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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 000-29829
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PACIFIC FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1815009
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 East Market Street
Aberdeen, Washington 98520-5244
(360) 533-8870
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Class Outstanding at March 31, 2000
-------------- -----------------------------
Common Stock, par value $1.00 per share 496,770 shareS
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1
<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
PART II OTHER INFORMATION 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Pacific Financial Corporation
March 31, 2000 and December 31, 1999
<TABLE>
<S> <C> <C>
March 31, December 31,
2000 1999
(Unaudited)
ASSETS
Cash and due from banks $ 10,740 $ 13,080
Interest bearing balances with banks 1,776 1,744
Federal funds sold 125 --
Investment securities available for sale 61,693 65,625
Investment securities held-to-maturity 1,553 1,615
Loans 162,826 152,664
Allowance for credit losses 1,980 1,930
----- -----
LOANS, NET 160,846 150,734
Premises and equipment 3,417 3,510
Foreclosed real estate 26 177
Accrued interest receivable 2,122 2,004
Cash surrender value of life insurance 2,356 2,330
Other assets 1,458 1,370
----- -----
TOTAL ASSETS $246,112 $242,189
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 35,227 $ 34,359
Interest bearing 178,551 171,780
------- -------
TOTAL DEPOSITS 213,778 206,139
Accrued interest payable 572 549
Short-term borrowings 8,164 9,675
Other liabilities 1,372 4,388
----- -----
TOTAL LIABILITIES 223,886 220,751
STOCKHOLDERS' EQUITY
Common Stock (par value $1); authorized: 497 497
5,000,000 shares; issued 496,770 shares
Surplus 11,420 11,420
Retained earnings 11,497 10,473
Accumulated other comprehensive income(loss) (1,188) (952)
-------- -----
TOTAL STOCKHOLDERS' EQUITY 22,226 21,438
-------- --------
Total liabilities and stockholders' equity $246,112 $242,189
</TABLE>
3
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2000 and 1999
(Dollars in thousands, except per share)
2000 1999
(UNAUDITED) (UNAUDITED)
INTEREST INCOMe
Loans $3,855 $3,390
Securities held to maturity - tax exempt 25 27
Securities available for sale:
Taxable 777 622
Tax-exempt 156 149
Deposits with banks
and federal funds sold 36 231
-- ---
Total interest income 4,849 4,419
INTEREST EXPENSE
Deposits 1,786 1,679
Other borrowings 129 15
--- --
Total Interest Expense 1,915 1,694
NET INTEREST INCOME 2,934 2,725
Provision for credit losses 53 --
----- -----
Net interest income after provision
for credit losses 2,881 2,725
NON-INTEREST INCOME
Service charges 179 183
Mortgage loan origination fees 1 15
Gain on sale of foreclosed real estate 31 --
Other operating income 145 129
--- ---
Total non-interest income 356 327
NON-INTEREST EXPENSE
Salaries and employee benefits 1,014 967
Occupancy and equipment 240 254
Other 492 467
--- ---
Total non-interest expense 1,746 1,688
Income before income taxes 1,491 1,364
Provision for income taxes 467 414
--- ---
NET INCOME $1,024 $ 950
Earnings per common share:
Basic $2.06 $1.94
Diluted 2.04 1.91
Average shares outstanding:
Basic 496,770 488,969
Diluted 502,082 498,221
4
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2000 and 1999
(Dollars in thousands)
<TABLE>
<S> <C> <C>
2000 1999
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income $ 1,024 $ 950
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for credit losses 53 --
Depreciation and amortization 112 149
Stock dividends received (55) (55)
Gain on sale of foreclosed real estate (31) --
(Increase) decrease in accrued interest receivable (118) 38
Increase (decrease) in accrued interest payable 23 (50)
Other 117 (131)
--- -----
Net cash provided by operating activities 1,125 901
INVESTING ACTIVITIES
Net increase in federal funds (32) (1,515)
Increase in interest bearing
deposits with banks (125) (516)
Proceeds from maturities of investments held to maturity 62 56
Purchases of securities available for sale -- (28,926)
Proceeds from maturities of
securities available for sale 3,607 21,450
Net (increase) decrease in loans (10,165) 2,938
Additions to premises and equipment (17) (79)
Proceeds from sales of foreclosed real estate 182 --
--- ---
Net cash used in investing activities (6,488) (6,592)
FINANCING ACTIVITIES
Net increase in deposits 7,639 2,604
Net increase (decrease) in short-term borrowings (1,511) 6,042
Payment of dividends (3,105) (2,379)
------- -------
Net cash provided by financing activities 3,023 6,267
Net increase (decrease) in cash and due from banks $(2,340) $ 576
CASH AND DUE FROM BANKS
Beginning of period $13,080 $ 8,634
End of period $10,740 $ 9,210
5
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 1,892 $ 1,744
Income Taxes 30 --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Unrealized losses on securities available
for sale, net of tax $ (236) $ (337)
Foreclosed real estate acquired in settlement of loans -- 30
6
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<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three months ended March 31, 2000 and 1999
(Dollars in thousands) (Unaudited) ACCUMULATED
OTHER
COMPREHENSIVE
COMMON RETAINED INCOME
STOCK SURPLUS EARNINGS (LOSS) TOTAL
Balance December 31, 1998 $489 $10,972 $9,656 $368 $21,485
Other comprehensive income:
Net income 950 950
Change in unrealized loss
on securities available for sale, net (219) (219)
Comprehensive income 731
---- ------ ------ ---- ------
Balance March 31, 1999 $489 $10,972 $10,606 $149 $22,216
Balance December 31, 1999 $497 $11,420 $10,473 $(952) $21,438
Other comprehensive income:
Net income 1,024 1,024
Change in unrealized loss
on securities available for sale, net (236) (236)
Comprehensive income 788
---- ------ ------ ------ ------
Balance March 31, 2000 $497 $11,420 $11,497 $(1,188) $22,226
</TABLE>
7
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NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited financial statements have been prepared by Pacific
Financial Corporation ("Pacific" or the "Company") in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2000, are not necessarily indicative of the results anticipated for
the year ending December 31, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
All dollar amounts in tables, except per share information, are stated in
thousands.
2. INVESTMENT SECURITIES
- ------------------------------
Investment securities consist principally of short and intermediate term debt
instruments issued by the U.S. Treasury, other U.S. government agencies, State
and local government units, and other corporations. The Company is a stockholder
in the Federal Home Loan Bank of Seattle (FHLB).
