<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-QSB
(Mark One)
__X__ QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
_____ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________to __________.
Commission file number 0-24638
MOUNTBATTEN, INC.
-----------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2633708
- ---------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
33 Rock Hill Road
Bala Cynwyd, Pennsylvania 19004
- ---------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
(610) 664-2259
--------------
(Issuer's telephone number)
n/a
--------------
(Former name, former address, and former fiscal year if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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
____
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date:
Class Outstanding at August 6, 1997
- ---------------------------- ---------------------------------
Common Stock 2,528,530
Par value $.001 per share
Transitional Small Business Disclosure Format (check one ) YES___ NO X
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Mountbatten, Inc. and Subsidiaries
Consolidated Balance Sheets
As of As of
June 30, December 31,
ASSETS 1997 1996
---- ----
(unaudited)
Fixed maturities
Available for sale, at fair value (amortized cost
of $7,221,160 and $8,596,475, respectively) $ 7,101,598 $ 8,487,946
Cash and cash equivalents 555,150 759,749
Premiums receivable 1,410,014 562,820
Miscellaneous accounts receivable 214,739 2,200
Reinsurance receivable 303,611 294,911
Subrogation receivable 734,948 606,476
Accrued investment income 104,194 60,196
Property and equipment, net 80,540 56,838
Deferred acquisition costs 614,587 393,447
Prepaid reinsurance premiums 467,747
Deferred tax asset 29,253 32,223
Other assets 246,296 2,015
------------ ------------
TOTAL ASSETS $ 11,862,677 $ 11,258,821
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid claims and claim adjustment expenses $ 1,031,143 $ 1,153,270
Unearned premiums 1,427,007 954,101
Reinsurance premium payable 353,834
Accrued expenses and other liabilities 84,478 254,927
Federal income taxes payable 146,010 161,505
------------ ------------
TOTAL LIABILITIES 2,688,638 2,877,637
------------ ------------
Shareholders' Equity
Common stock, par value $.001 per share;
Authorized 20,000,000 shares; issued and
and outstanding, 2,528,530 shares 2,529 2,529
Additional paid in capital 6,762,934 6,762,934
Net unrealized depreciation, fixed (78,911) (71,629)
maturities
Retained earnings 2,487,487 1,687,350
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 9,174,039 8,381,184
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 11,862,677 $ 11,258,821
============ ============
The accompanying notes are an integral part of these financial statements
2
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Mountbatten, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Six months ended
June 30,
1997 1996
---- ----
Underwriting:
Gross written premiums $ 4,383,755 $ 3,927,260
Premiums ceded (696,140) (671,561)
----------- -----------
Net written premiums 3,687,615 3,255,699
Change in unearned premium (472,906) (227,898)
----------- -----------
Net earned premiums 3,214,709 3,027,801
----------- -----------
Claims and claims adjustment expenses (62,049) 414,391
Commission expense 1,182,887 1,127,531
Salaries and benefits 639,357 480,040
Professional fees 66,909 79,060
Other operating expenses 396,914 329,684
----------- -----------
2,224,018 2,430,706
----------- -----------
Underwriting income 990,691 597,095
Interest income 223,335 197,775
----------- -----------
Income before income taxes 1,214,026 794,870
Provision for income taxes 413,889 245,560
----------- -----------
Net income $ 800,137 $ 549,310
=========== ===========
Primary earnings per share: $0.29 $0.21
Weighted average shares outstanding 2,803,290 2,638,595
The accompanying notes are an integral part of these financial statements
3
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Mountbatten, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three months ended
June 30,
1997 1996
---- ----
Underwriting:
Gross written premiums $ 2,625,155 $ 2,312,221
Premiums ceded (416,874) (394,979)
----------- -----------
Net written premiums 2,208,281 1,917,242
Change in unearned premium (369,368) (134,039)
----------- -----------
Net earned premiums 1,838,913 1,783,203
----------- -----------
Claims and claims adjustment expenses (29,294) 327,269
Commission expense 704,951 631,163
Salaries and benefits 301,236 255,342
Professional fees 37,630 49,935
Other operating expenses 207,478 174,729
----------- -----------
1,222,001 1,438,438
----------- -----------
Underwriting income 616,912 344,765
Interest income 104,730 98,166
----------- -----------
Income before income taxes 721,642 442,931
Provision for income taxes 246,478 141,738
----------- -----------
Net income $ 475,164 $ 301,193
=========== ===========
Primary earnings per share: $0.17 $0.11
Weighted average shares outstanding 2,826,901 2,673,584
The accompanying notes are an integral part of these financial statements
4
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Mountbatten, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income $ 800,137 $ 549,310
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 17,827 9,752
Change in:
Premiums receivable (847,194) (708,918)
Miscellaneous accounts receivable (212,539) 2,600
Reinsurance receivable (8,700) (22,446)
Subrogation recoverable (128,472) (16,562)
Accrued investment income (43,998) (32,421)
Unearned premiums 472,906 227,898
Unpaid claims and claim adjustment expenses (122,127) 353,617
Prepaid reinsurance premiums (821,581) 169,061
Accrued expenses and other liabilities (170,327) (169,319)
Deferred acquisition costs (221,140) (100,275)
Deferred tax asset 2,970 (39,101)
Federal income taxes payable (15,495) (110,240)
Other, net (240,657) 5,404
----------- -----------
Net cash provided by (used in) operating activities (1,538,390) (118,360)
----------- -----------
Investing activities:
Purchase of equipment (41,529) (20,677)
Purchase of investments (238,616) (286,295)
Maturities of investments 1,613,936 276,187
----------- -----------
Net cash provided by (used in) investing activities 1,333,791 (30,785)
----------- -----------
Net increase (decrease) in cash and cash equivalents (204,599) (87,575)
Cash and cash equivalents at beginning of period 759,749 755,639
----------- -----------
Cash and cash equivalents at end of period $ 555,150 $ 843,214
=========== ===========
</TABLE>
Supplemental disclosure of cash flow information:
The Company made payments of $425,000 and $355,800 during the six months ended
June 30, 1997 and 1996 for federal income taxes, respectively.
The accompanying notes are an integral part of these financial statements
5
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Mountbatten, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1 - Description of Business:
Mountbatten, Inc. ("Mountbatten") commenced operations in February 1992.
Mountbatten acts as a holding company for The Mountbatten Surety Company, Inc.
(the "Surety Company") and HMS Dreadnought, Inc. ("Dreadnought"). The Surety
Company underwrites performance, payment and other bonds, and is licensed to
conduct business in the Commonwealths of Pennsylvania, Virginia, and Kentucky,
the States of Delaware, Maryland, New Jersey, New York, Ohio, Indiana,
Tennessee, Connecticut, Mississippi, Illinois, South Carolina, West Virginia,
Alabama, and the District of Columbia. In these jurisdictions, the Surety
Company underwrites primarily construction and performance bonds through
independent agents and brokers. Dreadnought commenced operations in February
1997, and provides escrow, dispute resolution, claims handling, and construction
management services to Mountbatten. (Mountbatten together with the Surety
Company and Dreadnought are referred to below as the "Company").
Note 2 - Summary of Significant Accounting Policies:
Basis of presentation:
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). The consolidated financial
statements include the accounts of Mountbatten, Inc. and its subsidiaries. The
preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of the
surety bond business as well as competitive and other market conditions, call
for caution in drawing specific conclusions from interim results. In the opinion
of management, the interim financial statements reflect all adjustments,
consisting only of normal recurring accruals, necessary for the fair
presentation of the Company's results of operations and financial position for
the periods presented. Operating results for the six and three month periods
ended June 30, 1997 are not necessarily indicative of results that can be
expected for the fiscal year ending December 31, 1997. These condensed financial
statements should be read in conjunction with the financial statements and notes
thereto included in Mountbatten's Report on Form 10-KSB for the year ended
December 31, 1996.
Revenue recognition:
Premiums are recognized as earned over the estimated period of bond performance
or project completion, which is generally less than one year. Ceded reinsurance
premiums are recognized on a similar basis. Unearned premiums represent the
portion of net premiums applicable to the unexpired portion of the bond. The
estimates are based primarily on management's understanding of a bonded
project's stage of completion supplemented by historical completion patterns.
Cash equivalents:
Cash equivalents include highly liquid money market instruments with original
maturities of three months or less.
Investments:
The Company invests in U.S. Treasury securities with maturities ranging from
several months to five years. The Company's investments in debt securities are
classified as available-for-sale. Accordingly, any changes in carrying value are
reflected as adjustments to Shareholders' Equity.
6
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Note 2 - Summary of Significant Accounting Policies: - (continued)
Miscellaneous accounts receivable:
Miscellaneous accounts receivable primarily represents amounts invoiced for
claims management services and job completion activities performed by
Dreadnought.
Reinsurance receivable:
Reinsurance receivable is an estimate of amounts to be received from the Surety
Company's reinsurers on ceded paid and unpaid losses.
Subrogation recoverable:
The Surety Company requires bond applicants to enter into an indemnity agreement
which obligates the insured to reimburse the Surety Company for any claims paid
and costs incurred that are related to the bond. Subrogation recoverable
represents amounts estimated to be recovered by the Surety Company from bonded
principals for claim costs incurred by the Surety Company after a failure of a
bonded principal to fulfill a bonded obligation. The Company records subrogation
recoverable when a claim is incurred and it is highly probable that the costs
will be recovered. Changes in estimates of subrogation recoverable are credited
or charged to income in the period in which they are determined and are included
in claims and claim adjustment expenses.
Unpaid claims and claims adjustment expenses:
The reserve for claims and claim adjustment expenses is based on management's
individual case estimates of the ultimate future payments to be made on reported
claims and related expenses, and on estimates for incurred but not reported
("IBNR") claims. Individual case reserve estimates represent management's best
estimate of the ultimate unpaid liability remaining on each claim, regardless of
any collateral sources that may exist (i.e.: subrogation and/or reinsurance
receivable), and are revised by management as new information becomes available.
Changes in these estimates are charged or credited to income in the period in
which they are determined. Claim adjustment expenses include costs associated
directly with specific claims paid or in the process of settlement.
Note 3 - Income Taxes
The Company files a consolidated income tax return with its wholly owned
subsidiaries, and is a party to a tax sharing agreement. The Company had a
deferred tax asset of $29,253 and $32,223 at June 30, 1997 and December 31,
1996, respectively.
Note 4 - Reinsurance
In the normal course of business, the Company enters into contracts to cede
reinsurance primarily to limit losses from large exposures and to permit
recovery of a portion of direct losses; however, such a transfer of risk does
not relieve the Company from contingent liability for these losses.
The Company's current reinsurance program provides four layers of reinsurance.
