of restricted stock or
performance units designated as such by the Committee at the time of grant based
upon a determination that (1) the recipient is or may be a "covered employee"
within the meaning of Section 162(m)(3) of the Internal Revenue Code in the year
in which TSFG would expect to be able to claim a tax deduction with respect to
such performance unit awards, and (2) the Committee wishes such grant to qualify
for the exemption from the limitation on deductibility of compensation with
respect to any covered employee imposed by Section 162(m) of the Internal
Revenue Code. The Committee will specify the performance goals to which any
"qualified performance-based award" will be subject. No more than 25,000 shares
of common stock may be subject to "qualified performance-based awards" granted
to any participant in any fiscal year.
The provisions of restricted stock awards (including any applicable
performance goals) need not be the same with respect to each participant. During
the restriction period, the Committee may require that the stock certificates
evidencing restricted shares be held by TSFG. Restricted stock may not be sold,
assigned, transferred, pledged or otherwise encumbered. Restricted stock is
forfeited upon termination of employment, unless otherwise provided by the
Committee. Other than these restrictions on transfer and any other restrictions
the Committee may impose, the participant will have all the rights of a holder
of stock holding the class or series of stock that is the subject of the
restricted stock award.
PERFORMANCE UNITS. Performance units may be granted either alone or in
addition to other awards granted under the 2004 LTIP. Performance units may be
performance-based stock awards or performance-based cash awards. Performance
units may be granted subject to the attainment of performance goals and/or the
continued service of the participant. As noted above, performance units can be
"qualified performance-based awards." At the conclusion of the award cycle, the
Committee will evaluate the degree to which any applicable performance goals
have been achieved and the performance amounts earned, and will cause to be
delivered the amount earned in either cash or shares, at the election of the
Committee.
Except to the extent otherwise provided in the applicable Performance
unit agreement or the 2004 LTIP, all rights to receive cash or stock in
settlement of Performance units will be forfeited upon a participant's
termination of employment for any reason during the award cycle or before any
applicable performance goals are satisfied, unless the Committee, in its
discretion, waives any or all remaining payment limitations with respect to such
participant's performance units. However, the Committee may not waive the
satisfaction of the applicable performance goals in the case of performance
units that are "qualified performance-based awards" unless the participant's
employment is terminated by reason of death or disability or is terminated by
TSFG without cause or by the participant for good reason.
OTHER STOCK-BASED AWARDS. Other awards of common stock and other awards
that are valued by reference to, or otherwise based upon common stock, including
29
(without limitation) dividend equivalents and convertible debentures, may also
be granted under the 2004 LTIP, either alone or in conjunction with other
awards.
TRANSFERABILITY OF AWARDS AND REPRICING POLICY. Awards are
nontransferable other than by will or the laws of descent and distribution.
However, in the discretion of the Committee, nonqualified stock options and
stock appreciation rights may be transferred as expressly permitted by the
Committee, including to members of the holder's immediate family. The transfer
may be made directly or indirectly or by means of a trust or partnership or
otherwise. Stock options and stock appreciation rights may be exercised only by
the initial holder, any such permitted transferee or a guardian, legal
representative or beneficiary. Options and stock appreciation rights granted
under the 2004 LTIP cannot be repriced without shareholder approval.
CHANGE IN CONTROL. Unless provided otherwise by the Committee, in the
event of a change in control (as defined in the 2004 LTIP), any option or stock
appreciation right that is not then exercisable and vested will become fully
exercisable and vested, any restrictions on shares of restricted stock will
lapse, and performance units will be deemed earned and payable in full in cash.
In addition, unless otherwise determined by the Committee, if a stock option or
stock appreciation right holder's employment is terminated by TSFG other than
for cause, death or disability or if such holder voluntarily resigns for good
reason during the two-year period following a change in control, such holder may
exercise the option or stock appreciation right until at least the first
anniversary of such termination, unless the term of the option expires first.
If the Committee so provides, in the event of a change in control, a
holder of a nonqualified stock option or a freestanding stock appreciation right
may have the right, for 60 days after the change in control, to surrender all or
part of the stock option or stock appreciation right and receive cash for the
excess of (A) the greater of (i) the fair market value of a share of common
stock at the time of surrender or (ii) the highest trading price of a share of
common stock during the 60-day period preceding the change in control (or, under
some circumstances, the value of the consideration for each share of common
stock paid in the change of control, if higher) over (B) the exercise price of
the stock option or strike price of the stock appreciation right, whichever is
applicable.
EFFECTIVENESS, AMENDMENTS AND TERMINATION. The 2004 LTIP will be
effective as of the time it is approved by a majority of the votes cast by
TSFG's shareholders with respect to its approval. The Board of Directors may at
any time amend, alter, or discontinue the 2004 LTIP but may not impair the
rights of a holder of outstanding awards without the holder's consent except for
an amendment made to comply with applicable law, stock exchange rules or
accounting rules. No amendment may be made without the approval of TSFG's
shareholders to the extent such approval is required by applicable law or stock
exchange rules. The Committee may amend the terms of any outstanding stock
option or other award but no such amendment may cause a "qualified
performance-based award" to cease to qualify for the Section 162(m) exemption or
impair the rights of any holder without the holder's consent except an amendment
made to cause the 2004 LTIP or award to comply with applicable law, stock
exchange rules or accounting rules. The Committee's authority to amend any award
is subject to the condition that the Committee may not cause any such award to
cease to qualify as a "qualified performance-based award."
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the federal income tax rules relevant to
participants in the 2004 LTIP who receive options, based upon the Internal
Revenue Code as currently in effect. These rules are highly technical and
subject to change in the future. The following summary relates only to the
federal income tax treatment of the awards and the state, local and foreign tax
consequences may be substantially different. Stock options granted under the
2004 LTIP may be either nonqualified options or incentive options for federal
income tax purposes.
NONQUALIFIED OPTIONS. Generally, the optionee does not recognize any
taxable income at the time of grant of a nonqualified option. Upon the exercise
of the nonqualified option the optionee will recognize ordinary income, equal to
the excess of the fair market value of the common stock acquired on the date of
exercise over the exercise price, and will be subject to wage and employment tax
withholding. TSFG will generally be entitled to a deduction equal to such
30
ordinary income at the time that the employee recognizes such income. The
optionee will have a capital gain or loss upon the subsequent sale of the stock
in an amount equal to the sale price less the fair market value of the common
stock on the date of exercise. The capital gain or loss will be long-term or
short-term depending on whether the stock was held for more than one year after
the exercise date. TSFG will not be entitled to a deduction for any capital gain
realized. Capital losses on the sale of common stock acquired upon an option's
exercise may be used to offset capital gains.
INCENTIVE STOCK OPTIONS. Generally, the optionee will not recognize any
taxable income at the time of grant or exercise of an option that qualifies as
an incentive option under Section 422 of the Internal Revenue Code. However, the
excess of the stock's fair market value at the time of exercise over the
exercise price will be included in the optionee's alternative minimum taxable
income and thereby may cause the optionee to be subject to an alternative
minimum tax. The optionee will recognize long-term capital gain or loss,
measured by the difference between the stock sale price and the exercise price,
when the shares are sold.
