1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HERITAGE FINANCIAL SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $2.00 Par Value
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
2
HERITAGE FINANCIAL SERVICES, INC.
25 Jefferson Street
Clarksville, Tennessee 37040
March 31, 1998
Dear Fellow Shareholder:
On behalf of the Board of Directors, we cordially invite you to attend the
1998 Annual Meeting of shareholders of Heritage Financial Services, Inc. The
Annual Meeting will be held beginning at 1:00 p.m., local time, on Tuesday,
April 21, 1998, at the Volunteer Room, Ramada Inn, 50 College Street,
Clarksville, Tennessee 37040. The formal notice of the Annual Meeting appears on
the next page.
Enclosed is our Proxy Statement for the 1998 Annual Meeting that discusses
the proposals for which we seek your support.
The enclosed Notice and Proxy Statement contain detailed information about
the business to come before the meeting. We urge you to review the Proxy
Statement and each of the proposals contained therein carefully. Regardless of
the number of shares you own, it is important that your shares be represented
and voted at the meeting. Please take a moment now to sign, date and mail the
enclosed proxy in the postage prepaid envelope. Your Board of Directors
recommends a vote FOR each proposal.
We are gratified by our shareholders' continued interest in Heritage
Financial and pleased that in the past so many of you have voted your shares. We
hope that you will continue to do so and again urge you to return your proxy as
soon as possible.
Sincerely,
James G. Holleman Earl O. Bradley, III
Chairman of the Board President and Chief Executive Officer
3
HERITAGE FINANCIAL SERVICES, INC.
25 Jefferson Street
Clarksville, Tennessee 37040
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON TUESDAY, APRIL 21, 1998
Notice is hereby given that the annual meeting of shareholders of Heritage
Financial Services, Inc. (the "Company"), will be held beginning at 1:00 p.m.
local time, on Tuesday, April 21, 1998, at the Volunteer Room, Ramada Inn, 50
College Street, Clarksville, Tennessee:
I. To elect four directors whose terms expire in 1998, to serve three
year terms until the 2001 annual meeting of shareholders and until
their successors are elected and qualified.
II. To consider and act upon a proposal to amend the Company's Charter to
increase the Company's authorized Common Stock and to authorize the
Company to issue no par value Preferred Stock.
III. To consider and act upon a proposal to adopt the 1998 Stock Option
Plan.
IV. To consider and act upon a proposal to adopt the Outside Directors'
Stock Option Plan.
V. To ratify the appointment of Heathcott & Mullaly, P.C., Brentwood,
Tennessee, as Independent Public Accountants of the Company and its
affiliates for the fiscal year ending December 31, 1998.
VI. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
Shareholders of record at the close of business on February 27, 1998, are
entitled to notice of and to vote at the Annual Meeting.
All shareholders are cordially invited to attend the meeting in person.
Regardless of whether you plan to attend the meeting, however, please sign and
date the enclosed proxy and return it in the envelope provided as promptly as
possible. A proxy may be revoked at any time before it is voted at the meeting.
By Order of the Board of Directors
John T. Halliburton, Secretary
Clarksville, Tennessee
March 31, 1998
4
PRELIMINARY COPIES - Definitive copies of this Proxy Statement are intended to
be released to security holders on March 31, 1998.
HERITAGE FINANCIAL SERVICES, INC.
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 21, 1998
This proxy statement (the "Proxy Statement") is furnished to the
shareholders of Heritage Financial Services, Inc. (the "Company") in connection
with the solicitation of proxies on behalf of the Board of Directors of the
Company (the "Board of Directors" or the "Board"), for use at the annual meeting
of shareholders (the "Annual Meeting") to be held at 1:00 p.m., local time, on
Tuesday, April 21, 1998, at the Volunteer Room, Ramada Inn, 50 College Street,
Clarksville, Tennessee, and any adjournments or postponements thereof.
The mailing address of the Company's principal executive offices are
located at, 25 Jefferson Street, Clarksville, Tennessee and its telephone number
is (931)553-0500.
