<PAGE>
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
FIRST MUTUAL BANCSHARES, INC.
-------------------------------------------------------------
(Name of Registrant as specified in its Charter)
FIRST MUTUAL BANCSHARES, INC.
-------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(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:
-----------------------------------------------------------------------
(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:
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(4) Date Filed:
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<PAGE>
[FIRST MUTUAL BANCSHARES INC. LOGO]
March 20, 2000
Dear Shareholder:
It is our pleasure to invite you to attend the Annual Meeting of
Shareholders of First Mutual Bancshares, Inc. (the "Company") to be held at the
Hyatt Regency Bellevue, Bellevue, Washington, on April 27, 2000 at 3:00 p.m.
local time.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. During the meeting we will also
report on the operations of the Company. Directors and officers of the Company,
as well as a representative of Deloitte & Touche, will be present to respond to
any questions our shareholders may have.
Please sign, date and return the enclosed proxy card. If you attend the
meeting, you may vote in person even if you have previously mailed a proxy card.
Your continued interest in and support of the Company are sincerely
appreciated.
Sincerely,
John R. Valaas
President and Chief Executive Officer
- --------------------------------------------------------------------------------
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE YOUR COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
- --------------------------------------------------------------------------------
<PAGE>
FIRST MUTUAL BANCSHARES, INC.
400 - 108TH AVENUE N.E.
BELLEVUE, WASHINGTON 98004
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 27, 2000
Notice is hereby given that the 2000 Annual Meeting of Shareholders (the
"Meeting") of First Mutual Bancshares, Inc. (the "Company") will be held at the
Hyatt Regency Bellevue, 900 Bellevue Way N.E., Bellevue, Washington, on
April 27, 2000 at 3:00 p.m. local time.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of ten directors of the Company;
2. Approval and adoption of the First Mutual Bancshares, Inc. 2000 Stock
Option and Incentive Plan; and
3. Such other matters as may properly come before the Meeting or any
adjournments thereof.
NOTE: The Board of Directors is not aware of any other business to come
before the Meeting.
Pursuant to action by the Company's Board of Directors and the Company's
Bylaws, shareholders of record at the close of business on March 8, 2000 are the
shareholders entitled to vote at the Meeting and any adjournments thereof.
You are requested to fill in and sign the enclosed form of proxy, which is
solicited by the Board of Directors, and to mail it promptly in the enclosed
envelope. The proxy will not be used if you attend and vote at the Meeting in
person.
BY ORDER OF THE BOARD OF DIRECTORS
Phyllis A. Easterlin
Corporate Secretary
Bellevue, Washington
March 20, 2000
<PAGE>
FIRST MUTUAL BANCSHARES, INC.
400 - 108TH AVENUE N.E.
BELLEVUE, WASHINGTON 98004
(425) 455-7300
PROXY STATEMENT
- --------------------------------------------------------------------------------
ANNUAL MEETING OF SHAREHOLDERS
APRIL 27, 2000
- --------------------------------------------------------------------------------
This Proxy Statement is first being furnished to shareholders on or about
March 20, 2000 in connection with the solicitation by First Mutual
Bancshares, Inc. (the "Company") of proxies in the form enclosed for use at the
2000 Annual Meeting of Shareholders (the "Meeting"), to be held at the Hyatt
Regency Bellevue, 900 Bellevue Way N.E., Bellevue, Washington, on April 27, 2000
at 3:00 p.m. local time. The Company was created in connection with the
reorganization of First Mutual Savings Bank (the "Bank") into the holding
company form of ownership, which occurred on October 26, 1999. As a result of
the reorganization, among other things, the Company became the Bank's sole
shareholder and the Bank changed its name to First Mutual Bank. The Company did
not have any operations prior to the reorganization and, following the
reorganization, the Company's primary activity was, and continues to be,
managing the operations of the Bank. This proxy statement, which covers the
fiscal year ended December 31, 1999, includes information relating to both the
Company and the Bank.
- --------------------------------------------------------------------------------
OUTSTANDING SHARES, VOTING AND REVOCATION OF PROXIES
- --------------------------------------------------------------------------------
Shareholders of record as of the close of business on March 8, 2000 (the
"Record Date") are entitled to one vote for each share then held, which may be
voted in person or by proxy. As of the Record Date, the Company had 4,664,396
shares of Common Stock issued and outstanding. The Company did not have any
other class of equity security outstanding on the Record Date. Shareholders do
not have the right to cumulate votes for the election of directors. Shareholders
who execute proxies retain the right to revoke them by written notice to the
Secretary of the Company or the filing of a later proxy prior to a vote being
taken on a particular proposal at the Meeting. A proxy will not be voted if a
shareholder attends the Meeting and votes in person. Unless revoked, the shares
represented by such proxies will be voted at the Meeting and all adjournments
thereof. Proxies solicited by the Board of Directors (the "Board") of the
Company will be voted in accordance with the shareholders' instructions. If no
instructions are specified, the shares will be voted FOR the election of
management's nominees for directors, FOR the approval and adoption of the First
Mutual Bancshares, Inc. 2000 Stock Option and Incentive Plan, and in accordance
with the best judgment of the persons appointed as proxies with respect to the
transaction of such other business as may properly come before the Meeting.
Shares that are subject to abstentions and broker non-votes are counted as
present for purposes of determining the presence of a quorum. Neither
abstentions nor broker non-votes are included in tabulations for voting for
directors. Abstentions will be included in tabulations of the votes cast for
purposes of determining whether a proposal other than election of directors has
been approved. Broker non-votes will not be counted for purposes of determining
the number of votes cast for a proposal other than election of directors.
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL 1--ELECTION OF DIRECTORS
- --------------------------------------------------------------------------------
Ten directors will be elected at this meeting. The directors will be divided
into the three groups listed below. The directors in Group I will serve for one
year (and until their respective successors have been elected and qualified),
the directors in Group II will serve for two years (and until their respective
successors have been elected and qualified), and the directors in Group III will
serve for three years (and until their respective successors have been elected
and qualified). At each annual shareholder meeting after this year's meeting,
directors shall be elected for a term of three years to succeed those whose
terms expire in that year, with one group elected each year. The Company's
Bylaws provide that the Board will consist of not less than nine but not more
than 30 members, as determined from time to time by resolution of the Board. The
Board has approved the following nominees for directors, all of whom are
currently directors:
<TABLE>
<S> <C>
GROUP I (term to expire in 2001)
Janine Florence F. Kemper Freeman, Jr.
Victor E. Parker
GROUP II (term to expire in 2002)
Mary Case Dunnam George W. Rowley, Jr.
John R. Valaas H. Scott Wallace
GROUP III (term to expire in 2003)
James J. Doud, Jr. Richard S. Sprague
Robert C. Wallace
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES.
Election to the Board requires the approval of a majority of the shares
voting, assuming a quorum of the outstanding shares is present or represented at
the meeting. It is intended that the proxies solicited by the Board will be
voted for the election of the aforementioned named nominees. If any nominee is
unable to serve, the shares represented by all valid proxies will be voted for
the election of such substitute as the Board may recommend, or the Board may
reduce the number of directors to eliminate the vacancy. At this time, the Board
knows of no reason why any nominee might be unable or unwilling to serve upon
election.
The following table lists the groups, names and ages of the nominees (all of
whom are currently serving as directors), the nature and amount of their
beneficial ownership of Common Stock, and the amount and nature of the ownership
of the Company's Common Stock by each director, each named executive officer,
and all directors and executive officers as a group as of February 29, 2000.
2
<PAGE>
SECURITIES OWNED BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
POSITIONS HELD SHARES PERCENT
NAME AGE (DIRECTOR SINCE) BENEFICIALLY OWNED OF CLASS
- ---- -------- --------------------------------- ------------------ --------
<S> <C> <C> <C> <C>
GROUP I (term to expire in 2001)
Janine Florence.................. 51 Director (1985) 221,794(1)(2) 4.74%
F. Kemper Freeman, Jr............ 58 Chairman of the Board and 561,834(1)(3) 12.02%
Director (1968)
Victor E. Parker................. 59 Director (1983) 87,615(1) 1.87%
GROUP II (term to expire in 2002)
Mary Case Dunnam................. 51 Director (1993) 20,090(1) *
George W. Rowley, Jr............. 58 Director (1992) 104,154(1) 2.23%
John R. Valaas................... 55 President, Chief Executive 197,233(4) 4.20%
Officer and Director (1992)
H. Scott Wallace................. 73 Vice Chairman of the Board and 6,890(1) *
Director (1976)
GROUP III (term to expire in
2003)
James J. Doud, Jr................ 62 Director (1993) 15,098(1)(5) *
Richard S. Sprague............... 68 Director (1973) 68,944(1) 1.47%
Robert C. Wallace................ 54 Director (1985) 75,610(1)(6) 1.62%
OTHER NAMED EXECUTIVE OFFICERS:
Roger A. Mandery................. 57 Executive Vice President 64,204(7) 1.37%
James R. Boudreau................ 52 Senior Vice President 85,825(8) 1.83%
Kenneth J. Walkky................ 51 Vice President 38,934(9) *
All directors and executive
officers as a group (17
persons)....................... 1,594,765(10) 32.93%
</TABLE>
- ------------------------
* Less than one percent (1%) of outstanding shares
(1) Includes 6,890 shares that may be acquired pursuant to a stock option
exercisable within sixty (60) days.
(2) Includes 27,251 shares held in trust for the benefit of Ms. Florence's
daughter, and 67,844 shares held in trust for the benefit of Ms. Florence's
sister.
(3) Includes 59,515 shares held by Mr. Freeman's spouse and 48,450 shares held
in trust for the benefit of Mr. Freeman's daughter. Also includes 226,166
shares owned by Bellevue Square Managers I Limited Partnership. Mr. Freeman,
together with members of his immediate family, beneficially owns a 55.7%
interest in the partnership.
(4) Includes 24,589 shares held by Mr. Valaas' spouse, 8,167 shares held in
trust by Mr. Valaas and his spouse for their children, and 25,010 shares
that may be acquired pursuant to stock options exercisable within sixty (60)
days.
(5) Does not include 926,597 shares owned by Matthew G. Norton Co., of which
Mr. Doud is a business consultant, but not a beneficial owner of such
shares.
3
<PAGE>
(6) Includes 30,915 shares owned by Wallace Properties Group, of which Mr.
Wallace is the managing partner, and 16,725 shares owned by Mr. Wallace's
spouse.
(7) Includes 29,073 shares that may be acquired pursuant to stock options
exercisable within sixty (60) days.
(8) Includes 2,725 shares held by Mr. Boudreau's spouse, 893 shares held in
trust by Mr. Boudreau and his spouse for their daughter and son under the
UGMA, and 29,073 shares that may be acquired pursuant to stock options
exercisable within sixty (60) days. Mr. Boudreau is Senior Vice President of
the Bank and is not an officer of the Company.
(9) Includes 1,689 shares held by Mr. Walkky's spouse and 10,849 shares that
may be acquired pursuant to stock options exercisable within sixty (60)
days. Mr. Walkky is Vice President of the Bank and is not an officer of the
Company.