<TABLE>
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
(LOSSES)
March 31, 2000
State and Municipal Securities $ 1,553 -0- 1,553
----- ------ -----
TOTAL $ 1,553 -0- 1,553
SECURITIES AVAILABLE FOR SALE AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
(LOSSES)
March 31, 2000
U.S. Treasury Securities $ 504 (9) 495
U.S. Government Securities 31,944 (1,110) 30,834
State and Municipal Securities 12,293 (208) 12,085
Corporate Securities 15,365 (480) 14,885
Equity Securities 3,394 -0- 3,394
------ ------ ------
TOTAL $63,500 (1,807) 61,693
</TABLE>
8
<PAGE>
3. ALLOWANCE FOR CREDIT LOSSES
- ------------------------------------
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
Balances at beginning of period $1,930 $1,862
Provision for possible credit losses 53 0
Charge-offs 8 3
Recoveries 5 33
Net recoveries (charge-offs) (3) 30
-------- --------
Balances at end of period $1,980 $1,895
4. COMPUTATION OF BASIC EARNINGS PER SHARE:
- -------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
Net Income $1,024,000 $950,000
Shares Outstanding,
Beginning of Period 496,770 488,969
Shares Issued During Period Times
Average Time Outstanding -- --
Average Shares Outstanding 496,770 488,969
Basic Earnings Per Share $2.06 $1.94
9
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5. COMPUTATION OF DILUTED EARNINGS PER SHARE:
- ---------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
Net Income $1,024,000 $950,000
Options Outstanding 15,710 18,710
Proceeds Were Options Exercised $1,424,485 $1,229,500
Average Share Price During Period $137.00 $130.00
Proceeds Divided By Average Share Price 10,398 9,458
Incremental Shares 5,312 9,252
Average Shares Outstanding 496,770 488,969
Incremental Shares
Plus Outstanding Shares 502,082 498,221
Diluted Earnings Per Share $2.04 $1.91
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A WARNING ABOUT FORWARD-LOOKING INFORMATION
We have made forward-looking statements in this document that are
subject to risks and uncertainties. These statements are based on the beliefs
and assumptions of our management, and on information currently available to
them. Forward-looking statements include the information concerning our possible
or assumed future results of operations set forth under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and statements
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions.
Any forward-looking statements in this document are subject to risks
relating to, among other things, the following:
1. effective December 15, 1999, Harbor Bancorp, Inc. (now named
Pacific Financial Corporation) completed a merger of equals with
Pacific Financial Corporation; anticipated cost savings from the merger
may not be fully realized or realized within the expected time frame
(the transaction was treated as a pooling for accounting purposes, and
accordingly, all prior results of operations have been restated);
2. competitive pressures among depository and other financial
institutions may increase significantly;
3. changes in the interest rate environment may reduce margins;
4. general economic or business conditions, either nationally or
in the state or regions in which we do business, may be less favorable
than expected, resulting in, among other things, a deterioration in
credit quality or a reduced demand for credit;
5. legislative or regulatory changes may adversely affect the
businesses in which we are engaged; and
6. adverse changes may occur in the securities markets.
Our management believes the forward-looking statements are reasonable;
however, you should not place undue reliance on them. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. The future results and shareholder values of the combined
corporation following completion of the merger may differ materially from those
expressed or implied in these forward-looking statements. Many of the factors
that will determine these results and values are beyond our ability to control
or predict.
NET INCOME. For the three months ended March 31, 2000, Pacific's net income was
$1,024,000 compared to $950,000 for the same period in 1999. Major contributing
factors for the increase were an increase in net interest income and an increase
in non-interest income.
11
<PAGE>
NET INTEREST INCOME. Net interest income for the three months ended March 31,
2000 increased $209,000, or 7.7% compared to the same period in 1999. This is
due primarily to increased lending volume during the period. The average return
on loans was approximately 68 basis points higher for the period ended March 31,
2000 compared to the same period in 1999, while average deposit rates were
approximately 40 basis points higher for the same periods.
Interest income for the three months ended March 31, 2000, increased $430,000,
or 9.7%, compared to the comparable period in 1999. Securities balances and
average federal funds sold balances decreased during the three months ended
March 31, 2000, as the result of increased lending volume. Total loans
outstanding for the three months ended March 31, 2000 and March 31, 1999 were
$162,826,000 and $144,343,000, respectively, or 12.8% higher for the period in
2000.
Interest expense for the three months ended March 31, 2000 increased $221,000,
or 13%, compared to the same period in 1999. The deposit balances for the three
months ended March 31, 2000 and March 31, 1999 were $213,778,000 and
$213,299,000, respectively, while short term borrowings and federal funds
purchased for the periods were $8,164,000 and $6,128,000, respectively, an
increase of 33.2% over the 1999 period.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES. During the three months ended March
31, 2000, $53,000 was provided for possible credit losses, compared to no
provision for the same period in 1999. For the three months ended March 31,
2000, net charge-offs were $3,000, compared to net recoveries of $30,000 during
the same period in 1999.
At March 31, 2000, the allowance for credit losses stood at $1,980,000 compared
to $1,930,000 at December 31, 1999, and $1,895,000 at March 31, 1999. The ratio
of the allowance to total loans outstanding was 1.22%, 1.26% and 1.31%,
respectively, at March 31, 2000, December 31, 1999, and March 31, 1999.
Management considers the allowance for possible credit losses to be adequate for
the periods indicated.
NON-PERFORMING ASSETS AND FORECLOSED REAL ESTATE OWNED. Non-performing assets
totaled $1,296,000 at March 31, 2000. This represents .80% of total loans,
compared to $492,000 or .32% at December 31, 1999, and $224,000 or .16% at March
31, 1999. Accruing loans past due 90 days or more at March 31, 2000 include
government guaranteed loans totaling $864,000 which became non-performing during
the quarter ended March 31, 2000. Non-accrual loans at March 31, 2000 totaled
$292,000 of which $266,000 are secured by real estate. Management believes
losses associated with these loans will be minimal.
ANALYSIS OF NON-PERFORMING ASSETS
MARCH 31 DECEMBER 31 MARCH 31
(in thousands) 2000 1999 1999
Accruing loans past due 90 days or more $978 $140 $61
Non-accrual loans 292 175 2
Foreclosed real estate 26 177 161
-- --- ---
TOTAL $1,296 $492 $224
12
<PAGE>
NON-INTEREST INCOME AND EXPENSES. Non-interest income for the three months ended
March 31, 2000 increased $29,000 compared to the same period in 1999. Service
charges on deposit accounts decreased $4,000 compared to the same period in
1999. Mortgage loan origination fees decreased $14,000 compared to the three
months ended March 31, 1999 due to decreased loan refinancing activity. Gain on
sale of foreclosed real estate totaled $31,000 for the period ending March 31,
2000 compared to zero for the same period in 1999. Other operating income for
the three months ended March 31, 2000 increased $16,000 compared to the same
period in 1999. This was attributable primarily to increases in credit card and
ATM fees.