This Proxy Statement, the attached proxy and the Notice of Annual Meeting
were mailed to all shareholders entitled to vote at the Annual Meeting on or
about March 31, 1998. The Company's annual report to shareholders for the fiscal
year ended December 31, 1997 accompanies this Proxy Statement.
The purposes of the Annual Meeting are to act upon the following six
Proposals:
I. To elect four directors whose terms expire in 1998, to serve three
year terms until the 2001 annual meeting and until their successors
are elected and qualified.
II. To consider and act upon a proposal to amend the Company's Charter to
increase the Company's authorized Common Stock and to authorize the
Company to issue no par value Preferred Stock.
III. To consider and act upon a proposal to adopt the 1998 Stock Option
Plan.
IV. To consider and act upon a proposal to adopt the Outside Directors'
Stock Option Plan.
V. To ratify the appointment of Heathcott & Mullaly, P.C., Brentwood,
Tennessee, as Independent Public Accountants of the Company and its
affiliates for the fiscal year ending December 31, 1998.
VI. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
5
The Board of Directors has fixed the close of business on Friday, February
27, 1998 as the record date (the "Record Date") for the Annual Meeting. Only
shareholders of record at the close of business on that date will be entitled to
notice of, and to vote at, the Annual Meeting. The total number of shares of
Common Stock outstanding and entitled to vote on the Record Date was 569,928
shares. The Company has no other outstanding class of securities.
PROXY PROCEDURE
The Board of Directors solicits proxies so that each shareholder has the
opportunity to vote on the Proposals. When a proxy is returned properly signed
and dated by a shareholder, the shares represented thereby will be voted in
accordance with the instructions on the proxy. A shareholder may revoke his or
her proxy at any time before it is voted by attending the Annual Meeting and
voting in person, or by delivering to the Company's Corporate Secretary at the
Company's principal executive offices referred to above a written notice of
revocation or a duly executed proxy bearing a date later than that of the
previously submitted proxy.
If a shareholder returns a properly signed and dated proxy but does not
mark the boxes located on the proxy, the shares represented by that proxy will
be voted FOR each of the Proposals. Otherwise, the signed proxy will be voted as
indicated on the proxy. The proxy also gives the individuals named as proxies
discretionary authority to vote the shares represented on any other matter that
is properly presented for action at the Annual Meeting. If a shareholder neither
returns a signed proxy nor attends the Annual Meeting and votes in person, his
or her shares will not be voted.
VOTING PROCEDURES
A majority of the votes entitled to be cast at the Annual Meeting
constitutes a quorum. A share, once represented for any purpose at the Annual
Meeting, is deemed present for purposes of determining a quorum for the
remainder of the Annual Meeting and for any adjournment of the Annual Meeting,
unless a new record date is set for the adjourned meeting. This is true even if
the holder of the share abstains from voting with respect to any matter brought
before the Annual Meeting. Shareholders will be entitled to one vote for each
share held, which may be given in person or by proxy authorized in writing.
"Abstentions" are counted only for purposes of determining whether a quorum is
present at the meeting.
With respect to Proposal VI and to any other matter to properly come before
the Annual Meeting, such Proposal or other matters will be approved if the votes
cast favoring the Proposal or other matter exceed the votes cast opposing the
Proposal or other matter, unless the Company's Charter or Tennessee law require
a greater number of affirmative votes.
COST OF SOLICITATION
The cost of solicitation of proxies will be borne by the Company, including
expenses incurred in connection with preparing and mailing the Proxy Statement.
The initial solicitation will be by mail.
2
6
PROPOSAL I
ELECTION OF DIRECTORS
The Company's Charter and ByLaws provide that the Board of Directors shall
consist of a minimum of three (3) and a maximum of twelve (12) directors. The
Board currently consists of twelve directors, which also serve as directors of
Heritage Bank. The directors are elected by the shareholders for staggered three
year terms. Directors whose term of office expires at the 1998 Annual Meeting
are William G. Beach, Jeffrey V. Bibb, James G. Holleman and James E. Thomas,
Jr. Each of these directors has been nominated for terms expiring at the 2001
annual meeting, or until their successor is duly elected and qualified.
