<PAGE>
EXHIBIT 10.3
PARADIGM BANCORPORATION, INC.
1998 STOCK APPRECIATION RIGHTS PLAN
PLAN DATE JANUARY 1, 1998
Section 1. Purpose of the Plan. The Paradigm Bancorporation, Inc. 1998
Stock Appreciation Rights Plan (the "Plan") is intended to provide a method for
attracting and retaining key individuals, either as employees or directors of
Paradigm Bancorporation, Inc. (the "Company") and its Affiliates (collectively,
the "Company Group"), to encourage such individuals to remain with the Company
Group and devote their best efforts to its affairs, and to enable such
individuals to participate in the long term growth of the Company Group. As
used in this Plan, the term "Affiliates" means any parent of the Company and any
subsidiary of the Company within the meaning of Section 424(e) and (f) of the
Internal Revenue Code of 1986, as amended (the "Code").
Section 2. Administration of the Plan
(a) Composition of Committee. The Plan shall be administered by the
Compensation Committee (the "Committee") designated by the Board of Directors
of the Company (the "Board"), which shall also designate the Chairman of the
Committee. If the Company is governed by Section 16 of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), the Compensation Committee
shall be composed solely of two or more "non-employee directors" within the
meaning of Rule 16b-3 promulgated by the Securities and Exchange Commission
("Commission") under the Exchange Act ("Rule 16b-3").
(b) Committee Action. The Committee shall hold its meetings at such
times and places as it may determine. A majority of its members shall
constitute a quorum, and all determinations of the Committee shall be made by
not less than a majority of its members. Any decision or determination
reduced to writing and signed by a majority of the members shall be effective
as if it had been made by a majority vote of its members at a meeting duly
called and held. The Committee may designate the Secretary of the Company or
other Company employees to assist the Committee in the administration of the
Plan, and may grant authority to such persons to execute agreements or other
documents on behalf of the Committee and the Company. Any duly constituted
committee of the Board satisfying the qualifications of this Section 2 may be
appointed as the Committee.
(c) Committee Expenses. All expenses and liabilities incurred by the
Committee in the administration of the Plan shall be borne by the Company.
The Committee may employ attorneys, consultants, accountants or other
persons.
(d) Committee Authority. Subject to the express provisions of the
Plan, the Committee shall have discretionary authority to prescribe, amend
and rescind rules and regulations relating to the Plan, to interpret the
Plan, to prescribe and amend the terms of the Stock Appreciation Rights
Agreements (the "SAR Agreements"), which need not be identical, and to make
all other determinations deemed necessary or advisable for the administration
of the Plan.
<PAGE>
Section 3. Eligibility. The persons eligible to participate in the Plan as
a recipient of a stock appreciation right (the "Participant") shall include key
employees (including officers and directors who are also key employees) of the
Company Group and directors of the Company Group at the time the stock
appreciation right is granted.
Section 4. Units Subject to the Plan. The aggregate number of Stock
Appreciation Right Units ("Units") which may be granted to Participants under
the Plan shall not exceed 50,000 Units, subject to adjustment as provided in
Section 9 below. Should any Units theretofore granted to a Participant expire
pursuant to Sections 6.(c) or 6.(d), such Units may again be granted to a
Participant under the Plan.
Section 5. Grant of Units. The Committee shall have discretionary authority
to determine, authorize and designate those key employees and directors of the
Company Group who are to receive Units under the Plan and to determine the
number of Units each such Participant is to receive.
Section 6. SAR Agreements. Each Unit granted under the Plan shall be
exercisable only for cash (subject to Section 9) and shall be evidenced by an
SAR Agreement, in a form approved by the Committee, which shall be subject to
the following express terms and conditions and such other terms and conditions
as the Committee may deem appropriate. Such SAR Agreement may include, without
limitation, provisions relating to (i) vesting of Units, subject to the
provisions hereof accelerating vesting on a Change of Control or IPO (as defined
in Sections 7 and 8), (ii) tax matters (including provisions covering applicable
wage withholding requirements), and (iii) any other matters not inconsistent
with the terms and provisions of this Plan, that the Committee shall in its sole
discretion determine. The terms and conditions of SAR Agreements need not be
identical.
