<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 1997
-------------
OR
[_] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 0-11033
-------
MERCHANTS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0045946
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5005 WOODWAY, SUITE 300
HOUSTON, TEXAS 77056
(Address of principal executive offices) (zip code)
(713) 622-0042
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of August 1, 1997, Registrant had outstanding 1,951,839 shares of its $1.00
par value per share common stock.
<PAGE>
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The June 30,1997 and 1996 financial statements included herein are
unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the
opinion of management of the registrant, necessary to a fair statement
of the results for the interim periods.
PAGE
NO.
Consolidated Balance Sheets at June 30 and
at December 31,1996............................................... 3
Consolidated Statement of Income for the Three Months
Ended June 30, 1997 and 1996...................................... 4
Consolidated Statement of Income for the Six Months
Ended June 30,1997 and 1996....................................... 5
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1997 and 1996...................................... 6
Notes to Interim Consolidated Financial Statements
for the Period Ended June 30,1997................................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................. 15
ITEM 2. CHANGE IN SECURITIES.............................................. 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 15
ITEM 5. OTHER INFORMATION................................................. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
ASSETS
June 30, December 31,
1997 1996
-------- ------------
Cash and due from banks $ 33,054 $ 30,073
Time deposits in banks 1,500 1,000
Federal funds sold 16,125 6,375
Investment securities:
Available-for-Sale 111,331 123,076
Held-to-Maturity 18,246 20,196
Loans, net of allowance for
credit losses 315,941 291,811
Bank premises and equipment 14,888 14,797
Accrued interest receivable 3,643 3,663
Other assets 4,165 3,579
-------- --------
Total Assets $518,893 $494,570
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $137,235 $129,314
Interest bearing 323,771 309,729
-------- -------
461,006 439,043
Accrued interest, taxes and
other liabilities 2,343 2,016
-------- -------
Total Liabilities 463,349 441,059
-------- -------
Stockholders' Equity:
Common stock 1,978 1,978
Paid-in capital 25,767 25,767
Retained earnings 28,150 25,954
Unrealized securities gains
(losses) (29) 81
-------- -------
55,866 53,780
Less cost of stock held in
treasury:
Common Stock (322) (269)
-------- -------
Total Stockholders' Equity 55,544 53,511
-------- -------
Total Liabilities and
Stockholders' Equity $518,893 $494,570
======== ========
See Notes to Interim Consolidated Financial Statements.
3
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
JUNE 30,
-------------------
1997 1996
-------- --------
Interest Income:
Interest and fees on loans $7,388 $6,018
Investment securities:
Taxable 1,790 2,043
Non-taxable 210 230
Interest bearing deposits with bank 0 66
Time deposits with banks 17 23
Federal funds sold 265 292
------ ------
Total Interest Income 9,670 8,672
------ -----
Interest Expense:
Interest bearing deposits 3,015 2,686
------ ------
Total Interest Expense 3,015 2,686
------ ------
Net interest income 6,655 5,986
Provision for possible credit losses 435 82
------ ------
Net interest income after provision
for credit losses 6,220 5,904
------ ------
Non-Interest Income:
Service charges and fees 1,188 1,136
Other operating income 340 217
Securities gains (losses) 0 0
------ ------
Total Non-Interest Income 1,528 1,353
------ ------
Non-Interest Expense:
Salaries and employee benefits 2,820 2,984
Furniture, equipment and
occupancy expense 988 845
Other operating expenses 1,320 1,323
------ ------
Total Non-Interest Expense 5,128 5,152
------ ------
Income before income taxes 2,620 2,105
Income taxes 812 640
------ ------
Net Income $1,808 $1,465
====== ======
Per Share:
Net Income $ .93 $ .75
====== ======
Dividends - Common Stock $ .30 $ .20
====== ======
See Notes to Interim Consolidated Financial Statements.
4
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------
1997 1996
------- -------
Interest Income:
Interest and fees on loans $14,292 $11,657
Investment securities:
Taxable 3,609 4,055
Non-taxable 430 461
Interest bearing deposits with
bank 0 203
Time deposits with banks 30 51
Federal funds sold 514 797
------- -------
Total Interest Income 18,875 17,224
------- -------
Interest Expense:
Interest bearing deposits 5,948 5,506
Borrowed funds 0 9
------- -------
Total Interest Expense 5,948 5,515
------- -------
Net interest income 12,927 11,709
Provision for possible credit
losses 870 62
------- -------
Net interest income after provision
for credit losses 12,057 11,547
------- -------
Non-Interest Income:
Service charges and fees 2,372 2,303
Other operating income 630 449
Securities gains (losses) 0 0
------- -------
Total Non-Interest Income 3,002 2,752
------- -------
Non-Interest Expense:
Salaries and employee benefits 5,632 5,782
Furniture, equipment and
occupancy expense 1,948 1,569
Other operating expenses 2,752 2,713
------- -------
Total Non-Interest Expense 10,332 10,064
------- -------
Income before income taxes 4,727 4,235
Income taxes 1,457 1,300
------- -------
Net Income $ 3,270 $ 2,935
======= =======
Per Share:
Net Income $ 1.67 $ 1.51
======= =======
Dividends - Common Stock $ .55 $ .37
======= =======
See Notes to Interim Consolidated Financial Statements.
5
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,270 $ 2,935
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Provision for credit losses 870 163
Depreciation and amortization 908 847
Origination of mortgage loans for sale (5,430) (6,148)
Proceeds from mortgage loans sold 4,821 6,126
Provision for losses on real
estate and other assets 5 124
(Increase) decrease in interest
receivable 20 16
(Decrease) increase in accrued
interest and other liabilities (2) (466)
Other - net (19) 2
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITES 4,443 3,599
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in time deposits
in banks 0 (1,900)
Proceeds from the maturities of held-to-
maturity investment securities 1,935 1,660
Proceeds from the maturities of available-
for-sale investment securities 19,580 19,317
Purchase of held-to-maturity
investment securities 0 (1,368)
Purchase of available-for-sale
investment securities (8,218) (20,213)
Net decrease (increase) in loans (24,199) (25,013)
Purchase of bank premise and equipment (730) (3,731)
Proceeds from sale of real estate
and other loan related assets 212 200
Other (628) (772)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (12,048) (31,820)
-------- --------
See Notes to Interim Consolidated Financial Statements.
6
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 21,963 (10,802)
Dividends paid (1,074) (720)
Sale of Treasury stock 0 30
Purchase of Treasury stock (53) 0
Repayment of borrowings 0 (3,083)
Purchase minority interest 0 (287)
------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 20,836 (14,862)
------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 13,231 (43,083)
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 37,448 81,552
------- --------
CASH AND CASH EQUIVALENTS
END OF PERIOD 50,679 $ 38,469
======= ========
For the six months ended June 30:
Interest paid $ 5,898 $ 5,667
======= ========
Income taxes paid $ 1,800 $ 1,200
======= ========
Non-Cash Transactions:
Foreclosed properties transferred
to other real estate and loan
related assets $ 482 $ 589
======= ========
Bank loans for other real estate
and loan related assets sold $ 139 $ 700
======= ========
See Notes to Interim Consolidated Financial Statements.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. PRESENTATION OF FINANCIAL INFORMATION
The accompanying unaudited consolidated interim financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting solely of normal
recurring items) considered necessary for a fair presentation have been
included. The results of operations for the three and six months ended June 30,
1997, are not necessarily indicative of results that may be expected for the
entire year ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the annual
report on Form 10-K of Merchants Bancshares, Inc. (the "Company"), for the year
ended December 31, 1996.
NOTE 2. EARNINGS PER SHARE
Earnings per share amounts have been computed using the weighted average number
of common shares and common share equivalents outstanding during the period.
The number of such primary shares were 1,953,926 and 1,943,720 for the six
months ended June 30,1997 and 1996, respectively.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF STATEMENT OF INCOME
- -------------------------------
The following analysis discusses material changes in the results of operations
for the second quarter of 1997 compared to the second quarter of 1996 and the
first six months of 1997 as compared to the first six months of 1996. The
Company recorded earnings of $1,808,000 in the second quarter of 1997 and
$3,270,000 in the first six months of 1997 compared to $1,465,000 in the second
quarter of 1996 and $2,935,000 in the first six months of 1996.
NET INTEREST INCOME
- -------------------
Net interest income increased 11.2% in the second quarter of 1997 when compared
to the same period in 1996 and increased by 10.4% during the first six months of
1997 as compared to the first six months of 1996.
The increase of $1,218,000 for the first six months of 1997 over the same period
in 1996 resulted from a $1,651,000 (9.6%) increase in interest income on earning
assets, partially offset by an increase of $433,000 (7.9%) in interest expense.
Higher volumes of interest earning assets, particularly loans, were the primary
reasons for the increase in net interest income.
The Company's subsidiary bank (the "Subsidiary Bank") attempts to adjust the
rates paid or earned on interest bearing liabilities and interest earning assets
to maintain a consistent net interest margin to the extent possible.
PROVISION FOR CREDIT LOSSES
- ---------------------------
The provision for credit losses increased by $353,000 for the second quarter of
1997 compared to the second quarter of 1996 and increased by $708,000 for the
first six months of 1997 as compared to the same period in 1996. The provision
for credit losses for the first six months of 1997 was offset by $314,000 in net
losses charged to the allowance as compared with net losses of $71,000 for the
same period in 1996. The primary reason for the increased provision is the
increase in loan volumes. The ratio of the allowance for credit losses to
outstanding loans was 1.02% on June 30, 1997, as compared to .95% on June 30,
1996.