(10) Includes an aggregate of 174,896 shares of Common Stock subject to stock
options exercisable within sixty (60) days of the record date and an
aggregate of 87,844 shares of Common Stock held by the Company's Employee
Stock Ownership Plan ("ESOP").
As a matter of policy, the Company and the Bank generally do not make loans
to directors and officers, and do not make loans to employees for the purpose of
financing multifamily or income-producing properties. Any loans which benefit
(or appear to benefit) officers, directors or employees are fully disclosed to
the Bank's loan committee and may under some conditions be required to be
approved by the investment committee of the Bank's board. In 1999, the Bank had
a loan outstanding to a general partnership of which Janine Florence, a member
of the compensation committee, was one of twenty-three guarantors. This loan,
which was repaid in full on August 27, 1999, is described more fully in the
section entitled "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION."
In addition, the Bank made a commercial loan for the purchase of real property
to Mr. Rowley in December 1990 before he became a Director in October 1992. The
largest aggregate amount of indebtedness on the loan during 1999 was $439,986.
The rate of interest on the loan is 7.375% and the balance as of February 29,
2000, was $424,335.
The following biographies describe the business experience of each nominee
or continuing director and information concerning the director's community
activities in the Company's market area.
NOMINEES FOR ELECTION AS DIRECTORS
JAMES J. DOUD, JR. is a business consultant and former Executive Vice
President and Chief Operating Officer of Matthew G. Norton Co., Seattle,
Washington. He is Secretary/Treasurer and Director for Brooks Range Supply,
President of the Western Washington University Foundation, and a Director of the
Brooks Investment Co. He is a past Director for Bellingham National Bank,
Washington Physicians Service, Whatcom Medical Bureau, National Association of
Boat Manufacturers, United Way of Bellingham, and Whatcom County Chamber of
Commerce.
MARY CASE DUNNAM is active as a volunteer in various community groups,
including Trustee to the Board of the Seattle Academy of Arts & Sciences, member
of the Development Council for the Burke Museum, member of the Board of
Directors of Seattle Arts & Lectures, and past member of the Boards of Directors
of the Seattle Children's Home and St. Joseph's School. She is a homemaker and
mother and a life-long Seattle resident. Ms. Dunnam's father, Mr. Elwell Case,
was one of the original founders of the Bank.
JANINE FLORENCE is the owner of Cambridge Management and President of
Property Development Company, both of Bellevue, Washington, which companies are
involved in the leasing and development of commercial properties.
Ms. Florence's family founded and was part owner of Quality Food Centers, Inc.
("QFC") supermarkets, for which Ms. Florence served as Vice President at the
time the chain was sold in
4
<PAGE>
1986. She also served as Vice President of E. L. Leasing Co. until 1988.
Ms. Florence is a board member and past Chair of the Bellevue Downtown
Association, a member of the Executive Board of the Chief Seattle Council of the
Boy Scouts of America, and is currently the President and a board member of the
Bellevue Schools Foundation.
F. KEMPER FREEMAN, JR. is the third generation involved in the ownership
and development of Bellevue Square, a 1.2 million square foot regional shopping
center in Bellevue, Washington. Mr. Freeman's development company, Kemper
Development Company, has also developed the first phase of a mixed-use project
called Bellevue Place. Bellevue Place currently includes the 382 room Hyatt
Regency Hotel and 475,000 square feet of office and retail space. Mr. Freeman is
a Past Chairman, the current Government Affairs Chairman, and has served as a
Trustee of the International Council of Shopping Centers since 1987. He serves
as Chairman of the Board for both the Company and the Bank, and an Urban Land
Institute Council Member. Mr. Freeman also has a long history of involvement in
political and civic activities.
VICTOR E. PARKER is the President of Parker, Smith & Feek, Inc., Bellevue,
Washington, insurance brokers. Mr. Parker serves on the Board of Trustees for
the Greater Seattle Chamber of Commerce and on the Board of Directors for
Western Washington University Foundation. He is a past Trustee of the National
Association of Insurance Brokers, past Trustee and past President of the board
of Pacific Northwest Arts and Crafts Association-Bellevue Art Museum, past
Trustee and past President of the Association of Insurance Brokers-Pacific
Northwest, and a past Director of Assurex International. Mr. Parker was also a
Trustee of Big Brothers of Seattle-King County and of Lakeside School.
GEORGE W. (SKIP) ROWLEY, JR. is the Chairman and Chief Executive Officer of
Rowley Enterprises, Inc., a diversified real estate management company based in
Issaquah, Washington, with investments in mining, resort operations,
warehousing, manufacturing, and investments in multiple residential, office and
mini-storage buildings. Mr. Rowley has been a leader in the community, raising
funds for the newly constructed Issaquah Youth and Community Center and the new
Issaquah Library. He served as President of the Greater Issaquah Chamber of
Commerce from 1993-1995 and was President and founding member of the Eastside
Chamber Legislative Coalition from 1994-1995. He sits on numerous boards
including: The Empty Space Theatre, Mobility 21 and United for Washington, both
political action committees, and the Eastside Transportation Committee. In 1996
Rowley Enterprises was awarded the prestigious "Best in the Northwest"
Washington Family Business of the Year Award.
RICHARD S. SPRAGUE is General Counsel and Secretary of Bellevue Square
Managers, Inc. and a former partner in the law firm of Bogle & Gates.
Mr. Sprague was President of University Preparatory Academy and former President
of Ronald McDonald House, a charity providing lodging for families of children
being treated for serious illnesses at Children's Hospital & Medical Center.
Mr. Sprague previously served as Chairman of the Puget Sound Chapter of the
March of Dimes, President of the Center for Community Development, General
Counsel to the Seattle Chamber of Commerce, President of Greater Seattle, Inc.
(Seafair), President of the Washington Athletic Club, President of the Seattle
Mental Health Institute, and President of the University of Washington Alumni
Association. He is currently a member of the Board of Governors of Virginia
Mason Medical Center and a Director of the Virginia Mason Foundation.
JOHN R. VALAAS has served as the Bank's President and Chief Executive
Officer since February 1992 and as the Company's President and Chief Executive
Officer since October 1999. Previously Mr. Valaas had, since January 1990,
served as Senior Vice President and Manager of the Commercial Financial Services
Division for Seafirst Bank and in other positions of increasing responsibility
at Seafirst Bank and Bank of America. In addition to his responsibilities to the
Company, Mr. Valaas is a member of the Board of Overseers of Whitman College,
past Chairman of the Overlake Hospital Foundation, past President of the
Bellevue Art Museum, member of the Board of Directors for the Washington Savings
League, board member of the Bellevue Chamber of Commerce, board member and past
Chairman of the Bellevue Downtown Association, and board member of
TransAlliance, L.P.
5
<PAGE>
H. SCOTT WALLACE, a lifelong resident of the Eastside and a 45-year dairy
operator in the lower Snoqualmie Valley, now resides in Bellevue. He is a
20-year past Director of Darigold Farms and Darigold Inc., a dairy manufacturing
and processing company. His family has been a King-Pierce County "Dairy Family
of the Year." Representing the north and east portions of King County,
Mr. Wallace was elected and served eight years as one of three King County
commissioners. His two terms in public office included a period as Chairperson
of the Board of King County Commissioners. He is a past Chairman and 12-year
Director of the Lower Snoqualmie Valley (now Riverview) School District, and he
is currently the Vice Chairman of the King County Conservation District Board of
Supervisors. He is not related to Robert C. Wallace, who is also a Director of
the Company.
ROBERT C. WALLACE is the founder and managing partner of Wallace Properties
Group and Chairman of Wallace Properties, Inc., investors in, and investment
managers and developers of, real estate. Mr. Wallace is past Chairman of the
Seattle Chamber of Commerce, the Bellevue Chamber of Commerce and the Bellevue
Downtown Association. He is currently Chairman of the Washington State Major
League Baseball Stadium Public Facilities District and is also Chairman of the
Bellevue Convention Center Authority. He has served as President of the Bellevue
Rotary Club, Director of the King County East Convention and Visitors Bureau,
and was a Founding Director of the Seattle-King County Economic Development
Council. He is not related to H. Scott Wallace, who is also a Director of the
Company.
6
<PAGE>
MEETINGS, COMPENSATION, RELATIONSHIPS AND
CERTAIN COMMITTEES OF THE BOARD OF DIRECTORS
The members of the Company's Board of Directors (the "Board") also serve as
members of the Bank's board. During the period from October 26, 1999 to
December 31, 1999, the Board held three regular meetings and no special
meetings. No director in office in 1999 attended fewer than 75% of the aggregate
meetings of the Company's board except Mr. Parker, who missed one of the three
Board meetings. The Board did not have any committees in 1999.
During 1999, the Bank's board held twelve regular meetings, as well as
numerous committee meetings. No director in office in 1999 attended fewer than
75% of the aggregate meetings of the Bank's board and committees on which he or
she served, except Mr. Freeman and Mr. Parker. Both Messrs. Freeman and Parker
attended all Bank board meetings held during 1999. During 1999, the Bank's board
had investment, compensation, stock option, audit and loan committees.
In 1999, Mr. Freeman, as Chairman of the board of both the Bank and Company,
was paid a monthly director's fee of $2,200. Other directors received $600 per
Bank board meeting attended and $200 for each Bank board committee meeting
attended. Directors do not receive any additional compensation for attending
meetings of the Board or its committees. Each director who is not a full-time
paid employee of the Company receives, if sufficient shares are reserved under
the Plan, for every four years of service after April 1994, an option to acquire
6,890 (adjusted for capitalization changes as provided in the Plan) shares of
the Company's Common Stock, par value $1.00 per share (the "Common Stock") at a
price equal to the fair value of the shares at the time of the grant of the
option. A stock option for 6,890 (adjusted) shares was granted to all current
directors on April 28, 1998. Each such option is exercisable for six years and
becomes exercisable 50% upon completion of one full year of service after the
grant of the option and the balance at the end of the second year of service.
During 1999, the Bank purchased property, liability, casualty, medical and
other insurance for aggregate premiums of $48,652 through the insurance
brokerage firm of Parker, Smith & Feek, Inc., of which Mr. Parker is a
principal.
The Bank engaged Robert C. Wallace and the real estate brokerage firm of
which he is a principal, Wallace Properties, Inc., to provide real estate
services to the Bank. During 1999, Wallace Properties, Inc. assisted the Bank
with leasing office space for corporate offices and a branch office. All
commissions paid to Wallace Properties, Inc. in connection with these leases
were paid by the landlords and totaled less than $5,000.
The Board acts as a nominating committee for selecting the management
nominees for election as directors and will consider for nomination as directors
individuals recommended by shareholders, if such nominations are received prior
to October 15 of the year preceding the meeting of shareholders called for the
election of directors. No nomination from the floor of any annual meeting shall
be entertained, and any vote for a nominee not reviewed and recommended by the
nominating committee will be void and not counted. Accordingly, shareholder
recommendations of individuals to be considered for nomination to be elected as
directors at next year's Annual Meeting of Shareholders must be received by the
Secretary of the Company on or prior to October 15, 2000.