(a) Stock Appreciation Right Period. The Committee shall promptly
notify the Participant of the stock appreciation right grant, and an SAR
Agreement shall promptly be executed and delivered by and on behalf of the
Company and the Participant, provided that the stock appreciation right grant
shall expire if a written agreement is not signed by said Participant (or his
agent or attorney) and returned to the Company within 60 days from date of
receipt by the Participant of such agreement. The date of grant shall be the
date the Units are actually granted by the Committee, even though the SAR
Agreement may be executed and delivered by the Company and the Participant
after that date. Each SAR Agreement shall specify the period for which the
Units thereunder are granted (which in no event shall exceed ten years from
the date of grant) and shall provide that the Units shall expire at the end
of such period. If the original term of an SAR Agreement is less than ten
years from the date of grant, the SAR Agreement may be amended prior to its
expiration, with the approval of the Committee and the Participant, to extend
the term so that the term as amended is not more than ten years from the date
of grant.
(b) Exercise of Units. The Committee may provide in the SAR Agreement
that Units granted the Participant may be exercised in whole or in
increments. Units shall be exercised by the delivery of written notice to
the Secretary of the Company setting forth the number of Units being
exercised and the date on which such exercise is to be effective ("Exercise
Date"). Subject to Section 9.(b), upon the exercise of Units by the
Participant in accordance with the SAR Agreement, the Company shall pay the
Participant within thirty (30)
2
<PAGE>
days of the Exercise Date an amount of cash (the "Compensation Amount") equal
to the excess, if any, of the aggregate Unit Value (as defined below) of the
Units exercised as of the Exercise Date over the aggregate exercise price (as
set forth in the SAR Agreement) of the Units exercised. The value of one Unit
(the "Unit Value") as of the Exercise Date shall be equal to the Fair Market
Value (as defined below) of one share of common stock, $1.00 par value (the
"Stock"), of the Company as of such date. For all purposes under the Plan,
the "Fair Market Value" of a share of Stock on a particular date shall be
equal to the mean of the reported high and low sales prices of the Stock on
the exchange on which the Stock is traded on that date, or if no prices are
reported on that date, on the last preceding date on which such prices of the
Stock are so reported. If the Stock is not traded on such exchange at the
time a determination of its Fair Market Value is required to be made
hereunder, its Fair Market Value shall be deemed to be equal to the average
between the closing bid and ask price of the Stock on the most recent date
the Stock was publicly traded. In the event the Stock is not publicly traded
at the time a determination of its value is required to be made hereunder,
the determination of its Fair Market Value shall be made by the Committee in
such manner as it deems appropriate.
(c) Termination of Employment or Directorship. If a Participant ceases
to be employed by the Company Group or to serve as a director of the Company
Group for any reason other than death or disability, any Units which are
exercisable on the date of such termination of employment or directorship may
be exercised during a three-month period beginning on such date, but in no
event may any Unit be exercised after its expiration under the terms of the
SAR Agreement; provided however, if a Participant's employment (or a
Participant's service as a director) is terminated because of a Participant's
theft or embezzlement from the Company Group, disclosure of trade secrets of
the Company Group or the commission of a willful, felonious act while in the
employment of the Company Group or while serving as a director of the Company
Group, then any Units or unexercised portion thereof granted to said
Participant shall expire upon such termination of employment or service as a
director.