Unless otherwise instructed on the proxy, the proxy holders will vote the
proxies received by them FOR the election of the four nominees named above. If,
for any reason, one or more of the nominees named above should not be available
as a candidate for director, an event that the Board of Directors does not
anticipate, the proxy holders will vote for such other candidate or candidates
as may be nominated by the Board of Directors and discretionary authority to do
so is included in the proxy.
The Board of Directors recommends a vote FOR the election of all the
nominees.
The following table provides certain information about the nominees and the
other present directors of the Company. The information in the table has been
furnished to the Company by the individuals listed therein.
Positions Held With Director
Name Age (1) the Company/Bank Since (2)
---- ------- ------------------- ---------
NOMINEES FOR TERMS TO EXPIRE AT 2001 ANNUAL MEETING
William G. Beach 41 Director 1996
Jeffrey V. Bibb 43 Director 1989
James G. Holleman 66 Director, Chairman of 1989
Company and Bank
James E. Thomas, Jr. 64 Director 1989
CONTINUING DIRECTORS UNTIL 1999 ANNUAL MEETING
Earl O. Bradley, III 42 Director, President and 1989
Chief Executive Officer
of Company and Bank
W. Lawson Mabry 42 Director 1989
James W. Russell 73 Director 1989
Dr. Ted R. McCurdy 52 Director 1996
3
7
Positions Held With Director
Name Age (1) the Company/Bank Since (2)
---- ------- ------------------- ---------
CONTINUING DIRECTORS UNTIL 2000 ANNUAL MEETING
David R. Farris 60 Director 1994
George R. Fleming, Sr. 75 Director 1989
John T. Halliburton 50 Director, Executive Vice 1989
President and Secretary
of Company and Bank
Ruth C. Hutton 74 Director 1989
(1) As of February 1, 1998
(2) Director of the Company or, prior to formation of the Company, the Bank.
WILLIAM G. BEACH is the President of Beach Oil Company, an Amoco Oil
distributor and owner/operator of convenience markets. He is a 1978 graduate of
Austin Peay State University.
JEFFREY V. BIBB is a partner in the firm of Bibb, Lott and Fryer
Marketing/Advertising. Mr. Bibb is a 1976 graduate of Austin Peay State
University with a bachelor's degree in urban affairs and regional development.
EARL O. BRADLEY, III has served as President and Chief Executive Officer of
the Company and the Bank since their formation. Mr. Bradley is a 1977 graduate
of Austin Peay State University with a bachelor's degree in accounting. He is a
certified public accountant, and is a graduate of the University of Wisconsin
School for Bank Administration and Tennessee Commercial Lending School held at
Vanderbilt University.
DAVID R. FARRIS is a marketing consultant. Mr. Farris served as Executive
Vice President and Corporate Officer of American Standard, Inc. for 28 years. He
is a graduate of the University of Wisconsin with a bachelor's degree in
engineering, and did post graduate work at the University of Missouri.
GEORGE R. FLEMING, SR. practices law in the Clarksville community. He
received his J. D. degree from the University of Tennessee College of Law.
JOHN T. HALLIBURTON has served as Executive Vice President and Secretary of
the Company and the Bank since their formation. He is also the senior credit
officer of the Bank. He is a graduate of Austin Peay State University with a
bachelor's degree in business administration, and is a graduate of the Tennessee
Commercial Lending School held at Vanderbilt University.
JAMES G. HOLLEMAN has served as Chairman of the Board of the Company and
the Bank since their formation. He is engaged in the real estate business, and
is President of Conroy, Marable & Holleman Real Estate, Inc. and Chairman of the
Board of CM&H Commercial Properties, Inc. He is a graduate of Vanderbilt
University with a bachelor's degree in business administration.
4
8
RUTH C. HUTTON served as the manager of the Clarksville Credit Bureau prior
to her retirement. She is a graduate of the Garrett School of Business and the
University of North Carolina Management Institute.