Under the first layer, the Company retains 100% of all losses up to $150,000 and
the reinsurer assumes 95% of the next $850,000, subject to a maximum annual
recovery by the Company of $3,230,000. The second layer provides $1,000,000 of
coverage (95% to be assumed by the reinsurer) on any loss discovered for any
principal in excess of the first $1,000,000 of loss with an aggregate annual
maximum of $2,850,000. The third layer provides $2,500,000 of coverage on any
loss discovered for any principal in excess of the first $2,000,000 of loss with
an aggregate annual maximum of $5,000,000. The fourth layer provides
7
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Note 4 - Reinsurance: - (continued)
$3,000,000 of coverage on any loss discovered for any principal in excess of the
first $4,500,000 with an aggregate annual maximum of $3,000,000.
Effective November 1995, the reinsurance program required that the Company not
write any bond exceeding $5 million or bonds on the same work program in favor
of the principal exceeding $7.5 million in the aggregate. The work program limit
of $7.5 million increased to $10 million effective November 1996.
Note 5 - Statutory Surplus and Dividend Restrictions
The Surety Company is subject to minimum surplus requirements under the
Commonwealth of Pennsylvania insurance laws and regulations. Under applicable
Pennsylvania laws and regulations, the Surety Company is required to maintain a
minimum of $1,125,000 of paid in capital. The maximum amount of dividends, which
can be paid by the Surety Company to shareholders without prior approval of the
Insurance Commissioner, is subject to restrictions relating to statutory
surplus.
Note 6 - Unpaid Claims and Claim Adjustment Expenses and Reinsurance Receivable
The process by which reserves are established for insured events and related
litigation requires reliance upon estimates based on the Surety Company's
limited claims experience, supplemented with available industry data. The Surety
Company's limited claims experience creates uncertainty with respect to the
estimation of loss and loss adjustment expense reserves. As information develops
which varies from expected experience, provides additional data or, in some
cases, augments data which previously was not considered sufficient in
determining reserves, adjustments to reserves may be required. Included in loss
reserves at June 30, 1997 and December 31, 1996 are case reserves totaling
$583,407 and $634,156, respectively, and IBNR reserves of $447,736 and $519,114,
respectively.
Reinsurance receivable of $303,611 at June 30, 1997 includes $198,510 related to
unpaid losses, offset by $30,083 received from the reinsurer as an overpayment,
and $135,184 related to paid losses.
Reinsurance receivable of $294,911 at December 31, 1996 includes $324,994
related to unpaid losses, offset by $30,083 received from the reinsurer as an
overpayment.
Note 7 - Shareholders' Equity
In May 1997, the Company granted non-qualified stock options to selected
individuals to purchase 10,000 shares of common stock at an exercise price of
$8.50 per share. These options vest immediately, and are exercisable for a
ten-year period after the date of grant.
In June 1997, the Company granted incentive stock options to selected
individuals to purchase 7,500 shares of common stock at an exercise price of
$8.50 per share. These options vest over a five-year period, and are exercisable
for a ten-year period after the date of grant.
In June 1997, the Company granted non-qualified stock options to selected
individuals to purchase 25,000 shares of common stock at an exercise price of
$8.50 per share. These options vest immediately, and are exercisable for a
ten-year period after the date of grant.
All of the above stock options were granted at exercise prices equal to the
market value of the underlying stock as of the date of grant. Accordingly, no
compensation expense related to these grants has been recorded.
8
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company's principal business activity is to underwrite surety bonds through
its wholly owned subsidiary, the Surety Company. The Surety Company wrote its
first bond in October 1992. In May 1994, the Surety Company received a Treasury
Listing (the "T-Listing") to write federally required bonds anywhere in the
United States and its territories. The following table sets forth information,
chronologically, with respect to those jurisdictions in which the Surety Company
is presently licensed to write bonds:
State Date of Admission
- ----- -----------------
Pennsylvania September 11, 1992
Delaware July 13, 1994
Maryland October 7, 1994
New Jersey June 30, 1995
Virginia August 17, 1995
District of Columbia September 1, 1995
New York October 19, 1995
Ohio November 28, 1995
Kentucky April 26, 1996
Tennessee September 23, 1996
Indiana September 30, 1996
Connecticut December 1, 1996
Mississippi December 1, 1996
Illinois December 5, 1996
South Carolina February 3, 1997
West Virginia May 8, 1997
Alabama August 6, 1997
In addition, the Surety Company has applied for a license to underwrite bonds in
Georgia, North Carolina, and anticipates filing license applications in various
other states.
Results of Operations
Six months ended June 30, 1997 compared to six months ended June 30,
1996:
During the six-month period ended June 30, 1997, the Surety Company generated
$4,383,755 of gross written premiums, compared to $3,927,260 of gross written
premiums during the six-month period ended June 30, 1996, representing an
increase of $456,495 or 12%. Management attributes the increase in gross written
premiums primarily to the Surety Company's increased penetration of the states
in which the Surety Company became licensed in late 1995 and throughout 1996.
For the six months ended June 30, 1997, gross ceded reinsurance premiums totaled
$696,140, representing approximately 15.88% of gross written premiums. For the
six months ended June 30, 1996, gross ceded reinsurance premiums totaled
$671,561, representing approximately 17.1% of gross written premiums. The
increase in ceded reinsurance premiums was primarily the result of the increase
in gross written premiums, offset by a lower reinsurance rate afforded the
Surety Company under the reinsurance agreement that became effective on November
1, 1996.
The Company's current reinsurance program provides four layers of reinsurance.
Under the first layer, the Company retains 100% of all losses up to $150,000 and
the reinsurer assumes 95% of the next $850,000, subject to a maximum annual
recovery by the Company of $3,230,000. The second layer provides $1,000,000 of
coverage (95% to be assumed by the reinsurer) on any loss discovered for any
9
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principal in excess of the first $1,000,000 of loss with an aggregate annual
maximum of $2,850,000. The third layer provides $2,500,000 of coverage on any
loss discovered for any principal in excess of the first $2,000,000 of loss with
an aggregate annual maximum of $5,000,000. The fourth layer provides $3,000,000
of coverage on any loss discovered for any principal in excess of the first
$4,500,000 with an aggregate annual maximum of $3,000,000.
Prior to November 1996, the reinsurance program required that the Company not
write any bond exceeding $5 million or bonds on the same work program in favor
of the principal exceeding $7.5 million in the aggregate. The work program limit
of $7.5 million increased to $10 million effective November 1996.
For the six months ended June 30, 1997, claims and claim adjustment expenses
incurred resulted in a benefit of $62,049 (or an incurred loss and loss
adjustment expense benefit ratio of 1.9%), related to favorable development on
prior accident years, and from favorable claims adjustment expense experience.
For the six months ended June 30, 1996, claims and claim adjustment expenses
incurred were $414,391 (or an incurred loss and loss adjustment expense ratio of
13.7%), consisting for the most part of IBNR ($257,363, or 8.5% of net earned
premiums) and one other claim ($150,000, or 4.6% of net earned premiums).
A limited number of claims have been filed on the Surety Company's bonds.
Accordingly, at June 30, 1997 the Surety Company has established IBNR and case
reserves of $447,736 and $583,407, respectively, gross of reinsurance, to
provide for future claims and claim adjustment expense payments.
For the six months ended June 30, 1997, commission expenses were $1,182,887,
compared to $1,127,531 for the six months ended June 30, 1996. The increase in
commission expenses in 1997 relates to the higher level of gross written
premiums versus the 1996 period.
For the six-month periods ended June 30, 1997 and 1996, the Company incurred
salary and benefits costs of $639,357 and $480,040, respectively. The increase
in salary and benefit costs in 1997 reflects an increase in the number of
employees, including additional underwriters and related support personnel, as
well as increased compensation levels.
For the six months ended June 30, 1997, the Company incurred $66,909 for
professional services and $396,914 for other operating expenses, compared to
$79,060 and $329,684, respectively, for the similar period in 1996. The increase
in operating expenses reflects the required infrastructure changes to support
the Company's current and expected future levels of gross written premiums in a
greater number of markets.
For the six-month periods ended June 30, 1997 and 1996, the Company generated
$223,335 and $197,775, respectively, of income from its investments, comprised
exclusively of U.S. Government securities. The yield on average invested assets
for the 1997 and 1996 periods was 5.4% and 5.6%, respectively. The increase in
interest income in 1997 is the result of an increased level of average invested
assets, offset by a slightly lower yield.
The provision for income taxes for the six months ended June 30, 1997 was
$413,889 (an effective tax rate of 34%), as compared to $245,560 (an effective
tax rate of 31%) for 1996.
Net income for the six months ended June 30, 1997 was $800,137, as compared to
$549,310 for the six months ended June 30, 1996, an increase of $250,827, or
46%.
Three months ended June 30, 1997 compared to three months ended June
30, 1996:
During the three-month period ended June 30, 1997, the Surety Company generated
$2,625,155 of gross written premiums, compared to $2,312,221 of gross written
premiums during the three-month period ended June 30, 1996, representing an
increase of $312,934 or 14%. Management attributes the increase in gross written
premiums primarily to the Surety Company's increased penetration of the states
in which the Surety Company became licensed in late 1995 and throughout 1996.
For the three months ended June 30, 1997, gross ceded reinsurance premiums
totaled $416,874, representing approximately 15.88% of gross written premiums.
For the three months ended June 30, 1996, gross ceded reinsurance premiums
10
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totaled $394,979, representing approximately 17.1% of gross written premiums.
The increase in ceded reinsurance premiums was primarily the result of the
increase in gross written premiums, offset by a lower reinsurance rate afforded
the Surety Company under the reinsurance agreement that became effective on
November 1, 1996.
For the three months ended June 30, 1997, claims and claim adjustment expenses
incurred resulted in a benefit of $29,294 (or an incurred loss and loss
adjustment expense benefit ratio of 1.6%), related to favorable development on
prior accident years, and from favorable claims adjustment expense experience.
For the three months ended June 30, 1996, claims and claim adjustment expenses
incurred were $327,269 (or an incurred loss and loss adjustment expense ratio of
18.4%), consisting for the most part of IBNR ($170,242, or 9.6% of net earned
premiums) and one other claim ($150,000, or 8.4% of net earned premiums).
For the three months ended June 30, 1997, commission expenses were $704,951,
compared to $631,163 for the three months ended June 30, 1996. The increase in
commission expenses in 1997 relates to the higher level of gross written
premiums versus the 1996 period.
For the three-month periods ended June 30, 1997 and 1996, the Company incurred
salary and benefits costs of $301,236 and $255,342, respectively. The increase
in salary and benefit costs in 1997 reflects an increase in the number of
employees, including additional underwriters and related support personnel, as
well as increased compensation levels.
For the three months ended June 30, 1997, the Company incurred $37,630 for
professional services and $207,478 for other operating expenses, compared to
$49,935 and $174,729, respectively, for the similar period in 1996. The increase
in operating expenses reflects the required infrastructure changes to support
the Company's current and expected future levels of gross written premiums in a
greater number of markets.
For the three-month periods ended June 30, 1997 and 1996, the Company generated
$104,730 and $98,166, respectively, of income from its investments, comprised
exclusively of U.S. Government securities. The yield on average invested assets
for the 1997 and 1996 periods was 5.4%. The increase in interest income in 1997
is the result of an increased level of average invested assets.