Both the Bank and the Company currently have compensation committees that
review compensation and bonus plans for their employees, including compensation
of executive officers. During 1999, the Bank's compensation committee was
composed of Directors Dunnam, Florence, Valaas, H. Scott Wallace and Robert
Wallace, and it met three times.
During 1999, the Stock Option and Incentive Plan was maintained by the Bank
and managed by a stock option committee of the Bank's board composed of
Directors Dunnam, Florence, H. Scott Wallace and Robert Wallace, and it met one
time. Upon shareholder approval of the First Mutual Bancshares, Inc. 2000 Stock
Option and Incentive Plan, the Company's stock option committee will manage the
plan.
7
<PAGE>
The investment committee of the Bank meets almost weekly and oversees the
investment practices, including hedging and lending activities, of the Bank.
During 1999, the investment committee was composed of Directors Doud, Florence,
Freeman, Parker, Rowley, Valaas, Robert Wallace and William E. Tremper (until
his retirement from the Bank's board in October 1999), and it met 50 times.
The Bank's audit committee monitors the Bank's compliance with regulatory
and audit requirements and makes recommendations with respect to the Bank's
independent auditors and changes in accounting policies and procedures. During
1999, the Bank's audit committee was composed of Directors Doud, Florence,
Sprague and Tremper (until his retirement from the Bank's board in
October 1999), and it met four times.
The Bank's loan committee meets biweekly to review, primarily, income
property loans, construction loans and business banking loans under
consideration by the lending departments. During 1999, the Bank's loan committee
was composed of the following officers of the Bank: James Boudreau, Nancy
Chermak, Roger Mandery, John Valaas, Kenneth Walkky, Ronald Werth and James
Young.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Officers and directors of the Company and greater than ten percent (10%)
shareholders are required to report to the U.S. Securities and Exchange
Commission ("SEC") on a timely basis certain changes in their legal or
beneficial ownership of the Company's stock. SEC regulations require the Company
to disclose to its shareholders any reporting violations that came to the
Company's attention during the fiscal year based on a review of the applicable
filings required by the SEC to report such changes in legal or beneficial
ownership. The Company believes that during the fiscal year ended December 31,
1999, its officers, directors and shareholders who were subject to
Section 16(a) filed all required forms.
- --------------------------------------------------------------------------------
1999 ANNUAL MEETING OF SHAREHOLDERS ELECTION VOTING RESULTS
- --------------------------------------------------------------------------------
This is the Company's first annual meeting of shareholders. At the Bank's
1999 Annual Meeting of Shareholders, four directors were elected for a
three-year term. Of the Bank's 4,247,275 issued and outstanding shares eligible
to vote at the 1999 Annual Meeting, 3,996,226 participated in the election of
directors (94.09%).
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES VOTED
---------------------------
NOMINEES FOR WITHHELD
- -------- -------- --------
<S> <C> <C>
Mary Case Dunnam................................. 99.09% 0.91%
George W. Rowley, Jr............................. 99.16% 0.84%
John R. Valaas................................... 99.14% 0.86%
H. Scott Wallace................................. 99.12% 0.88%
</TABLE>
8
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
- --------------------------------------------------------------------------------
Persons and groups owning in excess of five percent (5%) of the Company's
Common Stock are required to file certain reports regarding such ownership with
the Company and the SEC. The following table sets forth, as of February 29,
2000, based on SEC filings and other information available to the Company, the
shares and percentage of Common Stock beneficially owned and held of record by
each person believed by the Company to own more than 5% of the outstanding
shares of the Company's Common Stock. None of the individuals or entities
identified owns beneficially, directly or indirectly, shares of any class of
securities of the Company's subsidiaries.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF CLASS
NAME AND BUSINESS ADDRESS OF BENEFICIAL OWNERSHIP OF COMMON STOCK
- ------------------------- ----------------------- ----------------
<S> <C> <C>
Matthew G. Norton Co...................................... 926,597 19.85%
1300 Norton Building
801 Second Avenue
Seattle, WA 98104
F. Kemper Freeman, Jr..................................... 561,834(1) 12.02%
P.O. Box 4186
Bellevue, WA 98009-4186
First Mutual Bank......................................... 358,098(2) 7.67%
Employee Stock Ownership Plan
400 108th Ave. N.E.
Bellevue, WA 98004
</TABLE>
- ------------------------
(1) Includes 59,515 shares held by Mr. Freeman's spouse and 48,450 shares held
in trust for the benefit of Mr. Freeman's daughter. Also includes 226,166
shares owned by Bellevue Square Managers I Limited Partnership.
Mr. Freeman, together with members of his immediate family, beneficially
owns a 55.7% interest in the partnership.
(2) Represents shares held by the ESOP, including 325,754 shares allocated to
participants' accounts, who are entitled to vote such shares, and 32,344
unallocated shares that are voted by the trustee in the same proportions as
allocated shares.
9
<PAGE>
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The following tables set forth compensation paid for services rendered in
the Bank's last three completed fiscal years ending December 31, 1999 to the
Bank's chief executive officer and the highest paid executive officers whose
total compensation exceeded $100,000 (the "named executive officers"). Following
the Bank's reorganization into the holding company form of ownership on
October 26, 1999, compensation for Messrs. Valaas and Mandery was paid 95% by
the Bank and 5% by the Company and compensation for Messrs. Boudreau and Walkky
was paid entirely by the Bank.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
------------------------------------- UNDERLYING
NAME AND PRINCIPAL SALARY BONUS OTHER ANNUAL OPTIONS/ ALL OTHER
POSITION YEAR ($) ($)(2) COMPENSATION(3) SARS(#) COMPENSATION(4)
- --------------------------- -------- -------- -------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John R. Valaas............. 1999 $229,463 $ 41,957 $13,905 10,000 $12,300
Director, President and 1998 228,055 339,162 13,221 6,500 12,300
Chief Executive Officer 1997 210,465 474,724 19,557 0 11,925
Roger A. Mandery........... 1999 $175,582 $ 32,211 $13,905 10,000 $12,300
Executive Vice President 1998 174,383 116,974 13,221 6,500 12,104
and Chief Financial 1997 155,886 20,154 19,557 7,500 11,596
Officer
James R. Boudreau.......... 1999 $151,095 $ 27,693 $13,905 10,000 $12,235
Senior Vice President and 1998 149,375 113,792 13,225 6,500 12,297
Chief Credit Officer 1997 131,009 16,921 17,816 7,500 10,761
Kenneth J. Walkky.......... 1999 $149,302 $ 20,655 $13,886 2,400 $11,981
Vice President-Income 1998 112,245 14,021 10,390 1,800 7,530
Property Lending 1997 106,723 13,547 14,379 2,100 6,397
</TABLE>
- ------------------------
(1) None of the named executives received compensation reportable under the
Restricted Stock Awards or Long-Term Incentive Plan Payouts columns.
(2) The amounts disclosed in this column reflect all discretionary bonuses as
well as basic bonus compensation that is distributed pursuant to the Bank's
bonus plan only in years in which net income, after-tax and after-bonus
distribution, exceeds the previous year's net income by at least five
percent (5%). This percentage was increased to ten percent (10%) beginning
with the third quarter of 1999.
(3) The amounts disclosed in this column are the value at year end of shares of
the Company's Common Stock allocated to the accounts of the executive
officers under the Company's ESOP, all of which are vested and not subject
to any restrictions.
(4) The amounts disclosed in this column consist only of Bank contributions
under the Bank's 401(k) plan.
10
<PAGE>
The following table provides information related to options granted to the
named executive officers during 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL EXERCISE RATES OF STOCK PRICE
SECURITIES OPTIONS/SARS OR APPRECIATION FOR
UNDERLYING GRANTED TO BASE OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(2) FISCAL YEAR ($/SH.)(3) DATE 5% ($) 10% ($)
- ---- ------------ ------------ ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
John R. Valaas........................ 10,000 16.1% $12.38 06/24/09 $77,826 $197,226
Roger A. Mandery...................... 10,000 16.1% $12.38 06/24/09 $77,826 $197,226
James R. Boudreau..................... 10,000 16.1% $12.38 06/24/09 $77,826 $197,226
Kenneth J. Walkky..................... 2,400 3.9% $12.38 06/24/09 $18,678 $ 47,334
</TABLE>
- ------------------------
(1) The potential realizable value portion of the table illustrates value that
might be realized upon exercise of the options immediately prior to the
expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Stock over the term of the options, but
is not intended to forecast future price appreciation of the Company's
Common Stock. It is important to note that options have value to the listed
executives only if the stock price increases above the exercise price shown
in the table during the effective option period. These numbers do not take
into account certain provisions of the options providing for cancellation of
the option following termination of employment.
(2) Options to acquire shares of Common Stock, each of which vests 1/3 annually
beginning two years after grant of the option.
(3) The option exercise price may be paid in shares of Common Stock owned by
the executive officer, in cash, or in any other form of valid consideration
or a combination of any of the foregoing, as determined by the stock option
committee in its discretion.
The following table provides information related to options exercised by the
named executive officers during the 1999 fiscal year and the number and value of
options held at fiscal year end. The Company does not have any outstanding stock
appreciation rights ("SARs").
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS/SARS AT FY-END THE-MONEY OPTIONS/SARS
SHARES 1999 (#) AT FY-END 1999 ($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE ($) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John R. Valaas.................. 0 0 25,010 17,150 $215,534 $(31,294)
Roger A. Mandery................ 0 0 29,073 25,675 $186,484 $(11,077)
James R. Boudreau............... 0 0 29,073 25,675 $186,484 $(11,077)
Kenneth J. Walkky............... 0 0 10,849 6,767 $ 72,411 $ (2,867)
</TABLE>
- ------------------------
(1) The closing price for the Company's Common Stock as reported on the Nasdaq
Stock Market effective December 31, 1999 was $12.00. The values indicated
reflect the reduction for the payment of the exercise price of applicable
options.
11
<PAGE>
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Bank and John R. Valaas are parties to an Employment Agreement dated
November 1996, whereby Mr. Valaas agreed to continue to serve as President and
Chief Executive Officer of the Bank. The agreement has a five-year term, which
may be extended by the parties to 2006, and provides that Mr. Valaas is entitled
to a base salary of no less than $210,000 per year, plus fringe benefits
generally provided officers of the Bank, and is eligible to participate in the
Bank's bonus plan. Mr. Valaas is also eligible for discretionary grants of stock
options under the Company's stock option plan.
The Bank also agreed that in the event of a termination of his employment
(whether voluntary or otherwise) following any future Change in Control of the
Bank, Mr. Valaas will be entitled to payment of his base salary for a period of
35 months following termination, with all stock options immediately vesting. A
Change in Control occurs when one person or entity (other than a group including
two or more of the Company's present directors) becomes the owner of 25% or more
of the Company's outstanding Common Stock, replacement of a majority of the
incumbent directors by directors whose elections have not been supported by the
present Board, or dissolution or sale of 70% or more in value of the assets of
the Bank ("Change of Control").