Non-interest expense for the three months ended March 31, 2000 increased $58,000
compared to the same period in 1999. For the three-month period in 2000,
salaries and benefits increased $47,000 while occupancy expense decreased
$14,000 and other expenses increased $25,000, compared to the same period in
1999. The increase in salaries and benefits was due to normal salary increases
for staff and an increase in the number of personnel.
INCOME TAXES. The federal income tax provision for the three months ended March
31, 2000 was $467,000, an increase of $53,000 compared to the same period in
1999. The effective tax rate for the 2000 period is 31.3% compared to 30.4% in
1999.
FINANCIAL CONDITION. Total assets were $246,112,000 at March 31, 2000, an
increase of $3,923,000, or 1.6%, over year-end 1999. Loans were $162,826,000 at
March 31, 2000, an increase of $10,162,000, or 6.7%, over year-end 1999. Total
deposits were $213,778,000 at March 31, 2000, an increase of $7,639,000, or
3.7%, compared to December 31, 1999.
LOANS. Loan detail by category as of March 31, 2000 and December 31, 1999
were as follows:
March 31, December 31,
2000 1999
Commercial and industrial $54,113 $53,560
Agricultural 2,045 2,101
Real estate mortgage 96,392 88,905
Real estate construction 5,317 3,325
Installment 3,253 3,222
Credit cards and other 1,706 1,551
----- -----
Total Loans 162,826 152,664
Allowance for credit losses (1,980) (1,930)
------- -------
Net Loans $160,846 $150,734
LIQUIDITY. Adequate liquidity is available to accommodate fluctuations in
deposit levels, fund operations, and provide for customer credit needs and meet
obligations and commitments on a timely basis. The Company has no brokered
deposits. It generally has been a net seller of federal funds. When necessary,
liquidity can be quickly increased by taking advances available from the Federal
Home Loan Bank of Seattle.
13
<PAGE>
SHAREHOLDERS' EQUITY. Total shareholders' equity was $22,226,000 at March 31,
2000, an increase of $788,000, or 3.7%, compared to December 31, 1999. Book
value per share increased to $44.74 at March 31, 2000 compared to $43.15 at
December 31, 1999. Book value is calculated by dividing total equity capital by
total shares outstanding.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate, credit, and operations risks are the most significant market
risks which affect the Company's performance. The Company relies on loan review,
prudent loan underwriting standards and an adequate allowance for possible
credit losses to mitigate credit risk.
An asset/liability management simulation model is used to measure interest rate
risk. The model produces regulatory oriented measurements of interest rate risk
exposure. The model quantifies interest rate risk through simulating forecasted
net interest income over a 12 month time period under various interest rate
scenarios, as well as monitoring the change in the present value of equity under
the same rate scenarios. The present value of equity is defined as the
difference between the market value of assets less current liabilities. By
measuring the change in the present value of equity under various rate
scenarios, management is able to identify interest rate risk that may not be
evident in changes in forecasted net interest income.
The Company is currently asset sensitive, meaning that interest earning assets
mature or reprice more quickly than interest-bearing liabilities in a given
period. Therefore, a significant increase in market rates of interest could
improve net interest income. Conversely, a decreasing rate environment may
adversely affect net interest income.
It should be noted that the simulation model does not take into account future
management actions that could be undertaken should actual market rates change
during the year. An important point should be kept in mind; the model simulation
results are not exact measures of the Company's actual interest rate risk. They
are rather only indicators of rate risk exposure, based on assumptions produced
in a simplified modeling environment designed to heighten sensitivity to changes
in interest rates. The rate risk exposure results of the simulation model
typically are greater than the Company's actual rate risk. That is due to the
conservative modeling environment, which generally depicts a worst-case
situation. Management has assessed the results of the simulation reports as of
March 31, 2000, and believes that there has been no material change since
December 31, 1999.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pacific Financial Corporation held its Annual Meeting of Stockholders
on April 17, 2000, at which the stockholders of the Company voted on and
approved the following:
1. The election of three Class A directors of Pacific Financial
Corporation for terms expiring at the Annual Meeting of
Stockholders in 2003.
2. Approval of 2000 Stock Incentive Compensation Plan.
14
<PAGE>
The voting with respect to each of these matters was as follows:
1. Election of Directors
NAME FOR WITHHOLD
Dennis A. Long 371,644 85
Joseph A. Malik 370,428 1,301
Robert J. Worrell 370,428 1,301
2. Approval of 2000 Stock Incentive Compensation Plan
FOR AGAINST ABSTAIN
350,632 14,132 6,965
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
-------
Exhibit No.
-----------
10.1 2000 Stock Incentive Compensation Plan.
10.2 Bonus Program for Officers.
27 Financial Data Schedule for the three-month period
ended March 31, 2000.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
2000.
15
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC FINANCIAL CORPORATION
DATED: May 12, 2000 By: /s/ Dennis A. Long
-------------------
Dennis A. Long
President
By: /s/ John Van Dijk
-------------------
John Van Dijk, Treasurer
(Principal Financial and
Accounting Officer)
16
PACIFIC FINANCIAL CORPORATION
2000 STOCK INCENTIVE COMPENSATION PLAN
1. PURPOSES
1.1 The purpose of the Pacific Financial Corporation 2000 Stock
Incentive Compensation Plan (the "Plan") is to enhance the long-term shareholder
value of Pacific Financial Corporation, a Washington corporation (the
"Company"), by offering opportunities to employees, persons to whom offers of
employment have been extended, directors, officers, consultants, agents,
advisors and independent contractors of the Company and its Subsidiaries (as
defined in Section 2) to participate in the Company's growth and success, and to
encourage them to remain in the service of the Company and its Subsidiaries and
to acquire and maintain stock ownership in the Company.
2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set
forth below:
2.1 Acquired Entities.
-----------------
"Acquired Entities" has the meaning given in Section 6.2.
2.2 Acquisition Transaction.
-----------------------
"Acquisition Transaction" has the meaning given in Section 6.2.
2.3 Award.
-----
"Award" means a grant made to a Participant pursuant to the Plan,
including, without limitation, grants of Options, Stock Appreciation Rights,
Stock Awards, Other Stock-Based Awards or any combination of the foregoing.