In order to qualify for the incentive option tax treatment described in
the preceding paragraph, the optionee must be employed by TSFG continuously from
the time of the option's grant until three months before the option's exercise
and the optionee must not sell the shares until more than one year after the
option's exercise date and more than two years after its grant date. If the
optionee does not satisfy these conditions, the optionee will recognize taxable
ordinary income when the optionee sells the shares in an amount equal to the
difference between the option exercise price and the lesser of (i) the fair
market value of the stock on the exercise date and (ii) the sale price. If the
sale price exceeds the fair market value on the exercise date, the excess will
be taxable to the optionee as long-term or short-term capital gain depending on
whether the optionee held the stock for more than one year. Notwithstanding the
foregoing, incentive stock options will not be treated as incentive stock
options to the extent that the aggregate fair market value of stock (determined
as of the date of grant) with respect to which the options are first exercisable
during any calendar year exceeds $100,000. TSFG will not be entitled to any
deduction by reason of the grant or exercise of the incentive option or the sale
of stock received upon exercise after the required holding periods have been
satisfied. If the optionee does not satisfy the required holding periods before
selling the shares and consequently recognizes ordinary income, TSFG will be
allowed a deduction corresponding to the optionee's ordinary income.
WITHHOLDING TAXES. Because the amount of ordinary income the optionee
recognizes with respect to the receipt or exercise of an award may be treated as
compensation that is subject to applicable withholding of federal, state and
local income taxes and Social Security taxes, TSFG may require the optionee to
pay the amount required to be withheld by TSFG before delivering to the
individual any shares or other payment to be received under the 2004 LTIP.
Arrangements for payment may include deducting the amount of any withholding or
other tax due from other compensation, including salary or bonus, otherwise
payable to the individual.
2004 LTIP DATA
It is impossible at the present time to indicate specifically the names
of persons to whom future restricted stock awards or options will be granted, or
the aggregate number of shares, within the limitations of the 2004 LTIP. Please
refer to the information above under the caption "New Plan Benefits Table" for
information regarding the issuance of awards under the 2004 LTIP during the 2003
year.
VOTE REQUIRED
These amendments to the 2004 LTIP requires the approval of holders of a
majority of the votes cast by the TSFG shareholders with respect to its
approval. Abstentions and broker non-votes will have no effect upon the vote on
this matter.
RECOMMENDATION
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF
THE 2004 LTIP.
31
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ITEM NO. 4 - INCREASE IN TSFG'S AUTHORIZED
COMMON STOCK TO 200 MILLION
-------------------------------------------------------------------------
INTRODUCTION
We are seeking shareholder approval to increase TSFG's authorized
common stock from 100 million to 200 million shares. At the Record Date, there
were 59,534,491 shares of TSFG common stock outstanding. In addition,
approximately 4.3 million shares are the subject of outstanding options,
unvested restricted stock grants and other outstanding obligations to issue
shares in the future. TSFG expects to issue approximately 5.2 million shares of
TSFG common stock to the shareholders of CNB Florida Bancshares, Inc., which is
being acquired by TSFG in a pending acquisition. TSFG also expects to continue
issuing shares in connection with its director and employee compensation plans,
its Dividend Reinvestment Plan, its Employee Stock Purchase Plan.
If approved, the increased number of authorized shares of TSFG common
stock will be available for issuance from time to time for such purposes and
consideration as the Board may approve. No further vote of the shareholders of
TSFG will be required, except as provided under South Carolina law or the rules
of the National Association of Securities Dealers. The availability of
additional shares for issuance, without the delay and expense of obtaining the
approval of shareholders at a special meeting, will afford TSFG the means of
raising additional capital. It will also facilitate acquisitions that TSFG may
seek to acquire using TSFG common stock rather than cash.
The additional shares of TSFG common stock for which authorization is
sought would be identical to the shares of TSFG common stock currently
authorized. Holders of TSFG common stock do not have preemptive rights to
subscribe to additional shares of TSFG common stock which may be issued by TSFG.
If the proposal is approved, an amendment to TSFG's Articles of Incorporation
providing for this increase will be filed with the South Carolina Secretary of
State.
The Board has no present intention of issuing any additional shares of
TSFG common stock, other than as described above. No executive officer or
Director of TSFG has any financial or other personal interest in this proposal.
To increase the number of authorized shares of TSFG common stock, TSFG
must amend the first sentence of paragraph (5) of its Articles of Incorporation
to read as follows: "The Corporation is authorized to issue a single class of
common shares, $1.00 par value per share and the total number of such shares
authorized is two hundred million (200,000,000)."
If this proposal is approved by the shareholders, it will become
effective upon the filing of an amendment to the Articles of Incorporation with
the Secretary of State of the state of South Carolina.
VOTE REQUIRED
The adoption of this proposed amendment authorizing additional shares
of TSFG common stock requires the affirmative vote of holders of two-thirds of
the TSFG common stock outstanding on the Record Date. Abstentions and broker
non-votes will count as votes against the proposal.
RECOMMENDATION
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE INCREASE
IN TSFG'S AUTHORIZED TSFG COMMON STOCK TO 200 MILLION SHARES.
32
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ITEM NO. 5 - APPROVAL OF TSFG'S DIRECTORS STOCK OPTION PLAN
------------------------------------------------------------------------
SUMMARY OF PROPOSED AMENDMENTS
We are seeking shareholder approval of the Amended and Restated
Directors Stock Option Plan (the "Restated Directors Plan"). The Restated
Directors Plan amends and restates TSFG's existing Amended and Restated
Directors Stock Option Plan (as unamended, the "Existing Plan") and provides for
the grant of stock options to non-employee members of the TSFG's Board of
Directors and corporate and advisory board members of TSFG's subsidiaries (such
persons being referred to in this Item 5 as "Board members"). The Existing Plan
currently provides that a maximum of 500,000 shares of common stock is reserved
for issuance. The Restated Directors Plan increases that number to 650,000. If
approved by shareholders, the Restated Directors Plan will be effective as of
February 18, 2004.
The Board of Directors believes that the amendments included in the
Restated Directors Plan provide needed flexibility in administering a typical
directors' stock option program. In particular, the Board of Directors believes
that it is appropriate to clarify that the Existing Plan allows Option grants
under circumstances in addition to the single annual grant that is currently
referenced. In addition, the Board believes that it is appropriate to clarify
that Options may be granted to subsidiary and advisory board members. There is
no present intention to issue Options to advisory board members under any
established program. However, TSFG's Board of Directors wants the flexibility to
do so, particularly for short periods of times following acquisitions.
PURPOSE OF THE RESTATED DIRECTORS PLAN
The Restated Directors Plan is intended to advance the interests of
TSFG and its shareholders in attracting, retaining and rewarding non-employee
Board members by creating an additional incentive for such Board members to
contribute to the growth and profitability of TSFG. Shareholder approval of the
Restated Directors Plan is being requested at this Annual Meeting. If such
shareholder approval is not received, TSFG's Existing Plan will remain in effect
unamended.
MATERIAL FEATURES OF THE RESTATED DIRECTORS PLAN
The following paragraphs provide a summary of the principal features of
the Restated Directors Plan. The Restated Directors Plan is set forth in its
entirety as Appendix B to this Proxy Statement. The following summary is
qualified in its entirety by reference to Appendix B.
GENERAL. The Restated Directors Plan provides for the granting of
nonstatutory stock options ("Options") to non-employee Board members. A maximum
of 500,000 shares of TSFG common stock is reserved for issuance under the
Restated Directors Plan (not including the increase in authorized options being
sought at this Annual Meeting). The share reserve of the Restated Directors Plan
consists of the following:
o 384,039 shares which are subject to Options issued under the Existing Plan
and outstanding on February 18, 2004 (the date on which the Restated
Directors Plan was approved by TSFG's Board of Directors),
o 64,284 shares which have been issued prior to February 18, 2004 pursuant to
the exercise of previously outstanding Options issued under the Existing
Plan; and
o 51,677 shares which are not subject to outstanding Options.