In November 1996, the Bank entered into an Employment Agreement with officer
Roger A. Mandery, whereby Mr. Mandery agreed to continue to serve as Executive
Vice President of the Bank. The agreement has a five-year term which is
extendible by the parties to 2006, and provides that Mr. Mandery is entitled to
an annual base salary of no less than $155,000, plus fringe benefits generally
provided officers of the Bank, and is eligible to participate in the Bank's
bonus plan. Mr. Mandery is also eligible for discretionary grants of stock
options under the Company's stock option plan.
The agreement also provides that in the event of a termination of his
employment (whether voluntary or otherwise) following any future Change of
Control of the Bank, Mr. Mandery will be entitled to payment of his base salary
for a period of 35 months following termination, with all stock options
immediately vesting.
The Bank and James R. Boudreau are parties to an Employment Agreement dated
November 1996, whereby Mr. Boudreau agreed to continue to serve as Senior Vice
President of the Bank. The agreement has a five-year term, which may be extended
by the parties to 2006, and provides that Mr. Boudreau is entitled to a base
salary of no less than $130,000 per year, plus fringe benefits generally
provided officers of the Bank, and is eligible to participate in the Bank's
bonus plan. Mr. Boudreau is also eligible for discretionary grants of stock
options under the Company's stock option plan.
The Bank also agreed that in the event of a termination of his employment
(whether voluntary or otherwise) following any future Change of Control of the
Bank, Mr. Boudreau will be entitled to payment of his base salary for a period
of 35 months following termination, with all stock options immediately vesting.
COMPENSATION COMMITTEE REPORT
The purpose of the compensation program of the Company and the Bank as its
principal subsidiary is to align executive compensation with the Company's
business objectives and performance, the long-term objectives of shareholders
and the individual executive's performance. This enables the Company to attract,
retain and reward executive officers who contribute, and are expected to
continue to contribute, to the Company's long-term success.
The Company's executive compensation program is administered by the stock
option committee and the compensation committee established as committees of the
Board. Currently, the membership of these two committees is the same at the
Company and Bank board levels. Each of these committees has four nonemployee
directors. The membership of the compensation committee also includes John
Valaas, who
12
<PAGE>
recuses himself from discussions or determinations related to his compensation.
The stock option committee and the compensation committee work with management
to develop compensation plans for the Company and Bank and are responsible for
determining the compensation of each named executive officer.
The compensation committee considers many factors in setting compensation
for the President and Chief Executive Officer, and the other named executive
officers, and in establishing guidelines for the compensation of other executive
officers of the Company and Bank. As the Bank is the Company's principal
operating subsidiary, among the most important of these factors is establishing
compensation that is commensurate with the Bank's performance, as measured by
operating, financial and strategic goals. Bank performance is measured against
previous performance, budgeted goals, and the operating results of peer
institutions, which are composed of FDIC-insured savings institutions of a
similar asset size and complexity and market and industry conditions including
the economy as a whole. Individual performance in terms of both qualitative and
quantitative goals (with the exception of assessing the performance of the Bank,
the compensation committee does not have specific measures and its decisions are
subjective) is an important part of this process. Industry surveys of
compensation for comparable positions in the Bank's Peer Group (which is
composed of Washington state financial institutions of a similar asset size) are
considered. It is the compensation committee's belief that officers who are
among the owners of their Bank not only have longer tenure, but are also more
focused on and aligned with the long-term performance expectations of
shareholders. It therefore works to retain superior executives by providing some
equity-based compensation, currently in the form of stock options. Whenever the
Company's economic performance includes other significant operating
subsidiaries, these general principles may apply separately as to the Company
and each of its subsidiaries.
No formal policy has been adopted by the Company or Bank with respect to
qualifying compensation paid to its executive officers for deductibility under
Section 162(m) of the Internal Revenue Code. With certain exceptions, this
section excludes from deductibility compensation to an executive officer in
excess of the dollar limit stated in the section.
COMPONENTS OF COMPENSATION
At present, the executive compensation program is comprised of base salary,
annual cash incentive compensation and long-term incentive compensation in the
form of stock options. Executives also participate, along with other Bank
employees, in the Bank's ESOP and other benefit plans.
BASE SALARY. Base salaries of the President and Chief Executive Officer and
the other named executive officers are based on surveys and data relating to the
Bank's Peer Group, as defined in the compensation committee report section of
this report. These surveys are used to determine whether compensation is
competitive with that offered by other companies in the banking and financial
services industries. In addition, base salaries are based on an assessment of
individual performance. In assessing performance, the compensation committee
takes into consideration individual experience and contributions, level of
responsibility, department performance, and Bank performance, which is measured
primarily by net income, but without setting specific goals. With the exception
of Bank performance, the compensation committee does not have any specific
measures, and its decisions are subjective. For 1999, salaries of
Messrs. Valaas, Mandery and Boudreau did not change, while Mr. Walkky's salary
was increased by 4%. The Compensation policy allows for total compensation of
individuals to exceed the median through incentive compensation plans based on
achievement of the Bank's operating, financial and strategic objectives.
BONUS PLAN. The Bank's named executive officers participate in the Bank's
staff bonus plan, which became effective July 1, 1999. Under the new staff bonus
plan a collective staff bonus is allocated among a performance pool, a retention
pool and a corporate officer pool, which includes non-executive officers. An
eligible executive officer could have bonus compensation received partly under
each pool. The plan does
13
<PAGE>
not provide a bonus unless the Bank's net income, after-tax and after-bonus
distributions, exceeds the prior year's net income by 10% or more. The aggregate
bonus amount ranges from 3% to 12% of such net income in relation to net income
improvement from 10% to 17% or more. The existence of this incentive
compensation is considered by the compensation committee in determining base
compensation for executive officers.
Bonuses to the Bank's named executive officers for the first two quarters of
1999 were paid under the prior plan, which established a sliding scale overall
bonus of between 4% and 10% of the Bank's after-tax, before-bonus income if net
income improved by at least 5%, up to 15%, when compared to the prior year. The
named executive officers participated in the bonus amount proportionately, based
on their qualifying compensation, along with other employees employed longer
than one year.
STOCK OPTION PLAN. Awards of stock options under the Bank's incentive stock
option plan are designed to more closely tie together the long-term interest of
the Bank's employees and its shareholders, and to assist in the retention of
officers and key employees. Future options granted will be under the Company's
2000 Stock Option and Incentive Plan if it is approved by the Company's
shareholders. The stock option committee selects the employees, including
executive officers, if any, to receive stock options and determines the number
of shares subject to each grant. The stock option committee's determination of
the size of option grants is generally intended to reflect an employee's
position with the Bank and his or her contributions, as described above relative
to guidelines for compensation. Options are granted either as incentive stock
options or as nonqualified stock options. The option plan has a ten-year term,
and options become exercisable on a gradual basis as stated in each grant. The
stock option committee reviews the outstanding options of the officers and key
employees from time to time and may grant additional options to encourage their
retention.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP); OTHER BENEFITS. Each named executive
officer participates with other employees in the Company's ESOP, health
insurance and other benefits which are generally applicable.
PRESIDENT AND CHIEF EXECUTIVE OFFICER COMPENSATION. The compensation for
the Company's and Bank's President and Chief Executive Officer, John R. Valaas,
is adjusted and determined by the compensation committee based on the same
policies and criteria as the compensation for the other named executive
officers. On November 18, 1999, the compensation committee resolved that the
President and Chief Executive Officer's base salary of $225,000 would be
increased to $236,250 in 2000.
In conclusion, the compensation and stock option committees believe the Bank
has been managed well in a challenging business environment for financial
institutions and has achieved above-average operating results when compared to
other thrift institutions in the Bank's Peer Group.
Submitted by Nonemployee Members of the stock option committee and
compensation committee:
H. Scott Wallace, Chairman
Mary Case Dunnam
Janine Florence
Robert C. Wallace
14
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1999, the Bank had a loan outstanding to a general partnership of which
Janine Florence, a member of the compensation committee, was one of twenty-three
guarantors. The loan was a commercial loan for the purchase of real property.
The largest aggregate amount of indebtedness on the loan during 1999 was
$1,897,704. The rate of interest on the loan was 9.125% from January 1, 1999 to
July 31, 1999 and 8.75% from August 1 to August 27, 1999, at which time the loan
was paid off in full. The Company does not have loans outstanding to any other
members of the stock option committee or the compensation committee. John
Valaas, Company President, is a Company employee as well as a director. He
serves on the compensation committee but does not participate in the
determination of his own compensation.
STOCK PRICE PERFORMANCE GRAPH
The graph below compares the Bank's five-year cumulative total return (for
the period after October 26, 1999, the graph reflects the Company's return),
including reinvestment of dividends, on its Common Stock to the similar returns
for (a) all U.S. stocks under the Nasdaq Index and (b) SNL Western Thrift Index
of all publicly-traded thrift stocks (including the Company) of ten western
states.
FIRST MUTUAL BANCSHARES, INC.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
<S> <C> <C> <C> <C> <C> <C>
First Mutual Bancshares, Inc. 100.00 176.21 230.76 406.59 308.64 312.54
NASDAQ - Total US* 100.00 141.33 173.89 213.07 300.25 542.43
SNL Western Thrift Index 100.00 166.92 212.81 351.43 302.50 242.47
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDING
---------------------------------------------------------------
INDEX 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
- ----- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First Mutual Bancshares, Inc............... 100.00 176.21 230.76 406.59 308.64 312.54
NASDAQ--Total US*.......................... 100.00 141.33 173.89 213.07 300.25 542.43
SNL Western Thrift Index................... 100.00 166.92 212.81 351.43 302.50 242.47
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL 2--APPROVAL AND ADOPTION OF 2000 STOCK OPTION AND INCENTIVE PLAN
- --------------------------------------------------------------------------------
At the meeting, the shareholders will be asked to approve and adopt
("Proposal 2") the Company's 2000 Stock Option and Incentive Plan (the "Plan").
A copy of the Plan is attached as Appendix A. The Board recommends that
shareholders vote for approval of Proposal 2 so that the Company and Bank may
continue to attract and retain qualified directors, officers and key employees
and to provide incentive for their efforts. Unless otherwise instructed, it is
the intention of the persons named in the accompanying form of proxy to vote
shares represented by properly executed proxies FOR approval of Proposal 2.
The Plan has two separate parts: one part permits stock option grants and
grants of stock appreciation rights to full-time employees of the Company, the
Bank and their future affiliated corporations and business entities (the
"Employee Portion"); and the other part establishes stock option grants for the
directors of the Company who are not full-time employees of the Company, the
Bank or any future parent or subsidiary of the Company (the "Director Portion").
DESCRIPTION OF PROPOSAL 2
Proposal 2 approves the Plan and its reservation of shares of the Company's
Common Stock ("Shares") for awards under the Plan. The Shares reserved for the
Plan's Employee Portion are the combination of (1) the number of Shares
remaining available for grant of employee options under the Bank's 1995 Stock
Option and Incentive Plan ("1995 Plan"), which is 8,393 Shares, (2) increased by
565,000 Shares, and (3) in the event any 1995 Plan employee options still
outstanding terminate or are not exercised, a number of Shares equal to the
number of Shares for that option under the 1995 Plan, which, if this were to
occur as to all such 1995 Plan employee options, is a further 304,367 Shares.