The provision for income taxes for the three months ended June 30, 1997 was
$264,478 (an effective tax rate of 34%), as compared to $141,738 (an effective
tax rate of 32%) for 1996.
Net income for the three months ended June 30, 1997 was $475,164, as compared to
$301,193 for the three months ended June 30, 1996, an increase of $173,971, or
58%.
Seasonality
Because most of the Surety Company's premiums are generated on construction
related bonds, and are associated with jobs primarily in mid-atlantic states,
the Surety Company's business has been seasonal. Accordingly, operating results
have varied from quarter to quarter, with premium levels lowest from November to
March. Seasonality is expected to have less of an effect on premium activity as
the Surety Company becomes licensed in states having more temperate climates.
Liquidity and Capital Resources
Initial operations of the Surety Company were financed by contributions from the
Company, principally from the sale of common stock by the Company. Continuing
operations have been financed by internally generated cash flow from operations.
Costs incurred by the Company are shared with the Surety Company under a
services agreement which provides for the Surety Company to reimburse the
Company for costs paid by the Company which are deemed to benefit the Surety
Company. The Surety Company may elect to pay dividends in the future, subject to
the dividend restrictions of the Commonwealth of Pennsylvania insurance laws and
regulations. The Company expects to maintain a high level of liquidity through,
among other things, the continued investment in U.S. government securities and
other high-grade investment instruments.
11
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During 1997, approximately $228,000 of the Company's cash and investment
portfolio was converted to U.S. Treasury Notes in conjunction with the final
licensure requirements of the State of South Carolina. Management anticipates
that additional "deposits" will be required in those states in which the Surety
Company intends to seek a license to write surety bonds.
The Company had approximately $7,657,000 of investments and cash equivalents at
June 30, 1997, and approximately $9,248,000 of investments and cash equivalents
at December 31, 1996. The decrease in investments and cash equivalents at June
30, 1997 results primarily from the payment of federal and state tax
obligations, reinsurance premiums, case reserves, and accrued liabilities that
existed at December 31, 1996.
The Company's anticipated expansion plans will require additional personnel and
financial resources. While certain costs are expected to increase due to the
changes in infrastructure, management believes that the Company and the Surety
Company have adequate liquidity to pay all claims and meet all other obligations
for the next twelve months, at a minimum.
The Surety Company requires capital to support its bond underwriting. Management
believes that the statutory surplus of the Surety Company, which was
approximately $8,715,000 at June 30, 1997, will be sufficient to support the
Surety Company's current and anticipated premiums and losses.
12
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PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of shareholders on May 14, 1997.
The matters voted upon at the meeting and the number of votes cast for, against
or withheld, as well as the number of abstentions and broker non-votes, as to
each such matter, including a separate tabulation with respect to each nominee
for director, are set forth as follows:
1. The following persons were elected as directors:
Name of Nominee No. of Votes "For" No. of Votes "Withheld"
Kenneth L. Brier 2,384,273 500
----------------- ---
Ted A. Drauschak 2,384,273 500
----------------- ---
J. Michael Adams 2,384,273 500
----------------- ---
Thomas P. Garry 2,384,273 500
----------------- ---
2. The proposal to elect of Price Waterhouse LLP as auditors for
the Company for 1997:
For 2,383,273
-------------
Against 1,000
-------------
Abstain 500
-------------
3. The proposal to amend the Company's 1995 Equity Incentive Plan
for Key Employees:
For 2,179,648
-------------
Against 43,100
-------------
Abstain 8,000
-------------
4. The proposal to amend the Company's 1995 Equity Incentive Plan
for Outside Directors:
For 2,174,998
-------------
Against 47,750
-------------
Abstain 8,000
-------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3.2 Amended and Restated Articles of Incorporation of
Registrant, as amended (incorporated by reference to Exhibit 3.2 to
Registrant's Form 10-QSB report for the quarter ended June 30, 1996)
Exhibit 3.3 By-Laws of Registrant (incorporated by reference to Exhibit
3.3 of Registrant's Form SB-2 Registration Statement No. 33-78336
declared effective September 1, 1994)
Exhibit 10.1 1995 Equity Incentive Plan for Key Employees, as amended
Exhibit 10.2 1995 Equity Incentive Plan for Outside Directors,
as amended
Exhibit 11. Computation of Earnings per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period for which this
report is filed.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
August 12, 1997 MOUNTBATTEN, INC.
By /s/ Kenneth L. Brier
-----------------------------
Kenneth L. Brier
President and Chief Executive Officer
(principal executive officer)
By /s/ Joel D. Cooperman
-----------------------------
Joel D. Cooperman
Vice President, Finance, Treasurer, and
Chief Financial Officer
(principal financial and accounting officer)
14
<PAGE>
Exhibit Index
Exhibit No. Description of Exhibit
3.2 Amended and Restated Articles of Incorporation of Registrant,
as amended (incorporated by reference to Exhibit 3.2 of
Registrant's Form 10-QSB report for the quarter ended June 30,
1996)
3.3 By-Laws of the Registrant (incorporated by reference to
Exhibit 3.3 of Registrant's Form SB-2 Registration Statement
No. 33-78336 declared effective September 1, 1994)
10.1 1995 Equity Incentive Plan for Key Employees
10.2 1995 Equity Incentive Plan for Outside Directors
11 Computation of Eanings per Share
27 Financial Data Schedule
<PAGE>
MOUNTBATTEN, INC.
1995 EQUITY INCENTIVE PLAN
FOR KEY EMPLOYEES
MOUNTBATTEN, INC., a corporation organized under the laws of the
Commonwealth of Pennsylvania, hereby sets forth the 1995 Equity Incentive Plan
for Key Employees. The Plan permits the grant of stock options, stock
appreciation rights, limited stock appreciation rights, restricted stock and
restricted unit awards. The Committee of the Board of Directors that administers
the Plan may select and grant to key employees of the Company and its
Affiliates, the type of option, stock appreciation right or award which the
Company determines to be most effective in advancing the interests of the
Company through the motivation and retention of those key employees upon whose
judgment, initiative and continued efforts the Company is largely dependent for
the successful conduct of its business.
1. DEFINITIONS
Whenever the following terms are used in the Plan they shall have the
meaning specified below unless the context clearly indicates to the contrary.
"Affiliate" shall mean any corporation in which the Company owns,
directly or indirectly, 25% or more of the voting stock.
"Award" shall mean an award of restricted stock or restricted units
granted under the provisions of Section 5 of the Plan.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean a change in the power to direct or cause
the direction of the management and policies of the Company arising from (1) any
"person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d) of
the Exchange Act), becoming the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of the Company's then
outstanding securities, other than a person or group who, as of the date of the
adoption of this Plan by the Board of Directors of the Company, is known by the
Company to be the beneficial owner, directly or indirectly, of securities of the
Company representing 10% or more of the combined voting power of the Company's
outstanding securities, or (2) more than 50% of the assets of the Company being
disposed of by the Company pursuant to a partial or complete liquidation of the
Company, a sale of assets (including stock of a subsidiary or subsidiaries) of
the Company or otherwise.
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Reference to a specific section of the Code shall include such section, any
valid regulation promulgated thereunder and any comparable provision of any
future legislation amending, supplementing or superseding such section.
"Committee" shall mean the committee appointed by the Board (pursuant
to Section 2(a) of the Plan) to administer the Plan.
"Company" shall mean Mountbatten, Inc., a Pennsylvania corporation.
"Director" shall mean a member of the Board.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Employee" shall mean any salaried, full-time employee of the Company,
or of any corporation which is then an Affiliate, whether such employee is so
employed at the time the Plan is adopted or becomes so employed subsequent to
the adoption of the Plan.
"Exercise Price" shall mean: (i) in the case of an Option, the Fair
Market Value per Share upon the date of grant; and (ii) in the case of a Right,
the Fair Market Value per Share upon the date of grant.
"Fair Market Value" shall be the last sales price of Shares quoted by
the automated quotation system of the National Association of Securities
Dealers, Inc. ("Nasdaq") for the date in question, as published in The Wall
Street Journal. If no sale prices are quoted with respect to the Shares by
Nasdaq for such date, the next preceding date for which such sale prices are
quoted shall be used.
"Grantee" shall mean an Employee to whom an Award is granted.
"Incentive Stock Option" shall mean an Option designated as such by the
Committee which meets the requirements of Section 422 of the Code.
"LSAR" shall mean a limited stock appreciation right awarded under the
provisions of Section 7 hereof.
"Option" shall mean an option to purchase Shares granted under the
provisions of Section 4 of the Plan and, where applicable, shall include an
Incentive Stock Option.
"Optionee" shall mean an Employee to whom an Option or Right is
granted.
"Plan" shall mean this 1995 Equity Incentive Plan for Key Employees, as
amended.
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"Related" shall mean: (i) in the case of a Right, a Right which is
granted in connection with, and to the extent exercisable, in whole or in part,
in lieu of, an Option or another Right; and (ii) in the case of an Option, an
Option with respect to which and to the extent a Right exercisable, in whole or
in part, in lieu thereof, has been granted.
"Restricted Stock Award" shall mean an award of restricted Shares
granted under the provisions of Section 5(d) of the Plan.
"Restricted Unit Award" shall mean an Award of restricted units granted
under the provisions of Section 5(e) of the Plan.
"Retirement" shall mean a Termination of Employment by reason of the
Employee's retirement at or after the Employee's earliest permissible retirement
date pursuant to and in accordance with his or her employer's regular retirement
plan or practice.
"Right" shall mean any Stock Appreciation Right or LSAR granted under
the Plan.
"Secretary" shall mean the Corporate Secretary or an Assistant
Secretary of the Company.
"Shares" shall mean shares of the Company's Common Stock, $.001 par
value per share.
"Stock Appreciation Right" shall mean a Right granted under the
provisions of Section 6 of the Plan.
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
"Termination of Employment" shall mean a cessation of the
employee-employer relationship between an Employee and the Company or an
Affiliate for any reason, including, but not by way of limitation, a termination
by resignation, discharge, death, Total Disability or Retirement or the
disaffiliation of an Affiliate, but excluding any such termination where there
is a simultaneous reemployment by the Company or an Affiliate.
"Total Disability" shall mean permanent and total disability as
determined in accordance with Section 72(m)(7) of the Code.
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<PAGE>
2. ADMINISTRATION
(a) Appointment of Committee. The Committee shall consist of at least
two Directors, appointed by and holding office at the pleasure of the Board. No
Options, Rights or Awards may be granted to any member of the Committee during
the term of such Director's membership on the Committee. A Director shall be
eligible to serve on the Committee only if such Director is a "non-employee
director" as that term is defined under Rule 16b-3 under the Exchange Act and an
"outside director" as that term is defined under Section 162(m) of the Code and
the rules, regulations and interpretations thereunder. The duties and
responsibilities of the Committee may be assigned by the Board to a standing
committee of the Board; provided, however, that all of the members of such
standing committee must satisfy all of the eligibility requirements set forth
above for membership on the Committee.