The Subsidiary Bank's policy is to maintain a level in the allowance for credit
losses that is adequate to cover the loan losses sustained plus provide for any
future possible losses on problem loans. The adequacy of the allowance is
continually monitored and management considers the current level to be
appropriate based on an evaluation of the Subsidiary Bank's loan portfolio. The
transactions in the allowance for credit losses were as follows:
9
<PAGE>
PROVISION FOR CREDIT LOSSES (CONTINUED)
- ---------------------------------------
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------------
1997 1996
------------ ----------
Loans outstanding at period end $319,210,000 $263,290,000
============ ============
Allowance at beginning of period $ 2,713,000 $ 2,411,000
------------ ------------
Provision charged to expense 870,000 162,000
------------ ------------
Loans charged off:
Commercial and industrial (151,000) (24,000)
Real estate (49,000) (15,000)
Installment (218,000) (134,000)
------------ ------------
Total (418,000) (173,000)
------------ ------------
Loans recovered:
Commercial and industrial 22,000 59,000
Real estate 6,000 8,000
Installment 76,000 35,000
------------ ------------
Total 104,000 102,000
------------ ------------
Net Loans recovered (charged off) (314,000) (71,000)
------------ ------------
Allowance at end of period $ 3,269,000 $ 2,502,000
============ ============
Ratios:
Allowance as a percent of
loans outstanding 1.02% .95%
============ ============
Allowance as a percent of
nonperforming loans 104.9% 88.5%
============ ============
NON-PERFORMING ASSETS
- ---------------------
All loans which cause management to have doubt as to the borrower's ability to
substantially comply with present loan repayment terms are included in the
schedule of non-performing loans.
Non-performing loans consist of loans on which interest is not being accrued and
loans which are 90 days or more past due as to principal and/or interest payment
and not yet in a non-accruing status. The policy of the Subsidiary Bank is to
continue to accrue interest on loans which are 90 days or more past due if
periodic payments are being made on the loans. If a loan is classified as past
due and payments then resume on the loan, it continues to be classified as past
due until all past due amounts are paid.
10
<PAGE>
NON-PERFORMING ASSETS (CONTINUED)
- ---------------------------------
The following table discloses information regarding non-performing assets for
the indicated periods:
JUNE 30,
----------------------
1997 1996
---------- ----------
Non-accrual loans $2,421,000 $2,061,000
Past due 90 days or more 694,000 767,000
---------- ----------
Total 3,115,000 2,828,000
Other real estate owned 996,000 1,428,000
---------- ----------
Total non-performing assets $4,111,000 $4,256,000
========== ==========
NON-INTEREST INCOME
- -------------------
The components included in non-interest income for the indicated periods are as
follows:
FOR THE QUARTER
ENDED JUNE 30,
----------------------
1997 1996
---------- ----------
Service charges and fees $1,188,000 $1,136,000
Other operating income 340,000 217,000
Securities transactions 0 0
---------- ----------
Total non-interest income $1,528,000 $1,353,000
========== ==========
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------
1997 1996
---------- ----------
Service charges and fees $2,372,000 $2,303,000
Other operating income 630,000 449,000
Securities transactions 0 0
---------- ----------
Total non-interest income $3,002,000 $2,752,000
========== ==========
Noninterest income increased $175,000 or 12.9% for the second quarter of 1997
compared to the same period in 1996 and increased $250,000 or 9.1% for the first
six months of 1997 compared to the first six months of 1996. The increases in
other operating income are primarily due to increased volumes of fees charged
for non-sufficient funds and ATM fees.
The Company maintains a policy of constantly monitoring and evaluating service
charges and fees to ensure that the fees charged reflect the cost of service
provided and remain competitive with other financial institutions located in the
Subsidiary Bank's market area.
11
<PAGE>
NON-INTEREST EXPENSE
- --------------------
Non-interest expense decreased by .5% for the second quarter of 1997 over the
second quarter of 1996 and increased 2.7% for the first six months of 1997
compared to the first six months of 1996. The totals were as follows:
FOR THE QUARTER
ENDED JUNE 30,
--------------------------
1997 1996
----------- -----------
Salaries and employee benefits $ 2,820,000 $ 2,984,000
Furniture, equipment and occupancy
expense 988,000 845,000
Other operating expenses 1,320,000 1,323,000
----------- -----------
Total non-interest expenses $ 5,128,000 $ 5,152,000
=========== ===========
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------
1997 1996
----------- ----------
Salaries and employee benefits $ 5,632,000 $ 5,782,000
Furniture, equipment and occupancy
expense 1,948,000 1,569,000
Other operating expenses 2,752,000 2,713,000
----------- -----------
Total non-interest expenses $10,332,000 $10,064,000
=========== ===========
Salaries and employee benefits are the most significant operating expenses of
the Company. These expenses decreased by 5.5% and 2.6% for the second quarter
and the first six months of 1997, respectively, as compared to the same periods
in 1996 and are attributable to staff reduction.
Furniture, equipment and occupancy expenses increased by 16.9% for the second
quarter of 1997 as compared to the second quarter of 1996 and increased by 24.2%
for the first six months of 1997 compared to the same period in 1996. The
opening of two branch facilities in the latter part of 1996 is responsible for
the increases. Other operating expenses remained virtually the same for the
second quarter and first six months comparisons.
ANALYSIS OF BALANCE SHEET
EARNING ASSETS
When comparing the total of earning assets at June 30, 1997, to the total at
December 31, 1996, earning assets increased 4.7%. The increase of $20,685,000
was due to increases of $500,000, $9,750,000 and $24,130,000 in time deposits,
federal funds sold and loans, respectively. The increases were partially offset
by a decrease of $13,695,000 in investment securities.
Included in the total of earning assets at June 30, 1997 are loans totaling
$2,421,000 which are on a non-accrual status. This compares to non-accrual
loans totaling $2,061,000 and $2,129,000 at June 30, 1996 and December 31, 1996,
respectively.
12
<PAGE>
DEPOSITS
The most important funding source for earning asset growth is deposits. Total
deposits increased by 5.0% from December 31, 1996 to June 30, 1997, compared to
a decrease of 2.5% from December 31, 1995, to June 30, 1996. Non-interest
bearing deposits increased 6.1% from December 31, 1996 to June 30, 1997, while
interest bearing deposits increased 4.5% for the same period.
CAPITAL
Shareholders' equity increased $2,033,000, or 3.8% for the six months ended June
30, 1997, as compared to an increase of $853,000 for the six months ended June
30, 1996. The ratio of shareholders' equity to total assets was 10.7% on June
30, 1997, as compared to 10.8% on December 31, 1996 and 10.6% on June 30, 1996.
Bank holding companies and their bank subsidiaries are required to maintain
certain capital ratios. The Federal Reserve Board's guidelines classify capital
into two tiers, referred to as Tier 1 and Tier 2. Tier 1 capital consists of
common and qualifying preferred shareholders' equity less goodwill. Tier 2
capital consists of mandatory convertible debt, preferred stock not qualifying
as Tier 1, qualifying subordinated debt and the allowance for credit losses up
to 1.25% of risk-weighted assets. The minimum ratio for the sum of Tier 1 and
Tier 2 to risk weighted assets is 8.0%, at least one-half of which should be in
the form of Tier 1 capital. At June 30, 1997, core capital (Tier 1) and total
capital (Tier 1 and Tier 2) as a percentage of risk-weighted assets was 16.20%
and 17.18%, respectively. The Subsidiary Bank at June 30, 1997 had core capital
of 14.95% and total capital of 15.93% as a percentage of risk weighted assets.
In addition to the foregoing ratios, bank holding companies are required to
maintain a minimum ratio of core capital to total assets (hereinafter referred
to as the "Leverage Ratio") of at least 3.0%. At June 30, 1997, the Company's
Leverage Ratio was 10.59%. A similar leverage ratio applicable to the
Subsidiary Bank has been adopted by the FDIC. At June 30, 1997, the Subsidiary
Bank's ratio was 9.79%.
LIQUIDITY AND CAPITAL COMMITMENTS
Liquidity is the ability of the Company and the Subsidiary Bank to meet their
short-term needs for cash arising from demands such as operating expenses,
withdrawal of deposits and demand for loans. The liquidity of the Company is
primarily provided by dividends from the Subsidiary Bank and interest on time
deposits in financial institutions.
The Subsidiary Bank's liquidity is primarily provided by maturing loans,
deposits, cash, short-term investments, time deposits in other banks, federal
funds sold and profits. With bank regulators critically reviewing liquidity,
the Company has adopted a policy of maintaining a minimum liquidity level of 20%
as measured by the FDIC formula, at the Subsidiary Bank. As of June 30, 1997,
the liquidity level of the Subsidiary Bank was 33.28%.
The Company believes that both it and the Subsidiary Bank have sufficient
capital and financial resources to meet its current and anticipated capital
commitments.
13
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal proceedings.
Not applicable
Item 2. Changes in securities.
Not applicable
Item 3. Defaults upon senior securities.
Not applicable
Item 4. Submission of matters to a vote of security holders.
(a) The Company's annual meeting of shareholders was held May 20, 1997.
(c) (1) The shareholders elected the following directors at the meeting:
VOTES FOR VOTES AGAINST ABSTENTIONS
--------------------------------------------
Norman H. Bird 1,337,292 0 7,170
Donald R. Harding 1,337,292 0 7,170
J. W. Lander, Jr. 1,337,292 0 7,170
J. W. Lander,III 1,337,292 0 7,170
(2) At the meeting the shareholders ratified the adoption of the
Company's 1997 Flexible Incentive Plan:
VOTES FOR VOTES AGAINST ABSTENTIONS
--------------------------------------------
1,324,192 5,930 7,170
Item 5. Other information.
Not applicable
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports of Form 8-K
No reports on Form 8-K were filed during the period ending
June 30, 1997.