W. LAWSON MABRY is a real estate broker with Conroy, Marable and Holleman
Real Estate, Inc., and is actively involved in the ownership and development of
real estate. He is a graduate of Austin Peay State University.
DR. TED R. MCCURDY is an oral and maxillofacial surgeon in private practice
at the Clarksville Oral Surgery Center. He is a graduate of Mercer University in
Macon, Georgia, attended the University of Tennessee Medical School in Memphis,
and completed his intern/residency at the University of Tennessee Memorial
Research Hospital in Knoxville.
JAMES W. RUSSELL, SR. serves as Chairman of Russell, Russell and Waddle,
Inc., a firm engaged in real estate development and contracting.
JAMES E. THOMAS, JR. is the owner and manager of real estate investment
properties. He is a graduate of Vanderbilt University with a bachelor's degree
in business administration.
STOCK OWNERSHIP OF DIRECTORS, OFFICERS AND PRINCIPAL SHAREHOLDERS
The following table sets forth information as of the Record Date as to the
shares of Common Stock beneficially owned by directors and executive officers
individually and by all executive officers and directors as a group.
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENT OF
NAME TITLE OWNED (1) CLASS
---- ----- --------- -----
William G. Beach (2) Director 1,382 0.24%
Jeffrey V. Bibb (4) Director 10,222 1.79%
Earl O. Bradley, III (3) (5) President and Chief 48,232 8.46%
Executive Officer of
Company and Bank
David R. Farris (2) (6) Director 3,365 0.59%
George R. Fleming, Sr. (2) (7) Director 19,759 3.47%
John T. Halliburton (3) (8) Executive Vice President 41,972 7.33%
and Secretary of Company
and Bank
5
9
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENT OF
NAME TITLE OWNED (1) CLASS
---- ----- --------- -----
W. Lawson Mabry (2) (10) Director 15,047 2.64%
Dr. Ted R. McCurdy (2) Director 1,279 0.22%
James W. Russell (2) (11) Director 20,765 3.64%
James E. Thomas (2) (12) Director 18,571 3.26%
Directors and Officers as a group (17 persons) (13) 228,418 39.53%
(1) Includes shares as to which such person, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise has or shares
voting power and/or investment power as these terms are defined in Rule 13d-3(a)
of the Securities Exchange Act of 1934.
(2) Includes 282, 377, 428, 534, 420, 278, 412, 400 and 89 shares beneficially
owned by Messrs. Beach, Farris, Fleming, Holleman, Mabry, McCurdy, Russell,
Thomas and Ms. Hutton, respectively, under the Directors' Unfunded Deferred
Compensation Plan.
(3) Includes 2,275 and 1,889 shares beneficially owned by Messrs. Bradley and
Halliburton, respectively, under the Heritage Bank Employee Stock Ownership Plan
& Trust (ESOP), and 500 and 3,000 shares subject to options granted to Messrs.
Bradley and Halliburton, respectively, under the 1989 Employees Stock Option
Plan, which are currently exercisable. The Company's 1997 ESOP contribution has
not been allocated.
(4) Includes 209 shares held in custodian accounts for minor children over which
Mr. Bibb has joint voting and investment power, 9,700 shares held in Mr. Bibb's
individual retirement account, and 313 shares jointly owned with his wife.
(5) Includes 871 shares held in custodian accounts for minor children over which
Mr. Bradley has sole voting and investment power, and 1,022 shares held in Mr.
Bradley's individual retirement account.
(6) Includes 1,494 shares held in Mr. Farris' individual retirement account, and
1,494 shares held in his wife's individual retirement account to which Mr.
Farris disclaims beneficial ownership.
(7) Includes 6,269 shares held by Fleming and Fleming Rental, a partnership of
which Mr. Fleming is a partner.
(8) Includes 4,406 shares held in Mr. Halliburton's individual retirement
account, and 32,677 shares jointly owned with his wife.
6
10
(9) Includes 1,054 shares owned by Mr. Holleman's wife.