2.4 Board.
-----
"Board" means the Board of Directors of the Company.
2.5 Cause.
-----
"Cause" means dishonesty, fraud, misconduct, disclosure of confidential
information, conviction of, or a plea of guilty or no contest to, a felony under
the laws of the United States or any state thereof, habitual absence from work
for reasons other than illness, intentional conduct which causes significant
injury to the Company, habitual abuse of alcohol or a controlled substance, in
each case as determined by the Plan Administrator, and its determination shall
be conclusive and binding.
<PAGE>
2.6 Change in Control.
-----------------
"Change in Control" means (i) the consummation of a merger or
consolidation of the Company with or into another entity or any other corporate
reorganization, if more than 50% of the combined voting power of the continuing
or surviving entity's securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not
shareholders of the Company immediately prior to such merger, consolidation or
other reorganization or (ii) the sale, transfer or other disposition of all or
substantially all of the Company's assets. A transaction shall not constitute a
Change in Control if its sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Company's securities
immediately before such transaction.
2.7 Code.
----
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.8 Common Stock.
------------
"Common Stock" means the common stock, par value $1.00 per share, of
the Company.
2.9 Disability.
----------
"Disability" means a medically determinable mental or physical
impairment or condition of the Holder which is expected to result in death or
which has lasted or is expected to last for a continuous period of twelve (12)
months or more and which causes the Holder to be unable, in the opinion of the
Plan Administrator on the basis of evidence acceptable to it, to perform his or
her duties for the Company and, in the case of a determination of Disability for
purposes of determining the exercise period for an Incentive Stock Option, to be
engaged in any substantial gainful activity. Upon making a determination of
Disability, the Plan Administrator shall, for purposes of the Plan, determine
the date of the Holder's termination of employment, service or contractual
relationship.
2.10 Exchange Act.
------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.11 Fair Market Value.
-----------------
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the closing sales price for the Common Stock as reported by the Nasdaq
National Market for a single trading day or (b) if the Common Stock is listed on
the New York Stock Exchange or the American Stock Exchange, the closing sales
price for the Common Stock as such price is officially quoted in the composite
tape of transactions on such exchange for a single trading day. If there is no
such reported price for the Common Stock for the date in question, then such
price on the last preceding date for which such price exists shall be
determinative of Fair Market Value.
2
<PAGE>
2.12 Grant Date.
----------
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Award is to be granted.
2.13 Holder.
------
"Holder" means the Participant to whom an Award is granted or the
personal representative of a Holder who has died.
2.14 Incentive Stock Option.
----------------------
"Incentive Stock Option" means an Option to purchase Common Stock
granted under Section 7 with the intention that it qualify as an "incentive
stock option" as that term is defined in Section 422 of the Code.
2.15 Involuntary Termination.
-----------------------
"Involuntary Termination" means termination of the Holder's service to
the Company (or the parent or subsidiary company employing such Holder) or the
other party to the transaction constituting a Change in Control by reason of (i)
the involuntary discharge of such Holder by the Company (or the parent or
subsidiary company employing such Holder) or the other party to the transaction
constituting a Change in Control for reasons other than Cause or (ii) the
voluntary resignation of the Holder following (A) a change in such Holder's
position with the Company (or its successor or the parent or subsidiary company
that employs such Holder) or the other party to the transaction constituting a
Change in Control that materially reduces such Holder's level of authority or
responsibility or (B) a reduction in such Holder's compensation (including base
salary, fringe benefits and participation in bonus or incentive programs based
on corporate performance) by more than 20%.
2.16 Nonqualified Stock Option.
-------------------------
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
2.17 Option.
------
"Option" means the right to purchase Common Stock granted under Section
7.
2.18 Option Shares.
-------------
"Option Shares" means the shares of Common Stock issuable upon a
Holder's exercise of an Option granted under the Plan.
2.19 Other Stock-Based Award.
-----------------------
"Other Stock-Based Award" means an Award granted under Section 11.
3
<PAGE>
2.20 Participant.
-----------
"Participant" means an individual who is a Holder of an Award or, as
the context may require, any employee, director (including directors who are not
employees), officer, consultant, agent, advisor or independent contractor of the
Company or a Subsidiary who has been designated by the Plan Administrator as
eligible to participate in the Plan.
2.21 Plan Administrator.
------------------
"Plan Administrator" means the Board or any committee designated to
administer the Plan under Section 3.1.
2.22 Qualifying Retirement.
---------------------
"Qualifying Retirement" means retirement from service to the Company or
a Subsidiary by a Participant who is both (i) at least sixty (60) years of age
and (ii) an employee or officer of the Company or a Subsidiary.
2.23 Restricted Stock.
----------------
"Restricted Stock" means shares of Common Stock granted pursuant to a
Stock Award under Section 10, the rights of ownership of which are subject to
restrictions prescribed by the Plan Administrator.
2.24 Securities Act.
--------------
"Securities Act" means the Securities Act of 1933, as amended.
2.25 Stock Appreciation Right.
------------------------
"Stock Appreciation Right" means an Award granted under Section 9.
2.26 Stock Award.
-----------
"Stock Award" means an Award granted under Section 10.
2.27 Subsidiary.
----------
"Subsidiary," except as expressly provided otherwise, means any entity
that is directly or indirectly controlled by the Company or in which the Company
has a significant ownership interest, as determined by the Plan Administrator,
and any entity that may become a direct or indirect parent of the Company.
4
<PAGE>
3. ADMINISTRATION
3.1 Plan Administrator.
------------------
The Plan shall be administered by the Board or a committee or
committees (which term includes subcommittees) appointed by, and consisting of
two or more members of, the Board. Any such committee shall have the powers and
authority vested in the Board hereunder (including the power and authority to
interpret any provision of the Plan or of any Award). The Board, or any
committee thereof appointed to administer the Plan, is referred to herein as the
"Plan Administrator." If and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, the Board shall consider in
selecting the Plan Administrator and the membership of any committee acting as
Plan Administrator for any persons subject or likely to become subject to
Section 16 under the Exchange Act the provisions regarding (a) "outside
directors" as contemplated by Section 162(m) of the Code and (b) "Non-Employee
Directors" as contemplated by Rule 16b-3 under the Exchange Act. The Board or
Plan Administrator may delegate the responsibility for administering the Plan
with respect to designated classes of eligible Participants to one or more
senior executive officers or committees thereof, the members of which need not
be members of the Board, subject to such limitations as the Board deems
appropriate. Committee members shall serve for such term as the Board may
determine, subject to removal by the Board at any time.