(b) Duty and Power of Committee. It shall be the duty of the Committee
to conduct the general administration of the Plan in accordance with its
provisions. The Committee shall have the power to determine which Employees are
key Employees and to interpret the Plan, the Options, the Rights and the
Awards, and to adopt rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret, amend or
revoke any such rules.
(c) Matters Relating to Termination of Employment. The Committee, in
its absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Employment, including, but not by way of limitation,
the question of whether a Termination of Employment resulted from Retirement or
Total Disability, and all questions of whether particular leaves of absence
constitute Terminations of Employment.
(d) Transfer Restrictions. The Committee, in its absolute discretion,
may impose such restrictions on the transferability of the Shares issued upon
the exercise of an Option or issued as an Award as it deems appropriate, and any
such restrictions shall be set forth in the respective Option or Award agreement
and may be referred to on the certificates evidencing such Shares.
(e) Committee Actions. The Committee may act either by vote of a
majority of its members at a meeting or by a memorandum or other written
instrument signed by all members of the Committee.
(f) Compensation; Professional Assistance; Good Faith Actions. Members
of the Committee may receive reasonable compensation for their services as
members, and all expenses and liabilities they incur in connection with the
administration of the Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants, or
other persons. The Committee, the Company and officers and directors of the
Company shall be entitled to rely upon the advice, opinions or valuations of any
such persons. All
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<PAGE>
actions taken and all interpretations and determinations made by the Committee
in good faith shall be final and binding upon all Optionees, Grantees, the
Company and all other interested persons. No member of the Committee shall be
personally liable for any action, determination, or interpretation made in good
faith with respect to the Plan, the Options, the Rights or the Awards, and all
members of the Committee shall be fully protected by the Company in respect to
any such action, determination or interpretation.
3. SHARES SUBJECT TO THE PLAN
(a) Limitations. The total number of Shares that may be subject to
Options, Rights and Awards granted under the Plan shall not exceed 500,000 in
the aggregate. Moreover, no key Employee shall be granted Options, Rights or
Awards with respect to a number of Shares, determined on a cumulative basis,
that exceeds 90% of the aggregate number of Shares that are available to be
issued under the Plan pursuant to this Section 3(a).
(b) Effect of Unexercised or Cancelled Options or Stock Appreciation
Rights, Unvested Restricted Stock or Unit Awards. If an Option, Right or Award
expires or is cancelled for any reason without having been fully exercised or
vested, the number of Shares or units subject to such Option, Right or Award
that were not purchased or did not vest prior to such expiration or cancellation
may again be made subject to an Option, a Right or an Award granted hereunder
(to the same Optionee or Grantee or to a different Optionee or Grantee),
provided that a surrender of all or part of an Option in connection with the
exercise of a Right shall not be considered a termination and the Shares covered
by such Option or the surrendered portion may not be reallocated by the
Committee.
(c) Changes in Company's Shares. In the event that the outstanding
Shares are hereafter increased or decreased or changed into or exchanged for a
different number or kind of shares or other securities of the Company, or of
another corporation by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split-up, stock dividend, spin-off or
combination of shares, appropriate adjustments shall be made by the Committee in
the aggregate number and kind of shares and units that may be issued on exercise
of Options or Rights or granted as Awards.
4. STOCK OPTIONS AND RIGHTS
(a) Granting of Options and Rights.
(1) Eligibility. Any key Employee of the Company or of any
corporation which is then an Affiliate shall be eligible to be granted Options
and/or Rights.
(2) Granting of Options and/or Rights.
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<PAGE>
(A) The Committee shall from time to time, in its absolute
discretion:
(i) Select from among the eligible key Employees to
whom Options or Rights should be granted and determine the
number of Shares to be subject to such Options or Rights.
(ii) Determine the terms and conditions of such
Options or Rights, consistent with the Plan.
(iii) Determine whether such Options are to be
Incentive Stock Options or not, provided any Incentive Stock
Option must meet all the applicable requirements of Section 422
of the Code.
(B) Upon the selection of a key Employee to be granted an
Option or Right, the Committee shall authorize the Company to grant
such Option or Right and may impose such conditions on the grant of
such Option or Right, as it deems appropriate.
(b) Terms of Options or Rights.
(1) Option Agreement; Rights Agreement. Each Option and/or Right
shall be evidenced by a written agreement which shall be executed by the
Optionee and the Company and which shall contain the terms and conditions
determined by the Committee. Notwithstanding anything to the contrary in the
Plan, agreements evidencing Incentive Stock Options shall contain such terms and
conditions, among others, as may be necessary in the opinion of the Committee to
qualify them as Incentive Stock Options under Section 422 of the Code.
(2) Exercise Price. The Exercise Price of the Shares subject to
each Option or Right shall be set by the Committee; provided, however, that the
price shall not be less than 100% of the Fair Market Value for such Shares on
the date the Option and/or Right is granted as determined by the Committee. The
Exercise Price shall be subject to adjustment only as provided in Section
4(b)(7) of the Plan.
(3) Date of Grant. The date on which an Option or Right shall be
granted shall be the date of the Committee's authorization of such grant or such
later date as may be determined by the Committee at the time such grant is
authorized.
(4) Commencement of Exercisability.
(A) Except as may be otherwise provided in the agreement
evidencing an Option and/or Right or as may be otherwise determined by
the Committee, no Option or Right may be exercised in whole or in part
during the first six months after such Option or Right is granted.
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<PAGE>
(B) Subject to the provisions of Section 4(b)(4)(A) and
(C), Options or Rights shall become exercisable at such times and in
such installments (which may be cumulative) as the Committee shall
provide in the terms of each individual Option or Right; provided,
however, that in the agreement evidencing an Option or Right or after
an Option or Right is granted, the Committee may, on such terms and
conditions as it may determine to be appropriate and notwithstanding
the provisions of Section 4(b)(4)(A) and (C), accelerate the time at
which such Option or Right or any portion thereof may be exercised.
(C) No portion of an Option or Right which is
unexercisable (except an Incentive Stock Option which is unexercisable
solely by virtue of the sequential exercise restriction contained in
Section 4(b)(9)(C)) at the time of the Optionee's Termination of
Employment shall thereafter become exercisable; provided, however, that
this does not limit the discretion of the Committee to provide in the
terms of an Option or Right that there will be an acceleration of
exercisability upon the occurrence of certain types of Terminations of
Employment.
(5) Replacement Options and Rights. The Committee, in its
absolute discretion, may grant to holders of outstanding Options or Right, in
exchange for the surrender and cancellation of such Options or Rights, new
Options or Rights having Exercise Prices lower (or higher) than the Exercise
Price provided in the Options or Rights so surrendered and cancelled and
containing such other terms and conditions as the Committee may deem
appropriate.
(6) Expiration of Options and Rights.
(A) Except as otherwise provided in Section 4(b)(6)(B),
each Option or Right shall terminate on the expiration of ten years
from the date the Option or Right was granted. Notwithstanding the
foregoing or any other provision of the Plan, no Incentive Stock Option
may be exercised after the expiration of ten years from the date the
Option was granted.
(B) Each Option or Right or portion thereof which has
become exercisable may be exercised until the first to occur of the
following events:
(i) The expiration of three months from the date of
the Optionee's Termination of Employment unless such
Termination of Employment results from the Optionee's death,
Total Disability or Retirement, and except as provided in (iv)
below; or
(ii) The expiration of one year from the date of the
Optionee's Termination of Employment by reason of Total
Disability; or
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<PAGE>
(iii) The expiration of one year from the date of the
Optionee's Retirement; provided no Incentive Stock Option may be
exercised after the expiration of three months from the date of
the Optionee's Retirement, and except as provided in (iv) below;
or
(iv) The expiration of one year from the date of the
Optionee's death, if such death occurs while the Optionee is in
the employ of the Company or an Affiliate or within the
three-month or one-year period referred to in (i), (ii) or (iii)
above, whichever is applicable.
(C) Subject to the provisions of subparagraphs (A) and (B)
of this Section 4(b)(6), the Committee shall provide, in the terms of
each individual Option or Right, when such Option or Right expires and
becomes unexercisable.
(7) Adjustments in Outstanding Options or Rights. In the event
that the outstanding Shares subject to Options or Rights are increased or
decreased or changed into or exchanged for a different number or kind of shares
of the Company, or other securities of the Company, or of another corporation,
by reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, stock dividend, spin-off or combination of
shares, the Committee shall make an appropriate and equitable adjustment in the
number and kind of shares as to which all outstanding Options or Rights, or
portions thereof then unexercised, shall be exercisable, to the end that after
such event the Optionee's proportionate interest shall be maintained as before
the occurrence of such event. Such adjustment in an outstanding Option or Right
shall be made without change in the total Exercise Price applicable to the
Option or Right or the unexercised portion of the Option or Right (except for
any change in the aggregate price resulting from rounding-off of share
quantities or prices) and with any necessary corresponding adjustment in option
price per share and provided that any such adjustment in respect to an Incentive
Stock Option shall be made in such manner as not to constitute a "modification"
as defined in Section 425 of the Code. Any such adjustment made by the Committee
shall be final and binding upon all Optionees, the Company and all other
interested persons.
(8) Change of Control. In its absolute discretion and on such
terms and conditions as it deems appropriate, and notwithstanding the provisions
of Section 4(b)(4), the Committee may provide that in the event of a Change of
Control, that such Option or Right shall immediately vest and may be exercised
at any time on or following a Change of Control.
(9) Certain Additional Provisions for Incentive Stock Options.
Notwithstanding anything to the contrary in the Plan, each Incentive Stock
Option must meet the following requirements:
(A) The Optionee at the time the Option is granted is an
Employee of the Company or a Subsidiary of the Company.
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<PAGE>
(B) The Optionee (together with persons whose stock
ownership is attributed to the Optionee pursuant to Section 425(d) of
the Code) at the time the Option is granted does not own stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of any of its Subsidiaries, unless
at the time of grant the exercise price of the Option is at least 110%
of the Fair Market Value of the Common Stock subject to the Option and
the Option may not be exercisable after the expiration of five years
from the date the Option was granted.
(C) No Option may be granted to an Employee which, when
aggregated with all other Incentive Stock Options granted to such
Employee by the Company and its Subsidiaries, would result in stock
having an aggregate Fair Market Value (determined for each share of
stock as of the time the Option covering such share is granted) in
excess of $100,000 becoming first available for purchase upon exercise
of the Option during any calendar year.
(D) The Option may not be exercised after the expiration
of three months after the Optionee ceases to be employed by the Company
or a Subsidiary.