15
<PAGE>
INDEX TO EXHIBITS
(If applicable)
Incorporated by reference from
------------------------------
EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
- -------------------------------- ---- ---- -------- -------
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession
2.1 Agreement and Plan of Reorganization S-4 11/25/94 33-86750 2.1
(3) Articles of Incorporation and Bylaws
3.1 Articles of Incorporation, together
with amendments thereto 8-K 04/23/96 0-11033 3(i)
3.2 Bylaws of the Registrant 8-K 04/23/96 0-11033 3(ii)
(4) Instruments defining rights of security
holders, including indentures
4.1 Form of specimen certificate representing
the Common Stock, par value $1.00 per
share of the Registrant N/A N/A N/A N/A
(10) Material contracts
10.3 Merchants Bancshares, Inc.
401 (k) Plan 10-K 12/31/89 0-11033 10.3
10.4 Merchants Bancshares, Inc.
Defined Benefit Pension Plan 10-K 12/31/94 0-11033 10.4
10.5 Merchants Bancshares, Inc.
1997 Flexible Incentive Plan N/A N/A N/A N/A
(27) Financial Data Schedule
27.1 Financial Data Schedule N/A N/A N/A N/A
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS BANCSHARES, INC.
Date: July 31, 1997 BY: /s/J. W. Lander, Jr.
---------------------------
J.W. Lander, Jr., Chairman
Date: July 31, 1997 BY: /s/J. W. Lander, III
---------------------------
J. W. Lander, III, President
(principal financial and chief
accounting officer)
17
<PAGE>
EXHIBIT 4.1
COMMON COMMON
[LOGO OF MERCHANTS BANCSHARES, INC. APPEARS HERE]
MB
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS
THIS CERTIFICATE IS SEE REVERSE FOR CERTAIN DEFINITIONS
TRANSFERABLE IN
CHICAGO, ILLINOIS AND CUSIP 588447 10 2
NEW YORK, NEW YORK
This Certifies that
SPECIMEN
is the record holder of
FULLY PAID AND NON-ASSESSABLE COMMON CAPITAL STOCK,
PAR VALUE ONE DOLLAR ($1.00) PER SHARE, OF
MERCHANTS BANCSHARES, INC.
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
In Witness Whereof the said Corporation has caused this Certificate to be
signed by its duly authorized officers and to be sealed with the seal of the
Corporation.
Dated
PRESIDENT COUNTERSIGNED AND REGISTERED:
HARRIS TRUST AND SAVINGS BANK
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
SECRETARY
[SEAL OF
MERCHANTS BANCSHARES, INC.
APPEARS HERE]
(C) SECURITY COLUMBIAN UNITED STATES BANCSHARES CORPORATION
<PAGE>
[LOGO OF MERCHANTS BANCSHARES, INC. APPEARS HERE]
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable law or regulations:
TEN COM-- as tenants in UNIF GIFT MIN ACT -- ______ Custodian _______
common (Cust) (Minor)
TEN ENT-- as tenants by Under Uniform Gifts to
the entireties Minors
JT TEN -- as joint tenants Act_____________________
with right of (State)
survivorship and not
tenants in common
Additional abbreviations may also be used though not in the above list.
NO HOLDER OF THE SHARES REPRESENTED BY THIS CERTIFICATE WILL HAVE ANY
PREEMPTIVE RIGHT TO ACQUIRE ANY SHARES OR SECURITIES OF ANY KIND, WHETHER NOW OR
HEREAFTER AUTHORIZED, WHICH MAY AT ANY TIME BE ISSUED, SOLD OR OFFERED FOR SALE
BY THE CORPORATION.
STATEMENTS DESCRIBING THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND
RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF STOCK AUTHORIZED TO BE ISSUED BY
THE CORPORATION ARE SET FORTH IN THE CORPORATION'S ARTICLES OF INCORPORATION ON
FILE IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF TEXAS. THE
CORPORATION WILL FURNISH COPIES OF SUCH STATEMENTS TO ANY SHAREHOLDER, WITHOUT
CHARGE, UPON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF
BUSINESS OR REGISTERED OFFICE.
For Value Received, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
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| |
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PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING POSTAL ZIP CODE OF ASSIGNEE
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Shares
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of the stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
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Attorney
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to transfer the said stock on the books of the within-named Company with full
power of substitution in the premises.
Dated
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NOTICE: X
THE SIGNATURE(S) TO ---------------------------------------
THIS ASSIGNMENT MUST (SIGNATURE)
CORRESPOND WITH THE
NAME(S) AS WRITTEN \
UPON THE FACE OF THE -------
CERTIFICATE IN EVERY /
PARTICULAR WITHOUT
ALTERATION OR EN- X
LARGEMENT OR ANY ---------------------------------------
CHANGE WHATEVER. (SIGNATURE)
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|THE SIGNATURE(S) SHOULD BE GUARANTEED |
|BY AN ELIGIBLE "GUARANTOR INSTITUTION"|
|AS DEFINED IN RULE 17Ad-15 UNDER THE |
|SECURITIES EXCHANGE ACT OF 1934, AS |
|AMENDED. |
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|SIGNATURE(S) GUARANTEED BY: |
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<PAGE>
EXHIBIT 10.5
MERCHANTS BANCSHARES, INC.
1997 FLEXIBLE INCENTIVE PLAN
------------------------------------
SECTION 1. PURPOSE OF THIS PLAN
The purposes of the Merchants Bancshares, Inc. 1997 Flexible Incentive Plan
are to (i) promote the interests of Merchants Bancshares, Inc. (the "Company")
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and its shareholders by enabling the Company and each of its Subsidiaries (as
hereinafter defined) to (A) attract, motivate and retain their respective
employees and non-employee Directors (as hereinafter defined) by offering such
employees and non-employee Directors performance-based stock incentives and
other equity interests in the Company and other incentive awards and (B)
compensate Consultants (as hereinafter defined) by offering such Consultants
performance-based stock incentives and other equity interests in the Company and
other incentive awards that recognize the creation of value for the shareholders
of the Company and (ii) promote the Company's long-term growth and success. To
achieve these purposes, eligible Persons may receive Stock Options, Stock
Appreciation Rights, Restricted Stock, Performance Awards, Dividend Equivalent
Rights and any other Awards (as such terms are hereinafter defined), or any
combination thereof.
SECTION 2. DEFINITIONS
As used in this Plan, the following terms shall have the meanings set forth
below unless the context otherwise requires:
2.1 "Award" shall mean the grant of a Stock Option, a Stock
Appreciation Right, Restricted Stock, a Performance Award, a Dividend
Equivalent Right or any other grant of incentive compensation pursuant to
this Plan.
2.2 "Award Period" shall have the meaning set forth in Subsection
----------
17.2 of this Plan.
----
2.3 "Book Value" shall mean the excess of the value of the assets of
an entity over the liabilities of such entity (determined in accordance
with United States generally accepted accounting principles, consistently
applied).
2.4 "Board" shall mean the Board of Directors of the Company, as the
same may be constituted from time to time.
2.5 "Cause" shall mean termination of a Participant's employment with
the Company or a Subsidiary upon the occurrence of one or more of the
following events:
(a) The Participant's failure to substantially perform such
Participant's duties with the Company or any Subsidiary as determined
by the Board following receipt by the Participant of written notice of
such failure and the Participant's failure to remedy such failure
within thirty (30) days after receipt of such notice
<PAGE>
(other than a failure resulting from the Participant's incapacity
during physical or mental illness);
(b) The Participant's willful failure or refusal to perform
specific directives of the Board, which directives are consistent with
the scope and nature of the Participant's duties and responsibilities,
and which are not remedied by the Participant within thirty (30) days
after being notified in writing of such Participant's failure by the
Board;
(c) The Participant's conviction of a felony; or
(d) A breach of the Participant's fiduciary duty to the Company
or any Subsidiary or willful violation in the course of performing the
Participant's duties for the Company or any Subsidiary of any law,
rule or regulation (other than traffic violations or other minor
offenses). No act or failure to act on the Participant's part shall
be considered willful unless done or omitted to be done in bad faith
and without reasonable belief that the action or omission was in the
best interest of the Company.
2.6 "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time (or any successor to such legislation).
2.7 "Common Stock" shall mean the Common Stock, par value $1.00 per
share, of the Company.
2.8 "Company" shall have the meaning set forth in Section 1 of this
---------
Plan.
2.9 "Consultant" shall mean any Person who or which is engaged by the
Company or any Subsidiary to render consulting services.
2.10 "Corporate Transaction" shall mean any recapitalization (other
than a transaction contemplated by Subsection 13(a)), merger, consolidation
-----------------
or conversion involving the Company or any exchange of securities involving
the Common Stock (other than a transaction contemplated by Subsection
----------
13(a)).
------
2.11 "Designated Beneficiary" shall mean the beneficiary designated
by a Participant, in a manner authorized by the Board, to exercise the
rights of such Participant in the event of such Participant's death. In
the absence of an effective designation by a Participant, the Designated
Beneficiary shall be such Participant's estate.
2.12 "Director" shall mean any member of the Board.
2.13 "Disability" shall mean permanent and total inability to engage
in any substantial gainful activity, even with reasonable accommodation, by
reason of any medically determinable physical or mental impairment which
has lasted or can reasonably
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<PAGE>
be expected to last without material interruption for a period of not less
than twelve (12) months, as determined in the sole discretion of the Board.
2.14 "Dividend Equivalent Right" shall mean the right of the holder
thereof to receive payments based on the cash dividends that would have
been paid on the number of Shares specified in an Award granting Dividend
Equivalent Rights if the number of Shares subject to such Award were held
by such holder on the record date for determining shareholders to whom
dividends are payable.
2.15 "Effective Date" shall mean May 20, 1997.
2.16 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time (or any successor to such legislation).
2.17 "Fair Market Value" shall mean with respect to the Shares, as of
any date, (i) if the Common Stock is listed or admitted to trade on a
national securities exchange, the closing price of the Common Stock on the
composite tape, as published in the Wall Street Journal, of the principal
national securities exchange on which the Common Stock is so listed or
admitted to trade, on such date or, if there is no trading in Shares on
such date, then the closing price of the Common Stock as quoted on such
composite tape on the next preceding date on which there was trading in
such Shares; (ii) if the Common Stock is not listed or admitted to trade on
a national securities exchange, then the closing price of the Common Stock
as quoted on the Nasdaq National Market; (iii) if the Common Stock is not
listed or admitted to trade on a national securities exchange or the Nasdaq
National Market, the mean between the bid and asked price for the Common
Stock on such date, as furnished by the NASD through NASDAQ or a similar
organization if NASDAQ is no longer reporting such information; or (iv) if
the Common Stock is not listed or admitted to trade on a national
securities exchange or the Nasdaq National Market and if bid and asked
prices for the Common Stock are not so furnished by the NASD or a similar
organization, the value established by the Board. Fair market value shall
be determined without regard to any restriction other than a restriction
which, by its terms, will never lapse.