3.2 Administration and Interpretation by the Plan Administrator.
-----------------------------------------------------------
Except for the terms, conditions and limitations explicitly set forth
in the Plan, the Plan Administrator shall have exclusive authority, in its
absolute discretion, to determine all matters relating to Awards under the Plan,
including the selection of individuals to be granted Awards, the type of Awards,
the number of shares of Common Stock subject to an Award, all terms, conditions,
restrictions and limitations, if any, of an Award and the terms of any
instrument that evidences the Award. The Plan Administrator shall also have
exclusive authority to interpret the Plan and may from time to time adopt,
change and rescind rules and regulations of general application for the Plan's
administration. This authority shall include the sole authority to correct any
defect, supply any omission or reconcile any inconsistency in this Plan and make
all other determinations necessary or advisable for the administration of the
Plan and do everything necessary or appropriate to administer the Plan. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
5
<PAGE>
4. STOCK SUBJECT TO THE PLAN
4.1 Authorized Number of Shares.
---------------------------
Subject to adjustment from time to time as provided in Section 13.1, a
maximum of 100,000 shares of Common Stock shall be available for issuance under
the Plan. Shares issued under the Plan shall be drawn from authorized and
unissued shares.
4.2 Limitations.
-----------
(a) Subject to adjustment from time to time as provided in Section
13.1, not more than 15,000 shares of Common Stock may be made subject to Awards
under the Plan to any individual Participant in the aggregate in any one (1)
calendar year, except that the Company may make additional one-time grants to
newly hired Participants of up to 5,000 shares per such Participant; such
limitation shall be applied in a manner consistent with the requirements of, and
only to the extent required for compliance with, the exclusion from the
limitation on deductibility of compensation under Section 162(m) of the Code.
(b) Subject to adjustment from time to time as provided in Section
13.1, not more than 1,000 shares of Common Stock may be made subject to Awards
to any non-employee director in the aggregate in any one calendar year.
4.3 Reuse of Shares.
---------------
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares) shall again be
available for issuance in connection with future grants of Awards under the
Plan; provided, however, that any such shares shall be counted in accordance
with the requirements of Section 162(m) of the Code if and to the extent
applicable. Shares that are subject to tandem Awards shall be counted only once.
Also, upon a stock-for-stock exercise only the net number of shares will be
deemed to have been used under this Plan.
5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
key employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
6
<PAGE>
6. AWARDS
6.1 Form and Grant of Awards.
------------------------
The Plan Administrator shall have the authority, in its sole
discretion, to determine the type or types of Awards to be made under the Plan.
Such Awards may include, but are not limited to, Incentive Stock Options,
Nonqualified Stock Options, Stock Appreciation Rights, Stock Awards and Other
Stock-Based Awards. Awards may be granted singly, in combination or in tandem so
that the settlement or payment of one automatically reduces or cancels the
other. Awards may also be made in combination or in tandem with, in replacement
of, as alternatives to, or as the payment form for, grants or rights under any
other employee or compensation plan of the Company.
6.2 Acquired Company Awards.
-----------------------
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old Award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (an
"Acquisition Transaction"). If a written agreement pursuant to which an
Acquisition Transaction is completed is approved by the Board and said agreement
sets forth the terms and conditions of the substitution for or assumption of
outstanding awards of the Acquired Entity, said terms and conditions shall be
deemed to be the action of the Plan Administrator without any further action by
the Plan Administrator, except as may be required for compliance with Rule 16b-3
under the Exchange Act, and the persons holding such Awards shall be deemed to
be Participants and Holders.
7. AWARDS OF OPTIONS
7.1 Grant of Options.
----------------
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 Option Exercise Price.
---------------------
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options.
7.3 Term of Options.
---------------
The term of each Option shall be as established by the Plan
Administrator or, if not so established, shall be ten (10) years from the Grant
Date.
7
<PAGE>
7.4 Exercise of Options.
-------------------
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall become exercisable, which provisions may be waived or modified by
the Plan Administrator at any time. If not so established in the instrument
evidencing the Option or otherwise set at the time of grant, the Option will be
subject to the following: (a) (i) 20% of the Option shall vest and become
exercisable one year after the Grant Date and (ii) an additional 20% of the
Option shall vest and become exercisable each successive year thereafter, so
that 100% of the Option shall be fully vested and exercisable on and after the
date which is five (5) years after the Grant Date; (b) in no event shall any
additional Option Shares vest after termination of Holder's employment by or
service to the Company; and (c) the Plan Administrator may waive or modify the
foregoing schedule at any time.
To the extent that the right to purchase shares has accrued thereunder,
an Option may be exercised from time to time by written notice to the Company,
in accordance with procedures established by the Plan Administrator, setting
forth the number of shares with respect to which the Option is being exercised
and accompanied by payment in full as described in Section 7.5. This Option may
only be exercised to purchase that number of Shares having an aggregate Fair
Market Value on the date of exercise greater than or equal to $2,500 (or the
lesser number of remaining shares covered by this Option).
7.5 Payment of Exercise Price.
-------------------------
The exercise price for shares purchased under an Option shall be paid
in full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or check (unless, at the time of exercise, the Plan
Administrator determines not to accept a personal check), except that the Plan
Administrator, in its sole discretion, may, either at the time the Option is
granted or at any time before it is exercised and subject to such limitations as
the Plan Administrator may determine, authorize payment in cash and/or one or
more of the following alternative forms: (a) tendering (either actually or, if
and so long as the Common Stock is registered under Section 12(b) or 12(g) of
the Exchange Act, by attestation) Common Stock already owned by the Holder for
at least six months (or any shorter period necessary to avoid a charge to the
Company's earnings for financial reporting purposes) having a Fair Market Value
on the day prior to the exercise date equal to the aggregate Option exercise
price; (b) if and so long as the Common Stock is registered under Section 12(b)
or 12(g) of the Exchange Act, delivery of a properly executed exercise notice,
together with irrevocable instructions, to (i) a third party designated by the
Company to deliver promptly to the Company the aggregate amount of sale proceeds
to pay the Option exercise price and any withholding tax obligations that may
arise in connection with the exercise and (ii) the Company to deliver the
certificates for such purchased shares directly to such third party, all in
accordance with the regulations of the Federal Reserve Board; or (c) such other
consideration as the Plan Administrator may permit.
8
<PAGE>
7.6 Post-Termination Exercises.
--------------------------
The Plan Administrator may establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Plan Administrator at any time.
If not so established in the instrument evidencing the Option, the
Option will be exercisable according to the following terms and conditions,
which may be waived or modified by the Plan Administrator at any time.