(10) Includes 10,371 shares held in Mr. Mabry's individual retirement account.
(11) Includes 486 shares held in Mr. Russell's individual retirement account,
486 shares held in his wife's individual retirement account as to which Mr.
Russell disclaims beneficial ownership, and 19,381 shares held in the James W.
and Vista Russell Revocable Living Trust.
(12) Includes 5,642 shares owned by Mr. Thomas's wife as to which Mr. Thomas
disclaims beneficial ownership, and 12,528 shares held in the James Eldon Thomas
Family Family Partnership, L.P.
(13) Includes 8,000 exercisable stock options, and 8,150 vested shares in the
Company's ESOP. The Company's 1997 ESOP contribution has not been allocated as
of the Record Date.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of the Company met five times during 1997. The Board of the Bank
meets monthly and on a called basis. During the fiscal year ended December 31,
1997, the Board met thirteen times. Each director attended at least 75% of all
meetings held by the Board and the committees on which he or she served.
The Bank has the following committees:
The Executive Committee generally meets weekly and acts upon Bank matters
between Board meetings. The Executive Committee consists of three permanent
members - the Chairman of the Board, the President and Chief Executive Officer,
and the Executive Vice President. The remaining directors serve on the Executive
Committee on a rotational basis. This Committee met 41 times in 1997.
The Audit Committee consists of Messrs. Fleming, McCurdy, Mabry and Ms.
Hutton. None of the members of the Audit Committee are employees of either the
Company or Bank. This Committee generally reviews internal and external audit
activities, compliance activities, and the adequacy of the systems of internal
control over operations and financial reporting, and advises the Board and
management of broad issues related to these areas. This Committee met twice
during 1997.
The Human Resources Committee consists of Messrs. Farris, Thomas, Beach,
Bibb and ex-officio Holleman. None of these members of the Human Resources
Committee are employees of the Company or Bank. Messrs. Bradley and Halliburton
also serve as ex-officio members of the Committee on matters not involving their
personal compensation. This Committee establishes the compensation of the
President and Chief Executive Officer and Executive Vice President, and approves
the compensation of senior officers (including grants of stock options), and
various compensation and benefits to be paid to employees of the Bank. This
Committee met twice during 1997.
The Facilities Committee consists of Messrs. Bibb, Farris, Mabry, Russell,
and Thomas. Also, Messrs. Holleman, Bradley and Halliburton serve as ex-officio
members. This Committee is responsible for planning future needs related to
facilities including site selection and building
7
11
and space requirements. Due to the construction of the new main office building,
this Committee met in conjunction with the monthly Board of Directors meetings.
COMPENSATION OF DIRECTORS
During 1997, the Chairman of the Board and Committee Chairmans received
annual retainers of $3,000 and $2,000, respectively. All other non-employee
directors receive an annual retainer of $1,800. Non-employee directors also
receive $200 for attendance at each Board Meeting and $100 for attendance at
each Committee Meeting. In addition, non-employee directors receive an incentive
fee of $1,800 should the Company achieve certain net income and asset growth
goals.
DIRECTORS' UNFUNDED DEFERRED COMPENSATION PLAN
In 1996, the Company adopted the Directors' Unfunded Deferred Compensation
Plan to provide incentive to the directors who have contributed to the success
of the Company, and which are expected to continue to contribute to such success
in the future. The plan is administrated by the Board, and acts through a
majority of its members. Non-employee directors are eligible to participate in
the plan and may elect to defer all or part of their director's compensation to
the plan. The plan purchases the Company's Common Stock for the benefit of those
directors electing to participate in the plan. Directors elected to defer
$74,128 and $59,900 in 1997 and 1996, respectively, of compensation into the
plan. Common Stock purchased for the benefit of the participating directors was
1,348 shares and 1,872 shares in January 1998 and 1997, respectively.