The Shares reserved for the Plan's Director Portion are the combination of
(1) the number of Shares remaining available for grant of director options under
the 1995 Plan, which is 76,190 Shares, (2) increased by 64,000 Shares, and
(3) in the event any 1995 Plan director options still outstanding terminate or
are not exercised, a number of Shares equal to the number of Shares for that
director option under the 1995 Plan, which, if this were to occur as to all such
1995 Plan director options, is a further 75,790 Shares. Upon shareholder
approval of Proposal 2, no new options will be granted under the 1995 Plan. The
closing price of the Company's Common Stock as reported on the Nasdaq National
Market on March 13, 2000, was $9.75.
THE PLAN
The purpose of the Plan is to attract and retain directors and key executive
personnel and to encourage continued employment of officers and key employees by
facilitating their purchase of an equity interest in the Company. Employees
designated by the stock option committee are eligible to receive stock option
awards under the Plan.
Unless it is terminated earlier, the Plan will expire in February, 2010, but
options granted before such expiration will remain in effect according to the
terms of the option. As to employees, options granted under the Plan are
intended to be either incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified
stock options. The Plan also contains provisions for stock appreciation rights
permitting an optionee to surrender his or her option for cancellation and
receive cash or Common Stock equal to the difference between the exercise price
of the option and the then fair market value of the shares of Common Stock
subject to the option.
The Board has appointed a stock option committee which has the authority to
determine the form and content of awards under the Plan, including, without
limitation, the number of shares granted, the stock price (which must be at
least fair market value if the option is an incentive stock option), the term of
the option (not to exceed ten years or, if the recipient is an employee who owns
more than 10% of the Bank's Common Stock, not to exceed five years), vesting
requirements and any other terms. Payment for shares
16
<PAGE>
subject to options may be in cash, Common Stock or a combination of cash and
Common Stock. The stock option committee has the power to interpret the Plan,
and to prescribe, amend and rescind rules and regulations relating to the Plan.
The stock option committee has the power to reissue options for any reason, but
does not have the power to change the terms of any option after the grant
without the consent of the recipient(s).
Under the Plan, all directors who are not full-time paid employees of the
Company, or any future parent or subsidiary of the Company, receive for every
four years of service after April 1994, if sufficient shares are reserved under
the Plan, an option to acquire 6,890 Shares (adjusted for capitalization changes
pursuant to the Plan) at a price equal to the fair value of the Shares at the
time of the grant of the option. Options issued to directors are nonqualified
options under applicable tax laws and regulations. Options for eligible
directors were issued in 1994 and 1998. Under the Plan future options will be
granted in 2002 and every four years thereafter for existing directors and upon
election of any new director (and every fourth year thereafter if the director
continues to serve as a director). Each such option is exercisable for six years
and becomes exercisable 50% upon completion of one full year of service after
the grant of the option and the balance at the end of the second year of
service. If sufficient Shares are not reserved under the Plan, the number of
Shares granted subject to the options would be prorated among then eligible
directors. The Board has authority under the Plan to amend it so that subsequent
director options are discretionary instead of being issued by this formula.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE PLAN. The federal income
tax consequences of participation in the Plan are complex and subject to change.
The following discussion is only a summary of the general rules applicable to
options. A taxpayer's particular financial or tax situation may be such that
some variation of the general rule is applicable. Accordingly, each participant
in the Plan should consult his or her own tax advisor concerning the tax
consequences of the grant or exercise of an option, or the disposition of any
Shares acquired pursuant to the exercise of an option, and the advisability of
making a Code Section 83(b) election.
INCENTIVE STOCK OPTIONS. For incentive stock options granted under the
Plan, the optionee will generally not recognize any income upon either the grant
or the exercise of the option and the Company will not be allowed a deduction
for federal income tax purposes. Upon a sale of the Shares, the tax treatment to
the optionee and the Company will depend primarily upon whether the optionee has
met certain holding-period requirements at the time he or she sells the Shares.
In addition, as discussed below, the exercise of an incentive stock option may
subject the optionee to alternative minimum tax liability.
If an optionee exercises an incentive stock option and does not dispose of
the Shares received within two years after the date of grant of such option or
within at least one year after the issuance of the Shares to him or her, any
gain realized upon disposition will be characterized as long-term capital gain
provided the Shares were a capital asset in the hands of the optionee.
If the optionee disposes of the Shares either within two years after the
date the option is granted or within one year after the issuance of the Shares
to him or her, such disposition will be treated as a disqualifying disposition
and generally an amount equal to the lesser of (1) the fair market value of the
Shares on the date of exercise minus the exercise price or (2) the amount
realized on the disposition minus the purchase price, will be taxed as ordinary
income to the optionee in the taxable year in which the disposition occurs. The
excess, if any, of the amount realized upon sale of the Shares over the fair
market value of the Shares at the time of the exercise of the option will
generally be treated as long-term capital gain if the Shares have been held for
more than one year following the exercise of the option. In the event of a
disqualifying disposition, the Company may withhold income taxes from the
optionee's compensation with respect to the ordinary income realized by the
optionee as a result of the disqualifying disposition.
The exercise of an incentive stock option may subject an optionee to
alternative minimum tax liability because the excess of the fair market value of
the Shares at the time an incentive stock option is exercised over the purchase
price of the Shares is included in an individual's income for the purpose of
calculating
17
<PAGE>
such tax. Consequently, an optionee may be obligated to pay alternative minimum
tax in the year he or she exercises an incentive stock option.
In general, there will be no federal income tax consequences to the Company
upon the grant, exercise or termination of an incentive stock option. If,
however, an optionee disposes of Shares prior to satisfying the two-year and
one-year holding periods described above, the Company will generally be entitled
to a deduction for federal income tax purposes in an amount equal to the
ordinary income, if any, recognized by the optionee upon disposition of the
Shares.
NONQUALIFIED STOCK OPTIONS. Nonqualified stock options granted under the
Plan do not qualify as "incentive stock options" and will not qualify for any
special tax benefits to the optionee. An optionee will generally not recognize
any taxable income at the time he or she is granted a nonqualified option.
However, upon its exercise, the optionee will generally recognize ordinary
income for federal income tax purposes measured by the excess of the then fair
market value of the Shares over the exercise price. Subject to the policy
described below, the income realized by the optionee will be subject to income
tax withholding by the Company out of the current earnings paid to the optionee.
If such earnings are insufficient to pay the tax, the optionee will be required
to make a direct payment to the Company for the tax liability.
Upon a sale of any Shares acquired pursuant to the exercise of a
nonqualified stock option, the difference between the sale price and the
optionee's basis in the Shares will generally be treated as a capital gain or
loss and will be characterized as long-term capital gain or loss if the Shares
have been held for more than one year at the date of their sale. The optionee's
basis for determination of gain or loss upon any subsequent disposition of
shares acquired upon the exercise of a nonqualified stock option will be the
amount paid for such Shares plus any ordinary income recognized as a result of
the exercise of such option.
In general, there will be no federal income tax consequences to the Company
upon the grant or termination of a nonqualified stock option or a sale or
disposition of the Shares acquired upon the exercise of a nonqualified stock
option. However, upon the exercise of a nonqualified stock option, the Company
will be entitled to a deduction for federal income tax purposes equal to the
amount of ordinary income that an optionee is required to recognize as a result
of the exercise, provided the Company has satisfied its reporting obligations
under the Code for the compensation comprising such income.
STOCK APPRECIATION RIGHTS. No income will be recognized by an optionee upon
the grant of a stock appreciation right ("SAR"). Upon exercise of a SAR,
however, the optionee will recognize ordinary income in an amount equal to the
amount of any cash received plus the fair market value of any Shares received.
The Company will generally be entitled to a deduction for federal income tax
purposes equal to the amount of ordinary income recognized by the optionee,
provided the Company has satisfied its reporting obligations under the Code for
any Shares issued to the optionee.
Notwithstanding the foregoing, in the event that Shares acquired pursuant to
a SAR or a nonqualified option are subject to certain conditions of limited
duration that create a substantial risk of forfeiture of such Shares by the
optionee and any person to whom he or she may have transferred Shares, the
optionee may not recognize ordinary income until the Shares are no longer
subject to such restrictions (instead of recognizing income on the date of
exercise). Under these circumstances, the optionee may avoid the deferral of
income by filing an election under Code Section 83(b) to recognize income on the
date of exercise.
Proposal 2 must receive more votes for than against after it is determined
that a quorum is represented at the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF PROPOSAL 2.
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AUDITORS
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The Board has renewed the Company's engagement with Deloitte & Touche,
Seattle, Washington, independent public accountants, as its auditors for the
2000 fiscal year. Deloitte & Touche also served as the Bank's auditors for the
1999 fiscal year. A representative of Deloitte & Touche will be present at the
Meeting to respond to questions from shareholders and will have the opportunity
to make a statement if he or she so desires.
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SOLICITATION OF PROXIES
- --------------------------------------------------------------------------------
The proxy accompanying this Proxy Statement is solicited by the Board of
Directors of the Company. Proxies may be solicited by officers, directors, and
regular supervisory and executive employees of the Company and the Bank, none of
whom will receive any additional compensation for their services. Allen
Nelson & Co. may also solicit proxies at an approximate cost of $3,000, plus
expenses. Such solicitations may be made personally, or by mail, telephone,
facsimile, e-mail, telegraph or messenger. The Company will pay persons not
owning shares of Common Stock beneficially, but holding shares on behalf of
others in their names or in the names of nominees, such as brokerage houses,
banks, and other fiduciaries, for the expense of forwarding soliciting materials
to their principals. All of the costs of solicitation of proxies will be paid by
the Company.
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OTHER MATTERS
- --------------------------------------------------------------------------------
The Board is not aware of any business to come before the Meeting other than
those matters described in this Proxy Statement. However, if any other matters
should properly come before the Meeting, it is intended that proxies in the
accompanying form will be voted in accordance with the best judgment of the
person or persons voting the proxies.
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FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company's 1999 Annual Report to Shareholders, including financial
statements prepared in conformity with generally accepted accounting principles,
are being mailed to shareholders with these proxy materials. Any shareholder who
has not received a copy of such Annual Report may obtain a copy by writing the
Company. Such Annual Report is not to be treated as part of the proxy
solicitation material nor as having been incorporated by reference.
A COPY OF FORM 10-K (WHICH ALSO SERVES AS THE COMPANY'S ANNUAL DISCLOSURE
STATEMENT UNDER APPLICABLE RULES) FOR THE COMPANY'S MOST RECENT FISCAL YEAR AS
FILED WITH THE SEC WILL BE FURNISHED WITHOUT CHARGE TO SHAREHOLDERS OF RECORD OR
BENEFICIAL OWNERS AS OF THE RECORD DATE UPON REQUEST TO PHYLLIS A. EASTERLIN,
CORPORATE SECRETARY, FIRST MUTUAL BANCSHARES, INC., 400 108TH AVENUE N.E.,
BELLEVUE, WASHINGTON 98004, (425) 455-7300.