In case of termination of the Holder's employment or services other
than by reason of death or Cause, the Option shall be exercisable, to the extent
of the number of shares purchasable by the Holder at the date of such
termination, only (a) within one (1) year if the termination of the Holder's
employment or services are coincident with Disability or, in the case of
Nonqualified Stock Options, a Qualifying Retirement, or (b) within three (3)
months after the date the Holder ceases to be an employee, director, officer,
consultant, agent, advisor or independent contractor of the Company or a
Subsidiary if termination of the Holder's employment or services is for any
reason other than death or Disability, but in no event later than the remaining
term of the Option. Any Option exercisable at the time of the Holder's death may
be exercised, to the extent of the number of shares purchasable by the Holder at
the date of the Holder's death, by the personal representative of the Holder's
estate entitled thereto at any time or from time to time within one (1) year
after the date of death, but in no event later than the remaining term of the
Option. In case of termination of the Holder's employment or services for Cause,
the Option shall automatically terminate upon first discovery by the Company of
any reason for such termination and the Holder shall have no right to purchase
any Shares pursuant to such Option, unless the Plan Administrator determines
otherwise. If a Holder's employment or services with the Company are suspended
pending an investigation of whether the Holder shall be terminated for Cause,
all the Holder's rights under any Option likewise shall be suspended during the
period of investigation.
A transfer of employment or services between or among the Company and
its Subsidiaries shall not be considered a termination of employment or
services. The effect of a Company-approved leave of absence or short-term break
in service on the terms and conditions of an Option shall be determined by the
Plan Administrator, in its sole discretion.
9
<PAGE>
8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock
Options shall be subject to the following additional terms and conditions:
8.1 Dollar Limitation.
-----------------
To the extent the aggregate Fair Market Value (determined as of the
Grant Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the Participant holds two (2) or more such Options that become exercisable for
the first time in the same calendar year, such limitation shall be applied on
the basis of the order in which such Options were granted.
8.2 10% Shareholders.
----------------
If a Participant owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five (5)
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 Eligible Employees.
------------------
Individuals who are not employees of the Company or one of its
subsidiary corporations may not be granted Incentive Stock Options. For purposes
of this Section 8.3, "subsidiary corporation" shall have the meanings attributed
to those terms for purposes of Section 422 of the Code.
8.4 Term.
----
The term of an Incentive Stock Option shall not exceed ten (10) years.
8.5 Exercisability.
--------------
To qualify for Incentive Stock Option tax treatment, an Option
designated as an Incentive Stock Option must be exercised within three (3)
months after termination of employment for reasons other than death, except
that, in the case of termination of employment due to total Disability, such
Option must be exercised within one (1) year after such termination. Employment
shall not be deemed to continue beyond the first 90 days of a leave of absence
unless the Participant's reemployment rights are guaranteed by statute or
contract.
10
<PAGE>
8.6 Taxation of Incentive Stock Options.
-----------------------------------
In order to obtain certain tax benefits afforded to Incentive Stock
Options under Section 422 of the Code, the Participant must hold the shares
issued upon the exercise of an Incentive Stock Option for two (2) years after
the Grant Date of the Incentive Stock Option and one (1) year from the date the
shares are transferred to the Participant. A Participant may be subject to the
alternative minimum tax at the time of exercise of an Incentive Stock Option.
The Participant shall give the Company prompt notice of any disposition of
shares acquired by the exercise of an Incentive Stock Option prior to the
expiration of such holding periods.
8.7 Incorporation of Other Provisions.
---------------------------------
With respect to Incentive Stock Options, if this Plan does not contain
any provision required to be included herein under Section 422 of the Code, such
provision shall be deemed to be incorporated herein with the same force and
effect as if such provision had been set out in full herein; provided, however,
that to the extent any Option that is intended to qualify as an Incentive Stock
Option cannot so qualify, the Option, to that extent, shall be deemed to be a
Nonqualified Stock Option for all purposes of this Plan.
9. STOCK APPRECIATION RIGHTS
9.1 Grant of Stock Appreciation Rights.
----------------------------------
The Plan Administrator may grant a Stock Appreciation Right separately
or in tandem with a related Option.
9.2 Tandem Stock Appreciation Rights.
--------------------------------
A Stock Appreciation Right granted in tandem with a related Option will
give the Holder the right to surrender to the Company all or a portion of the
related Option and to receive an appreciation distribution (in shares of Common
Stock or cash or any combination of shares and cash, as the Plan Administrator,
in its sole discretion, shall determine at any time) in an amount equal to the
excess of the Fair Market Value for the date the Stock Appreciation Right is
exercised over the exercise price per share of the right, which shall be the
same as the exercise price of the related Option. A tandem Stock Appreciation
Right will have the same other terms and provisions as the related Option. Upon
and to the extent a tandem Stock Appreciation Right is exercised, the related
Option will terminate.
9.3 Stand-Alone Stock Appreciation Rights.
-------------------------------------
A Stock Appreciation Right granted separately and not in tandem with an
Option will give the Holder the right to receive an appreciation distribution in
an amount equal to the excess of the Fair Market Value for the date the Stock
Appreciation Right is exercised over the exercise price per share of the right.
A stand-alone Stock Appreciation Right will have such terms as the Plan
Administrator may determine, except that the term of the right, if not otherwise
established by the Plan Administrator, shall be ten (10) years from the Grant
Date.
11
<PAGE>
9.4 Exercise of Stock Appreciation Rights.
-------------------------------------
Unless otherwise provided by the Plan Administrator in the instrument
that evidences the Stock Appreciation Right, the provisions of Section 7.6
relating to the termination of a Holder's employment or services shall apply
equally, to the extent applicable, to the Holder of a Stock Appreciation Right.
10. STOCK AWARDS
10.1 Grant of Stock Awards.
---------------------
The Plan Administrator is authorized to make Awards of Common Stock or
of rights to receive shares of Common Stock to Participants on such terms and
conditions and subject to such restrictions, if any (which may be based on
continuous service with the Company or the achievement of performance goals
related to (i) sales, gross margin, operating profits or profits, (ii) growth in
sales, gross margin, operating profits or profits, (iii) return ratios related
to sales, gross margin, operating profits or profits, (iv) cash flow, (v) asset
management (including inventory management), or (vi) total shareholder return,
where such goals may be stated in absolute terms or relative to comparison
companies), as the Plan Administrator shall determine, in its sole discretion,
which terms, conditions and restrictions shall be set forth in the instrument
evidencing the Award. The terms, conditions and restrictions that the Plan
Administrator shall have the power to determine shall include, without
limitation, the manner in which shares subject to Stock Awards are held during
the periods they are subject to restrictions and the circumstances under which
forfeiture of Restricted Stock shall occur by reason of termination of the
Holder's services or upon the occurrence of other events.