ADMINISTRATION OF THE RESTATED DIRECTORS PLAN. The Restated Directors
Plan is administered by TSFG's Board of Directors. Subject to the terms of the
Restated Directors Plan, TSFG's Board of Directors has the discretion to
determine which eligible persons will be granted Options, the size and types of
33
such Options, and the terms and conditions of such Options. All decisions and
interpretations by TSFG's Board of Directors are final and binding on all
participants.
ELIGIBILITY. Only non-employee Board members are eligible to receive
Options under the Restated Directors Plan. As of March 1, 2004, there were 13
non-employee members of TSFG's Board of Directors, and approximately 292
non-employee subsidiary and advisory board members of TSFG's subsidiaries. There
is no present intention to issue Options to advisory board members under any
establish program. However, TSFG's Board of Directors wants the flexibility to
do so, particularly for short periods of times following acquisitions.
OPTIONS. Options granted under the Restated Directors Plan will be
nonstatutory stock options, which do not qualify for treatment as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). See "Tax Aspects" below. The number of shares
covered by each option will be determined by the Board. As described above under
the heading "Director Compensation", the Board has established guidelines for
annual grants to non-employee TSFG directors, which the Board intends to
continue to follow in connection with the Restated Directors Plan.
The exercise price per share for each option will be 100% of the fair
market value per share of TSFG common stock on the date of grant. The exercise
price must be paid in full at the time of exercise in cash, by check, the tender
of shares of TSFG common stock that are already owned by the participant, or by
any combination of the foregoing.
Options become exercisable at the times and on the terms established by
the Board. Options expire at the times established by the Board but not later
than 10 years after the date of grant. A vested option generally will remain
exercisable for 90 days following the participant's termination of service,
unless such termination results from the participant's death or disability, in
which case the option generally will remain exercisable for 6 months following
termination, provided that in no case may an option be exercised after its
expiration date. In addition, if the participant's service terminates due to
death, there is generally an additional year of vesting credit given.
TSFG's Board of Directors may offer to buy out an option in cash or
shares of TSFG common stock, based on terms established at the time of such
offer.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event that TSFG
common stock changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in our capital
structure effected without the receipt of consideration by us, appropriate
adjustments will be made in the number and class of shares of stock subject to
the Restated Directors Plan, the number and class of shares of stock subject to
any Option outstanding under the Restated Directors Plan, and the exercise price
of any such outstanding Option. In the event of a liquidation or dissolution of
TSFG, any unexercised Options will terminate. The Board may, in its discretion,
provide that each participant will have the right to exercise all of the
participant's Options, including those not otherwise exercisable, until the date
10 days prior to the consummation of the liquidation or dissolution. In the
event of a merger or sale of substantially all of the assets of TSFG, each
outstanding Option will be assumed or an equivalent Option will be substituted
by the successor corporation. If the successor corporation refuses to assume the
Options or to substitute equivalent Options, such Options will become 100%
vested. In such event, the Board will notify the participant that each Option
subject to exercise is fully exercisable for 15 days from the date of such
notice and that the Option terminates upon expiration of such period.
AMENDMENT AND TERMINATION OF THE RESTATED DIRECTORS PLAN. The Restated
Directors Plan will continue in effect until the first to occur of (i) its
termination by TSFG's Board of Directors, or (ii) the date on which all shares
available for issuance under the Restated Directors Plan have been issued and
all restrictions on such shares have lapsed. Options outstanding at the time of
termination of the Restated Directors Plan will remain in effect according to
their terms. The Board may amend, alter, suspend or terminate the Restated
Directors Plan, or any part thereof, at any time and for any reason; provided,
however, that the Board may not amend the Restated Directors Plan without
obtaining shareholder approval to the extent necessary to comply with any
applicable rule or statute. No such action by the Board or shareholders may
impair any Option previously granted under the Restated Directors Plan without
the written consent of the participant.
34
TRANSFERABILITY OF OPTIONS. Except as determined by the Board in its
sole discretion, Options may not be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated, other than by will or by the applicable
laws of descent and distribution.
FEDERAL INCOME TAX CONSEQUENCES
Nonstatutory stock options do not qualify for treatment as incentive
stock options under Section 422 of the Code. A recipient of a nonstatutory stock
option will not have taxable income upon the grant of the option. Upon the
exercise of a nonstatutory stock option, the participant will recognize ordinary
income in an amount equal to the excess of the fair market value of the shares
on the exercise date over the exercise price. Upon the sale of shares acquired
upon exercise of a nonstatutory stock option, any gain or loss, based on the
difference between the sale price and the fair market value of the shares on the
exercise date, will be taxed as a capital gain or loss. Such capital gain or
loss will be long-term or short-term depending on whether the shares were held
for more than one year. TSFG will be entitled to a tax deduction in connection
with an Option under the Restated Directors Plan only in an amount equal to the
ordinary income realized by the participant and at the time the participant
recognizes such income.
The foregoing discussion is only intended to be a general summary of
the United States federal income tax aspects of Options granted under the
Restated Directors Plan, and an individual's tax consequences may vary depending
on his or her particular circumstances. In addition, no information is given
with respect to state or local taxes that may be applicable.
OPTIONS TO BE GRANTED TO CERTAIN INDIVIDUALS AND GROUPS
No Options will be granted under the Restated Directors Plan until it
is approved by the shareholders. Although the Restated Directors Plan does not
provide for automatic option grants to non-employee directors, pursuant to the
guidelines established by the Board, TSFG expects to issue options to purchase
1,000 shares to each of the non-employee board members of TSFG and its two bank
subsidiaries (currently totaling 31 persons).
DIRECTORS STOCK OPTION PLAN DATA
Information regarding the options that will be awarded in the future is
set forth above under the caption "New Plan Benefits Table."
VOTE REQUIRED
The Restated Directors Plan requires the approval of holders of a
majority of the votes cast by the TSFG shareholders with respect to its
approval. Abstentions and broker non-votes will have no effect upon the vote on
this matter.
RECOMMENDATION
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF
THE RESTATED DIRECTORS PLAN.
-------------------------------------------------------------------
ITEM NO. 6 - APPROVAL OF CERTAIN AMENDMENTS
TO TSFG'S EMPLOYEE STOCK PURCHASE PLAN
-------------------------------------------------------------------
INTRODUCTION
We are seeking approval of an amendment to TSFG's Employee Stock
Purchase Plan (the "ESPP") to extend the term of the ESPP from May 1, 2004 to
35
May 1, 2014. The ESPP provides employees of TSFG and its subsidiaries with the
opportunity to acquire TSFG common stock through a payroll deduction plan.
Except as set forth above, the ESPP would remain unaltered in all material
respects.
The ESPP was originally adopted by our board of directors and approved
by our shareholders in 1994. The amendments for which approval is being sought
were approved by our board of directors on February 18, 2004, subject to
shareholder approval.
REASONS FOR APPROVAL
The Board recommends approval of the proposed amendments because they
are necessary to continue the operation of the ESPP. Through the Record Date, a
total of 109,727 shares have been issued through the ESPP. The Board believes
that the ESPP furthers TSFG's goal of employee stock ownership in TSFG. TSFG
also believes that the equity ownership by employees will serve as a significant
incentive to Company employees to improve the long-term performance of TSFG,
thereby improving the long-term return to all of TSFG's shareholders.
Accordingly, the Board believes that the proposed amendment is in the best
interests of TSFG and its shareholders.
MATERIAL FEATURES OF THE EMPLOYEE STOCK PURCHASE PLAN
The following is a summary of the principal terms of the amended ESPP.