2.18 "Group" shall have the meaning ascribed to such term in Section
13(d) of the Exchange Act.
2.19 "Incentive Stock Option" shall mean any option to purchase
Shares awarded pursuant to this Plan which qualifies as an "Incentive Stock
Option" pursuant to Section 422 of the Code.
2.20 "Limited Stock Appreciation Rights" shall have the meaning set
forth in Subsection 7.4 of this Plan.
--------------
2.21 " Material Subsidiary" shall mean any Subsidiary of which the
Book Value or fair market value (whichever is greater) constitutes fifty
percent (50%) or more of the
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<PAGE>
Book Value of the Company. The fair market value of a Subsidiary will be
determined in good faith by the Board.
2.22 "Named Executive Officer" shall have the meaning set forth in
Subsection 17.1 of this Plan.
---------------
2.23 "NASD" shall mean the National Association of Securities
Dealers, Inc.
2.24 "NASDAQ" shall mean the National Association of Securities
Dealers Automated Quotation system.
2.25 "Nasdaq National Market" shall mean the Nasdaq National Market
of the NASD.
2.26 "Non-Qualified Stock Option" shall mean any option to purchase
Shares awarded pursuant to this Plan that does not qualify as an Incentive
Stock Option (including, without limitation, any option to purchase Shares
originally designated as or intended to qualify as an Incentive Stock
Option but which does not (for whatever reason) qualify as an Incentive
Stock Option).
2.27 "Non-Share Method" shall have the meaning set forth in
Subsection 6.6(c) of this Plan.
-----------------
2.28 "Non-Tandem Stock Appreciation Right" shall mean any Stock
Appreciation Right granted alone and not in connection with an Award which
is a Stock Option.
2.29 "Optionee" shall mean any Participant who has been granted and
holds a Stock Option awarded pursuant to this Plan.
2.30 "Participant" shall mean any Person who has been granted and
holds an Award granted pursuant to this Plan.
2.31 "Performance Award" shall mean any Award granted pursuant to
this Plan of Shares, rights based upon, payable in or otherwise related to
Shares (including Restricted Stock) or cash, as the Board may determine, at
the end of a specified performance period established by the Board and may
include, without limitation, Performance Shares or Performance Units.
2.32 "Performance Shares" shall have the meaning set forth in
Subsection 9.1 of this Plan.
--------------
2.33 "Performance Units" shall have the meaning set forth in
Subsection 9.1 of this Plan.
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<PAGE>
2.34 "Permitted Modification" shall be deemed to be any modification
of an Award which is made in connection with a Corporate Transaction and
which provides (i) in connection with a Stock Option, that subsequent to
the consummation of the Corporate Transaction (A) the exercise price of
such Stock Option will be proportionately adjusted to reflect the exchange
ratio applicable to the particular Corporate Transaction and/or (B) the
nature and amount of consideration to be received upon exercise of the
Stock Option will be the same (on a per share basis) as was received by
Persons who were holders of shares of Common Stock immediately prior to the
consummation of the Corporate Transaction, (ii) in connection with a Stock
Appreciation Right, that subsequent to the consummation of the Corporate
Transaction (A) the base price of such Stock Appreciation Right will be
proportionately adjusted to reflect the exchange ratio applicable to the
particular Corporate Transaction and/or (B) the benefits to be received by
the holder of such Stock Appreciation Right will be measured based upon the
nature and amount of consideration received (on a per share basis) by
Persons who were holders of shares of Common Stock immediately prior to the
consummation of the Corporate Transaction, and (iii) in connection with a
Dividend Equivalent Right, that subsequent to the consummation of the
Corporate Transaction the benefits to be received by the holder of such
Dividend Equivalent Right will be measured based upon the nature and amount
of consideration received (on a per share basis) by Persons who were
holders of shares of Common Stock immediately prior to the consummation of
the Corporate Transaction.
2.35 "Person" shall mean an individual, partnership, limited
liability company, corporation, joint stock company, trust, estate, joint
venture, association or unincorporated organization or any other form of
business organization.
2.36 "Plan" shall mean this Merchants Bancshares, Inc. 1997 Flexible
Incentive Plan as it may be amended from time to time.
2.37 "Reload Option" shall mean a Stock Option as defined in
Subsection 6.6(b) of this Plan.
-----------------
2.38 "Reorganization" shall mean any stock split, stock dividend,
reverse stock split, combination of Shares or any other similar increase or
decrease in the number of Shares issued and outstanding.
2.39 "Restricted Stock" shall mean any Shares granted pursuant to
this Plan that are subject to restrictions or substantial risk of
forfeiture.
2.40 "Retirement" shall mean termination of employment of an employee
of the Company or any Subsidiary, other than discharge for Cause, after age
65 or on or before age 65 if pursuant to the terms of any retirement plan
maintained by the Company or any Subsidiary in which such employee
participates.
2.41 "Securities Act" shall mean the Securities Act of 1933, as
amended from time to time (or any successor to such legislation).
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<PAGE>
2.42 "Share Retention Method" shall have the meaning set forth in
Subsection 6.6(c) of this Plan.
-----------------
2.43 "Shares" shall mean shares of the Common Stock and any shares of
capital stock or other securities hereafter issued or issuable upon, in
respect of or in substitution or exchange for shares of Common Stock.
2.44 "Stock Appreciation Right" shall mean the right of the holder
thereof to receive property or Shares with a Fair Market Value equal to or
cash in an amount equal to the excess of the Fair Market Value of the
aggregate number of Shares subject to such Stock Appreciation Right on the
date of exercise over the Fair Market Value of the aggregate number of
Shares subject to such Stock Appreciation Right on the date of the grant of
such Stock Appreciation Right (or such other value as may be specified in
the agreement granting such Stock Appreciation Right). A Stock
Appreciation Right may be a Tandem Stock Appreciation Right, Non-Tandem
Stock Appreciation Right or Limited Stock Appreciation Right.
2.45 "Stock Option" shall mean any Incentive Stock Option or Non-
Qualified Stock Option.
2.46 "Subsidiary" shall mean a subsidiary corporation of the Company,
as defined in Section 424(f) of the Code.
2.47 "Tandem Stock Appreciation Right" shall mean a Stock
Appreciation Right granted in connection with an Award which is a Stock
Option.
2.48 "Transactional Consideration" shall have the meaning set forth
in Subsection 13(b) of this Plan.
----------------
SECTION 3. ADMINISTRATION OF THIS PLAN
3.1 Board. This Plan shall be administered and interpreted by the
Board.
3.2 Awards. (a) Subject to the provisions of this Plan, the Board
is authorized to:
(i) determine the Persons to whom Awards are to be granted;
(ii) determine the types and combinations of Awards to be
granted; the number of Shares to be covered by an Award; the exercise
price of an Award; the time or times when an Award shall be granted
and may be exercised; the terms, performance criteria or other
conditions, vesting periods or any restrictions for an Award; any
restrictions on Shares acquired pursuant to the exercise of an Award;
and any other terms and conditions of an Award;
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<PAGE>
(iii) interpret the provisions of this Plan;
(iv) prescribe, amend and rescind rules and regulations
relating to this Plan;
(v) determine whether, to what extent and under what
circumstances to provide loans from the Company to Participants to
exercise Awards granted pursuant to this Plan, and the terms and
conditions of such loans;
(vi) rely upon employees of the Company for such clerical and
recordkeeping duties as may be necessary in connection with the
administration of this Plan;
(vii) accelerate or defer (with the consent of the Participant)
the vesting of any rights pursuant to an Award; and
(viii) make all other determinations and take all other actions
necessary or advisable for the administration of this Plan.
(b) Without limiting the Board's right to amend this Plan pursuant to
Section 14, the Board may take all actions authorized by Subsection 3.2(a)
---------- -----------------
of this Plan, including, without limitation, granting such Awards pursuant
to this Plan as the Board may deem necessary or appropriate.
3.3 Procedures. (a) Proceedings by the Board with respect to this
Plan will be conducted in accordance with the articles of incorporation and
bylaws of the Company.
(b) A majority of the Board members shall constitute a quorum for
action by the Committee. All determinations of the Board shall be made by
not less than a majority of its members.
(c) All questions of interpretation and application of this Plan or
pertaining to any question of fact or Award granted hereunder will be
decided by the Board, whose decision will be final, conclusive and binding
upon the Company and each other affected party.
SECTION 4. SHARES SUBJECT TO PLAN
4.1 Limitations. The maximum number of Shares that may be issued
with respect to Awards granted pursuant to this Plan shall not exceed two
hundred thousand (200,000) Shares unless increased or decreased by reason
of changes in the capitalization of the Company as hereinafter provided or
by amendment of this Plan. The Shares issued pursuant to this Plan may be
authorized but unissued Shares, or may be issued Shares which have been
reacquired by the Company.
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<PAGE>
4.2 Changes. To the extent that any Award granted pursuant to this
Plan shall be forfeited, shall expire or shall be cancelled, in whole or in
part, then the number of Shares covered by the Award so forfeited, expired
or cancelled may again be awarded pursuant to the provisions of this Plan.
In the event that Shares are delivered to the Company in full or partial
payment of the exercise price for the exercise of a Stock Option, the
number of Shares available for future Awards granted pursuant to this Plan
shall be reduced only by the net number of Shares issued upon the exercise
of the Stock Option. Awards that may be satisfied either by the issuance
of Shares or by cash or other consideration shall, until the form of
consideration to be paid is finally determined, be counted against the
maximum number of Shares that may be issued pursuant to this Plan. If the
Award is ultimately satisfied by the payment of consideration other than
Shares, as, for example, a Stock Option granted in tandem with a Stock
Appreciation Right that is settled by a cash payment, such Shares may again
be made the subject of an Award granted pursuant to this Plan. Awards will
not reduce the number of Shares that may be issued pursuant to this Plan if
the settlement of the Award will not require the issuance of Shares, as,
for example, a Stock Appreciation Right that can be satisfied only by the
payment of cash.