(d) Disability or Death of Participant. In the event of the
determination of disability or the death of a Participant while he is
employed by (or serves as a director of) the Company Group, the Units
previously granted to him may be exercised (to the extent he would have been
entitled to do so at the date of the determination of disability or death) at
any time and from time to time, within a three-month period after such
determination of disability or death, by the former Participant, the guardian
of his estate, the executor or administrator of his estate or by the person
or persons to whom his rights under the SAR Agreement shall pass by will or
the laws of descent and distribution, but in no event may any Unit be
exercised after its expiration under the terms of the SAR Agreement. A
Participant shall be deemed to be disabled if, in the opinion of a physician
selected by the Committee, he is incapable of performing services for the
Company Group of the kind he was performing at the time the disability
occurred by reason of any medically determinable physical or mental
impairment which can be expected to result in death or to be of long,
continued and indefinite duration. The date of determination of disability
for purposes hereof shall be the date of such determination by such
physician.
(e) Expiration of Units. Any Units exercised pursuant to this Plan
shall expire automatically as of the Exercise Date. Additionally, Units
shall expire upon the Participant's
3
<PAGE>
termination of service with the Company Group in accordance with paragraphs
(c) and (d) above.
Section 7. Change of Control. For purposes of the Plan, a "Change of
Control" shall mean any of the following events:
(a) the Company is not the surviving entity in any merger or
consolidation with an entity which is not an Affiliate (or survives only as a
subsidiary of another entity which is not an Affiliate);
(b) the Company sells all or substantially all of its assets to any
other person or entity (other than an Affiliate);
(c) any person or entity (including a "group" as contemplated by Section
13(d)(3) of the Exchange Act) acquires or gains ownership or control of
(including, without limitation, power to vote) more than 50% of the
outstanding shares of Stock;
(d) the Company is to be dissolved and liquidated; or
(e) as a result of or in connection with a contested election of
directors, the persons who were directors of the Company before such election
shall cease to constitute a majority of the Board.
"Change of Control Value" shall mean (i) the price per share offered to
stockholders of the Company in any merger, consolidation, reorganization, sale
of assets or dissolution transaction, (ii) the price per share offered to
stockholders of the Company in any tender offer or exchange offer whereby a
Change of Control takes place, or (iii) if such Change of Control occurs other
than in (i) or (ii) above, the Fair Market Value per share of Stock, as
determined by the Committee, whichever is applicable. In the event that the
consideration offered to stockholders of the Company consists of anything other
than cash, the Committee shall determine the fair cash equivalent of the portion
of the consideration offered which is other than cash.
Section 8. Initial Public Offering. For purposes of the Plan, an "Initial
Public Offering" or "IPO" shall mean the consummation of an underwritten public
offering of Stock pursuant to a registration statement of the Company filed
under the Securities Act of 1933, as amended, after the effective date of the
Plan (other than any registration statement (a) relating to warrants, options or
shares of capital stock of the Company granted or to be granted or sold
primarily to employees, directors, or officers of the Company, (b) filed in
connection with a transaction described in Rule 145 under the Securities Act of
1933, as amended, or any successor rule, (c) relating to employee benefit plans
or interests therein, or (d) primarily relating to preferred stock or other
securities issued in connection with any financing by the Company which is
principally debt or preferred stock financing) wherein the aggregate net
proceeds (after deducting all costs, discounts, commissions and other expenses
of the offering) to the Company are at least $5,000,000. "IPO Price" shall mean
the price per share of Stock offered in an IPO.
4
<PAGE>
Section 9. Recapitalization or Reorganization.
(a) Solely for purposes of the Plan, each Unit has been equated with one
share of Stock as constituted on the date of adoption of the Plan. If, after
the adoption of the Plan, the Company shall be recapitalized or otherwise
change its capital structure or the number of issued and outstanding shares
of Stock shall be changed as a result of a share dividend or a subdivision or
consolidation of shares without receipt of consideration by the Company, the
number of Units theretofore granted to each Participant and the maximum
number of Units which may be granted under the Plan shall be appropriately
adjusted to reflect such change.