Please note that the following description is qualified in its entirety by the
full text of the amended ESPP. The full text of the ESPP has been filed as an
exhibit to the copy of this Proxy Statement filed electronically with the SEC
and can be reviewed at http://www.sec.gov. A copy of the ESPP document may also
be obtained without charge by written request to Investor Relations Department,
The South Financial Group, Inc., 102 South Main Street, Greenville, SC 29601.
ELIGIBILITY. In general, employees of TSFG and any subsidiary who work
20 hours or more per week for more than five months per calendar year and who
have completed one year of continuous service with TSFG or a subsidiary are
eligible to participate. However, executive officers who are reporting persons
under Section 16 of the Exchange Act and persons who beneficially own more than
5% of TSFG's common stock may not participate. As of the date hereof,
approximately 1,426 employees are eligible to participate in the Employee Stock
Purchase Plan. None of the executive officers set forth in the Summary
Compensation Table above are eligible to participate in the Employee Stock
Purchase Plan.
AMOUNTS WITHHELD. Under the terms of the Employee Stock Purchase Plan,
an eligible employee may authorize TSFG to withhold up to 10% of his or her base
compensation (up to a maximum of $25,000 per year) to be used to purchase TSFG
common stock. These payroll deductions will be accumulated for quarterly periods
and used to purchase TSFG common stock on quarterly purchase dates as set forth
in the Employee Stock Purchase Plan. TSFG common stock purchased pursuant to the
ESPP is acquired from TSFG's authorized but unissued common stock or from shares
of TSFG common stock acquired in the market. Plan participants are subject to
certain limitations when increasing the amount of their payroll deductions.
OPERATION OF THE ESPP. The ESPP generally operates in successive
quarterly periods ("Quarterly Purchase Periods") commencing on February 1, May
1, August 1 and November 1. A participant must designate in the election the
percentage of compensation to be withheld from his or her pay during a Quarterly
Purchase Period and credited to a bookkeeping account maintained under the ESPP
in his or her name on our books. The number of shares acquired by a participant
upon exercise of his or her option will be determined by dividing the
participant's ESPP account balance as of the last day of a Quarterly Purchase
Period by the "Purchase Price", which is 95% of the TSFG common stock's "fair
market value" on the date of purchase. Fair market value is defined as the high
and low sale prices of the TSFG common stock on the Nasdaq National Market on
the five business days preceding the date in question.
A participant may elect to terminate his or her contributions to the
ESPP during a Quarterly Purchase Period at any time prior to the Exercise Date.
A participant's participation in the ESPP will also terminate prior to the
applicable Exercise Date upon termination of employment by us for any reason, or
in the event that he or she is no longer an eligible employee.
36
If a participant's ESPP participation terminates during a Quarterly
Purchase Period, his account balance is frozen and used to purchase shares on
the Exercise Date. Once termination occurs within a Quarterly Purchase Period,
participation cannot be reinitiated until a subsequent Quarterly Purchase
Period. A participant's termination from participation will not have any effect
upon his ability to participate in any succeeding Quarterly Purchase Period,
provided that the applicable eligibility and participation requirements are
again then met.
SHARES AUTHORIZED FOR SALE. The total number of shares which may be
issued under the ESPP is currently limited to 330,750, of which 109,727 shares
have been issued.
ADMINISTRATION. The ESPP is administered by a committee comprised of
non-employee Board members appointed from time to time by the Board (the "Plan
Administrators"). The ESPP Administrators have full authority to administer the
Employee Stock Purchase Plan, including, without limitation, authority to
interpret and construe provisions of the ESPP and to adopt such rules and
regulations for the ESPP as they deem necessary. The Board may, in certain
instances and subject to applicable law, amend the Employee Stock Purchase Plan.
However, no material amendments may be made without requisite shareholder
approval.
FEDERAL INCOME TAX CONSEQUENCES
The current federal income tax consequences of the ESPP are summarized
in the following general discussion of the general tax principles applicable to
the ESPP. This summary is not intended to be exhaustive and does not describe
state, local, or international tax consequences.
The ESPP is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Internal Revenue Code. Participant contributions to the
ESPP are made on an after-tax basis (that is, the contributions are deducted
from compensation that is taxable to the participant and for which we or one of
our subsidiaries are generally entitled to a tax deduction). Generally, no
taxable income is recognized by a participant either as of the first day of each
quarterly purchase period (the "Grant Date") or as of the last day of the
quarterly purchase period (the "Quarterly Purchase Date") in which the stock is
purchased. A participant will generally recognize income (or loss) upon a sale
or disposition of the shares acquired under the ESPP. If the shares are held by
the participant with respect to an option granted under the ESPP for a period of
two years or more from the Grant Date and for at least one year from the
Quarterly Purchase Date (the "Required Holding Period"), and are sold at a price
in excess of the purchase price paid by the participant for the shares, the gain
on the sale of the shares will be taxed as ordinary income to the participant to
the extent of the lesser of (1) the amount by which the fair market value of the
shares on the Grant Date exceeded the purchase price, or (2) the amount by which
the fair market value of the shares at the time of their sale exceeded the
purchase price. Any portion of the gain not taxed as ordinary income will be
treated as long-term capital gain. If the shares are held for the Required
Holding Period and are sold at a price less than the purchase price paid by the
participant for the shares, the loss on the sale will be treated as a long-term
capital loss to the participant. TSFG will not be entitled to any deduction for
federal income tax purposes for shares held for the Required Holding Period that
are subsequently sold by the participant, whether at a gain or loss.
If a participant disposes of shares within the Required Holding Period
(a "Disqualifying Disposition"), the participant will recognize ordinary income
in an amount equal to the difference between the purchase price paid by the
participant for the shares and the fair market value of the shares on the
Quarterly Purchase Date, and we will be entitled to a corresponding deduction
for federal income tax purposes. In addition, if a participant makes a
Disqualifying Disposition at a price in excess of the purchase price paid by the
participant for the shares, the participant will recognize a capital gain in an
amount equal to the difference between the selling price of the shares and the
fair market value of the shares on the Quarterly Purchase Date. Alternatively,
if a participant makes a Disqualifying Disposition at a price less than the fair
market value of the shares on the Quarterly Purchase Date, the Participant will
recognize a capital loss in an amount equal to the difference between the fair
market value of the shares on the Quarterly Purchase Date and the selling price
of the shares. TSFG will not receive a deduction for federal income tax purposes
with respect to any capital gain recognized by a participant who makes a
Disqualifying Disposition.
37
ESPP DATA
The benefits that will be received by or allocated to eligible
employees under the ESPP in the future cannot be determined at this time because
the amount of contributions set aside to purchase shares of common stock under
the ESPP (subject to the limitations discussed above) is entirely within the
discretion of each participant. Please refer to the information above under the
caption "New Plan Benefits Table" for information regarding purchases of shares
under the ESPP during the 2003 year. If the proposed amendments to the ESPP had
been in effect for our fiscal year ended December 31, 2003, we do not expect
that the number of shares purchased by participants in the plan during that year
would have been materially different than the numbers of shares set forth in the
New Plan Benefits Table referenced above.
VOTE REQUIRED
This amendment to the ESPP requires the approval of holders of a
majority of TSFG's outstanding common stock. Abstentions and broker non-votes
will have no effect upon the vote on this matter.
RECOMMENDATION
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF
THE AMENDMENT TO THE EMPLOYEE STOCK PURCHASE PLAN.
-------------------------------------------------------------------
ITEM NO. 7 - RATIFICATION OF KPMG LLP AS AUDITORS FOR 2004
-------------------------------------------------------------------
The Board of Directors recommends the ratification of the appointment
of KPMG LLP, independent certified public accountants, as auditors for TSFG and
its subsidiaries for fiscal year 2004 and to audit and report to the
shareholders upon the financial statements of TSFG as of and for the period
ending December 31, 2004. KPMG LLP currently serves as TSFG's independent
auditors and was engaged by TSFG pursuant to approval by the Board of Directors,
as principal accountants for TSFG starting with the 1995 fiscal year.