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SHAREHOLDER PROPOSALS
- --------------------------------------------------------------------------------
In order to be (a) eligible for inclusion in the proxy materials of the
Company for next year's Annual Meeting of Shareholders, or (b) presented at next
year's Annual Meeting of Shareholders without inclusion in the Company's proxy
materials, shareholder proposals must be received no later than November 20,
2000. Such proposals must be mailed to the Company's principal executive offices
at 400 108th Avenue N.E., Bellevue, Washington 98004. Any such proposal shall be
subject to the requirements of the proxy rules promulgated by the Securities
Exchange Act of 1934, as amended.
BY ORDER OF THE BOARD OF DIRECTORS
Phyllis A. Easterlin
Corporate Secretary
Bellevue, Washington
March 20, 2000
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APPENDIX A
FIRST MUTUAL BANCSHARES, INC.
2000 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE OF THE PLAN. The Plan shall be known as the First Mutual
Bancshares, Inc. 2000 Stock Option and Incentive Plan (the "Plan"). The purpose
of the Plan is to attract and retain the best available personnel as officers
and directors and for positions of substantial responsibility within the
Company, the Company's primary subsidiary, First Mutual Bank (the "Bank") or any
other present or future Parent or Subsidiary of the Company, and to provide
additional incentive to such individuals in order to promote the success of the
Company's business by aligning employee financial interests with long-term
shareholder value. Options granted under the Plan may be either Incentive Stock
Options or Nonqualified Stock Options, at the discretion of the Committee and as
reflected in the terms of the written option agreement. Each and every provision
of the Plan relating to Incentive Stock Options shall be interpreted to conform
to the requirements of Section 422 of the Code.
This Plan also provides for (i) Awards of Options to directors who are not
full-time employees and (ii) for Awards of Stock Appreciation Rights.
2. DEFINITIONS. As used herein, the following definitions shall apply.
(a) "Award" means the grant by the Committee of an Incentive Stock
Option, a Nonqualified Stock Option, or a Stock Appreciation Right, or any
combination thereof, as provided in the Plan.
(b) "Bank" shall mean First Mutual Bank, a Washington stock bank under
RCW title 32, and any successor thereto.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean the Stock Option Committee appointed by the
Board of Directors in accordance with paragraph 4(a) of the Company's Plan;
provided, however, if the Board of Directors appoints more than one
committee pursuant to Section 4, then "Committee" shall refer to the
appropriate committee, as indicated by the context of the reference.
(f) "Common Shares" shall mean common stock of the Company.
(g) "Company" shall mean First Mutual Bancshares, Inc., a Washington
Corporation, and any successor thereto.
(h) "Continuous Employment" or "Continuous Status as an Employee" shall
mean the absence of any interruption or termination of service as an
Employee. Continuous status as an Employee shall not be considered
interrupted in the case of sick leave, maternity leave, infant care leave,
medical emergency leave, military leave or any other leave of absence
authorized and approved by the Company or its appropriate Subsidiary; nor
shall it be interrupted in the case of transfers between payroll locations
of the Company or between the Company and any Parent or Subsidiary, or their
respective successors.
(i) "Director" means a director of the Company.
(j) "Effective Date" shall mean the date of Board adoption of the Plan,
February 17, 2000. Any Award under this Plan made prior to the date of
shareholder approval is expressly subject to such shareholder approval of
the Plan.
(k) "Employee" shall mean any person, including officers, employed on a
full-time basis by the Company or any present or future Parent or Subsidiary
of the Company.
(l) "Incentive Stock Option" shall mean any Option intended to qualify
as an Incentive Stock Option under Section 422 of the Code.
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(m) "Non-Employee Director" shall have the same meaning as defined or
interpreted for purposes of Rule 16b-3 (including amendments and successor
provisions) as promulgated by the Securities and Exchange Commission
pursuant to its authority under the Exchange Act ("Rule 16b-3").
(n) "Nonqualified Stock Option" means an Option which is not intended to
qualify as an Incentive Stock Option.
(o) "Option" shall mean a Stock Option granted pursuant to this Plan.
(p) "Optioned Shares" shall mean the Common Shares subject to an Option.
(q) "Optionee" shall mean an Employee who receives an Option.
(r) "Outside Director" shall have the same meaning as defined or
interpreted for purposes of Section 162(m) of the Code.
(s) "Parent" shall mean any present or future corporation which would be
a "parent corporation" as defined in Subsections 424(e) and (g) of the Code.
(t) "Plan" shall mean this First Mutual Bancshares, Inc. 2000 Stock
Option and Incentive Plan, as amended from time to time.
(u) "Related" means (i) in the case of a Stock Appreciation Right, a
Stock Appreciation Right which is granted in connection with, and to the
extent exercisable, in whole or in part, in lieu of, an Option and (ii) in
the case of an Option, an Option with respect to which and to the extent a
Stock Appreciation Right which is exercisable, in whole or in part, in lieu
thereof has been granted.
(v) "Stock Appreciation Right" means a stock appreciation right with
respect to Common Shares granted by the Committee pursuant to Section 12
hereof.
(w) "Share" shall mean one Common Share, as adjusted in accordance with
Section 11 of the Plan.
(x) "Subsidiary" shall mean (i) in the case of an Incentive Stock Option
a "subsidiary corporation," whether now or hereafter existing, as defined in
Section 424(f) of the Code, and (ii) in the case of a Nonqualified Stock
Option, in addition to a subsidiary corporation as defined in (i), a limited
liability company, partnership or other entity in which the Company controls
50 percent or more of the voting power or equity interests.
3. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan and the provisions below in this Section 3, the maximum aggregate
number of shares which may be optioned and sold under the Plan is 573,393 Common
Shares as to Awards to Employees, augmented as stated below in this paragraph,
and, separately, 140,190 Common Shares for Awards to Non-Employee Directors
under Section 21 of this Plan augmented as stated below in this paragraph. These
numbers include Common Shares reserved and available for grant under the 1995
Plan which are effectively transferred to this Plan. The Shares may be
authorized, but unissued, or reacquired Common Shares. For purposes of
calculating this maximum aggregate number under either portion of the Plan,
options remaining outstanding under the Bank's 1995 Stock Option and Incentive
Plan, as amended ("1995 Plan") shall not be counted as if those options were
under this Plan; provided, however, that if such an option terminates or is not
exercised, the Common Shares reserved therefor shall be added to the maximum
aggregate number of shares under this Plan.
If an Option or Award under this Plan should expire or become unexercisable
for any reason without having been exercised in full, or if an Option or Award
is terminated by the mutual agreement of the Company and the person having the
Award or Option, the unpurchased Shares which were subject thereto shall, unless
the Plan shall have been terminated, become available for future grant under the
Plan.
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Further, Common Shares optioned under the 1995 Plan, upon an option under
that plan expiring or becoming unexercisable for any reason without having been
exercised in full, or such an option being terminated by mutual written
agreement, become available for future grant under the corresponding employee
portion or Non-Employee Director portion of this Plan, and accordingly increase
the maximum aggregate number of Shares under this Plan.
Shares which are subject to Stock Appreciation Rights and related Options
shall be counted only once in determining the maximum number of Shares with
respect to which Awards may be granted under the Plan at a particular time.
An Award shall not be considered to have been made under the Plan with
respect to any Stock Appreciation Right which terminates and new Awards may be
granted under the Plan with respect to the number of Shares as to which such
termination has occurred.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) The Board of Directors shall appoint one or more Committees each
consisting of not less than three members of the Board of Directors to
administer the Plan. Once appointed, such Committees shall continue to
serve until otherwise directed by the Board of Directors.
(ii) Any grants of Options to officers who are subject to Section 16
of the Securities Exchange Act of 1934 (the "Exchange Act") shall be made
by (a) a Committee of two or more directors, each of whom is a
Non-Employee Director and an Outside Director or (b) as otherwise
permitted by both Rule 16b, Section 162(m) of the Code and other
applicable regulations.
(iii) Subject to the foregoing subparagraphs (i) and (ii) from time
to time the Board of Directors may increase the size of the Committee(s)
and appoint additional members thereof, remove members (with or without
cause) and appoint new members in substitution therefor, or fill
vacancies however caused.
(b) POWERS OF THE COMMITTEE. Subject to the provisions of the Plan, the
Board, acting through the Committee, shall have the authority, in its
discretion: (i) to determine the Employees to whom, and the time or times at
which, Awards or Options shall be granted and the number of Shares to be
represented by each Award or Option; (ii) to grant Incentive Stock Options,
Nonqualified Stock Options and Stock Appreciation Rights; (iii) to
determine, in accordance with Section 8 of the Plan, the fair market value
of the Shares; (iv) to determine, in accordance with Section 8 of the Plan,
the exercise price per share of Options to be granted; (v) to interpret the
Plan; (vi) to prescribe, amend, and rescind rules and regulations relating
to the Plan; (vii) to determine the terms and provisions of each Option
granted (which need not be identical) and, with the consent of the holder
thereof, modify or amend each Option; (viii) to reduce the exercise price
per share of outstanding and unexercised Options; (ix) to accelerate or
defer (with the consent of the Optionee) the exercise date of any Option;
(x) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted
by the Board; and (xi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations, and
interpretations of the Committee shall be final and binding on all Optionees
and any other holders of any Awards or Options granted under the Plan.
(d) COMPLIANCE WITH SECURITIES LAWS.
As it determines from time to time, the Committee shall have the
right to:
(i) require an Optionee to execute, as a condition of exercise of an
Option, a letter evidencing Optionee's intent with respect to investment
or sale of the Shares;
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(ii) place appropriate legends upon the certificate or certificates
for the Shares; and
(iii) take such other acts as it deems necessary in order to cause
the issuance of Optioned Shares to comply with applicable provisions of
state and federal securities laws.
In furtherance of the foregoing and not by way of limitation thereof,
no Option shall be exercisable unless such Option and the Shares to be
issued pursuant thereto shall be registered under appropriate federal and
state securities laws, or shall be exempt therefrom, in the opinion of
the Board upon advice of counsel to the Company. Each Option agreement
shall contain adequate provisions to assure that there will be no
violation of such laws. This provision shall in no way obligate the
Company to undertake registration of Options or Shares hereunder. Issue,
transfer or delivery of certificates for Shares pursuant to the exercise
of Options may be delayed, at the discretion of the Committee, until the
Committee is satisfied that the applicable requirements of the federal
and state securities laws have been met.
(e) NOTICE OF EXERCISE.
The Optionee (or other person or persons, if any, entitled hereunder)
desiring to exercise an Option as to all or part of the Shares covered
thereby shall in writing notify the Company at its principal office,
specifying the number of Optioned Shares to be purchased and, if required
by the Company, representing in form satisfactory to the Company that the
Shares are being purchased for investment and not with a view to resale
or distribution. The Company from time to time may issue or specify to
Optionees a written form for use in connection with any such exercise.
5. ELIGIBILITY.
(a) All Employee Awards are discretionary. Options, other than director
options, may be granted only to Employees. For avoidance of doubt, except as
to director options under Section 21, directors are not eligible to
participate in the Plan unless they are full-time Employees.