(10) Substitute Options or Rights. Options or Rights may be
granted under the Plan from time to time in substitution for options or rights
held by employees of other corporations who are about to become Employees of
the Company as the result of a merger or consolidation of the employing
corporation with the Company or the acquisition by the Company or any Affiliate
of the assets of the employing corporation or the acquisition by the Company or
any Affiliate of stock of the employing corporation as a result of which it
becomes an Affiliate of the Company. The terms and conditions of substitute
Options or Rights so granted may vary from the terms and conditions set forth in
the Plan to such extent as the Committee at the time of grant may deem
appropriate in order to conform, in whole or in part, to the provisions of the
options or rights in substitution for which Options or Rights are being granted,
but no such variation shall be such as to affect the qualified status of any
such Option which has been granted in substitution for an incentive stock option
under Section 422 of the Code.
(c) Exercise of Options and Rights.
(1) Person Eligible to Exercise. During the lifetime of the
Optionee, only the Optionee may exercise an Option or Right granted to the
Optionee or any portion thereof. After the death of the Optionee, any
exercisable portion of an Option or Right may be exercised by the Optionee's
personal representative or by any person empowered to do so under the deceased
Optionee's will or under the then applicable laws of descent and distribution.
The Company may require appropriate proof from any such other person of such
person's right or power to exercise the Option or Right or any portion thereof.
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<PAGE>
(2) Fractional Shares; Partial Exercise. The Company shall not
be required to issue fractional Shares on exercise of an Option and the
Committee may, by the terms of the Option, require any partial exercise thereof
to be with respect to a specified minimum number of Shares.
(3) Manner of Exercise. An exercisable Option or Right, or any
exercisable portion thereof, may be exercised solely by delivery to the
Secretary or the Secretary's office of all of the following:
(A) Notice in writing signed by the Optionee or other
person then entitled to exercise such Option or Right or portion
thereof, stating that such Option or Right or portion is exercised,
such notice complying with all applicable rules established by the
Committee;
(B) In the case of an Option, full cash payment of the
Exercise Price for the Shares with respect to which such Option or
portion is thereby exercised and which are to be delivered to the
Optionee pursuant to such exercise; provided, at the discretion of the
Committee, payment may be made in whole or in part in Shares which
Shares will be valued at its then Fair Market Value as determined by
the Committee or in whole or in part pursuant to such other
arrangement, including any deferred payment arrangement or simultaneous
exercise and sale arrangement, as the Committee, in its absolute
discretion, determines; and
(C) Such representations and documents as the Committee,
in its absolute discretion, deems necessary or advisable to effect
compliance with all applicable provisions of the Securities Act of
1933, as amended, and any other federal or state securities laws or
regulations. The Committee may, in its absolute discretion, also take
whatever additional actions it deems appropriate to effect such
compliance including, without limitation, placing legends on Share
certificates and issuing stop-transfer orders to transfer agents and
registrars.
(4) Right to Elect to Pay Profit or to Credit Profit in Lieu of
Delivering Option Shares. The Committee, in its absolute discretion, may elect
(in lieu of delivering all or a portion of the shares of Common Stock as to
which an Option has been exercised) if the Fair Market Value of the Common Stock
exceeds the Exercise Price of the Option (i) to pay the Optionee in cash or in
Shares, or a combination of cash and Shares, an amount equal to the excess of
the Fair Market Value of the Shares on the exercise date over the Exercise Price
or, in the case of an Option which is not an Incentive Stock Option, (ii) to
defer payment and to credit the amount of such excess on the Company's books for
the account of the Optionee and either (a) to treat the amount in such account
as if it had been invested in the manner from time to time determined by the
Committee, with dividends or other income thereon being deemed to have been so
reinvested or (b) for the Company's convenience, to contribute the amount in
such account to a trust, which may be revocable by the
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<PAGE>
Company, for investment in the manner from time to time determined by the
Committee and set forth in the instrument creating such trust. The election
pursuant to this Section 4(c)(4) shall be made by giving written notice to the
Optionee (or other person exercising the Option). Shares paid pursuant to this
subparagraph will be valued at the Fair Market Value on the exercise date. For
purposes of any cash payment to an Optionee who is subject to Section 16(b) of
the Exchange Act and who exercises an Option during a "window period," for
purposes of this Section 4(c)(4) the Fair Market Value of the Common Stock on
the exercise date shall be deemed to be that value determined by the Committee
in its discretion which is not less than the lowest Fair Market Value, nor more
than the highest Fair Market Value, of a Share on any day during such "window
period." "Window period" shall mean the ten-day period defined in Rule
16b-3(e)(3) under the Exchange Act. For purposes of the limitations in Section
3(a), the number of Shares which are paid or credited pursuant to this Section
4(c)(4) shall not be counted, but the full number of Shares as to which the
Option was exercised shall be counted even though the Committee has made an
election under this Section 4(c)(4) in respect to some or all of the Shares.
(5) Conditions to Issuance of Stock Certificates. The Shares
deliverable upon exercise of an Option, or any part thereof, may be either
previously authorized but unissued Shares or issued Shares which have then been
reacquired by the Company. The Company shall not be required to issue or deliver
any certificate or certificates for Shares purchased upon the exercise of any
Option or portion thereof prior to fulfillment of all of the following
conditions:
(A) The admission of such Shares to listing on all stock
exchanges or automated quotation system operated by a national
securities association on which such class of stock is then listed or
traded;
(B) The completion of any registration or other
qualification of such Shares under any state or federal law or under
the rulings or regulations of the Securities and Exchange Commission or
any other governmental regulatory body, which the Company shall, in its
absolute discretion, deem necessary or advisable;
(C) The obtaining of any approval or other clearance from
any state or federal governmental agency which the Company shall, in
its absolute discretion, determine to be necessary or advisable;
(D) The provision for any income tax withholding which the
Company shall, in its absolute discretion, determine to be necessary or
advisable; and
(E) The lapse of such reasonable period of time following
the exercise of the Option as the Company may determine, in its
absolute discretion, from time to time to be necessary or advisable for
reasons of administrative convenience.
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<PAGE>
(6) Rights as Shareholders. An Optionee shall not be, nor have
any of the rights or provisions of, a shareholder of the Company in respect to
any Shares which may be purchased upon the exercise of any Option, or that are
subject to any Right, or portion thereof unless and until certificates
representing such Shares have been issued by the Company to such Optionee.
5. AWARDS
(a) Eligibility. Any key Employee of the Company or of any corporation
which is then an Affiliate shall be eligible to be granted Awards.
(b) Award Procedure. The Committee shall from time to time in its
absolute discretion:
(1) Select from among the eligible key Employees the Employees
to whom Awards shall be granted, determine whether such Awards are to be
Restricted Stock Awards or Restricted Unit Awards (or both) and determine the
number of Shares or units to be covered by such Awards; and
(2) Determine the terms and conditions of such Awards,
consistent with the Plan.
(c) Award Agreements. Each Award shall be evidenced by a written
agreement, executed by the Grantee and the Company, which shall contain such
restrictions, terms and conditions as the Committee may require and (without
limiting the generality of the foregoing) such agreements reflecting Restricted
Stock Awards may impose an escrow condition and/or require that an appropriate
legend be placed on Share certificates.
(d) Restricted Stock Awards.
(1) Shares Subject to Award. The Shares awarded as a Restricted
Stock Award may be either previously authorized but unissued Shares or issued
Shares which have then been reacquired by the Company. Such awarded Shares shall
be issued in the name of the Grantee and delivered to the Grantee (or the escrow
holder, if any) as soon as reasonably practicable after the Award is made (and
after the Grantee has executed the Award agreement and any other documents which
the Committee, in its absolute discretion, may require) without the payment of
any cash consideration by such Grantee. Unless and until the Shares so awarded
to the Grantee shall have vested in the manner set forth in Section 5(f), below,
such Shares shall not be sold, transferred or otherwise disposed of and shall
not be pledged or otherwise hypothecated. Upon the Termination of Employment of
the Grantee, all of such Shares which are not then vested shall thereupon be
forfeited and automatically transferred to and reacquired by the Company at no
cost to the Company. The
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Committee may also impose such other restrictions and conditions on the Shares
as it deems appropriate.
(2) Rights as Shareholder.
(A) Upon delivery of the Shares awarded to the Grantee (or
the escrow holder, if any) as a Restricted Stock Award, the Grantee
shall have all the rights of a shareholder with respect to such Shares,
including the right to vote the Shares and receive all dividends, or
other distributions paid or made with respect to the Shares.
(B) In the event that as a result of a stock dividend,
stock-split, reclassification, recapitalization, combination of Shares
or the adjustment in the capital stock of the Company or otherwise, or
as a result of a merger, consolidation, spin-off or other
reorganization, the Company's Common Stock shall be increased, reduced
or otherwise changed, and by virtue of any such change a Grantee shall
in the Grantee's capacity as owner of unvested Shares of stock which
have been awarded to the Grantee as a Restricted Stock Award (the
"prior Shares") be entitled to new or additional or different shares of
stock or securities (other than rights or warrants to purchase
securities), such new or additional or different shares or securities
shall thereupon be considered to be unvested Restricted Stock Awards
and shall be subject to all of the conditions and restrictions which
were applicable to the prior Shares pursuant to the Plan.
(C) If a Grantee receives rights or warrants with respect
to any Shares which were awarded to the Grantee as Restricted Stock
Awards, such rights or warrants or any Shares or other securities
acquired by the exercise of such rights or warrants may be held,
exercised, sold or otherwise disposed of by the Grantee free and clear
of the restrictions and obligations provided in the Plan.
(3) Conditions. Each Restricted Stock Award shall contain either
performance-based criteria to be met prior to vesting or require a minimum time
period of six months over which the Shares comprising such Restricted Stock
Award shall vest in increments as the Committee, in each case, shall determine.
(e) Restricted Unit Awards.
(1) Restricted Unit Account. In the case of Restricted Unit
Awards, no Shares shall be issued to the Grantee at the time the Award is made,
and no fund shall be set aside by the Company for the payment of any such Award;
but rather the Company shall establish and maintain a separate written account
for each Grantee and shall record in such account the number of Restricted Units
awarded to such Grantee. Whenever the Company pays a cash dividend upon its
Common Stock, there
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shall be credited to each such Grantee's account an amount equal to the cash
dividend paid upon one Share for each Restricted Unit then in such Grantee's
account (hereinafter referred to as "Dividend Equivalents").
(2) Payment of Restricted Units. Each Restricted Unit Award
agreement shall specify a date or dates on which payment of the value of vested
Restricted Units (and Dividend Equivalents with respect to such vested
Restricted Units) in the Grantee's account is to be made. As soon as reasonably
practicable after the payment date, the Company shall deliver to the Grantee one
Share for each vested Restricted Unit credited to the Grantee's account and cash
equal to the vested Dividend Equivalents credited to the Grantee's account;
provided, however that the Committee may, in its absolute discretion, elect to
pay the Grantee cash or part cash and part Shares in lieu of delivering only
Shares for the vested Restricted Units. If a cash payment is made in lieu of
delivering Shares the amount of such cash payment shall (in respect to each
vested Restricted Unit for which a cash payment is to be made) be equal to the
Fair Market Value of the Shares on the payment date. The Shares delivered in
payment, in whole or in part, of a Restricted Unit may be either previously
authorized but unissued Shares or issued Shares which have then been reacquired
by the Company. Payments to be made hereunder shall, if the Grantee is then
deceased, be made to the Grantee's estate or others as may be designated in
writing by the Grantee, with the approval of the Committee.