Representatives of KPMG LLP will be present at the Annual Meeting and
such representatives will have the opportunity to make a statement if they
desire to do so and will be available to respond to appropriate questions that
the shareholders may have. Neither the firm nor any of its members has any
relation with TSFG except in the firm's capacity as auditors or as advisors. The
appointment of auditors is approved annually by the Board of Directors and,
commencing with fiscal year 2002, subsequently submitted to the shareholders for
ratification. The decision of the Board is based on the recommendation of the
Audit Committee.
Ratification requires the approval of holders of a majority of the
votes cast by the TSFG shareholders with respect to this matter. Abstentions and
broker non-votes will have no effect upon the vote on this matter.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF KPMG LLP AS INDEPENDENT AUDITORS.
----------------------------------------------------
RELATED PARTY TRANSACTIONS
----------------------------------------------------
TSFG's Directors and officers and their associates have had, and TSFG
expects them to have in the future, banking transactions in the ordinary course
of business with TSFG's banking subsidiaries. These transactions are on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated third parties. Such loans have not
involved more than normal risks of collectibility nor have they presented any
other unfavorable features. The aggregate dollar amount of these loans was
approximately $20.3 million at December 31, 2003. During 2003, new loans of
approximately $18.3 million were made, and repayments of principal totaled
approximately $19.3 million.
38
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MISCELLANEOUS MATTERS RELATING TO THE ANNUAL MEETING
-------------------------------------------------------------------
- --------------------------------------------------------------
HOUSEHOLDING OF PROXY STATEMENT, FORM 10-K AND ANNUAL REPORT
- --------------------------------------------------------------
Our stock transfer agent and a number of brokers with accountholders
who are owners of TSFG common stock will be "householding" our proxy materials.
This means that only one copy of this Proxy Statement, the 2003 Annual Report to
Shareholders and the Annual Report on Form 10-K may have been sent to you and
the other TSFG shareholders who share your address. Householding is designed to
reduce the volume of duplicate information that shareholders receive and reduce
TSFG's printing and mailing expenses.
If your household has received only one copy of these materials, and
you would prefer to receive separate copies of these documents, either now or in
the future, please call our transfer agent (Registrar and Transfer Company) at
800-368-5948 or e-mail them at info@rtco.com. They will deliver separate copies
promptly. If you are now receiving multiple copies of our proxy materials and
would like to have only one copy of these documents delivered to your household
in the future, please contact Registrar and Transfer Company in the same manner.
- ----------------------------
EXPENSES OF SOLICITATION
- ----------------------------
TSFG will bear the cost associated with this solicitation, including
the cost of preparing, handling, printing and mailing these Proxy Materials.
Proxies will be solicited principally through these Proxy Materials. However,
TSFG has also engaged the firm of Georgeson Shareholder Communications, Inc.
("Georgeson") as proxy solicitors to assist TSFG in this proxy solicitation.
Georgeson employees may contact shareholders by mail, by telephone or through
personal solicitation. TSFG expects to pay Georgeson approximately $____ plus
expense reimbursements, in connection with such services. Proxies may also be
solicited by telephone or through personal solicitation conducted by regular
TSFG employees. Employees will be reimbursed for the actual out-of-pocket
expenses incurred in connection with such solicitation. Banks, brokers and other
custodians are requested to forward these Proxy Materials to their customers
where appropriate, and TSFG will reimburse such banks, brokers and custodians
for their reasonable out-of-pocket expenses incurred in sending these Proxy
Materials to beneficial owners of the shares.
- ----------------------------
PROPOSALS BY SHAREHOLDERS
- ----------------------------
A shareholder who wishes to either (1) present a proposal for inclusion
in the proxy materials relating to TSFG's Annual Meeting of Shareholders to be
held in 2005 or (2) propose one or more director nominees for consideration by
the Nominating and Corporate Governance Committee, should submit his or her
proposals on or before November 18, 2004, to the Secretary of The South
Financial Group, 102 S. Main Street, Greenville, South Carolina 29601. After
that date, a proposal will not be considered timely. Shareholders submitting
proposals for inclusion in the proxy statement and form of proxy must comply
with the proxy rules under the Securities Exchange Act of 1934, as amended, and
all shareholders submitting proposals must comply with the Bylaw requirements
described below.
The Bylaws of TSFG require timely advance written notice of shareholder
nominations of Director candidates and of any other proposals to be presented at
an annual meeting of shareholders. In the case of Director nominations by
shareholders, the Bylaws require that a shareholder's notice be delivered to the
principal executive offices of TSFG during the period of time from the 30th day
to the 60th day prior to the annual meeting of shareholders at which Directors
are to be elected, unless such requirement is expressly waived in advance of the
meeting by formal action of the Board of Directors. In the case of other
proposals by shareholders at an annual meeting, the Bylaws require that advance
written notice be delivered to TSFG's Secretary (at the address indicated
above). To be timely, a shareholder's notice must be delivered to or mailed and
39
received at the principal executive offices of TSFG between the 60th and 90th
days prior to the first anniversary of the preceding year's annual meeting.
However, in the event that the date of the annual meeting is more than 30 days
before or more than 60 days after such anniversary date, such shareholder notice
must be so delivered between the 60th and 90th days prior to such annual meeting
or within 10 days following the day on which public announcement of the date of
such meeting is first made by TSFG. A copy of the Bylaws is available upon
request to the Secretary of TSFG at the address indicated above.
-------------------------------------------------------------------
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------------------
Section 16(a) of the Exchange Act requires TSFG's Directors, executive
officers and 10% shareholders to file reports of holdings and transactions in
TSFG common stock with the Securities and Exchange Commission. Based on a review
of Section 16(a) reports received by TSFG and written representations from its
Directors and executive officers, TSFG believes that all of its executive
officers, Directors and 10% shareholders have made all filings required under
Section 16(a) for 2003 in a timely manner.
--------------------------------------------------------
FINANCIAL INFORMATION
--------------------------------------------------------
TSFG'S 2003 ANNUAL REPORT TO SHAREHOLDERS AND ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 2003 (WITHOUT EXHIBITS) ARE ENCLOSED.
ADDITIONAL COPIES MAY BE OBTAINED UPON REQUEST FROM THE SOUTH FINANCIAL GROUP,
POST OFFICE BOX 1029, GREENVILLE, SOUTH CAROLINA 29602, ATTENTION: INVESTOR
RELATIONS DEPARTMENT. COPIES MAY ALSO BE OBTAINED ONLINE AT
HTTP://WWW.THESOUTHGROUP.COM.
March 17, 2004 By order of the Board of Directors,
William P. Crawford, Jr.
Executive Vice President,
General Counsel and Secretary
40
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF
DIRECTORS OF THE SOUTH FINANCIAL GROUP, INC.
PURPOSE
The Audit Committee (the "Committee") is appointed by the Board of
Directors (the "Board") of The South Financial Group, Inc. (the "Company"). The
primary function of the Committee is to assist the Board in fulfilling its
oversight responsibilities, primarily through:
o overseeing management's conduct of the Company's financial reporting
process and systems of internal accounting and financial controls;
o monitoring the independence and performance of the Company's outside
auditors; and
o providing an avenue of communication among the outside auditors, management
and the Board.