10.2 Issuance of Shares.
------------------
Upon the satisfaction of any terms, conditions and restrictions
prescribed with respect to a Stock Award, or upon the Holder's release from any
terms, conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall transfer, as soon as practicable, to the Holder
or, in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, the appropriate number of
shares of Common Stock covered by the Award.
10.3 Waiver of Restrictions.
----------------------
Notwithstanding any other provisions of the Plan, the Plan
Administrator may, in its sole discretion, waive the forfeiture period and any
other terms, conditions or restrictions on any Restricted Stock under such
circumstances and subject to such terms and conditions as the Plan Administrator
shall deem appropriate.
12
<PAGE>
11. OTHER STOCK-BASED AWARDS
The Plan Administrator may grant other Awards under the Plan pursuant
to which shares of Common Stock (which may, but need not, be shares of
Restricted Stock pursuant to Section 10) are or may in the future be acquired,
or Awards denominated in stock units, including ones valued using measures other
than market value. Such Other Stock-Based Awards may be granted alone or in
addition to or in tandem with any Award of any type granted under the Plan and
must be consistent with the Plan's purpose.
12. ASSIGNABILITY
Except as otherwise specified or approved by the Plan Administrator at
the time of grant of an Award or any time prior to its exercise, no Award
granted under the Plan may be assigned, pledged or transferred by the Holder
other than by will or by the laws of descent and distribution, and during the
Holder's lifetime, such Awards may be exercised only by the Holder.
Notwithstanding the foregoing, and to the extent permitted by Section 422 of the
Code, the Plan Administrator, in its sole discretion, may permit such
assignment, transfer and exercisability and may permit a Holder of such Awards
to designate a beneficiary who may exercise the Award or receive compensation
under the Award after the Holder's death; provided, however, that (i) any Award
so assigned or transferred shall be subject to all the same terms and conditions
contained in the instrument evidencing the Award, (ii) the original Holder shall
remain subject to withholding taxes upon exercise, (iii) any subsequent transfer
of an Award shall be prohibited and (iv) the events of termination of employment
or contractual relationship set forth in subsection 7.6 shall continue to apply
with respect to the original transferor-Holder.
13. ADJUSTMENTS
13.1 Adjustment of Shares.
--------------------
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock of the Company, then the Plan
Administrator, in its sole discretion, shall make such equitable adjustments as
it shall deem appropriate in the circumstances in (i) the maximum number and
class of securities subject to the Plan as set forth in Section 4.1, (ii) the
maximum number and class of securities that may be made subject to Awards to any
individual Participant as set forth in Section 4.2, and (iii) the number and
class of securities that are subject to any outstanding Award and the per share
price of such securities, without any change in the aggregate price to be paid
therefor. The determination by the Plan Administrator as to the terms of any of
the foregoing adjustments shall be conclusive and binding.
13
<PAGE>
13.2 Dissolution, Liquidation or Change in Control Transactions.
----------------------------------------------------------
(a) In the event of the proposed dissolution or liquidation of
the Company, the Company shall notify each Holder at least fifteen (15) days
prior to such proposed action. To the extent not previously exercised, all
Awards will terminate immediately prior to the consummation of such proposed
action.
(b) If, in connection with a Change in Control, an Option does
not remain outstanding and either such Option is not assumed by the surviving
entity or its parent, or the surviving entity or its parent does not substitute
options with substantially the same terms for such Option, such Option shall,
unless the applicable agreement representing an Option provides otherwise, or
unless the Plan Administrator determines otherwise in its sole and absolute
discretion, become exercisable in full, whether or not the vesting requirements
set forth in the Option Agreement have been satisfied, for a period prior to the
effective date of such Change in Control of a duration specified by the Plan
Administrator, and thereafter the Option shall terminate.
(c) Unless the applicable agreement representing an Award
provides otherwise, or unless the Plan Administrator determines otherwise in its
sole and absolute discretion in connection with any Change in Control, the
vesting of Shares shall be accelerated in connection with a Change in Control
which becomes effective before such Holder's service to the Company terminates
as follows:
(i) If Options were outstanding at the effective time of the
Change in Control and they are accelerated in full pursuant to Subsection (b)
above or otherwise, the vesting of all Shares shall be accelerated in full
whether or not the vesting requirements set forth in the applicable Award
agreement have been satisfied.
(d) Notwithstanding Subsections (b) and (c) above, if the Company
and the other party to the transaction constituting a Change in Control agree
that such transaction is to be treated as a "pooling of interests" for financial
reporting purposes, and if the Company's independent public accountants and such
other party's independent public accountants separately determine in good faith
that the transaction constituting a Change in Control would qualify for
treatment as a "pooling of interests" but for the acceleration of vesting
provided for in Subsections (b) and (c) above, then the acceleration of
exercisability shall not occur to the extent that the Company's independent
public accountants and such other party's independent public accountants
separately determine in good faith that such acceleration would preclude the use
of "pooling of interests" accounting for such transaction.
14
<PAGE>
13.3 Further Adjustment of Awards.
----------------------------
Subject to the preceding Section 13.2, the Plan Administrator shall
have the discretion, exercisable at any time before a sale, merger,
consolidation, reorganization, dissolution, liquidation or Change in Control of
the Company, as defined by the Plan Administrator, to take such further action
as it determines to be necessary or advisable, and fair and equitable to
Participants, with respect to Awards. Such authorized action may include (but
shall not be limited to) establishing, amending or waiving the type, terms,
conditions or duration of, or restrictions on, Awards so as to provide for
earlier, later, extended or additional time for exercise, payment or settlement
or lifting restrictions, differing methods for calculating payments or
settlements, alternate forms and amounts of payments and settlements and other
modifications, and the Plan Administrator may take such actions with respect to
all Participants, to certain categories of Participants or only to individual
Participants. The Plan Administrator may take such actions before or after
granting Awards to which the action relates and before or after any public
announcement with respect to such sale, merger, consolidation, reorganization,
dissolution, liquidation or Change in Control that is the reason for such
action. Without limiting the generality of the foregoing, if the Company is a
party to a merger or consolidation, outstanding Awards shall be subject to the
agreement of merger or consolidation. Such agreement, without the Holder's
consent, may provide for:
(a) the continuation of such outstanding Award by the Company (if
the Company is the surviving corporation);
(b) the assumption of the Plan and some or all outstanding Awards
by the surviving corporation or its parent;
(c) the substitution by the surviving corporation or its parent
of Awards with substantially the same terms for such outstanding Awards; or
(d) the cancellation of such outstanding Awards with or without
payment of any consideration.