SECTION 5. ELIGIBILITY
Eligibility for participation in this Plan shall be confined to those
individuals who are employed by the Company or a Subsidiary and such Consultants
and non-employee Directors as may be designated by the Board. In making any
determination as to Persons to whom Awards shall be granted, the type of Award
and/or the number of Shares to be covered by the Award, the Board shall consider
the position and responsibilities of the Person, the importance of the Person to
the Company, the duties of the Person, the past, present and potential
contributions of the Person to the growth and success of the Company and such
other factors as the Board may deem relevant in connection with accomplishing
the purposes of this Plan.
SECTION 6. STOCK OPTIONS
6.1 Grants. The Board may grant Stock Options alone or in addition
to other Awards granted pursuant to this Plan to any eligible Person. Each
Person so selected shall be offered a Stock Option to purchase the number
of Shares determined by the Board. The Board shall specify whether such
Stock Option is an Incentive Stock Option or Non-Qualified Stock Option and
any other terms or conditions relating to such Award; provided, however
only employees of the Company or a Subsidiary may be granted Incentive
Stock Options. To the extent that any Stock Option designated as an
Incentive Stock Option does not qualify as an Incentive Stock Option
(whether because of its provisions, the failure of the shareholders of the
Company to authorize the issuance of Incentive Stock Options, the time or
manner of its exercise or otherwise), such Stock Option or the portion
thereof which does not qualify shall be deemed to constitute a Non-
Qualified Stock Option. Each Person to be granted a Stock Option shall
enter into a written agreement with the Company, in such form as the Board
may prescribe, setting forth the terms and conditions (including, without
limitation, the exercise price and vesting schedule) of the Stock Option.
At any time and from time to time, the Optionee
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<PAGE>
and the Board may agree to modify an option agreement in such respects as
they may deem appropriate, including, without limitation, the conversion of
an Incentive Stock Option into a Non-Qualified Stock Option. The Board may
require that an Optionee meet certain conditions before the Stock Option or
a portion thereof may vest or be exercised, as, for example, that the
Optionee remain in the employ of the Company or a Subsidiary for a stated
period or periods of time.
6.2 Incentive Stock Options Limitations.
(a) In no event shall any individual be granted Incentive Stock
Options to the extent that the Shares covered by any Incentive Stock
Options (and any incentive stock options granted pursuant to any other
plans of the Company or its Subsidiaries) that may be exercised for
the first time by such individual in any calendar year have an
aggregate Fair Market Value in excess of $100,000. For this purpose,
the Fair Market Value of the Shares shall be determined as of the
date(s) on which the Incentive Stock Options are granted. It is
intended that the limitation on Incentive Stock Options provided in
this Subsection 6.2(a) be the maximum limitation on Stock Options
-----------------
which may be considered Incentive Stock Options pursuant to the Code.
(b) The option exercise price of an Incentive Stock Option shall
not be less than one hundred percent (100%) of the Fair Market Value
of the Shares subject to such Incentive Stock Option on the date of
the grant of such Incentive Stock Option.
(c) Notwithstanding anything herein to the contrary, in no event
shall any employee owning more than ten percent (10%) of the total
combined voting power of the Company or any Subsidiary be granted an
Incentive Stock Option unless the option exercise price of such
Incentive Stock Option shall be at least one hundred ten percent
(110%) of the Fair Market Value of the Shares subject to such
Incentive Stock Option on the date of the grant of such Incentive
Stock Option.
(d) In no event shall any individual be granted an Incentive
Stock Option after the expiration of ten (10) years from the date this
Plan is adopted or is approved by the shareholders of the Company (if
shareholder approval is required by Section 422 of the Code).
(e) To the extent shareholder approval of this Plan is required
by Section 422 of the Code, no individual shall be granted an
Incentive Stock Option unless this Plan is approved by the
shareholders of the Company within twelve (12) months before or after
the date this Plan is initially adopted. In the event this Plan is
amended to increase the number of Shares subject to issuance upon the
exercise of Incentive Stock Options or to change the class of
employees eligible to receive Incentive Stock Options, no individual
shall be granted an Incentive
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<PAGE>
Stock Option unless such amendment is approved by the shareholders of
the Company within twelve (12) months before or after such amendment.
(f) No Incentive Stock Option shall be granted to any employee
owning more than ten percent (10%) of the total combined voting power
of the Company or any Subsidiary unless the term of such Incentive
Stock Option is equal to or less than five (5) years measured from the
date on which such Incentive Stock Option is granted.
6.3 Option Term. The term of a Stock Option shall be for such period
of time from the date of its grant as may be determined by the Board;
provided, however, that no Incentive Stock Option shall be exercisable
later than ten (10) years from the date of its grant.
6.4 Time of Exercise. No Stock Option may be exercised unless it is
exercised prior to the expiration of its stated term and, in connection
with options granted to employees of the Company or its Subsidiaries, at
the time of such exercise, the Optionee is, and has been continuously since
the date of grant of such Stock Option, employed by the Company or a
Subsidiary, except that:
(a) A Stock Option may, to the extent vested as of the date the
Optionee ceases to be an employee of the Company or a Subsidiary, be
exercised during the three-month period immediately following the date
the Optionee ceases (for any reason other than death, Disability or
termination for Cause) to be an employee of the Company or a
Subsidiary (or within such other period as may be specified in the
applicable option agreement), provided that, if the Stock Option has
been designated as an Incentive Stock Option and the option agreement
provides for a longer exercise period, the exercise of such Stock
Option after such three-month period shall be treated as the exercise
of a Non-Qualified Stock Option;
(b) If the Optionee dies while in the employ of the Company or a
Subsidiary, or within three months after the Optionee ceases (for any
reason other than termination for Cause) to be such an employee (or
within such other period as may be specified in the applicable option
agreement), a Stock Option may, to the extent vested as of the date of
the Optionee's death, be exercised by the Optionee's Designated
Beneficiary during the one year period immediately following the date
of the Optionee's death (or within such other period as may be
specified in the applicable option agreement); provided that, if the
Stock Option has been designated as an Incentive Stock Option and the
option agreement provides for a longer exercise period, the exercise
of such Stock Option after such one-year period shall be treated as
the exercise of a Non-Qualified Stock Option;
(c) If the Optionee ceases to be an employee of the Company or a
Subsidiary by reason of the Optionee's Disability, a Stock Option, to
the extent vested as of the date the Optionee ceases to be an employee
of the Company or
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<PAGE>
a Subsidiary, may be exercised during the one year period immediately
following the date on which the Disability is determined to exist (or
within such other period as may be specified in the applicable option
agreement); provided that, if the Stock Option has been designated as
an Incentive Stock Option and the option agreement provides for a
longer exercise period, the exercise of such Stock Option after such
one-year period shall be treated as the exercise of a Non-Qualified
Stock Option; and
(d) If the Optionee's employment is terminated for Cause, all
Stock Options held by such Optionee shall simultaneously terminate
and will no longer be exercisable.
Nothing contained in this Subsection 6.4 will be deemed to extend the term
--------------
of a Stock Option or to revive any Stock Option which has previously lapsed
or been cancelled, terminated or surrendered. Stock Options granted under
this Plan to Consultants or non-employee Directors will contain such terms
and conditions with respect to the death or disability of a Consultant or
non-employee Director or termination of a Consultant's or non-employee
Director's relationship with the Company as the Board deems necessary or
appropriate. Such terms and conditions will be set forth in the option
agreements evidencing the grant of such Stock Options.
6.5 Vesting of Stock Options.
(a) Each Stock Option granted pursuant to this Plan may only be
exercised to the extent that the Optionee is vested in such Stock
Option. Each Stock Option shall vest separately in accordance with
the option vesting schedule determined by the Board, which will be
incorporated in the option agreement entered into between the Company
and such Optionee. The option vesting schedule may be accelerated if,
in the sole discretion of the Board, the acceleration of the option
vesting schedule would be in the best interests the Company.
(b) In the event of the dissolution or liquidation of the
Company, each Stock Option granted pursuant to this Plan shall
terminate as of a date to be fixed by the Board; provided, however,
that not less than thirty (30) days' written notice of the date so
fixed shall be given to each Optionee. Upon the date fixed by the
Board, any unexercised Stock Options shall terminate and be of no
further effect.
6.6 Manner of Exercise of Stock Options.
(a) Except as otherwise provided in this Plan, Stock Options may
be exercised as to Shares only in amounts and at intervals of time
specified in the written option agreement between the Company and the
Optionee. Each exercise of a Stock Option, or any part thereof, shall
be evidenced by a written notice delivered by the Optionee to the
Company. The purchase price of the Shares as
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<PAGE>
to which a Stock Option shall be exercised shall be paid in full at
the time of exercise, and may be paid to the Company either:
(i) in cash (including check, bank draft or money order); or
(ii) by other consideration deemed acceptable by the Board
in its sole discretion.
(b) If an Optionee delivers Shares (including Shares of
Restricted Stock) already owned by the Optionee in full or partial
payment of the exercise price for any Stock Option, or if the Optionee
elects to have the Company retain that number of Shares out of the
Shares being acquired through the exercise of the Stock Option having
a Fair Market Value equal to the exercise price of the Stock Option
being exercised, the Board may, in its sole discretion, authorize the
grant of a new Stock Option (a "Reload Option") for that number of
-------------
Shares equal to the number of already owned Shares surrendered
(including Shares of Restricted Stock) or newly acquired Shares being
retained by the Company in payment of the option exercise price of the
underlying Stock Option being exercised. The grant of a Reload Option
will become effective upon the exercise of the underlying Stock
Option. The option exercise price of the Reload Option shall be the
Fair Market Value of a Share on the effective date of the grant of the
Reload Option. Each Reload Option shall be exercisable no later than
the time when the underlying stock option being exercised could be
last exercised. The Board may also specify additional terms,
conditions and restrictions for the Reload Option and the Shares to be
acquired upon the exercise thereof.