(b) Each Option shall be stated in a written option agreement and shall
be designated in such agreement as either an Incentive Stock Option or a
Nonqualified Stock Option. However, notwithstanding such designations, to
the extent that the aggregate fair market value of the Shares with respect
to which Options designated as Incentive Stock Options are exercisable for
the first time by any Optionee during any calendar year (under all plans of
the Company) exceeds $100,000, such Options shall be treated as Nonqualified
Stock Options.
(c) For purposes of Section 5(b), Options shall be taken into account in
the order in which they were granted, and the fair market value of the
Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(d) Nothing in the Plan or any Option or Award granted hereunder shall
confer upon any Optionee any right with respect to continuation of
employment with the Company, nor shall it interfere in any way with the
Optionee's right or the Company's right to terminate the employment
relationship at any time with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon its adoption by the
Board February 17, 2000. It shall continue in effect until February 16, 2010,
unless sooner terminated under Section 15 of the Plan. Any Option duly granted
under this Plan prior to the Plan's expiration or termination shall be
exercisable pursuant to its terms and the terms hereof until expiration or
earlier termination of such Option.
7. TERM OF OPTION. The term of each Option shall be no more than ten
(10) years from the date of grant. However, in the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is granted, owns
Shares representing more than ten percent (10%) of the voting power of all
classes
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of shares of the Company or any Parent or Subsidiary, the term of the Option
shall be no more than five (5) years from the date of grant.
8. EXERCISE PRICE AND CONSIDERATION.
(a) The per Share exercise price under each Option shall be such price
as is determined by the Board, subject to the following:
(1) In the case of an Incentive Stock Option
(i) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns shares representing more than ten
percent (10%) of the voting power of all classes of shares of the
Company or any Parent or Subsidiary, the per Share exercise price
shall be no less than 110% of the fair market value per Share on the
date of grant.
(ii) granted to any other Employee, the per Share exercise price
shall be no less than 100% of the fair market value per Share on the
date of grant.
(2) In the case of a Nonqualified Stock Option the per Share exercise
price may be less than, equal to, or greater than the fair market value
per Share on the date of grant.
(b) The fair market value per Share shall be the closing price per share
of the Common Share on the Nasdaq Stock Market ("Nasdaq") on the date of
grant. If the Shares cease to be listed on Nasdaq, the Committee shall
designate an alternative method of determining the fair market value of the
Shares.
(c) 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 Board at the time of grant and may consist of cash and/or check.
Payment may also be made by delivering a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to
the Company the amount of sale proceeds necessary to pay the exercise price.
If the Optionee is an officer of the Company within the meaning of
Section 16 of the Exchange Act, he may in addition be allowed to pay all or
part of the purchase price with Shares. Shares used by officers to pay the
exercise price shall be valued at their fair market value on the exercise
date.
(d) Prior to issuance of the Shares upon exercise of an Option, the
Optionee shall pay any federal, state, and local withholding obligations of
the Company, if applicable. If an Optionee is an officer of the Company
within the meaning of Section 16 of the Exchange Act, he may elect to pay
such withholding tax obligations by having the Company withhold Shares
having a value equal to the amount required to be withheld. The value of the
Shares to be withheld shall equal the fair market value of the Shares on the
day the Option is exercised. The right of an officer to dispose of Shares to
the Company in satisfaction of withholding tax obligations shall be deemed
to be approved as part of the initial grant of an option, unless thereafter
rescinded, and shall otherwise be made in compliance with Rule 16b-3 and
other applicable regulations.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE, RIGHTS AS A SHAREHOLDER. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Committee at the time of grant, and as shall be
permissible under the terms of the Plan.
An Option may not be exercised for a fraction of a share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Committee, consist of any
consideration and method of payment
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allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the share certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such share certificate
promptly upon exercise of the Option. In the event that the exercise of an
Option is treated in part as the exercise of an Incentive Stock Option and in
part as the exercise of a Nonqualified Stock Option pursuant to Section 5(b),
the Company shall issue a share certificate evidencing the Shares treated as
acquired upon the exercise of an Incentive Stock Option and a separate share
certificate evidencing the Shares treated as acquired upon the exercise of a
Nonqualified Stock Option, and shall identify each such certificate accordingly
in its share transfer records. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the share certificate
is 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 which thereafter may be 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 STATUS AS EMPLOYEE. In the event of termination of
an Optionee's Continuous Status as an Employee, such Optionee may exercise
stock options to the extent exercisable on the date of termination. Such
exercise must occur within three (3) months (or such shorter time as may be
specified in the grant), after the date of such termination (but in no event
later than the date of expiration of the term of such Option as set forth in
the Option Agreement). To the extent that the Optionee was not entitled to
exercise the Option at the date of such termination, or does not exercise
such Option within the time specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of
Section 9(b) above, in the event of termination of an Optionee's Continuous
Status as an Employee as a result of total and permanent disability (i.e.,
the inability to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected
to result in death or which has lasted or can be expected to last for a
continuous period of twelve (12) months), the Optionee may exercise the
Option, but only to the extent of the right to exercise that would have
accrued had the Optionee remained in Continuous Status as an Employee for a
period of twelve (12) months after the date on which the Employee ceased
working as a result of the total and permanent disability. Such exercise
must occur within eighteen (18) months (or such shorter time as is specified
in the grant) from the date on which the Employee ceased working as a result
of the total and permanent disability (but in no event later than the date
of expiration of the term of such Option as set forth in the Option
Agreement). To the extent that the Optionee was not entitled to exercise
such Option within the time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. Notwithstanding the provisions of Section 9(b)
above, in the event of the death of an Optionee:
(i) who is at the time of death an Employee of the Company, the
Option may be exercised, at any time within six (6) months following the
date of death (but in no event later than the date of expiration of the
term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that would have accrued had the Optionee continued living and
remained in Continuous Status as an Employee twelve (12) months after the
date of death; or
(ii) whose Option has not yet expired but whose Continuous Status as
an Employee terminated prior to the date of death, the Option may be
exercised, at any time within six (6) months following the date of death
(but in no event later than the date of expiration of the term of such
Option as set forth in the Option Agreement), by the Optionee's estate or
by a
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person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that had
accrued at the date of termination.
(e) Notwithstanding subsections (b), (c), and (d) above, the Board shall
have the authority to extend the expiration date of any outstanding option
in circumstances in which it deems such action to be appropriate (provided
that no such extension shall extend the term of an option beyond the date on
which the option would have expired if no termination of the Employee's
Continuous Status as an Employee had occurred).
10. NON-TRANSFERABILITY OF OPTIONS. The Option 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; provided that the Committee may
permit further transferability, on a general or specific basis, and may impose
conditions and limitations on any permitted transferability.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) ADJUSTMENTS. Subject to any required action by the shareholders 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 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 Shares, or any other
increase or decrease in the number of issued Shares effected without receipt
of consideration by the Company; provided, however, that 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 provided herein, no issuance by the
Company of shares of any class, or securities convertible into shares 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.
In the event of the proposed dissolution or liquidation of the Company,
the Option will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in
the exercise of its sole discretion in such instances, declare that any
Option shall terminate as of a date fixed by the Board and give each
Optionee the right to exercise an Option as to all or any part of the
Optioned Shares, including Shares as to which the Option would not otherwise
be exercisable. In the event of a proposed sale of all or substantially all
of the assets of the Company, or the merger of the Company with or into
another corporation, each Option shall be assumed or an equivalent option
shall be substituted by such successor corporation or a Parent or Subsidiary
of such successor corporation, unless such successor corporation does not
agree to assume the Option or to substitute an equivalent option, in which
case the Board shall, in lieu of such assumption or substitution, provide
for the Optionee to have the right to exercise the Option as to all of the
Optioned Shares, including Shares as to which the Option would not otherwise
be exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable
for a period of fifteen (15) days from the date of such notice, and the
Option will terminate upon the expiration of such period.
(b) CHANGE IN CONTROL. In the event of a change in control of the
Company, the Optionee at his option may receive on the date immediately
prior to the consummation of such change in control, in lieu of stock, cash
in an amount equal to the aggregate difference between the exercise price
per share and the market price per share of the stock underlying such
outstanding options on the date immediately prior to the consummation of
such change in control of the Company. For purposes of
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this Section, "change in control" shall mean: the acquisition of the
"beneficial ownership" (as that term is defined in Rule 13d-3 of the General
Rules and Regulations under the Securities Exchange Act of 1934) of
twenty-five (25) percent or more of the voting securities of the Company by
any person or by persons acting as a group within the meaning of
Section 13(d) of the Securities Exchange Act of 1934; provided, however,
that for the purposes of the Option Plan no change in control shall be
deemed to have occurred if prior to the acquisition of, or offer to acquire
twenty-five (25) percent or more of the voting securities of the Company the
full Board of Directors of the Company shall have adopted by not less than a
two-thirds vote a resolution specifically approving such acquisition or
offer. The term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any form of entity not
specifically listed herein.
(c) EXTRAORDINARY CORPORATE ACTION. Subject to any required action by
the shareholders of the Company, in the event of any Change in Control,
recapitalization, merger, consolidation, exchange of shares, spin-off,
reorganization, tender offer, liquidation or other extraordinary corporate
action or event, the Committee, in its sole discretion, shall have the
power, prior or subsequent to such action or event to:
(i) appropriately adjust the number of shares of Common Stock subject
to each stock option, the exercise price per share of Common Stock, and
the consideration to be given or received by the Company upon the
exercise of any outstanding Option;
(ii) cancel any or all previously granted Options, provided that
appropriate consideration is paid to the Optionee in connection
therewith; and/or
(iii) make such other adjustments in connection with the Plan as the
Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable; provided, however, that no action shall be
taken by the Committee which would cause Incentive Stock Options granted
pursuant to the Plan to fail to meet the requirements of Section 422 of
the Code.
Except as expressly provided in Section 11(a) and 11(b) hereof, no
Optionee shall have any rights by reason of the occurrence of any of the
events described in this Section 11.
(d) ACCELERATION. The Committee shall at all times have the power to
accelerate the exercise date of Options previously granted under the Plan.
12. STOCK APPRECIATION RIGHTS. A Stock Appreciation Right shall, upon its
exercise, entitle the person to whom such Stock Appreciation Right was granted
to receive a number of Shares or cash or combination thereof, as the Committee
in its discretion, shall determine, the aggregate value of which (i.e., the sum
of the amount of cash and/or the fair market value of such Shares on date of
exercise) shall equal (as nearly as possible, it being understood that the
Company shall not issue any fractional shares) the amount by which the fair
market value per Share on the date of such exercise shall exceed the exercise
price of such Stock Appreciation Right, multiplied by the number of Shares with
respect of which such Stock Appreciation Right shall have been exercised. A
Stock Appreciation Right may be related to an Option or may be granted
independently of any Option as the Committee shall determine whether and to what
extent a Related Stock Appreciation Right shall be granted with respect thereto;
provided, however and notwithstanding any other provision of the Plan, that if
the Related Option is an Incentive Stock Option, the Related Stock Appreciation
Right shall satisfy all the restrictions and limitations of this Plan and
applicable laws as if such Related Stock Appreciation Right were an Incentive
Stock Option. In the case of a Related Option, such Related Option shall cease
to be exercisable to the extent of the Shares with respect to which the Related
Stock Appreciation Right was exercised. Upon the exercise or termination of a
Related Option, any Related Stock Appreciation Right shall terminate to the
extent to the Shares with respect to which the Related Option was exercised or
terminated.