13.4 Limitations.
-----------
The grant of Awards will in no way affect the Company's right to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
13.5 Fractional Shares.
-----------------
In the event of any adjustment in the number of shares covered by any
Option, any fractional shares resulting from such adjustment shall be
disregarded and each such Option shall cover only the number of full shares
resulting from such adjustment.
15
<PAGE>
14. WITHHOLDING
The Company may require the Holder to pay to the Company in cash the
amount of any withholding taxes that the Company is required to withhold with
respect to the grant, exercise, payment or settlement of any Award. The Company
shall have the right to withhold from any Award or any shares of Common Stock
issuable pursuant to an Award or from any cash amounts otherwise due or to
become due from the Company to the Participant an amount equal to such taxes.
The Company may also deduct from any Award any other amounts due from the
Participant to the Company or a Subsidiary.
15. AMENDMENT AND TERMINATION OF PLAN
15.1 Amendment of Plan.
-----------------
The Plan may be amended by the Board in such respects as it shall deem
advisable including, without limitation, such modifications or amendments as are
necessary to maintain compliance with applicable statutes, rules or regulations;
however, to the extent required for compliance with Section 422 of the Code or
any applicable law or regulation, shareholder approval will be required for any
amendment that will increase the aggregate number of shares as to which
Incentive Stock Options may be granted or change the class of persons eligible
to participate. Amendments made to the Plan which would constitute
"modifications" to Incentive Stock Options outstanding on the date of such
Amendments shall not be applicable to such outstanding Incentive Stock Options
but shall have prospective effect only. The Board may condition the
effectiveness of any amendment on the receipt of shareholder approval at such
time and in such manner as the Board may consider necessary for the Company to
comply with or to avail the Company, the Holders or both of the benefits of any
securities, tax, market listing or other administrative or regulatory
requirement which the Board determines to be desirable. Whenever shareholder
approval is sought, and unless required otherwise by applicable law or exchange
requirements, the proposed action shall require the affirmative vote of holders
of a majority of the shares present, entitled to vote and voting on the matter
without including abstentions or broker non-votes in the denominator.
15.2 Termination Of Plan.
-------------------
The Company's shareholders or the Board may suspend or terminate the
Plan at any time. The Plan will have no fixed expiration date; provided,
however, that no Incentive Stock Options may be granted more than ten (10) years
after the earlier of the Plan's adoption by the Board or approval by the
shareholders.
16
<PAGE>
16. GENERAL
16.1 Award Agreements.
----------------
Awards granted under the Plan shall be evidenced by a written agreement
which shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and which are not inconsistent with the
Plan.
16.2 Continued Employment or Services; Rights In Awards.
--------------------------------------------------
None of the Plan, participation in the Plan as a Participant or any
action of the Plan Administrator taken under the Plan shall be construed as
giving any Participant or employee of the Company any right to be retained in
the employ of the Company or limit the Company's right to terminate the
employment or services of the Participant.
16.3 Registration; Certificates For Shares.
-------------------------------------
The Company shall be under no obligation to any Participant to register
for offering or resale or to qualify for exemption under the Securities Act, or
to register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
16.4 No Rights As A Shareholder.
--------------------------
No Option, Stock Appreciation Right or Other Stock-Based Award shall
entitle the Holder to any cash dividend, voting or other right of a shareholder
unless and until the date of issuance under the Plan of the shares that are the
subject of such Award, free of all applicable restrictions.
16.5 Compliance With Laws And Regulations.
------------------------------------
17
<PAGE>
In interpreting and applying the provisions of the Plan, any Option
granted as an Incentive Stock Option pursuant to the Plan shall, to the extent
permitted by law, be construed as an "incentive stock option" within the meaning
of Section 422 of the Code.
16.6 No Trust Or Fund.
----------------
The Plan is intended to constitute an "unfunded" plan. Nothing
contained herein shall require the Company to segregate any monies or other
property, or shares of Common Stock, or to create any trusts, or to make any
special deposits for any immediate or deferred amounts payable to any
Participant, and no Participant shall have any rights that are greater than
those of a general unsecured creditor of the Company.
16.7 Section 83(b) Election.
----------------------
Any Holder may, in his or her sole discretion, choose to make an
election under Section 83(b) of the Code in connection with an Option granted to
such Holder pursuant to Section 7 of the Plan.
16.8 Severability.
------------
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
17. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the
Board, so long as it is approved by the Company's shareholders at any time
within twelve (12) months of such adoption.
Original Plan adopted by the Board on February 22, 2000 and approved by
the Company's shareholders on April 17, 2000.
18
<PAGE>
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
Date of Date of
Adoption/ Shareholder
Amendment/ Approval
Adjustment Section Effect of Amendment (if applicable)
---------- ------- ------------------- --------------
Adoption by Board on -- -- April 17, 2000
February 22, 2000
Pacific Financial Corporation's officers participate in a cash incentive
compensation plan that provides for year-end bonuses calculated under a formula
based on the corporation's equity as of the beginning of the year. No bonuses
are paid unless the corporation's pre-tax return on equity for the year, before
taking into account income taxes, accrual for incentive payments, extraordinary
revenues or expenses not directly associated with normal bank operations, and
certain other items, exceeds the percentage amount calculated by dividing 16
percent by 1 minus the corporation's effective tax rate. If the pre-tax return
on equity threshold is reached, the corporation contributes to the bonus pool a
dollar amount equal to 5 percent of earnings yielding a 15 percent return on
equity, 10 percent of any amount above 15 percent up to a 20 percent return on
equity, and 15 percent of the amount attributable to a return on equity above 20
percent. The bonus pool is paid out to the officers based on their levels of
responsibility.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Pacific Financial Corporation's March 31, 2000, Form 10-Q and is
qualified in its entirety by reference to such financial statements and
related data.
</LEGEND>
<CIK> 0001093728
<NAME> Pacific Financial Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<CASH> 10,740
<INT-BEARING-DEPOSITS> 1,776
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<DEPOSITS> 213,778
<SHORT-TERM> 8,164
<LIABILITIES-OTHER> 1,944
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0
0
<COMMON> 497
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<TOTAL-LIABILITIES-AND-EQUITY> 246,112
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<NET-INCOME> 1,024
<EPS-BASIC> 2.06
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</TABLE>