(c) The amount, as determined by the Board, of any federal, state
or local tax required to be withheld by the Company due to the
exercise of a Stock Option shall, subject to the authorization of the
Board, be satisfied, at the election of the Optionee, either (a) by
payment by the Optionee to the Company of the amount of such
withholding obligation in cash or other consideration acceptable to
the Board in its sole discretion (the "Non-Share Method") or (b)
----------------
through either the retention by the Company of a number of Shares out
of the Shares being acquired through the exercise of the Stock Option
or the delivery of already owned Shares having a Fair Market Value
equal to the amount of the withholding obligation (the "Share
-----
Retention Method"). If an Optionee elects to use the Share Retention
----------------
Method in full or partial satisfaction of any tax liability resulting
from the exercise of a Stock Option, the Board may authorize the grant
of a Reload Option for that number of Shares as shall equal the number
of Shares used to satisfy the tax liabilities of the Optionee arising
out of the exercise of such Stock Option. Such Reload Option will be
granted at the price and on the terms set forth in Subsection 6.6 (b).
-------------------
The cash payment or an amount equal to the Fair Market Value of the
Shares so withheld, as the case may be, shall be remitted by the
Company to the appropriate taxing authorities.
-12-
<PAGE>
(d) An Optionee shall not have any of the rights of a shareholder
of the Company with respect to the Shares subject to a Stock Option
except to the extent that such Stock Option is exercised and one or
more certificates representing such Shares shall have been delivered
to the Optionee.
SECTION 7. STOCK APPRECIATION RIGHTS
7.1 Grants. The Board may grant to any eligible Consultant, non-
employee Director or employee of the Company or a Subsidiary either Non-
Tandem Stock Appreciation Rights or Tandem Stock Appreciation Rights.
Stock Appreciation Rights shall be subject to such terms and conditions as
the Board shall impose. The grant of the Stock Appreciation Right may
provide that the holder will be paid for the value of the Stock
Appreciation Right either in cash or in Shares, or a combination thereof,
at the sole discretion of the Board. In the event of the exercise of a
Stock Appreciation Right payable in Shares, the holder of the Stock
Appreciation Right shall receive that number of whole Shares having an
aggregate Fair Market Value on the date of exercise equal to the value
obtained by multiplying (i) either (a) in the case of a Tandem Stock
Appreciation Right, the difference between the Fair Market Value of a Share
on the date of exercise over the per share exercise price of the related
Stock Option, or (b) in the case of a Non-Tandem Stock Appreciation Right,
the difference between the Fair Market Value of a Share on the date of
exercise over the Fair Market Value on the date of the grant by (ii) the
number of Shares as to which the Stock Appreciation Right is exercised.
However, notwithstanding the foregoing, the Board, in its sole discretion,
may place a ceiling on the amount payable upon exercise of a Stock
Appreciation Right, but any such limitation shall be specified at the time
that the Stock Appreciation Right is granted.
7.2 Exercisability. A Tandem Stock Appreciation Right granted in
connection with an Incentive Stock Option (i) may be exercised at, and only
at, the times and to the extent the related Incentive Stock Option is
exercisable, (ii) will expire upon the termination of the related Incentive
Stock Option, (iii) may not exceed 100% of the difference between the
exercise price of the related Incentive Stock Option and the Fair Market
Value of the Shares subject to the related Incentive Stock Option at the
time the Tandem Stock Appreciation Right is exercised and (iv) may be
exercised at, and only at, such times as the Fair Market Value of the
Shares subject to the related Incentive Stock Option exceeds the exercise
price of the related Incentive Stock Option. A Tandem Stock Appreciation
Right may be transferred at, and only at, the times and to the extent the
related Stock Option is transferable. If a Tandem Stock Appreciation Right
is granted, there shall be surrendered and cancelled from the related Stock
Option at the time of exercise of the Tandem Stock Appreciation Right, in
lieu of exercise pursuant to the related Stock Option, that number of
Shares as shall equal the number of Shares as to which the Tandem Stock
Appreciation Right shall have been exercised.
7.3 Certain Limitations on Non-Tandem Stock Appreciation Rights. A
Non-Tandem Stock Appreciation Right will be exercisable as provided by the
Board and will have such other terms and conditions as the Board may
determine. A Non-Tandem Stock Appreciation Right is subject to
acceleration of vesting or immediate termination
-13-
<PAGE>
in certain circumstances in the same manner as Stock Options pursuant to
Subsections 6.4 and 6.5 of this Plan.
-----------------------
7.4 Limited Stock Appreciation Rights. The Board may grant "Limited
-------
Stock Appreciation Rights," either as Tandem Stock Appreciation Rights or
-------------------------
Non-Tandem Stock Appreciation Rights. Limited Stock Appreciation Rights
will become exercisable only upon the occurrence of such event as the Board
may designate at the time of grant or thereafter.
SECTION 8. RESTRICTED STOCK
8.1 Grants. The Board may grant Awards of Restricted Stock to any
Consultant, non-employee Director or employee of the Company or a
Subsidiary for such minimum consideration, if any, as may be required by
applicable law or such greater consideration as may be determined by the
Board, in its sole discretion. The terms and conditions of the Restricted
Stock shall be specified by the grant agreement. The Board, in its sole
discretion, may specify any particular rights which the Participant to whom
a grant of Restricted Stock is made shall have in the Restricted Stock
during the restriction period and the restrictions applicable to the
particular Award, the vesting schedule (which may be based on service,
performance or other factors) and rights to acceleration of vesting
(including, without limitation, whether non-vested Shares are forfeited or
vested upon termination of employment). Further, the Board may grant
performance-based Awards consisting of Restricted Stock by conditioning the
grant, or vesting or such other factors, such as the release, expiration or
lapse of restrictions upon any such Award (including the acceleration of
any such conditions or terms) of such Restricted Stock upon the attainment
of specified performance goals or such other factors as the Board may
determine. The Board shall also determine when the restrictions shall
lapse or expire and the conditions, if any, pursuant to which the
Restricted Stock will be forfeited or sold back to the Company. Each Award
of Restricted Stock may have different restrictions and conditions. Unless
otherwise set forth in the grant agreement, Restricted Stock may not be
sold, pledged, encumbered or otherwise disposed of by the recipient until
the restrictions specified in the Award expire. Awards of Restricted Stock
are subject to acceleration of vesting, termination of restrictions and
termination in the same manner as Stock Options pursuant to Subsections 6.4
---------------
and 6.5 of this Plan.
-------
8.2 Awards and Certificates. Any Restricted Stock issued hereunder
may be evidenced in such manner as the Board, in its sole discretion, shall
deem appropriate including, without limitation, book-entry registration or
issuance of a stock certificate or certificates. In the event any stock
certificate is issued in respect of Shares of Restricted Stock, such
certificate shall bear an appropriate legend with respect to the
restrictions applicable to such Award. The Company may retain, at its
option, the physical custody of any stock certificate representing any
awards of Restricted Stock during the restriction period or require that
the certificates evidencing Restricted Stock be placed in escrow or trust,
along with a stock power endorsed in blank, until all restrictions are
removed or expire.
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<PAGE>
SECTION 9. PERFORMANCE AWARDS
9.1 Grants. A Performance Award may consist of either or both, as
the Board may determine, of (i) the right to receive Shares or Restricted
Stock, or any combination thereof as the Board may determine ("Performance
-----------
Shares"), or (ii) the right to receive a fixed dollar amount payable in
------
Shares, Restricted Stock, cash or any combination thereof, as the Board may
determine ("Performance Units"). The Board may grant Performance Awards to
-----------------
any eligible Consultant, non-employee Director or employee of the Company
or a Subsidiary, for such minimum consideration, if any, as may be required
by applicable law or such greater consideration as may be determined by the
Board, in its sole discretion. The terms and conditions of Performance
Awards shall be specified at the time of the grant and may include
provisions establishing the performance period, the performance criteria to
be achieved during a performance period, the criteria used to determine
vesting (including the acceleration thereof), whether Performance Awards
are forfeited or vest upon termination of employment during a performance
period and the maximum or minimum settlement values. Each Performance
Award shall have its own terms and conditions, which shall be determined in
the sole discretion of the Board. If the Board determines, in its sole
discretion, that the established performance measures or objectives are no
longer suitable because of a change in the Company's business, operations,
corporate structure or for other reasons that the Board deems satisfactory,
the Board may modify the performance measures or objectives and/or the
performance period. Awards of Performance Shares and/or Performance Units
are subject to acceleration of vesting, termination of restrictions and
termination in the same manner as Stock Options pursuant to Subsections 6.4
---------------
and 6.5 of this Plan.
-------
9.2 Terms and Conditions. Performance Awards may be valued by
reference to the Fair Market Value of a Share or according to any other
formula or method deemed appropriate by the Board, in its sole discretion,
including, but not limited to, achievement of specific financial,
production, sales, cost or earnings performance objectives that the Board
believes to be relevant or the Company's performance or the performance of
the Common Stock measured against the performance of the market, the
Company's industry segment or its direct competitors. Performance Awards
may also be conditioned upon the applicable Participant remaining in the
employ of the Company or one of its Subsidiaries for a specified period.
Performance Awards may be paid in cash, Shares (including Restricted Stock)
or other consideration, or any combination thereof. Performance Awards may
be payable in a single payment or in installments and may be payable at a
specified date or dates or upon attaining the performance objective or
objectives, all at the sole discretion of the Board. The extent to which
any applicable performance objective has been achieved shall be
conclusively determined by the Board in its sole discretion.
