DESCRIPTION OF COMMON STOCK OF
PACIFIC FINANCIAL CORPORATION
The restated articles of incorporation (the "Articles") of Pacific Financial
Corporation ("Pacific Financial") authorize issuance of up to 25,000,000 shares
of common stock ("Common Stock"), par value $1.00 per share. Shares of Common
Stock are not listed for trading on any stock exchange or quoted on any
automated quotation system. The following summary describes material aspects of
the Common Stock. For additional information, please refer to the Articles, the
bylaws of Pacific Financial (the "Bylaws"), and the Washington Business
Corporation Act (the "Act").
DIVIDEND RIGHTS
The holders of the Common Stock are entitled to such dividends as the Board
of Directors of Pacific Financial (the "Board") may declare, from time to time,
out of funds legally available for that purpose. The Act permits dividends to be
paid only if, after distributing the dividend, Pacific Financial would be able
to pay its debts as they become due in the ordinary course of business. In
addition, a dividend may not be paid to the holders of the Common Stock under
the Act if Pacific Financial's total assets would be less than the sum of (a)
its total liabilities and (b) the amount that would be needed, if Pacific
Financial were to be dissolved at the time of the dividend, to satisfy the
preferential rights of persons whose right to payment is superior to the
recipients of the dividend. Moreover, dividends from Pacific Financial will
depend on its receipt of dividends from subsidiaries because Pacific Financial
has no other source of income. Accordingly, the dividend restrictions placed on
those subsidiaries, which include restrictions imposed by regulatory authorities
that prohibit unsound or unsafe banking practices, may effectively limit the
amount of dividends Pacific Financial can pay.
VOTING RIGHTS
The holders of Common Stock possess exclusive voting rights in Pacific
Financial. Each holder of Common Stock is entitled to one vote for each share
held of record on all matters submitted to a vote of holders of Common Stock. A
majority of those votes entitled to be cast on a particular matter within a
voting group constitutes a quorum for that voting group. Once a quorum is
present at a shareholder meeting, action is approved if the number of votes cast
in favor of a proposed action exceed the number of votes cast against that
proposal unless otherwise required by the Articles, applicable law, or the rules
of any stock exchange or other trading system on which the Common Stock may be
listed.
ELECTION OF DIRECTORS
The Board must consist of at least five but not more than 20 directors. The
Board is divided into three classes, with equal numbers of directors in each
class to the extent possible. The classes are staggered so that one class is
elected each year to a three-year term. Holders of the Common Stock do not have
cumulative voting rights in the election of directors. Holders of the Common
Stock may remove directors from office, with or
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without cause, by a majority vote at a special meeting of shareholders called
expressly for that purpose.
AMENDMENT TO ARTICLES AND BYLAWS
By their express terms, the Articles may be amended in any manner permitted
by law. The Act requires shareholder approval, by a majority of votes entitled
to be cast, for all but a few expressly excepted changes to the Articles. The
Bylaws, according to their express terms, may be amended (a) by the shareholders
at any regular or special meeting of the shareholders or (b) by majority vote of
the directors at any regular or special meeting of the Board. However, the
agreement governing the December 15, 1999 merger of Harbor Bancorp, Inc. and
Pacific Financial (the "Merger Agreement") prohibits amendment to either the
Bylaws or Articles for the three years following completion of the merger unless
such amendment is approved by at least 60 percent of the directors.
LIQUIDATION
If there is a liquidation, dissolution, or winding up of Pacific Financial,
the holders of Common Stock will be entitled to share ratably in all assets
remaining after payment of its debts and other liabilities.
PROVISIONS AFFECTING A CHANGE OF CONTROL OR OTHER EXTRAORDINARY TRANSACTIONS
Pacific Financial's Articles and Bylaws contain provisions that may
discourage persons from acquiring large blocks of Common Stock or replacing
management personnel, thereby delaying or preventing a change of control of
Pacific Financial. For example, the staggered election of directors, described
above, makes it difficult to replace a majority of directors in a short period
of time. The Articles also specifically authorize the Board to consider
non-monetary factors, such as social effects on communities and employees, when
considering tender offers, merger proposals, and offers to purchase
substantially all of Pacific Financial's assets. This provision expands the
grounds on which the Board might reject those types of transactions.
Other provisions of the Articles make it difficult for a person or entity
already controlling a large amount of the Common Stock to increase that
ownership interest. For example, fair price provisions impose special
requirements for shareholder and Board approval in connection with transactions
involving a person or entity holding at least 20 percent of the Common Stock.
Moreover, management has no duty to call special meetings of the shareholders
unless requested to do so by persons representing at least 25 percent of the
voting power of the Common Stock. This 25 percent threshold makes it difficult
for a shareholder to force Board action or seek shareholder ratification.
Neither the Bylaws nor Articles abrogate any special requirements that the
Act imposes on change-of-control transactions. Therefore, Pacific Financial is
subject to the Act's requirement that mergers, asset sales, and dissolutions be
ratified by two-thirds of any voting group entitled to vote on the transaction.
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Finally, the Merger Agreement prohibits Pacific Financial from taking
certain actions for three years after completion of the merger unless approved
by 60 percent or more of the directors. Several of the actions subject to this
provision are relevant to a change of control, including amendment of the
Articles, certain changes in management, and other specified corporate
transactions.
OTHER CHARACTERISTICS
The outstanding shares of Common Stock are fully paid and non-assessable.
Holders of Common Stock do not have any preemptive, conversion, or other
subscription rights with respect to any additional shares of capital stock of
Pacific Financial which may be issued. Therefore, the Board may authorize the
issuance and sale of shares of capital stock of Pacific Financial without first
offering them to existing holders of Common Stock. In addition, the Common Stock
is not subject to any redemption or sinking fund provisions.