(b) In the event of an IPO or a Change of Control, all outstanding Units
shall immediately vest and become exercisable. The Committee, in its
discretion, may determine that upon the occurrence of an IPO or a Change of
Control, each Unit shall expire within a specified reasonable number of days
after notice to the Participant, and such Participant shall receive, with
respect to each Unit, cash in an amount equal to the excess, if any, of the
IPO Price or Change of Control Value (as applicable) over the exercise price
set forth in the SAR Agreement. Alternatively, in the event of a Change of
Control, the Committee, in its discretion, may provide that Units held by a
Participant shall become Units covering the number and class of shares of
stock or other securities or property (including, without limitation, cash)
to which the Participant would have been entitled pursuant to the terms of
the agreement of merger, consolidation or sale of assets or dissolution if,
immediately prior to such merger, consolidation or sale of assets or
dissolution the Participant had been the holder of record of the number of
shares of Stock then covered by such Units. The provisions contained in this
paragraph shall not terminate any rights of a Participant to further payments
pursuant to any other agreement with the Company Group following a Change of
Control.
(c) In the event of changes in the outstanding Stock by reason of
recapitalization, reorganizations, mergers, consolidations, combinations,
exchanges or other relevant changes in capitalization occurring after the
date of the grant of a Unit and not otherwise provided for by this Section,
any outstanding Units shall be subject to adjustment by the Committee at its
reasonable discretion. In the event of any such change in the outstanding
Stock, the aggregate number of Units available under the Plan may be
appropriately adjusted by the Committee, whose determination shall be
reasonable and conclusive.
(d) The existence of the Plan and the Units granted hereunder shall not
affect in any way the right or power of the directors or the stockholders of
the Company Group to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company Group=s capital structure or
its business, any merger or consolidation of the Company or any Affiliate,
any issue of debt or equity securities ahead of or affecting Stock or the
rights thereof, the dissolution or liquidation of the Company or any
Affiliate or any sale, lease, exchange or other disposition of all or any
part of its assets or business or any other corporate act or proceeding.
(e) Any adjustment provided for in paragraphs (a), (b) or (c) above
shall be subject to any required stockholder action.
5
<PAGE>
(f) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares
of stock of any class, for cash, property, labor or services, upon direct
sale, upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such
shares or other securities, and in any case whether or not for fair value,
shall not affect, and no adjustment by reason thereof shall be made with
respect to, the Units theretofore granted.
Section 10. Prohibition Against Assignment or Encumbrance. Except as set
forth in Section 6.(d) and Section 14, no right, title, interest or benefit
hereunder shall ever be transferable or liable for or charged with any of the
torts or obligations of a Participant or any person claiming under a
Participant, or be subject to seizure by any creditor of a Participant or any
person claiming under a Participant. No Participant or any person claiming
under a Participant shall have the power to anticipate or dispose of any right,
title, interest or benefit hereunder in any manner until the same shall have
been actually distributed free and clear of the terms of the Plan.
Section 11. Nature of the Plan. The Plan shall constitute an unfunded,
unsecured obligation of the Company to make payments in accordance with the
provisions of the Plan. Neither the establishment of the Plan, the granting and
vesting of Units nor the determination of Compensation Amounts shall be deemed
to create a trust. No Participant shall have any security or other interest in
any assets of the Company, in Stock, or otherwise.
Section 12. Employment Relationship. For all purposes of the Plan, a
Participant shall be considered to be in the employment of the Company Group as
long as he remains employed on a full-time basis by the Company and/or its
Affiliates, or any corporation to which substantially all of the assets and
business of the Company and/or its Affiliates are transferred. Nothing in the
adoption of the Plan or the granting of Units shall confer on any Participant
the right to continued employment by the Company or any Affiliate or affect in
any way the right of the Company or any Affiliate to terminate such employment
at any time. Any question as to whether and when there has been a termination
of a Participant's employment and the cause of such termination shall be
determined by the Committee, and its determination shall be final.