COMPOSITION
1. The Committee shall have at least three (3) members at all times,
each of whom must be independent of management, as well the Company and each of
its affiliates. A member of the Committee shall be considered independent if:
(a) in the sole discretion of the Board, it is determined that
he or she has no relationship that may interfere with the exercise of his or her
independent judgment; and
(b) he or she meets the Nasdaq rules regarding independence of
audit committee members.
2. If any member of the Committee enters into or develops a "business
relationship" (as that term is defined in applicable Nasdaq rules), that member
shall have an affirmative obligation to promptly disclose such relationship to
the Board.
3. No member of the Committee shall accept any consulting, advisory or
other compensatory fee from the Company other than in connection with serving on
the Committee or as a member of the Board.
4. All members of the Committee shall have a practical knowledge of
finance and accounting and be able to read and understand fundamental financial
statements or be able to do so within a reasonable period of time after
appointment to the Committee.
5. At least one member of the Committee shall have accounting or
related financial management expertise, as the Board interprets such
qualification in its business judgment. At least one member of the Committee
shall be a "financial expert," as defined by the regulations by the Securities
and Exchange Commission (the "SEC") adopted in accordance with the
Sarbanes-Oxley Act of 2002.
6. Each member of the Committee shall be appointed by the Board and
shall serve until the earlier to occur of the date on which he or she shall be
replaced by the Board, resigns from the Committee, or resigns from the Board.
MEETINGS
1. The Committee shall meet as frequently as circumstances dictate, but
no less than four times annually. The Board shall name a chairperson of the
Committee, who shall prepare and/or approve an agenda in advance of each
meeting. A majority of the members of the Committee shall constitute a quorum.
The Committee shall maintain minutes or other records of meetings and activities
of the Committee.
2. The Committee shall, through its chairperson, report regularly to
the Board following the meetings of the Committee, addressing such matters as
the quality of the Company's financial statements, the Company's compliance with
legal or regulatory requirements, the performance and independence of the
outside auditors, the performance of the internal audit function or other
matters related to the Committee's functions and responsibilities.
RESPONSIBILITIES AND DUTIES
The Committee's principal responsibility is one of oversight. The
Company's management is responsible for preparing the Company's financial
statements and the outside auditors are responsible for auditing and/or
reviewing those financial statements.
While the Committee has the powers and responsibilities set forth in
this charter, it is not the responsibility of the Committee to plan or conduct
audits or to determine that the Company's financial statements present fairly
the financial position, the results of operations and the cash flows of the
Company, in compliance with generally accepted accounting principles. This is
the responsibility of management and the outside auditors. In carrying out these
oversight responsibilities, the Committee is not providing any expert or special
assurance as to the Company's financial statements or any professional
certification as to the outside auditors' work.
A-1
The Committee's specific responsibilities are as follows:
General
1. The Committee shall have the power to conduct or authorize
investigations into any matters within the Committee's scope of
responsibilities. The Committee shall have unrestricted access to members of
management and other employees of the Company, as well as all information
relevant to the carrying out of its responsibilities.
2. The Committee shall, with the assistance of management, the outside
auditors and legal counsel, as the Committee deems appropriate, review and
evaluate, at least annually, the Committee's:
(a) charter;
(b) powers and responsibilities; and (c) performance.
The Committee shall report and make recommendations to the Board with respect to
the foregoing, as appropriate.
3. The Committee shall ensure inclusion of its then-current charter in
the proxy statement for the Company's annual meetings of shareholders, at least
once every three years in accordance with regulations of the SEC.
4. The Committee shall prepare annual Committee reports for inclusion
in the proxy statements for the Company's annual meetings, as required by rules
promulgated by the SEC.
5. The Committee shall, in addition to the performance of the duties
described in this charter, undertake such additional duties as from time to time
may be:
(a) delegated to it by the Board; (b) required by law or under
Nasdaq rules; or (c) deemed desirable, in the Committee's discretion, in
connection with its functions described in this charter.
6. The Committee shall be empowered to retain, at the Company's
expense, independent counsel, accountants or others for such purposes as the
Committee, in its sole discretion, determines to be appropriate to carry out its
responsibilities.
Internal Controls and Risk Assessment
1. The Committee shall review annually, with management and the outside
auditors, if deemed appropriate by the Committee:
(a) the internal audit budget, staffing, performance, and
audit plan;
(b) material findings of internal audit reviews and
management's response, including any significant changes required in the
internal auditor's audit plan or scope and any material difficulties or disputes
with management encountered during the course of the audit;
(c) the effectiveness of or weaknesses in the Company's
internal controls, including computerized information system controls and
security, the overall control environment and accounting and financial controls;
and
(d) the Company's risk management area, including receiving a
report from the Company's head of risk management addressing each of the
Company's identified risk areas and describing the processes in place to monitor
and control those risks.
2. The Committee shall obtain from the outside auditors their
recommendations regarding internal controls and other matters relating to the
accounting procedures and the books and records of the Company and its
subsidiaries and review the correction of controls deemed to be deficient.
3. The Committee shall review the appointment, performance and
replacement of the senior internal auditing executive, and the activities,
organizational structure and qualifications of the persons responsible for the
internal audit function.
4. The Committee shall, in accordance with SEC regulations to be
adopted under the Sarbanes-Oxley Act, establish procedures for:
(a) the receipt, retention and treatment of complaints
received by the Company regarding accounting, internal accounting controls or
auditing matters; and
(b) the confidential, anonymous submission by employees of the
Company of concerns regarding questionable accounting or auditing matters.
5. The Committee shall review major financial risk exposures and the
guidelines and policies which management has put in place to govern the process
of monitoring, controlling and reporting such exposures.
Outside Auditors; Their Performance and Independence
1. The outside auditors are ultimately accountable to the Board and the
Committee, as the representatives of the shareholders of the Company. The
Committee shall evaluate and recommend to the Board the selection and, where
appropriate, the replacement of the outside auditors. The Committee shall
recommend to the Board the outside auditors to be proposed for shareholder
approval in any proxy statement.
A-2
2. The Committee shall:
(a) confer with the outside auditors concerning the scope of
their examinations of the books and records of the Company and its subsidiaries;
(b) review the scope, plan and procedures to be used on the
annual audit, as recommended by the outside auditors;
(c) review the results of the annual audits and interim
financial reviews performed by the outside auditors, including:
(1) the outside auditors' audit of the Company's
annual financial statements, accompanying footnotes
and its report thereon;
(2) any significant changes required in the outside
auditors' audit plans or scope;
(3) any material differences or disputes with
management encountered during the course of the audit (the Committee to be
responsible for overseeing the resolution of such differences and disputes);
(4) any material management letter comments and
management's responses to recommendations made by the
outside auditors in connection with the audit;
(5) matters required to be discussed by Statement on
Auditing Standards No. 61, as amended
(Communications with Audit Committees), relating to the conduct of the audit;
(d) authorize the outside auditors to perform such
supplemental reviews or audits as the Committee may deem desirable; (e)
obtain from the outside auditors assurance that they have
complied with Section 10A, as amended, of the Securities Exchange Act of 1934.
3. The Committee shall inquire into any accounting adjustments that
were noted or proposed by the outside auditors but were "passed" as immaterial
or otherwise.
4. The Committee shall inquire as to any matters that were referred to
the outside auditors' national office relating to accounting policies and/or
financial statement disclosure within the Company's financial statements and, to
the extent deemed appropriate, request an opportunity to address such issues
directly with a representative of such national office.
5. The Committee shall, at least annually, obtain and review a report
by the independent auditors' describing: (a) the outside auditors' internal
quality control procedures; (b) any material issues raised by the most recent
internal quality-control review or peer review of the outside auditors, or by
any inquiry or investigation by governmental or professional authorities, within
the preceding five years, respecting one or more independent audits carried out
by the outside auditors, and any steps taken to deal with any such issues.