-15-
<PAGE>
SECTION 10. DIVIDEND EQUIVALENT RIGHTS
The Board may grant a Dividend Equivalent Right to any eligible Consultant,
non-employee Director or employee of the Company or a Subsidiary, either as a
component of another Award or as a separate Award, and, in general, each such
Participant awarded a Dividend Equivalent Right that is outstanding on a
dividend record date for the Common Stock shall be credited with an amount equal
to the cash or stock dividends or other distributions that would have been
received had the Shares subject to the Award been issued and outstanding on the
dividend record date. The terms and conditions of the Dividend Equivalent Right
shall be specified in a dividend equivalent right agreement which evidences such
Award. Dividend Equivalent Rights may be settled in cash or Shares, or a
combination thereof, in a single payment or in installments. A Dividend
Equivalent Right granted as a component of another Award may provide that such
Dividend Equivalent Right shall be settled upon exercise, settlement or payment
for or lapse of restrictions on such other Award, and that such Dividend
Equivalent Right shall expire or be forfeited or annulled pursuant to the same
conditions as such other Award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms and conditions different from
such other Award.
SECTION 11. OTHER AWARDS
The Board may grant to any eligible Consultant, non-employee Director or
employee of the Company or a Subsidiary other forms of Awards based upon,
payable in or otherwise related to, in whole or in part, Shares, if the Board,
in its sole discretion, determines that such other form of Award is consistent
with the purposes of this Plan. The terms and conditions of such other form of
Award shall be specified in a written agreement which sets forth the terms and
conditions of such Award, including, but not limited to, the price, if any, and
the vesting schedule, if any, of such Award. Such Awards may be granted for
such minimum consideration, if any, as may be required by applicable law or for
such other greater consideration as may be determined by the Board, in its sole
discretion.
SECTION 12. COMPLIANCE WITH SECURITIES AND OTHER LAWS
As a condition to the issuance or transfer of any Award or any security
issuable in connection with such Award, the Company may require an opinion of
counsel, satisfactory to the Company, to the effect that (i) such issuance
and/or transfer will not be in violation of the Securities Act or any other
applicable securities laws and (ii) such issuance and/or transfer will not be in
violation of the rules and regulations of any securities exchange or automated
quotation system on which the Common Stock is listed or admitted to trading.
Further, the Company may refrain from issuing, delivering or transferring any
Award or any security issuable in connection with such Award until the Board has
determined that such issuance, delivery or transfer will not violate such
securities laws or rules and regulations and that the recipient has tendered to
the Company any federal, state or local tax owed as a result of such issuance,
delivery or transfer, when the Company has a legal liability to satisfy such
tax. The Company shall not be liable for damages due to delay in the issuance,
delivery or transfer of any Award or any security issuable in connection with
such Award or any agreement, instrument or certificate evidencing such Award or
security for any reason whatsoever, including, but not limited to, a delay
caused by the
-16-
<PAGE>
listing requirements of any securities exchange or automated quotation system or
any registration requirements under the Securities Act, the Exchange Act, or
under any other state or federal law, rule or regulation. The Company is under
no obligation to take any action or incur any expense to register or qualify the
issuance, delivery or transfer of any Award or any security issuable in
connection with such Award under applicable securities laws or to perfect any
exemption from such registration or qualification or to list any security on any
securities exchange or automated quotation system. Furthermore, the Company
will have no liability to any person for refusing to issue, deliver or transfer
any Award or any security issuable in connection with such Award if such refusal
is based upon the foregoing provisions of this Section 12. As a condition to
----------
any issuance, delivery or transfer of any Award or any security issuable in
connection with such Award, the Company may place legends on any agreement,
instrument or certificate evidencing such Award or security, issue stop transfer
orders with respect thereto and require such agreements or undertakings as the
Company may deem necessary or advisable to assure compliance with applicable
laws or regulations, including, if the Company or its counsel deems it
appropriate, representations from the recipient of such Award or security to the
effect that such recipient is acquiring such Award or security solely for
investment and not with a view to distribution and that no distribution of the
Award or the security will be made unless registered pursuant to applicable
federal and state securities laws, or in the opinion of counsel to the Company,
such registration is unnecessary.
SECTION 13. ADJUSTMENTS UPON THE OCCURRENCE OF A REORGANIZATION OR
CORPORATE TRANSACTION
(a) In the event of a Reorganization, the number of Shares subject to
this Plan and to each outstanding Award, and the exercise price of each
Award which is based upon Shares, shall (to the extent deemed appropriate
by the Board) be proportionately adjusted (as determined by the Board in
its sole discretion) to account for any increase or decrease in the number
of issued and outstanding Shares of the Company resulting from such
Reorganization.
(b) If a Corporate Transaction is consummated and immediately
following the consummation of such Corporate Transaction the Persons who
were holders of shares of Common Stock immediately prior to the
consummation of such Corporate Transaction do not receive any securities or
other property (hereinafter collectively referred to as "Transactional
-------------
Consideration") as a result of such Corporate Transaction and substantially
-------------
all of such Persons continue to hold the shares of Common Stock held by
them immediately prior to the consummation of such Corporate Transaction
(in substantially the same proportions relative to each other), the Awards
will remain outstanding and will (subject to the provisions of Subsections
-----------
6.1, 7.1, 7.3, 8.1 and 9.1) continue in full force and effect in accordance
--------------------------
with its terms (without any modification) following the consummation of the
Corporate Transaction.
(c) If a Corporate Transaction is consummated and immediately
following the consummation of such Corporate Transaction the Persons who
were holders of shares of Common Stock immediately prior to the
consummation of such Corporate Transaction do receive Transactional
Consideration as a result of such Corporate Transaction or
-17-
<PAGE>
substantially all of such Persons do not continue to hold the shares of
Common Stock held by them immediately prior to the consummation of such
Corporate Transaction (in substantially the same proportions relative to
each other), the terms and conditions of the Awards will be modified as
follows:
(i) If the documentation pursuant to which a Corporate
Transaction will be consummated provides for the assumption (by the
entity issuing Transactional Consideration to the Persons who were the
holders of shares of Common Stock immediately prior to the
consummation of such Corporate Transaction) of the Awards granted
pursuant to this Plan without any modification or amendment (other
than Permitted Modifications and the modifications contemplated by
Subsections 6.1, 7.1, 7.3, 8.1 and 9.1 of this Plan), such Awards will
--------------------------------------
remain outstanding and will continue in full force and effect in
accordance with its terms following the consummation of such Corporate
Transaction (subject to such Permitted Modifications and the
provisions of Subsections 6.1, 7.1, 7.3, 8.1 and 9.1).
--------------------------------------
(ii) If the documentation pursuant to which a Corporate
Transaction will be consummated does not provide for the assumption by
the entity issuing Transactional Consideration to the Persons who were
the holders of shares of Common Stock immediately prior to the
consummation of such Corporate Transaction of the Awards granted
pursuant to this Plan without any modification or amendment (other
than Permitted Modifications), all portions of Awards with respect to
which vesting restrictions will not have lapsed/been satisfied on or
prior to such consummation will, as of such consummation, terminate
and cease to be outstanding. Upon the consummation of such a
Corporate Transaction, all unexercised Awards which are not to be so
assumed will automatically terminate and cease to be outstanding. The
Company will provide each Participant holding Awards which will not be
so assumed (but with respect to which all applicable vesting
restrictions will have lapsed/been satisfied prior to consummation of
such Corporate Transaction) with reasonable notice of the impending
termination of such Awards.
Nothing contained in this Section 13 will be deemed to extend the term of
----------
an Award or to revive any Award which has previously lapsed or been
cancelled, terminated or surrendered.
SECTION 14. AMENDMENT OR TERMINATION OF THIS PLAN
14.1 Amendment of This Plan. Notwithstanding anything contained in this
Plan to the contrary, all provisions of this Plan (including, without
limitation, the maximum number of Shares that may be issued with respect to
Awards to be granted pursuant to this Plan) may at any time or from time to time
be modified or amended by the Board; provided, however, that no Award at any
time outstanding pursuant to this Plan may be modified, impaired or cancelled
adversely to the holder of the Award without the consent of such holder.
-18-
<PAGE>
14.2 Termination of This Plan. The Board may suspend or terminate this
Plan at any time, and such suspension or termination may be retroactive or
prospective. Termination of this Plan shall not impair or affect any Award
previously granted hereunder and the rights of the holder of the Award shall
remain in effect until the Award has been exercised in its entirety or has
expired or otherwise has been terminated by the terms of such Award.
SECTION 15. AMENDMENTS AND ADJUSTMENTS TO AWARDS
The Board may amend, modify or terminate any outstanding Award with the
Participant's consent at any time prior to payment or exercise in any manner not
inconsistent with the terms of this Plan, including, without limitation, (i) to
change the date or dates as of which and/or the terms and conditions pursuant to
which (A) a Stock Option becomes exercisable or (B) a Performance Award is
deemed earned, (ii) to amend the terms of any outstanding Award to provide an
exercise price per share which is higher or lower than the then current exercise
price per share of such outstanding Award or (iii) to cancel an Award and grant
a new Award in substitution therefor under such different terms and conditions
as the Board determines in its sole discretion to be appropriate including, but
not limited to, having an exercise price per share which may be higher or lower
than the exercise price per share of the cancelled Award. The Board may also
make adjustments in the terms and conditions of, and the criteria included in
agreements evidencing Awards in recognition of unusual or nonrecurring events
(including, without limitation, the events described in Section 13 hereof)
----------
affecting the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations or accounting
principles, whenever the Board determines that such adjustments are appropriate
to prevent reduction or enlargement of the benefits or potential benefits
intended to be made available pursuant to this Plan. Any provision of this Plan
or any agreement regarding an Award to the contrary notwithstanding, the Board
may cause any Award granted to be cancelled in consideration of a cash payment
or alternative Award made to the holder of such cancelled Award equal in value
to the Fair Market Value of such cancelled Award. The determinations of value
pursuant to this Section 15 shall be made by the Board in its sole discretion.
----------
SECTION 16. GENERAL PROVISIONS
16.1 No Limit on Other Compensation Arrangements. Nothing contained in
this Plan shall prevent the Company from adopting or continuing in effect other
compensation arrangements, and such arrangements may be either generally
applicable or applicable only in specific cases.