PROPOSAL II
AMENDMENT TO CHARTER TO INCREASE AUTHORIZED COMMON STOCK
AND AUTHORIZE PREFERRED STOCK
The Board of Directors has adopted resolutions approving and recommending
to the shareholders for their approval an amendment to the Company's Charter
which would increase the number of authorized shares of Common Stock, $2.00 par
value per share, from 1,000,000 shares to 3,000,000 shares and authorize the
Company to issue up to 1,000,000 shares of no par value preferred stock (the
"Preferred Stock"). The following summary of the proposed amendment should be
read in conjunction with, and is qualified in its entirety by reference to, the
complete text of the proposed amendment which is attached hereto as Appendix A.
EXPLANATION OF AND REASONS FOR THE AMENDMENT.
A. INCREASE IN AUTHORIZED COMMON STOCK.
The Board of Directors believes that it is advisable to increase the
authorized number of shares of Common Stock in order to have such additional
shares available for the Company for, among other things, possible issuances in
connection with such activities as stock splits and stock dividends,
implementation of employee benefit plans, public offerings of shares for cash,
and acquisitions of other companies. As of January 31, 1998, the Company had a
total of 569,928 shares of Common Stock outstanding, and in addition 33,881
shares of Common Stock were reserved for issuance under the Company's stock
option plan. Except for the shares issuable under the Company's option plans
described above, the Company has no agreements or understandings regarding the
issuance of any shares of Common Stock.
8
12
Under the provisions of the Tennessee Business Corporation Act, the Board
of Directors generally may issue authorized but unissued shares of Common Stock
without shareholder approval. Having a substantial number of authorized but
unissued shares of Common Stock that is not reserved for specific purposes would
allow the Company to take prompt action with respect to corporate opportunities
that develop, without the delay and expense of convening a special meeting of
shareholders for the purpose of approving an increase in the Company's
capitalization The issuance of additional shares of Common Stock may, depending
upon the circumstances under which such shares are issued, reduce shareholders'
equity per share and may reduce the percentage ownership of Common Stock by
existing shareholders. It is not the present intention of the Board of Directors
to seek shareholder approval prior to any issuance of shares of Common Stock
that would become authorized by the amendment unless otherwise required by law
or regulation. Frequently, opportunities arise that require prompt action, and
it is the belief of the Board of Directors that the delay necessitated for
shareholder approval of a specific issuance could be to the detriment of the
Company and its shareholders.
When issued, the additional shares of Common Stock authorized by the
amendment will have the same rights and privileges as the shares of Common Stock
currently authorized and outstanding. Holders of Common Stock have no preemptive
rights and, accordingly, shareholders would not have any preferential rights to
purchase any of the additional shares of Common Stock when such shares are
issued.
B. AUTHORIZATION OF PREFERRED STOCK.
The Board of Directors recommends the authorization of Preferred Stock to
increase the Company's financial flexibility. The Board of Directors believes
that the complexity of modern business financing and acquisition transactions
requires greater flexibility in the Company's capital structure than now exists.
The Preferred Stock would be available for issuance from time to time as
determined by the Board of Directors for any proper corporate purpose. Such
purposes might include, without limitation, issuance in public or private sales
for cash as a means of obtaining additional capital for use in the Company's
business and operations, and issuance as part or all of the consideration
required to be paid by the Company for acquisitions of other businesses or
properties. The Company does not, at present, have any agreements,
understandings or arrangements which would result in the issuance of any shares
of Preferred Stock.
If the proposed amendment is approved, the Board of Directors would be
empowered, without the necessity of further action or authorization by the
Company's shareholders, unless required in a specific case by applicable laws or
regulations, to authorize the issuance of the Preferred Stock from time to time
in one or more series, and to fix by resolution or resolutions, designations,
preferences, limitations and relative rights of each such series. Each series of
Preferred Stock could, as determined by the Board of Directors at the time of
issuance, rank, with respect to dividends and redemption and liquidation rights,
senior to the Company's Common Stock. No preferred stock is presently authorized
by the Company's Charter.