Section 13. Directorship. For all purposes of the Plan, a Participant shall
be considered to serve as a director of the Company Group as long as he remains
a duly elected or appointed director of the Company and/or its Affiliates, or
any corporation to which substantially all of the assets and business of the
Company and/or its Affiliates are transferred. Nothing in the adoption of the
Plan or the granting of Units shall confer on any Participant the right to
continued service as a director of the Company or any Affiliate. Any question
as to whether and when there has been a termination of a Participant's service
as a director and the cause of such termination shall be determined by the
Committee, and its determination shall be final.
Section 14. Beneficiary Designation. Each Participant under the Plan may
name, from time to time, any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid
in the case of the death or disability of the Participant before he receives any
or all of such benefit. Each designation will revoke all prior designations by
the same Participant, shall be in a form prescribed by the Committee, and will
be effective only when
6
<PAGE>
filed by the Participant in writing with the Committee during his lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to his estate.
Section 15. Amendment and Termination of the Plan. The Board in its sole
discretion may terminate the Plan at any time with respect to any Units which
have not theretofore been granted to Participants. The Board shall have the
right to alter or amend the Plan or any part thereof from time to time, except
that the Board shall not make any alteration or amendment which would impair the
rights of a Participant with respect to Units theretofore granted to that
Participant without that Participant's consent. If not sooner terminated under
the provisions of this Section 15, the Plan shall terminate as of the date on
which all Units theretofore granted to Participants have been exercised or
forfeited or have expired.
Section 16. Tax Withholding. The Company or any Affiliate shall have the
power to withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state, and local withholding tax requirements on
any grant under the Plan.
Section 17. Indemnification. Each person who is or shall have been a member
of the Board shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him in connection with or resulting from any claim,
action, suit, or proceeding to which he may be a party or in which he may be
involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him in settlement thereof, with the
Company's approval, or paid by him in satisfaction of any judgment in any such
action, suit, or proceeding against him, provided he shall give the Company an
opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification is in addition to any such rights to which such persons may be
entitled under the Company's Articles of Incorporation or Bylaws, as a matter of
law, or otherwise, or any power that the Company may have to indemnify them or
hold them harmless.
Section 18. Requirements of Law. The granting of Units and the exercise of
Units shall be subject to all applicable laws, rules, and regulations, and to
such approvals by any governmental agencies or national securities exchanges as
may be required.
Section 19. Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Texas and,
to the extent applicable, federal law.
7
<PAGE>
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing by the directors of the Company, Paradigm Bancorporation, Inc. has
caused these presents to be duly executed in its name and on its behalf by its
proper officers thereunto, duly authorized, as of this 1st day of March, 1998.
PARADIGM BANCORPORATION, INC.
By:
_____________________________________
Name:
_____________________________________
Title:
_____________________________________
8
<PAGE>
FIRST AMENDMENT TO THE
1998 STOCK APPRECIATION RIGHTS PLAN
This First Amendment to the Paradigm Bancorporation, Inc. 1998 Stock
Appreciation Rights Plan (the "Plan") is made effective as of August 1, 1999.
The Plan is hereby amended in the following respect:
a. Section 4 of the Plan is hereby amended to read as follows:
"Section 4. Units Subject to the Plan. The aggregate number of Stock
Appreciation Right Units ("Units") which may be granted to Participants under
the Plan shall not exceed 150,000 Units, subject to adjustment as provided in
Section 9 below. Should any Units theretofore granted to a Participant expire
pursuant to Sections 6.(c) or 6.(d), such Units may again be granted to a
Participant under the Plan."
Section 2. Ratification. Except as hereby amended, the Plan shall remain
unchanged and is ratified and confirmed in all respects and it
shall be continuing and binding upon the parties.
Section 3. Defined Terms. All terms used in the First Amendment that are
defined in the Plan shall have the same meaning as in the Plan.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be
executed as of the date first above written.
PARADIGM BANCORPORATION, INC.
By:
----------------------------------------
9