(3) Deferral of Payment. The Restricted Unit Award agreement may
permit a Grantee to request the payment of vested Restricted Units (and Dividend
Equivalents with respect to such Restricted Units) be deferred beyond the
payment date specified in the agreement. It shall be at the Committee's sole
discretion whether or not to permit such deferment and to specify the terms and
conditions which are not inconsistent with the Plan, to be contained in the
agreement. In the event of such deferment, the Committee may determine that
interest shall be credited annually on the Dividend Equivalents at a rate to be
determined by the Committee. The Committee may also determine to compound such
interest.
(4) Adjustments in Capitalization. The Committee shall make an
appropriate adjustment in the number of kind of Restricted Units then credited
to the account or accounts of any Grantee due to changes in the Company's
outstanding Common Stock by reason of a merger, consolidation, spin-off or
other reorganization, recapitalization, reclassification, stock split-up, stock
dividend, or combination of Shares and any such adjustment made by the Committee
shall be final and binding upon all Grantees, the Company and all other
interested persons.
(5) No Trust Fund. Grantees of Restricted Unit Awards shall not
have any interest in any fund or specific asset of the Company by reason of such
Award. No trust fund shall be created in connection with the Plan or any
Restricted Unit Award thereunder, and there shall be no required funding of
amounts which may become payable under any such Award.
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(f) Vesting of Awards. Shares awarded as Restricted Stock Awards and
units awarded as Restricted Unit Awards (including Dividend Equivalents with
respect to such Restricted Unit Awards) shall vest at such time or times and on
such terms, conditions and performance criteria, as the Committee may determine;
provided, however, that (i) no such Shares or units shall vest until six months
from the date of Award and (ii) the vesting of such Shares or units shall occur
only if the Grantee on the date of the vesting is then and has continuously been
an Employee from the date of the Award. In the event of Termination of
Employment as a result of the death or Total Disability of a Grantee, the
Committee, in its absolute discretion, may determine that the unvested portion
of some or all Shares awarded to the Grantee as Restricted Stock Awards and some
or all units awarded to the Grantee as Restricted Unit Awards (including
unvested Dividend Equivalents) shall thereupon immediately vest. The Committee
may also decide at any time in its absolute discretion and on such terms and
conditions as it deems appropriate, to accelerate the vesting of Shares awarded
as Restricted Stock Awards and units awarded as Restricted Unit Awards
(including unvested Dividend Equivalents).
6. STOCK APPRECIATION RIGHTS
(a) Eligibility. Any key Employee of the Company or of any corporation
which is then an Affiliate shall be eligible to be granted Stock Appreciation
Rights.
(b) Grant of Stock Appreciation Rights. A Stock Appreciation Right
whether Related to an Option or independent of an Option shall, upon its
exercise, entitle the Optionee to whom such Stock Appreciation Right was granted
to receive the number of Shares or cash or combination thereof, as the Committee
in its discretion shall determine at the date of grant and as provided for in
the applicable agreement pursuant to which the Stock Appreciation Right is
granted. The aggregate value of the Stock Appreciation Right (i.e., the sum of
the amount of cash and/or Fair Market Value of such Shares on the date of
exercise) shall equal the amount by which the Fair Market Value per Share on the
date of such exercise shall exceed the Exercise Price of such Stock Appreciation
Right (see Section 6(c) below for instructions on how to calculate the Exercise
Price of a Related Stock Appreciation Right), multiplied by the number of Shares
with respect of which such Stock Appreciation Right shall have been exercised. A
Stock Appreciation Right may be related to an Option or may be granted
independently of any Option, as the Committee shall from time to time in each
case determine at the date of grant and as provided in the applicable agreement.
(c) Related Stock Appreciation Right. A Related Stock Appreciation
Right may be granted at the time of grant of an Option or, in the case of a
nonqualified stock option, at any time thereafter during the term of the
nonqualified stock option. The Exercise Price of a Related Stock Appreciation
Right shall be the same as the Exercise Price of the Related Option. The
following provisions shall apply to a Related Stock Appreciation Right:
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(1) Grant of Related Stock Appreciation Right. Related Stock
Appreciation Rights may be granted by the Committee under the Plan in connection
with an Option, either at the time of grant or by amendment to the Related Stock
Option Agreement. Each Related Stock Appreciation Right shall be subject to the
same terms and conditions as the Related Option and to such additional
conditions as the Committee shall determine, shall be exercisable only to the
extent the Related Option is exercisable and shall become nonexercisable and be
forfeited if and to the extent the Related Option is exercised or becomes
unexercisable.
(2) Exercise of Stock Appreciation Rights. A Related Stock
Appreciation Right shall entitle the Optionee to surrender to the Committee
unexercised the Related Option, or any portion thereof, and to receive from the
Company in exchange therefor a cash payment and/or Shares having an aggregate
Fair Market Value equal to the excess of the Fair Market Value of one Share over
the Exercise Price per Share provided for in the related Option, multiplied by
the number of Shares called for by the Option, or portion thereof, which is
surrendered. The Committee shall have the sole discretion to determine the form
in which payment is to be made upon the exercise of a Related Stock Appreciation
Right (i.e., whether in cash, in Shares or partly in cash and partly in Shares).
In no event will fractional Shares be issued but cash will be paid in lieu
thereof.
(3) Window Period Exercises for Cash. Notwithstanding the
provisions of Section 6(c)(2), above, the Committee shall have the ability, in
its discretion, to fix the Fair Market Value of a Share for purposes of
determining the amount of cash and the number of Shares, if any, to be received
upon the exercise of a Related Stock Appreciation Right during any "window
period" (which consists of a period beginning on the third business day
following the date of release of quarterly or annual sales and earnings
information by the Company and ending on the twelfth business day following such
release date) for payment wholly or partly in cash at an amount not greater than
the highest Fair Market Value, nor less than the lowest Fair Market Value, of a
Share during such window period.
(4) Relation to Related Options. Related Stock Appreciation
Rights shall be exercisable at such time as may be determined by the Committee,
provided that a Related Stock Appreciation Right shall not be exercisable prior
to the time the Related Option could be exercised and, except in the event of
death or Total Disability, shall not be exercisable for a period of six months
from the date of grant of such Right. A Related Stock Appreciation Right may be
exercised in whole or in part only upon surrender of a proportionate part of the
Related Option by the Optionee.
(5) Expiration or Termination. Each Related Stock Appreciation
Right and all Rights and obligations thereunder shall terminate and may no
longer be exercised upon the termination or exercise of the Related Option.
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(6) Shares May Be Used Only Once. Shares subject to a Related
Option to which a Related Stock Appreciation Right is related shall be used not
more than once to calculate the cash or Shares to be received by the Optionee
pursuant to an exercise of such Related Stock Appreciation Right.
(7) Effect of Death or Other Termination of Employment. In the
event of the Termination of Employment of a recipient of a Related Stock
Appreciation Right, the recipient's Related Stock Appreciation Right shall be
exercisable only to the extent and upon the conditions that the Related Option
is exercisable under the applicable provisions of Section 4(b)(6) hereof.
(8) Adjustment in Outstanding Options. In the event that the
Options to which any Related Stock Appreciation Rights are related are adjusted
pursuant to the provisions of Section 4(b)(7), then the Committee shall make an
appropriate and equitable adjustment in the number of such Stock Appreciation
Rights, to the end that after such event the Optionee shall be in the same
position with respect to the Options as the Optionee was prior to the occurrence
of such event.
7. LIMITED STOCK APPRECIATION RIGHTS; ACCELERATION OF AWARDS
(a) Grant of LSAR. At the time of grant of an Option or Stock
Appreciation Right to any Optionee (or, in the case of a nonqualified stock
option or a Stock Appreciation Right not related to an Incentive Stock Option,
at any time thereafter during the term of the Option or Stock Appreciation
Right), the Committee shall have full and complete authority and discretion also
to grant to the Optionee an LSAR which is Related to such Option or Stock
Appreciation Right.
(b) Exercise of LSAR. An LSAR shall entitle the holder thereof, upon
exercise of the LSAR within the exercise period prescribed below and
satisfaction of any conditions imposed by the Committee in the grant of the
LSAR, to surrender the Related Option and/or Related Stock Appreciation Right or
any portion thereof, and to receive without payment to the Company an amount of
cash determined pursuant to Section 7(d) hereof. An LSAR shall be exercisable
only during one or more of the periods prescribed below in Section 7(c);
provided, however, that no LSAR may be exercised within six months of the date
the LSAR was granted and an LSAR shall be exercisable only at such time or times
and to the extent that the Related Stock Appreciation Right or Option is
exercisable and only when the Fair Market Value per Share exceeds the Exercise
Price per Share. To the extent that an LSAR is exercised, the Related Option
and/or Stock Appreciation Right shall automatically be cancelled to the extent
of the number of Shares covered by such exercise, and such Shares shall no
longer be available for future Grants or Awards. To the extent that a Related
Option or Stock Appreciation Right is exercised, the Related LSAR shall
automatically be cancelled to the extent of the number of Shares covered by such
exercise.
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(c) Trigger Event. An LSAR shall be exercisable, subject to the
provisions in Section 7(b), during any one or more of the following periods:
(1) For a period of 60 days beginning on the date on which
Shares are first purchased pursuant to a tender offer or exchange offer (other
than such an offer by the Company, any Subsidiary, any employee benefit plan of
the Company or of any Subsidiary or any entity holding Shares or other
securities of the Company for or pursuant to the terms of such plan), whether or
not such offer is approved or opposed by the Company and regardless of the
number of Shares purchased pursuant to such offer;
(2) For a period of 60 days beginning on the date the Company
acquired knowledge that any person or group deemed a person as used in Section
13(d) of the Exchange Act (other than the Company, any Subsidiary, any employee
benefit plan of the Company or of any Subsidiary or any entity holding shares or
other securities of the Company for or pursuant to the terms of any such plan,
or any person or group who, as of the date of adoption of this Plan by the Board
of Directors of the Company, is known by the Company to be the beneficial owner,
directly or indirectly, of securities representing 10% or more of the combined
voting power of the Company's outstanding securities), in a transaction or
series of transactions, has become the beneficial owner, directly or indirectly
(with beneficial ownership determined as provided in Rule 13d-3, or any
successor rule, under the Exchange Act), of securities of the Company entitling
the person or group to 30% or more of all votes (without consideration of the
rights of any class of stock to elect directors by a separate class vote) to
which all shareholders of the Company would be entitled to vote in the election
of the Board of Directors were an election held on such date;
(3) For a period of 60 days beginning on the date, during any
period of two consecutive years, when individuals who at the beginning of such
period constitute the Board of Directors of the Company cease for any reason to
constitute at least a majority thereof, unless the election, or the nomination
for election by the shareholders of the Company, of each new director was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period; and
(4) For a period of 60 days beginning on the date of approval by
the shareholders of the Company of an agreement (a "reorganization agreement")
providng for:
(A) The merger or consolidation of the Company with
another corporation where the shareholders of the Company, immediately
prior to the merger or consolidation, do not beneficially own,
immediately after the merger or consolidation, shares of the
corporation issuing cash or securities in the merger or consolidation
entitling such shareholders to 51% or more of all votes (without
consideration of the rights of any class of stock to elect directors by
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a separate class vote) to which all shareholders of such corporation
would be entitled in the election of directors or where the members of
the Board of Directors of the Company, immediately prior to the merger
or consolidation, do not, immediately after the merger or
consolidation, constitute a majority of the Board of Directors of the
corporation issuing cash or securities in the merger or consolidation;
or
(B) The sale or other disposition of all or substantially all
the assets of the Company.