The amendment would authorize the Board of Directors to determine, among
other things, with respect to each series of Preferred Stock which may be
issued: (a) the distinctive designation and number of shares constituting such
series; (b) the dividend rates, if any, on the shares of that series and whether
dividends would be payable in cash, property, rights or securities; (c) whether
dividends would be non-cumulative, cumulative to the extent earned,
9
13
partially cumulative or cumulative and, if cumulative, the date from which
dividends on the series would accumulate; (d) whether, and upon what terms and
conditions, the shares of that series would be convertible into or exchangeable
for other securities or cash or other property or rights; (e) whether, and upon
what terms and conditions, the shares of that series would be redeemable; (f)
the rights and preferences, if any, to which the shares of that series would be
entitled in the event of voluntary or involuntary dissolution or liquidation of
the Company; (g) whether a sinking fund would be provided for the redemption of
the series and, if so, the terms of and amounts payable into such sinking fund;
(h) whether the holders of such securities would have voting rights and the
extent of those voting rights; (i) whether the issuance of any additional shares
of such series, or of any other series, shall be subject to restrictions as to
issuance or as to the powers, preferences or rights of any such other series;
and (j) any other preferences, privileges and relative rights of such series as
the Board of Directors may deem advisable. Holders of the Company's Common Stock
have no preemptive right to purchase or otherwise acquire any Preferred Stock
that may be issued in the future.
It is not possible to state the precise effect of the authorization of the
Preferred Stock upon the rights of holders of the Company's Common Stock until
the Board of Directors determines the respective preferences, limitations and
relative rights of the holders of one or more series of the Preferred Stock.
However, such effect might include: (a) reduction of the amount otherwise
available for payment of dividends on Common Stock, to the extent dividends are
payable on any issued shares of Preferred Stock, and restrictions on dividends
on Common Stock if dividends on the Preferred Stock are in arrears; (b) dilution
of the voting power of the Common Stock to the extent the Preferred Stock has
voting rights; and (c) the holders of Common Stock not being entitled to share
in the Company's assets upon liquidation until satisfaction of any liquidation
preference granted to the Preferred Stock.
The adoption of the amendment may be viewed as having the effect of
discouraging an unsolicited attempt by another person or entity to acquire
control of the Company. The Board of Directors would have the ability to issue a
significant number of shares of Common and Preferred Stock as a defense to an
attempted takeover of the Company. Issuances of authorized preferred shares can
be implemented, and have been implemented by some companies in recent years,
with voting or conversion privileges intended to make acquisition of the company
more difficult or more costly. Such an issuance could discourage or limit the
shareholders' participation in certain types of transactions that might be
proposed (such as a tender offer), whether or not such transactions were favored
by the majority of the shareholders, and could enhance the ability of officers
and directors to retain their positions.
VOTE REQUIRED. Under Tennessee law, the affirmative vote of the holders of
a majority of the votes cast by the holders of the Company's Common Stock
represented and entitled to vote at the Annual Meeting is required to adopt
Proposal II.
The Board of Directors recommends a vote FOR the proposed amendment to the
Charter.
PROPOSAL III
ADOPTION OF 1998 STOCK OPTION PLAN
The Company currently has two stock-based incentive compensation plans -
the 1989 Employees Stock Option Plan and the Incorporators Stock Option Plan.
10
14
The 1989 Employees Stock Option Plan (which expires this year) allows the
Company to grant incentive stock options to officers and key employees of the
Company. Options to purchase 33,881 shares are currently available for grant.
The Incorporators Stock Option Plan authorized the Board to grant non-qualified
stock options to the incorporators of the Bank. There are no remaining shares
available for grant under the Incorporators Stock Option Plan.