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13. TIME OF GRANTING OPTIONS. The date of grant of an Award or Option
shall, for all purposes, be the date on which the Company completes the
corporate action relating to the grant of an option and all conditions to the
grant have been satisfied, provided that conditions to the exercise of an Award
or Option shall not defer the date of grant. Notice of a grant shall be given to
each person to whom an Award or Option is so granted within a reasonable time
after the determination has been made.
14. SUBSTITUTIONS AND ASSUMPTIONS. The Board shall have the right to
substitute or assume Options in connection with mergers, reorganizations,
separations, or other transactions to which Section 424(a) of the Code applies,
provided such substitutions and assumptions are permitted by Section 424 of the
Code and the regulations promulgated thereunder. The number of Shares reserved
pursuant to Section 3 may be increased by the corresponding number of Options
assumed and, in the case of a substitution, by the net increase in the number of
Shares subject to Options before and after the substitution.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable
(including, but not limited to amendments which the Board deems appropriate
to enhance the Company's ability to claim deductions related to stock option
exercises); provided that any increase in the number of Shares subject to
the Plan, other than in connection with an adjustment under Section 11 of
the Plan, shall require approval of, or ratification by, the shareholders of
the Company by majority vote.
(b) EMPLOYEES IN FOREIGN COUNTRIES. The Board shall have the authority
to adopt such modifications, procedures, and subplans as may be necessary or
desirable to comply with provisions of the laws of foreign countries in
which the Company or its Subsidiaries may operate to assure the viability of
the benefits from Options granted to Employees employed in such countries
and to meet the objectives of the Plan.
(c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Awards or Options already granted
and such Awards or Options shall remain in full force and effect as if this
Plan had not been amended or terminated, unless mutually agreed otherwise
between the Optionee and the Board, which agreement must be in writing and
signed by the Optionee and the Company.
(d) CHANGE IN APPLICABLE LAW. Notwithstanding any other provision
contained in the Plan, in the event of a change in any federal or state law,
rule or regulation which would make the exercise of all or part of any
previously granted Incentive and/or Non-Incentive Stock Option unlawful or
subject the Company to any penalty, the Committee may restrict any such
exercise without the consent of the Optionee or other holder thereof in
order to comply with any such law, rule or regulation or to avoid any such
penalty.
16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Award or Option unless the exercise of such Award
or Option and the issuance and delivery of such Shares pursuant thereto shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
17. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. SHAREHOLDER APPROVAL. The Plan is subject to majority approval by the
shareholders of the Company at the annual meeting of shareholders to be held on
April 27, 2000. If the Plan is not so approved by the shareholders, the Bank's
1995 Plan nonetheless shall continue in effect.
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<PAGE>
19. WITHHOLDING TAX. The Bank shall have the right to deduct from all
amounts paid in cash with respect to the exercise of a Stock Appreciation Right
under the Plan any taxes required by law to be withheld with respect to such
cash payments. Where a Participant or other person is entitled to receive Shares
pursuant to the exercise of an Option of Stock Appreciation Right pursuant to
the Plan, the Bank shall have the right to require the Participant or such other
person to pay the Bank the amount of any taxes which the Bank is required to
withhold with respect to such Shares, or, in lieu thereof, to retain, or sell
without notice, a number of such Shares sufficient to cover the amount required
to be withheld.
20. GOVERNING LAW. The Plan shall be governed by and construed in
accordance with the laws of the State of Washington.
21. DIRECTOR OPTIONS. The Bank's 1995 Plan, as last amended in 1996, with
shareholder approval, has reserved separately, within the director portion of
such plan, a remaining number of 76,190 shares for Non-Employee Director
Options, and shares reserved for prior Non-Employee Director Options outstanding
(75,790 shares). Upon shareholder approval of this Plan, (i) future Non-Employee
Director Options shall be awarded as to Common Shares on the same basis under
this Plan as under the 1995 Plan, (ii) 140,190 Common Shares plus the number, if
any, of Common Shares as to which previously awarded Non-Employee Director
Options under the Bank hereafter are terminated or not exercised, are reserved
for such purpose, and (iii) the Bank's 1995 Plan shall perform prior
Non-Employee Director Options outstanding, using Common Shares in the number
necessary for such purpose, but it shall not make future awards of any
Non-Employee Director Options.
Except for the authority to amend stated in subparagraph (g), the balance of
this Section 21 carries over and adapts the provision of the Bank's 1995 Plan
concerning Non-Employee Director Options (Section 24 thereof) as now applicable
to the Company.
In order to attract and retain qualified directors and to provide incentive
for their efforts, shares as specified above in this Section 21, subject to
adjustment as provided in Section 11, are reserved for Director Options granted
and to be granted to Non-Employee Directors as follows:
(a) These Director Options do not apply to directors who are also
full-time paid employees of the Company or any Parent or Subsidiary of the
Company. Other directors now serving and those hereafter appointed or
elected as directors of the Company shall be eligible.
(b) The further addition of shares to this director portion of the Plan,
beyond the shares described above in this Section 21, is subject to
shareholder approval.
(c) Within the limits of shares available within this director portion
of the Plan, each eligible director, now or hereafter serving, shall be
granted an option to acquire 2,500 shares of stock of the Bank adjusted for
changes in the Bank or Company's Shares after January, 1994, and subject to
further adjustment hereafter as provided in Section 11, at a price equal to
the fair value of the shares (under the methodology of Section 8) at the
time of the grant of the option, which option shall be exercisable one-half
( 1/2) upon completion of one (1) full year of service after the grant of
the option, and a like amount at the end of the second year so that the
option becomes fully exercisable after two (2) years of completed service
following the grant of the option.
(d) If shares are available within the director portion of the Plan, an
option for a like number of shares, adjusted for changes referred to in
Section 11 as to the Bank or Company Shares as applicable, from January,
1994, to the date of issuance, may be issued to a director at the start of
his next year of service after four (4) years, and so on, the exercise price
to be established at the time of the grant of the option. As to Non-Employee
Directors now serving, the next date for grant of Director Options is April,
2002.
(e) If, after receiving a grant of an option, a director ceases to be a
director during the term of the option, the portion of the option which has
not become exercisable shall be forfeited unless the reason
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<PAGE>
the director left office was death, disability or retirement from the Board
of Directors under mandatory age requirement provisions applicable to the
Bank. In each of these latter instances, the option shall become fully
vested and exercisable.
(f) The period during which the option may be exercised is limited to
the period of six (6) years after the grant of option, subject, of course,
to nonvesting and forfeiture rules just provided above.
(g) The issuance of these options to directors who are not employees of
the Company is not discretionary and shall occur as a matter of course under
the supervision of the President of the Company; provided, however, if the
Board decides to do so in the future it may change this Section 21 so that
Non-Employee Director Options granted after the date of such change are
discretionary, and if that change is made, Awards thereafter made under this
Section 21 shall be subject to approval of the Board. These Non-Employee
Director Options are not incentive stock options under Internal Revenue Code
Section 422. Except as provided otherwise within this Section 21, the
balance of the terms of the Plan shall apply to Non-Employee Director
Options as appropriate in the context of these options which are to
directors and not to employees.
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<PAGE>
REVOCABLE PROXY
FIRST MUTUAL BANCSHARES, INC.
ANNUAL MEETING OF SHAREHOLDERS
April 27, 2000
The undersigned shareholder of First Mutual Bancshares, Inc. hereby
appoints Messrs. F. Kemper Freeman, Jr. and John R. Valaas of First Mutual
Bancshares, Inc., and either of them, with full power of substitution to each,
to act as attorneys-in-fact and proxies to represent the undersigned at the
Annual Meeting of Shareholders, to be held at the Hyatt Regency Bellevue,
Bellevue, Washington, on April 27, 2000, at 3:00 p.m., local time, and at any
and all adjournments thereof, and to vote all of the shares of Common Stock of
First Mutual Bancshares, Inc. which the undersigned is entitled to vote as
fully as if the undersigned were present in person, in the manner indicated on
the reverse hereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AND WILL BE VOTED IN
THE MANNER DIRECTED ON THIS PROXY CARD; IF NO SPECIFICATION IS MADE, A VOTE
FOR THE ELECTION OF ALL NOMINEES AND FOR PROPOSAL 2 WILL BE ENTERED.
Should the undersigned be present and elect to vote in person at the
Annual Meeting or at any adjournment thereof, upon notification to the
Secretary of First Mutual Bancshares, Inc. at the Meeting of the shareholder's
decision to terminate the proxy, this power of attorney and proxy shall be
deemed terminated and of no further force and effect.
(Continued and to be signed on the reverse side.)
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
ANNUAL MEETING
OF
FIRST MUTUAL BANCSHARES, INC.
SHAREHOLDERS
____________
Thursday, April 27, 2000
3:00 p.m.
Hyatt Regency Bellevue
900 Bellevue Way N.E.
Bellevue, WA 98004
<PAGE>
<TABLE>
<S> <C>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS WHICH RECOMMENDS A VOTE FOR Please mark
EACH OF THE NOMINEES AND FOR PROPOSAL 2. your votes as
indicated in
this example
/ X /
FOR ALL WITHHOLD AUTHORITY TO
NOMINEES VOTE FOR ALL NOMINEES FOR AGAINST ABSTAIN
1. Election of the following / / / / 2. Proposal to adopt and approve / / / / / /
nominees to serve as directors the First Mutual Bancshares,
for the terms indicated below: Inc. 2000 Stock Option and
Incentive Plan.
Term ending 2001: Janine Florence F. Kemper Freeman, Jr.
Victor E. Parker
3. In their discretion, the
Term ending 2002: Mary Case Dunnam George W. Rowley, Jr. Proxies are authorized to vote
John R. Valaas H. Scott Wallace upon such other business as may
properly come before the
Term ending 2003: James J. Doud, Jr. Richard S. Sprague meeting.
Robert C. Wallace
(INSTRUCTION: To withhold authority to vote for any IF NO DIRECTION IS MADE, THIS PROXY WILL
individual nominee(s), write that nominee's name in BE VOTED "FOR ALL NOMINEES" AND "FOR"
the space provided below.) PROPOSAL 2.
The undersigned hereby revokes any and
all prior proxies and acknowledges
receipt from the Company prior to the
execution of this proxy of Notice of
Meeting, the Proxy Statement dated March
20, 2000, and the Report to Shareholders.
Please sign exactly as your name appears
to the left. When signing as attorney,
executor, administrator, trustee, or
guardian, please give your full name. If
shares are held jointly, each holder
should sign.
Signature______________________________ Signature if held jointly______________________________ Dated____________________
PLEASE COMPLETE, DATE, SIGN, AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED SELF-ADDRESSED POSTAGE-PREPAID ENVELOPE.
</TABLE>
- FOLD AND DETACH HERE -