Each of the events specified in (1), (2), (3) and (4) is a "Trigger
Event" for the purposes of the Plan.
(d) Payment Upon Exercise. Upon exercise of an LSAR, the Participant
shall be entitled to receive an amount of cash in respect of each Share subject
to the Related Option or Stock Appreciation Right equal to the excess of the
fair market value of such Share over the Exercise Price of such Related Option
or Stock Appreciation Right. In the case of LSARs related to Incentive Stock
Options, "fair market value" shall mean the Fair Market Value of Shares on the
date the LSAR is exercised. In the case of all other LSARs, "fair market value"
shall mean the highest last sale price of the Shares quoted by Nasdaq during the
period beginning on the 90th day prior to the date on which the LSAR is
exercised and ending on such date, except that:
(1) In the event of a tender offer or exchange offer for Shares,
fair market value shall mean the greater of such last sale price or the highest
price paid for Shares pursuant to any tender offer or exchange offer in effect
at any time beginning on the 90th day prior to the date on which the LSAR is
exercised and ending on such date;
(2) In the event of the acquisition by any person or group of
beneficial ownership of securities of the Company entitling the person or group
to 30% or more of the combined voting power of the Company's outstanding
securities as described in Section 7(c)(2), fair market value shall mean the
greater of such last price or the highest price per Share paid shown on Schedule
13D, or any amendment thereto, filed by the person or group becoming a 30%
beneficial owner or disclosing an intention or possible intention to acquire
control of the Company; and
(3) In the event of approval by shareholders of the Company of a
reorganization agreement, fair market value shall mean the greater of such last
sale price or the fixed or formula price specified in the reorganization
agreement if such price is determinable as of the date of exercise of the LSAR.
Any securities or property which are part or all of the consideration
paid for Shares in a tender offer or exchange offer or under an approved
reorganization agreement shall be valued at the higher of (1) the valuation
placed on such securities
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or property by the person making the tender offer or exchange offer or by the
corporation other than the Company issuing securities or property in the merger
or consolidation or to whom the Company is selling or otherwise disposing of
all or substantially all the assets of the Company and (2) the valuation placed
on such securities or property by the Committee.
(e) Acceleration of Options and Stock Appreciation Rights. All Options
and Stock Appreciation Rights shall become fully exercisable upon the occurrence
of any Trigger Event, whether or not such Options or Stock Appreciation Rights
are then exercisable under the provisions of the applicable agreements relating
thereto, except that:
(1) In no event will Stock Appreciation Rights or Options
related to Stock Appreciation Rights be exercisable within six months after the
date on which granted; and
(2) Stock Appreciation Rights related to LSARs may not be
exercised for cash during any of the 60-day periods after a Trigger Event.
8. MISCELLANEOUS PROVISIONS
(a) Options, Rights and Awards Not Transferable. No Option or interest
or right therein or part thereof and no Right, Restricted Stock Award or
Restricted Unit Award shall be liable for the debts, contracts, or engagements
of the Optionee, Grantee or such person's successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means, whether such disposition be
voluntary or involuntary or by operation of law by judgment, levy, attachment,
garnishment or any other legal or equitable proceedings (including bankruptcy),
and any attempted disposition thereof shall be null and void and of no effect;
provided, however, that nothing in this Section 8(a) shall prevent transfers by
will or by the applicable laws of descent and distribution.
(b) Employment. Nothing in the Plan or in any Option, Right or Award
shall confer upon any Employee the right to continue in the employ of the
Company or any Affiliate or shall interfere with or restrict in any way the
rights of the Company and Affiliates to discharge any Employee at any time for
any reason whatsoever, with or without good cause.
(c) Effect of a Change of Control. The Committee may, in its absolute
discretion, provide that in the event of a Change of Control, some or all Shares
and units awarded under the Plan as Restricted Stock Awards or Restricted Unit
Awards including unvested Dividend Equivalents shall immediately vest.
(d) Amendment, Suspension or Termination of the Plan. The Plan may be
wholly or partially amended or otherwise modified, suspended or terminated at
any
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time or from time to time by the Board or the Committee, subject to any required
shareholder approval or any shareholder approval that the Board may deem
advisable for any reason, such as for the purpose of obtaining or retaining any
statutory or regulatory benefits under tax, securities or other laws or
satisfying any applicable stock exchange listing requirements. Neither the
amendment, suspension, nor termination of the Plan shall, without the consent of
the Optionee or the Grantee, alter or impair any rights or obligations under any
Option, Right or Award theretofore granted. No Option, Right or Award may be
granted during any period of suspension nor after termination of the Plan, and
in no event may any Option intended to be an Incentive Stock Option be granted
under the Plan more than ten years after the date the adoption of the Plan was
approved by the Board.
(e) Effect upon Other Compensation Plans. The adoption of the Plan
shall not affect any other stock option, compensation or incentive plans in
effect for the Company or any Affiliate and the Plan shall not preclude the
Board from establishing any other forms of incentive or compensation for
Employees of the Company or any Affiliate.
(f) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the
Exchange Act applies to Options, Rights or Awards granted under the Plan, it is
the intent of the Company that the Plan comply in all respects with the
requirements of Rule 16b-3, that any ambiguities or inconsistencies in
construction of the Plan be interpreted to give effect to such intention and
that if the Plan shall not so comply, whether on the date of adoption or by
reason of any later amendment to or interpretation of Rule 16b-3, the
provisions of the Plan shall be deemed to be automatically amended so as to
bring them into full compliance with such rule.
(g) Shareholder Approval. Notwithstanding anything to the contrary set
forth herein, no Option or Right may be exercised and no Award may be granted
until the Plan shall have been approved by the affirmative vote of the holders
of a majority of the outstanding Shares present or represented by proxy and
entitled to vote at a duly convened meeting of shareholders of the Company.
(h) Titles. Titles are provided herein for convenience only and are not
to serve as a basis for interpretation or construction of the Plan.
As amended by the Board of Directors on March 21, 1997.
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MOUNTBATTEN, INC.
1995 EQUITY INCENTIVE PLAN
FOR OUTSIDE DIRECTORS
MOUNTBATTEN, INC., a corporation organized under the laws of the
Commonwealth of Pennsylvania, hereby sets forth the 1995 Equity Incentive Plan
for Outside Directors. The Plan provides for the grant of nonqualified stock
options to Outside Directors. The Plan shall become effective upon the approval
of the Plan by shareholders of the Company in accordance with Section 5(d).
1. Definitions. Whenever the following terms are used in the Plan they
shall have the meanings specified below unless the context clearly indicates to
the contrary:
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean a change in the power to direct or cause
the direction of the management and policies of the Company arising from (1) any
"person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d) of
the Exchange Act), becoming the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of the Company's then
outstanding securities, other than a person or group who, as of the date of the
adoption of this Plan by the Board of Directors of the Company, is known by the
Company to be the beneficial owner, directly or indirectly, of securities of the
Company representing 10% or more of the combined voting power of the Company's
outstanding securities, or (2) more than 50% of the assets of the Company being
disposed of by the Company pursuant to a partial or complete liquidation of the
Company, a sale of assets (including stock of a subsidiary or subsidiaries) of
the Company or otherwise.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Reference to a specific section of the Code shall include such section, any
valid regulation promulgated thereunder and any comparable provision of any
future legislation amending, supplementing or superseding such section.
"Common Stock" shall mean the Common Stock, $.001 par value, of the
Company.
"Company" shall mean Mountbatten, Inc., a Pennsylvania corporation.
"Director" shall mean a member of the Board or a member of the Board of
Directors of any Subsidiary of the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
<PAGE>
"Fair Market Value" shall mean the last sales price of the Company's
Common Stock quoted in the automated quotation system of the National
Association of Securities Dealers, Inc. ("Nasdaq") for the date in question, as
published in The Wall Street Journal. If no such sale prices are quoted by
Nasdaq for such date, the next preceding date for which such sale prices are
quoted shall be used.
"Option" shall mean an option granted under the provisions of Section 4
of the Plan to purchase Common Stock of the Company.
"Optionee" shall mean an Outside Director to whom an Option is granted.
"Outside Director" shall mean a Director who, at the time he becomes a
Director, is not also an employee of the Company or any Subsidiary of the
Company or any affiliate of the Company or any Subsidiary of the Company.
"Plan" shall mean this 1995 Equity Incentive Plan for Outside
Directors.
"Secretary" shall mean the Corporate Secretary or an Assistant
Secretary of the Company.
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
"Surety Company" shall mean The Mountbatten Surety Company, Inc., a
Pennsylvania insurance company.
"Termination of Service" shall mean a cessation of an Outside
Director's service as a member of the Board or the Board of Directors of any
Subsidiary of the Company, whether as a result of resignation, failure to be
reelected, removal for cause, death or any other reason.
"Total Disability" shall mean a permanent and total disability as
determined in accordance with Section 72(m)(7) of the Code.
2. Administration.
(a) Administration by the Board. The Plan shall be administered by the
Board.
(b) Duty and Power of Board Under the Plan. It shall be the duty of the
Board to conduct the general administration of the Plan in accordance with its
provisions. The Board shall have the power to interpret the Plan and the Options
and
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to adopt rules for the administration, interpretation and application of the
Plan as are consistent therewith and to interpret, amend or revoke any such
rules. The Board shall not have any discretion to determine who will be granted
Options or to determine the number of Options to be granted to any Outside
Director, the timing of such grant or the exercise price of any Option.
(c) Board Actions. The Board may act either by vote of a majority of
its members present at a meeting of the Board at which a quorum is present or by
a memorandum or other written instrument signed by all members of the Board.
(d) Compensation; Professional Assistance; Good Faith Actions. Members
of the Board shall not receive any compensation for their services in
administering the Plan, but all expenses and liabilities they incur in
connection with the administration of the Plan shall be borne by the Company.
The Board may employ attorneys, consultants, accountants or other persons. The
Board, the Company and the officers and directors of the Company shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the Board
in good faith shall be final and binding upon all Optionees, the Company and all
other interested persons. No member of the Board shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan, and all members of the Board shall be fully protected and indemnified
by the Company in respect to any such action, determination or interpretation.