6. Pre-approval by the Committee shall be required with respect to the
fees for all audit and other services performed by the outside auditors as
negotiated by management. To the extent permitted by applicable laws and
regulations, such pre-approval may be delegated to a sub-committee of the
Committee, to be dealt with in accordance with such conditions as the Committee
may from time to time establish.
7. The Committee's approval of any non-audit services to be rendered by
the outside auditors must be obtained in advance of engaging the outside
auditors to render such services. To the extent permitted by applicable laws and
regulations, such pre-approval may be delegated to a sub-committee of the
Committee, to be dealt with in accordance with such conditions as the Committee
may from time to time establish. The Committee shall not approve the engagement
of the outside auditors to render non-audit services prohibited by law or rules
and regulations promulgated by the SEC. The Committee shall consider whether the
provision of non-audit services is compatible with maintaining the outside
auditors' independence, including, but not limited to, the nature and scope of
the specific non-audit services to be performed and whether the audit process
would require the outside auditors to review any advice rendered by the outside
auditors in connection with the provision of non-audit services.
8. The Committee shall receive from the outside auditors on a periodic
basis a formal written statement delineating all relationships between the
outside auditors and the Company, consistent with the Independence Standards
Board, Standard No. 1, regarding relationships and services, which may impact
the objectivity and independence of the outside auditors, and other applicable
standards. The statement shall include a description of all services provided by
the outside auditors and the related fees. The Committee shall actively engage
in a dialogue with the outside auditors regarding any disclosed relationships or
services that may impact the objectivity and independence of the outside
auditors and shall evaluate, after gathering information from management, and
other Board members, the performance of the outside auditors and recommend that
the Board take action to satisfy itself of the independence of the outside
auditors.
9. The Committee shall establish written hiring policies for current
and former employees of the outside auditors.
10. The Committee shall consider whether it is appropriate to adopt a
policy of insisting upon the rotation of the outside auditors' lead audit
partner or rotating the outside auditors on a periodic basis. Based upon its
evaluation, the Committee shall take, or recommend that the Board take,
appropriate action to monitor the independent status of the outside auditors.
A-3
Financial Reporting
1. The Committee shall review and discuss with the outside auditors and
management the Company's audited annual financial statements that are to be
included in the Company's annual report on Form 10-K and the outside auditors'
opinion with respect to such financial statements, including reviewing the
nature and extent of any significant changes in accounting principles or the
application of such accounting principles; and determine whether to recommend to
the Board that the financial statements be included in the Company's annual
report on Form 10-K for filing with the SEC.
2. The Committee shall review and discuss with the outside auditors and
management, and require the outside auditors to review, the Company's interim
financial statements to be included in the Company's quarterly reports on Form
10-Q prior to filing such reports with the SEC.
3. The Committee shall review and discuss:
(a) the existence of significant estimates and judgments
underlying the financial statements, including the rationale behind those
estimates as well as the details on material accruals and reserves and the
Company's accounting principles;
(b) all critical accounting policies identified to the
Committee by the outside auditors;
(c) major changes to the Company's accounting principles and
practices, including those required by professional or regulatory pronouncements
and actions, as brought to its attention by management and/or the outside
auditors; and
(d) material questions of choice with respect to the
appropriate accounting principles and practices to be used in the preparation of
the Company's financial statements, as brought to its attention by management
and/or the outside auditors.
4. The Committee shall review and discuss the Company's disclosure
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in any annual or quarterly report, or other report or
filing filed with the SEC.
5. The Committee shall discuss generally with management earnings press
releases of the Company, as well as financial information and earnings guidance
provided by the Company to analysts and rating agencies.
6. The Committee shall review and discuss with outside auditors any
transaction involving the Company and any related party and any transaction
involving the Company and any other party in which the parties' relationship
could enable the negotiation of terms on other than an independent, arm's length
basis.
7. The Committee shall discuss with the outside auditors any item not
reported as a contingent liability or loss in the Company's financial statements
as a result of a determination that such item does not satisfy a materiality
threshold. The Committee shall review with the outside auditors the quantitative
and qualitative analysis applied in connection with such assessment of
materiality, including, without limitation, the consistency of such assessment
with the requirements of SEC Staff Accounting Bulletin No. 99.
8. The Committee shall review and consider other matters in relation to
the financial affairs of the Company and its accounts, and in relation to the
internal and external audit of the Company as the Committee may, in its
discretion, determine to be advisable.
9. The Committee shall meet at least annually with management, the
Director of Internal Audit and the outside auditors in separate executive
sessions to discuss any matters that the Committee or each of these groups
believes should be discussed privately.
Compliance with Laws, Regulations and Policies
1. The Committee shall review with management actions taken to ensure
compliance with any code or standards of conduct for the Company which may be
established by the Board.
2. The Committee shall review with the Company's legal counsel any
legal compliance matters, including banking regulations, securities trading
practices and any other legal matters that could have a significant, adverse
impact on the Company's financial statements.
3. The Committee shall review with the Company's counsel and others any
federal, tax or regulatory matters that may have a material impact on the
Company's operations and the financial statements, related Company compliance
programs and policies, and programs and reports received from regulators, and
shall monitor the results of the Company's compliance efforts.
4. The Committee shall periodically review the rules promulgated by the
SEC and the Nasdaq relating to the qualifications, activities, responsibilities
and duties of audit committees and shall take, or recommend that the Board take,
appropriate action to comply with such rules.
Adopted by the Board of Directors: February 18, 2004
A-4
THE SOUTH FINANCIAL GROUP, INC.
AMENDED AND RESTATED DIRECTORS STOCK OPTION PLAN
(Amended and Restated February 18, 2004)
1. Purposes of the Plan. The purposes of this Amended and Restated
Directors Stock Option Plan are to attract and retain the best available
personnel to serve as Outside Directors, to provide additional incentive to
Outside Directors and to promote the success of the Company's business. Eligible
Outside Directors may be granted Options under the Plan. This Amended and
Restated Directors Stock Option Plan amends and restates the Company's existing
Amended and Restated Directors Stock Option Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board.
(b) "Applicable Laws" means the requirements relating to the
administration of equity compensation plans under U.S. state corporate laws,
U.S. federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted, the requirements
of any regulatory body having jurisdiction with respect to the Plan and the
applicable laws of any other country or jurisdiction where Options are granted
under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Common Stock" means the Common Stock, $1.00 par value, of the
Company.
(f) "Company" means The South Financial Group, Inc., a South Carolina
corporation.
(g) "Director" means a member of the Board, or a member of a Subsidiary
Board or and advisory board member with respect to a Subsidiary.
(h) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(i) "Employee" means any person, including Directors, employed by the
Company or any Parent or Subsidiary of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(k) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including, without limitation, the Nasdaq National
Market of the Nasdaq Stock Market, its Fair Market Value shall be the closing
sales price for such stock as quoted on such exchange or system for the day of
determination (or if the markets are closed on such day, on the most recent
prior trading day), as reported in The Wall Street Journal or such other source
as the Administrator deems reliable; or
(ii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Option" means a stock option granted pursuant to the Plan. All
Options granted hereunder shall be nonstatutory stock options which are not
intended to qualify as incentive stock options within the meaning of Section
422(b) of the Code.
(m) "Option Agreement" means a written or electronic agreement between
the Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(n) "Optioned Stock" means the Common Stock subject to an Option.
(o) "Optionee" means the holder of an outstanding Option granted under
the Plan.
(p) "Outside Director" means a Director who is not an Employee. An
Outside
(q) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(r) "Plan" means this 2003 Directors Stock Plan.