16.2 No Right to Employment or Continuation of Relationship. Nothing in
this Plan or in any Award, nor the grant of any Award, shall confer upon or be
construed as giving any Participant any right to remain in the employ of the
Company or a Subsidiary or to continue as a Consultant or non-employee Director.
Further, the Company or a Subsidiary may at any time dismiss a Participant from
employment or terminate the relationship of any Consultant or non-employee
Director with the Company or any Subsidiary, free from any liability or any
claim pursuant to this Plan, unless otherwise expressly provided in this Plan or
in any agreement evidencing an Award made under this Plan. No Consultant, non-
employee Director or employee
-19-
<PAGE>
of the Company or any Subsidiary shall have any claim to be granted any Award,
and there is no obligation for uniformity of treatment of any Consultant, non-
employee Director or employee of the Company or any Subsidiary or of any
Participants.
16.3 GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND EFFECT OF THIS PLAN AND
ANY RULES AND REGULATIONS RELATING TO THIS PLAN SHALL BE DETERMINED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAWS PRINCIPLES THEREOF.
16.4 Severability. If any provision of this Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction
or as to any individual or Award, or would disqualify this Plan or any Award
under any law deemed applicable by the Board, such provision shall be construed
or deemed amended to conform to applicable law, or if it cannot be construed or
deemed amended without, in the sole determination of the Board, materially
altering the intent of this Plan or the Award, such provision shall be stricken
as to such jurisdiction, individual or Award and the remainder of this Plan and
any such Award shall remain in full force and effect.
16.5 No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to this Plan or any Award, and the Board shall determine, in
its sole discretion, whether cash, other securities or other property shall be
paid or transferred in lieu of any fractional Shares or whether such fractional
Shares or any rights thereto shall be cancelled, terminated or otherwise
eliminated.
16.6 Headings. Headings are given to the Sections and Subsections of this
Plan solely as a convenience to facilitate reference. Such headings shall not
be deemed in any way material or relevant to the construction or interpretation
of this Plan or any provision thereof.
16.7 Effective Date. The provisions of this Plan that relate to the grant
of Incentive Stock Options shall be effective as of the date of the approval of
this Plan by the shareholders of the Company.
16.8 Transferability of Awards. Awards shall not be transferable otherwise
than by will or the laws of descent and distribution without the written consent
of the Board (which may be granted or withheld at the sole discretion of the
Board). Awards may be exercised, during the lifetime of the holder, only by the
holder. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of an Award contrary to the provisions hereof, or the levy of any
execution, attachment or similar process upon an Award shall be null and void
and without effect.
16.9 Rights of Participants. Except as hereinbefore expressly provided in
this Plan, any Person to whom an Award is granted shall have no rights by reason
of any subdivision or consolidation of stock of any class or the payment of any
stock dividend or any other increase or decrease in the number of shares of
stock of any class or by reason of any dissolution, liquidation, reorganization,
merger or consolidation or spinoff of assets or stock of another corporation,
and any issue by the Company of shares of stock of any class or securities
-20-
<PAGE>
convertible into shares of stock of any class shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
exercise price of Shares subject to an Award.
16.10 No Limitation Upon the Rights of the Company. The grant of an Award
pursuant to this Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, or changes of its capital or
business structure; to merge, convert or consolidate; to dissolve or liquidate;
or sell or transfer all or any part of its business or assets.
16.11 Date of Grant of an Award. Except as noted in this Section 16.11,
-------------
the granting of an Award shall take place only upon the execution and delivery
by the Company and the Participant of a written agreement and neither any other
action taken by the Board nor anything contained in this Plan or in any
resolution adopted or to be adopted by the Board or the shareholders of the
Company shall constitute the granting of an Award pursuant to this Plan. Solely
for purposes of determining the Fair Market Value of the Shares subject to an
Award, such Award will be deemed to have been granted as of the date specified
by the Board notwithstanding any delay which may elapse in executing and
delivering the applicable agreement.
SECTION 17. NAMED EXECUTIVE OFFICERS
17.1 Applicability of Section 17. The provisions of this Section 17 shall
----------
apply only to those executive officers (i) whose compensation is required to be
reported in the Company's proxy statement pursuant to Item 402(a)(3)(i) and (ii)
(or any successor thereto) of Regulation S-K (or any successor thereto) under
the general rules and regulations under the Exchange Act and (ii) whose total
compensation, including estimated Awards, is determined by the Board to possibly
be subject to the limitations on deductions imposed by Section 162(m) of the
Code ("Named Executive Officers"). In the event of any inconsistencies between
------------------------
this Section 17 and the other Plan provisions as they pertain to Named Executive
----------
Officers, the provisions of this Section 17 shall control.
----------
17.2 Establishment of Performance Goals. Awards for Named Executive
Officers, other than Stock Options and Stock Appreciation Rights, shall be based
on the attainment of certain performance goals. No later than the earlier of
(i) ninety (90) days after the commencement of the applicable fiscal year of the
Company or one of its Subsidiaries or such other award period as may be
established by the Board ("Award Period") and (ii) the completion of twenty-five
------------
percent (25%) of such Award Period, the Board shall establish, in writing, the
performance goals applicable to each such Award for Named Executive Officers.
At the time the performance goals are established, their outcome must be
substantially uncertain. In addition, the performance goal must state, in terms
of an objective formula or standard, the method for computing the amount of
compensation payable to the Named Executive Officer if the goal is obtained.
Such formula or standard shall be sufficiently objective so that a third party
with knowledge of the relevant performance results could calculate the amount to
be paid to the subject Named Executive Officer. The material terms of the
performance goals for Named Executive Officers and the compensation payable
thereunder shall be submitted to the shareholders of the Company for their
review and approval if and to the extent required for such compensation to be
deductible pursuant to Section 162(m) (or any successor thereto) of the Code,
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<PAGE>
and the Treasury Regulations thereunder. Shareholder approval, if necessary,
shall be obtained for such performance goals prior to any Award being paid to
such Named Executive Officer. If shareholder approval is required and not
received with respect to such performance goals, no amount shall be paid to such
Named Executive Officer for such applicable Award Period pursuant to this Plan.
17.3 Components of Awards. Each Award granted to a Named Executive
Officer, other than Stock Options and Stock Appreciation Rights, shall be based
on performance goals which are sufficiently objective so that a third party
having knowledge of the relevant facts could determine whether the goal was met.
Except as provided in Subsection 17.8 herein, performance measures which may
---------------
serve as determinants of Named Executive Officers' Awards shall be limited to
the following measures: earnings per share; return on assets; return on equity;
return on capital; net profit after taxes; net profit before taxes; operating
profits; stock price; and sales or expenses. Within ninety (90) days following
the end of each Award Period, the Board shall certify in writing that the
performance goals, and any other material terms were satisfied. Thereafter,
Awards shall be made for each Named Executive Officer as determined by the
Board. The Awards may not vary from the pre-established amount based on the
level of achievement.
17.4 No Mid-Year Change in Awards. Except as provided in Subsections 17.8
----------------
and 17.9 herein, each Named Executive Officer's Awards shall be based
- --------
exclusively on the performance measures established by the Board pursuant to
Subsections 17.2 and 17.3.
- -------------------------
17.5 No Partial Award Period Participation. A Named Executive Officer who
becomes eligible to participate in this Plan after performance goals have been
established in an Award Period pursuant to Subsections 17.2 and 17.3 may not
-------------------------
participate in this Plan prior to the next succeeding Award Period, except with
respect to Awards which are Stock Options or Stock Appreciation Rights.
17.6 Performance Goals. Except as provided in Subsection 17.8 herein,
---------------
performance goals shall not be changed following their establishment, and Named
Executive Officers shall not receive any payout, except with respect to Awards
which are Stock Options or Stock Appreciation Rights, when the minimum
performance goals are not met or exceeded.
17.7 Individual Performance and Discretionary Adjustments. Except as
provided in Subsection 17.8 herein, subjective evaluations of individual
---------------
performance of Named Executive Officers shall not be reflected in their Awards,
other than Awards which are Stock Options or Stock Appreciation Rights. The
payment of such Awards shall be entirely dependent upon the attainment of the
preestablished performance goals.
17.8 Amendments. No amendment of this Plan with respect to any Named
Executive Officer may be made which would (i) increase the maximum amount that
can be paid to any one Participant pursuant to this Plan, (ii) change the
specified performance goal for payment of Awards, or (iii) modify the
requirements as to eligibility for participation in this Plan, unless the
Company's shareholders have first approved such amendment in a manner which
would permit the deduction under Section 162(m) (or any successor thereto) of
the Code of such payment in the fiscal year it is paid. The Board shall amend
this Section 17 and such other provisions as
----------
-22-
<PAGE>
it deems appropriate, to cause amounts payable to Named Executive Officers to
satisfy the requirements of Section 162(m) (or any successor thereto) and the
Treasury regulations promulgated thereunder.
17.9 Stock Options and Stock Appreciation Rights. Notwithstanding any
provision of this Plan (including the provisions of this Section 17) to the
----------
contrary, the amount of compensation which a Named Executive Officer may receive
with respect to Stock Options and Stock Appreciation Rights which are granted
hereunder is based solely on an increase in the value of the applicable Shares
after the date of grant of such Award. Thus, no Stock Option may be granted
hereunder to a Named Executive Officer with an exercise price less than the Fair
Market Value of Shares on the date of grant. Furthermore, the maximum number of
Shares (or cash equivalent value) with respect to which Stock Options or Stock
Appreciation Rights may be granted hereunder to any Named Executive Officer
during any calendar year may not exceed fifty thousand (50,000) Shares, subject
to adjustment as provided in Section 13 hereunder.
----------
17.10 Maximum Amount of Compensation. The maximum amount of compensation
payable as an Award (other than an Award which is a Stock Option or Stock
Appreciation Right) to any Named Executive Officer during any calendar year may
not exceed $1,000,000.
-23-
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<PAGE>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
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