3. Shares Subject to the Plan.
(a) Limitations. The shares of stock issuable pursuant to Options shall
be shares of the Company's Common Stock. The total number of such shares that
may be subject to Options granted under the Plan shall not exceed 50,000 in the
aggregate.
(b) Effect of Unexercised or Cancelled Options. If an Option expires or
is cancelled for any reason without having been fully exercised or vested, the
number of shares subject to such Option which were not purchased or did not vest
prior to such expiration or cancellation may again be made subject to an Option
granted hereunder.
(c) Changes in the Company's Shares. In the event that the outstanding
shares of Common Stock of the Company are hereafter increased or decreased or
changed into or exchanged for a different number or kind of shares or other
securities of the Company, or of another corporation, by reason of
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, stock dividend (either in shares of the Company's Common Stock or of
another class of the Company's stock), spin-off or combination of shares,
appropriate adjustments shall be made by the Board in the aggregate number and
kind of shares that may be issued on exercise of Options.
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4. Stock Options.
(a) Granting of Options.
(i) Eligibility. Each Outside Director shall be eligible to be
granted Options.
(ii) Granting of Options. Each Outside Director on the first
business day following the election of directors at each annual meeting of
shareholders of the Company shall, on such date, be granted an Option for the
purchase of 2,000 shares of Common Stock. Each person appointed or elected an
Outside Director after the first business day following the election of
directors at each annual meeting of shareholders of the Company but on or before
December 31 of such year shall, on the business day following the date of
appointment or election to the Board or to the Board of Directors of any
Subsidiary of the Company, as the case may be, be granted an Option for the
purchase of 2,000 shares of Common Stock.
(iii) Form of Option. All Options granted under this Plan shall
be non-statutory options not intended to qualify under Section 422 of the Code.
(b) Terms of Options.
(i) Option Agreement. Each Option shall be evidenced by a
written stock option agreement that shall be executed by the Optionee and the
Company and that shall contain such terms and conditions as the Board determines
are required by the Plan.
(ii) Option Price. The exercise price of the shares subject to
each Option shall be 100% of the Fair Market Value for such shares on the date
the Option is granted.
(iii) Date of Grant. The date on which an Option shall be
granted shall be the date determined under Section 4(a)(ii).
(iv) Commencement of Exercisability. Except as otherwise
provided in Section 4(b)(vii), no Option may be exercised in whole or in part
during the first six months after such Option has been granted and, thereafter,
the Option shall be exercisable in full or in part at any time or from time to
time until it expires as provided in Section 4(b)(v).
(v) Expiration of Options.
(A) Each Option shall terminate on the expiration of
ten years from the date the Option was granted.
-4-
<PAGE>
(B) Each Option, or portion thereof, which has become
exercisable may be exercised until the earlier to occur of: (1) the expiration
of such Option pursuant to Section 4(b)(v)(A), or (2) the expiration of one year
from the date of the Optionee's Termination of Service, except that, in the
event of an Optionee's removal for cause, all Options shall terminate
immediately upon such Optionee's Termination of Service.
(vi) Adjustment in Outstanding Options. In the event that the
outstanding shares of the Common Stock of the Company are increased or
decreased or changed into or exchanged for a different number or kind of shares
of the Company, or other securities of the Company, or of another corporation,
by reason of reorgani zation, merger, consolidation, recapitalization,
reclassification, stock split-up, stock dividend (either in shares of the
Company's Common Stock or of another class of the Company's stock), spin-off or
combination of shares, the Board shall make an appropriate and equitable
adjustment in the number and kind of shares as to which all outstanding Options,
or portions thereof then unexercised, shall be exercisable, to the end that
after such event the Optionee's proportionate interest shall be maintained as
before the occurrence of such event. Such adjustment in an outstanding Option
shall be made without change in the total price applicable to the Option or the
unexercised portion of the Option (except for any change in the aggregate price
resulting from rounding-off of share quantities or prices) and with any
necessary corresponding adjustment in Option price per share. Any such
adjustment made by the Board shall be final and binding upon all Optionees, the
Company and all other interested persons.
(vii) Change in Control. In the event of a Change in Control
each outstanding Option shall become immediately exercisable, regardless of
whether the Option had otherwise become exercisable pursuant to Section
4(b)(iv).
(c) Exercise of Options.
(i) Person Eligible to Exercise. During the lifetime of the
Optionee, only he or she may exercise an Option granted to him or her or any
portion thereof. After the death of the Optionee, any exercisable portion of an
Option may be exercised by his or her personal representative or by any person
empowered to do so under the deceased Optionee's will or under the then
applicable laws of descent and distribution. The Company may require appropriate
proof from any such other person of his or her right or power to exercise the
Option or any portion thereof.
(ii) Fractional Shares. The Company shall not be required to
issue fractional shares on exercise of an Option.
(iii) Manner of Exercise. An exercisable Option, or any
exercisable portion thereof, may be exercised solely by delivery to the
Secretary or his or her office of all of the following:
-5-
<PAGE>
(A) Notice in writing signed by the Optionee or other
person then entitled to exercise such Option or portion thereof, stating that
such Option or portion is exercised, such notice complying with all applicable
rules established by the Board;
(B) Full cash payment for the shares with respect to
which such Option or portion is thereby exercised and which are to be delivered
to him or her pursuant to such exercise; provided, at the discretion of the
Board, payment may be made in whole or in part in shares of Common Stock of the
Company, which Common Stock will be valued at its then Fair Market Value, or in
whole or in part pursuant to such other arrangement, including a simultaneous
exercise and sale arrangement, as the Board, in its absolute discretion,
determines; and
(C) Such representations and documents as the Board, in
its absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act of 1933, as amended, and any
other federal or state securities laws or regulations. The Board may, in its
absolute discretion, also take whatever additional actions it deems appropriate
to effect such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer orders to transfer agents and
registrars.
(iv) Conditions to Issuance of Stock Certificates. The shares of
Common Stock deliverable upon exercise of an Option, or any part thereof, may be
either previously authorized but unissued shares or issued shares which have
then been reacquired by the Company. In addition to the satisfaction of the
other applicable provisions of the Plan, the Company shall not be required to
issue or deliver any certificate or certificates for shares of Common Stock
purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(A) The admission of such shares to listing on all
stock exchanges or automated quotation systems of a national securities
association on which such class of stock is then listed;
(B) The completion of any registration or other
qualification of such shares under any state or federal law or under the rulings
or regulations of the Securities and Exchange Commission or any other
governmental regulatory body which the Company shall, in its absolute
discretion, deem necessary or advisable;
(C) The obtaining of any approval or other clearance
from any state or federal governmental agency which the Company shall, in its
absolute discretion, determine to be necessary or advisable;
(D) The provision for any income tax withholding which
the Company shall, in its absolute discretion, determine to be necessary or
advisable; and
-6-
<PAGE>
(E) The lapse of such reasonable period of time
following the exercise of the Option as the Company may determine, in its
absolute discretion, from time to time to be necessary or advisable for reasons
of administrative convenience.
(v) Rights as Shareholders. An Optionee shall not be, nor have
any of the rights of, a shareholder of the Company in respect to any shares that
may be purchased upon the exercise of any Option or portion thereof unless and
until certificates representing such shares have been issued by the Company to
such Optionee.
5. Miscellaneous Provisions.
(a) No Assignment or Transfer. No Option or interest or right therein
or part thereof, shall be liable for the debts, contracts, or engagements of the
Optionee or his or her successors in interest nor shall they be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means, whether such disposition is voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided,
however, that nothing in this Section 5(a) shall prevent transfers by will or by
the applicable laws of descent and distribution.
(b) Amendment, Suspension or Termination of the Plan. The Plan may be
wholly or partially amended or otherwise modified, suspended or terminated at
any time or from time to time by the Board, subject to any required shareholder
approval or any shareholder approval that the Board may deem advisable for any
reason, such as for the purpose of obtaining or retaining any statutory or
regulatory benefits under tax, securities or other laws or satisfying any
applicable stock exchange listing requirements. Neither the amendment,
suspension nor termination of the Plan shall, without the consent of the
Optionee, alter or impair any rights or obligations under any outstanding
Option. No Option may be granted during any period of suspension nor after
termination of the Plan.
(c) Compliance with Rule 16b-3. To the extent that Rule 16b-3 under the
Exchange Act applies to Options granted under the Plan, it is the intent of the
Company that the Plan comply in all respects with the requirements of Rule
16b-3, that any ambiguities or inconsistencies in construction of the Plan be
interpreted to give effect to such intention and that if the Plan shall not so
comply, whether on the date of adoption or by reason of any later amendment to
or interpretation of Rule 16b-3, the provisions of the Plan shall be deemed to
be automatically amended so as to bring them into full compliance with such
rule.
(d) Shareholder Approval. Notwithstanding anything to the contrary set
forth herein, no Option may be exercised until the Plan shall have been approved
by the affirmative vote of the holders of a majority of the shares of the
Company's
-7-
<PAGE>
outstanding Common Stock present or represented by proxy and entitled to vote at
a duly convened meeting of shareholders of the Company.
(e) Titles. Titles are provided herein for convenience only and are not
to serve as a basis for interpretation or construction of the Plan.
As amended by the Board of Directors on March 21, 1997.
-8-
<PAGE>
MOUNTBATTEN, INC.
COMPUTATION OF NET INCOME PER SHARE (UNAUDITED) Exhibit 11
Primary Net Income Per Share
Six months ended June 30,
1997 1996
---- ----
Net Income available to
Common Shareholders $ 800,137 $ 549,310
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 274,760 110,065
---------- ----------
Total 2,803,290 2,638,595
========== ==========
Primary Net Income per Share $ 0.29 $ 0.21
========== ==========
Fully Diluted Net Income Per Share
Net Income available to
Common Shareholders $ 800,137 $ 549,310
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 281,513 140,317
---------- ----------
Total 2,810,043 2,668,847
========== ==========
Fully Diluted Net Income per Share $ 0.28 $ 0.21
========== ==========
<PAGE>
MOUNTBATTEN, INC.
COMPUTATION OF NET INCOME PER SHARE (UNAUDITED) Exhibit 11
Primary Net Income Per Share
Three months ended June 30,
1997 1996
---- ----
Net Income available to
Common Shareholders $ 475,164 $ 301,193
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 298,371 145,054
---------- ----------
Total 2,826,901 2,673,584
========== ==========
Primary Net Income per Share $ 0.17 $ 0.11
========== ==========
Fully Diluted Net Income Per Share
Net Income available to
Common Shareholders $ 475,164 $ 301,193
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 311,877 177,345
---------- ----------
Total 2,840,407 2,705,875
========== ==========
Fully Diluted Net Income per Share $ 0.17 $ 0.11
========== ==========
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 7,101,598
<DEBT-CARRYING-VALUE> 0
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0
0
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4,383,755
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<RESERVE-OPEN> 1,153,270
<PROVISION-CURRENT> 158,432
<PROVISION-PRIOR> (220,481)
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