(s) "Service Provider" means a person serving as a Director.
(t) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 below.
(u) "Subsidiary" means any "subsidiary corporation" of the Company
whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11
of the Plan, the maximum aggregate number of Shares that may be issued pursuant
to Options granted under the Plan is 650,000. This includes 64,284 Shares issued
upon the exercise of Options prior to the February 18, 2004 and 410,004 Options
which are currently outstanding. The Shares may be authorized but unissued, or
reacquired Common Stock. If an Option expires or becomes unexercisable without
having been exercised in full, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated). However, Shares that have actually been issued under the Plan,
upon exercise of an Option shall not be returned to the Plan and shall not
become available for future distribution under the Plan.
B-1
4. Administration of the Plan.
(a) Administrator. The Plan shall be administered by the Board.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
and subject to the approval of any relevant authorities, the Administrator shall
have the authority in its discretion, and only to the extent consistent with the
other provisions of this Plan:
(1) to determine the Fair Market Value;
(2) to select the Outside Directors to whom Options may from time to
time be granted hereunder;
(3) to determine the number of Shares to be covered by each Option
granted hereunder;
(4) to approve forms of agreement for use under the Plan;
(5) to determine the terms and conditions, of any Option granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options may be exercised (which may be
based on performance criteria), and any other restriction or limitation
regarding any Option or the Common Stock relating thereto, based in each case on
such factors as the Administrator, in its sole discretion, shall determine;
(6) to determine whether and under what circumstances an Option may
be bought out in cash under subsection 9(e);
(7) to prescribe, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(8) to allow Optionees to satisfy withholding tax obligations, if
any, by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option that vests, that number of Shares having a Fair Market
Value equal to the minimum amount required to be withheld, and no more in any
event. The Fair Market Value of the Shares to be withheld shall be determined on
the date that the amount of tax to be withheld is to be determined. All
elections by Optionees to have Shares withheld for this purpose shall be made in
such form and under such conditions as the Administrator may deem necessary or
advisable;
(9) to construe and interpret the terms of the Plan and Options
granted pursuant to the Plan; (10) to modify or amend each agreement granted
pursuant to this Plan; provided, however, that the Administrator may not without
advance stockholder approval (i) adopt a discretionary amendment to an Option to
accelerate the vesting of Shares subject to such Option, or (ii) amend an Option
to reduce the exercise price per Share thereof or to implement an option
exchange program pursuant to which an Option could be exchanged for a new Option
with a lower exercise price per Share; and
(11) to make all other determinations deemed necessary or advisable
for administering the Plan. (c) Effect of Administrator's Decision. All
decisions, determinations and interpretations of the Administrator shall be
final and binding on all Optionees.
5. Eligibility.
(a) Options may only be granted to Outside Directors.
(b) Neither the Plan nor any Option shall confer upon any Optionee any
right with respect to continuing the Optionee's relationship as a Service
Provider with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate such relationship at any time, with or
without cause.
6. Establishment and Term of Plan. The Plan shall become effective on
February 18, 2003, subject to approval by the stockholders of the Company at its
2004 Annual Meeting of Shareholders. In the event that the Plan is not approved
at the 2004 Annual Meeting of Shareholders, the Plan, as in effect immediately
prior to February 19, 2004, shall continue in effect. The Plan shall continue in
effect until the earlier of its termination by the Board or the date on which
all of the Shares available for issuance under the Plan have been issued and any
Option Agreements have lapsed.
7. Term of Option. The term of each Option shall be stated in the
Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be no less than 100% of the Fair Market Value per
Share on the date of grant:
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator. Such consideration may consist of (1) cash, (2) check, (3)
other Shares which (x) in the case of Shares acquired directly or indirectly
from the Company, have been owned by the Optionee for more than six months (or
such longer or shorter period of time required to avoid a charge to earnings for
financial accounting purposes) on the date of surrender, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which such Option shall be exercised, (4) consideration
received by the Company under a cashless exercise program implemented by the
Company in connection with the Plan, or (5) any combination of the foregoing
methods of payment. In making its determination as to the type of consideration
to accept, the Administrator shall consider if acceptance of such consideration
may be reasonably expected to benefit the Company.
B-2
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
hereunder shall be exercisable according to the terms hereof at such times and
under such conditions as determined by the Administrator and set forth in the
Option Agreement. An Option may not be exercised for a fraction of a Share. An
Option shall be deemed exercised when the Company or its designated broker
receives (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 11 of the Plan. Exercise of an Option in any manner shall
result in a decrease in the number of Shares thereafter available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
ceases to be a Service Provider, such Optionee may exercise his or her Option
within ninety (90) days after the date of termination (or such other period of
time as is specified in the Option Agreement) to the extent that the Option is
vested on the date of termination, but in no event later than the expiration of
the term of the Option as set forth in the Option Agreement (the "Option
Expiration Date"). If, on the date of termination, the Optionee is not vested as
to his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified by the Administrator, the
Option shall terminate, and the Shares covered by such Option shall revert to
the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within six (6) months after the date of termination (or such other
period of time as is specified in the Option Agreement) to the extent the Option
is vested on the date of termination, but in no event later than the Option
Expiration Date. If, on the date of termination, the Optionee is not vested as
to his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
the Option may be exercised within six (6) months after the date of the
Optionee's death (or such other period of time as is specified in the Option
Agreement), but in no event later than the Option Expiration Date), by the
Optionee's estate or by a person who acquires the right to exercise the Option
by bequest or inheritance. The Option will be exercisable during such period to
the extent that the right to exercise the Option would have accrued had the
Optionee continued living and remained a Service Provider for one (1) year after
the date of death. If, at the time of death, the Optionee is not vested as to
the entire Option, the Shares covered by the portion of the Option which would
not have vested as of the date one (1) year after the date of the Optionee's
death shall immediately revert to the Plan. If the Option is not so exercised
within the time specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options. Except as determined otherwise by
the Administrator in its discretion, Options may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by
the laws of descent or distribution and may be exercised, during the lifetime of
the Optionee, only by the Optionee.
11. Adjustments upon Changes in Capitalization, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of Shares covered by each outstanding
Option, and the number of Shares which have been authorized for issuance under
the Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per share of Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
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provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
or into another corporation or the sale of substantially all of the assets of
the Company, each outstanding Option shall be assumed or an equivalent option,
right or agreement substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option, the Optionee shall
fully vest in and have the right to exercise the Option with respect to all of
the Optioned Stock, including Shares as to which it would not otherwise be
vested or exercisable. If an Option becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option shall be fully exercisable for a period of fifteen (15) days from the
date of such notice, and the Option shall terminate upon the expiration of such
period. For the purposes of this Section 11(c), the Option shall be considered
assumed if, following the merger or sale of assets, the option or right confers
the right to purchase or receive, for each Share of Optioned Stock subject to
the Option immediately prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property) received in the merger or
sale of assets by holders of Common Stock for each Share held on the effective
date of the transaction (and if holders were offered a choice of consideration,
the type of consideration chosen by the holders of a majority of the outstanding
Shares); provided, however, that if such consideration received in the merger or
sale of assets is not solely stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option, for each
Share of Optioned Stock subject to the Option, to be solely stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such later date as is determined by the Administrator.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan; provided, however, that the Board may not
materially amend the Plan without obtaining stockholder approval to the extent
that stockholder approval is necessary or desirable to comply with Applicable
Laws.
(b) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the Plan unless the issuance and delivery of such Shares complies
with Applicable Laws and shall be further subject to the approval of counsel for
the Company with respect to such compliance.
15. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is 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 failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. Reservation of Shares. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
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