The Human Resources Committee studied the Company's stock-based incentive
compensation plans. The Human Resources Committee concluded that the plans did
not provide the Company's management with sufficient share authorization or
award flexibility with respect to stock-based compensation. The Board believes
that a key element of officer and key employee compensation is stock-based
incentive compensation. Such compensation advances the interests of the Company
by encouraging and providing for, the acquisition of equity interests in the
Company by officers and key employees, thereby providing substantial motivation
for superior performance. In order to provide the Board with greater
flexibility, to adapt to changing economic and competitive conditions, and to
implement stock-based compensation strategies which will attract and retain
those employees who are important to the long term success of the Company, the
Board, in March of 1998, adopted, subject to shareholder approval, the 1998
Stock Option Plan (the "Employee Plan"). If approved by the shareholders, the
Employee Plan will become effective as of April 1998 and will terminate 10 years
after that date. A summary of the Employee Plan follows, but this summary is
qualified in its entirety by reference to the full text of the Employee Plan,
which is attached as Appendix B to this proxy statement.
The persons to whom options may be granted under the Employee Plan will be
determined from time to time by the Company's Board of Directors unless and
until such time as the Board delegates administration of the Employee Plan to a
committee of the Board of Directors (the "Committee"). Officers and key
employees of the Company and its subsidiary, as determined by the Board or the
Committee, are eligible for grants of options.
The Employee Plan provides for the granting of incentive stock options and
non-statutory stock options. Incentive stock options offer employees the
possibility of deferring taxes until the underlying shares of stock acquired
upon exercise of the option are sold. For some of the Company's employees, the
benefits of incentive stock options are outweighed by the disadvantages of
certain restrictions imposed by the Internal Revenue Code. In addition, with
non-statutory stock options, the Company receives a tax deduction at the time
the employee recognizes ordinary income in an amount of such income to the
employee. With incentive stock options, the Company does not receive a tax
deduction at any time (assuming that the employee meets the holding period
requirements for capital gain treatment).
The Employee Plan will be administered by the Committee. No person while a
member of the Committee is eligible to be granted an option under the Employee
Plan. Members of the Committee are appointed, and vacancies thereon filled, by
the Board of Directors of the Company, and the Board has the power to remove
members of the Committee.
An aggregate of 150,000 shares of the Company's Common Stock, $2.00 par
value, may be issued pursuant to the exercise of stock options by such officers
and key employees of the Company and its subsidiary as the Committee may
determine. There are no limitations on the number of shares of Common Stock
which may be optioned to any person, except that the aggregate fair market value
(determined as of the time the option is granted) of Company Common Stock with
respect to which incentive stock options are exercisable for the first time
11
15
by an employee during any calendar year under the Employee Plan (and any other
incentive stock option plan of the Company or any subsidiary) may not exceed
$100,000.
The Board of Directors believes that it is in the best interest of the
Company and its shareholders to adopt the Employee Plan to help to attract and
retain key persons of outstanding competence and to further the identity of
their interests with those of the Company's shareholders generally. A majority
of the votes cast is necessary for approval of this proposal. The Board of
Directors recommends a vote FOR approval of the 1998 Stock Option Plan.
PROPOSAL IV
ADOPTION OF OUTSIDE DIRECTORS' STOCK OPTION PLAN
The Board of Directors has adopted resolutions approving and recommending
to the shareholders for their approval the Company's Outside Directors' Stock
Option Plan which would provide that options under the plan would be granted
pursuant to a formula. The text of the proposed Directors' Plan is attached as
Appendix C to this proxy statement.
The Directors' Plan provides that on the first business day following the
Annual Meeting of Shareholders of the Company of each of the years 1998 through
and including 2002, each person who is a non-employee director of the Company on
such date shall be granted automatically an option to purchase 500 shares of
the Company's Common Stock, $2.00 par value per share. Pursuant to the
Directors' Plan, no non-employee director may receive options to purchase more
than an aggregate of 2,500 shares of the Company's Common Stock over the term
of the Directors' Plan. The options granted will vest at a rate of 20% per year
on the anniversary date of the annual meeting of shareholders with respect to
which such options were granted. The exercise price of all options shall equal
the fair market value of the Company's Common Stock on the date of grant.
An aggregate of 40,000 shares will be reserved for grants of options
pursuant to the Directors' Plan. Shares subject to options which terminate or
expire unexercised will be available for future option grants. The total number
of shares subject to the Directors' Plan and the number covered under each
individual option is subject to automatic adjustment in the event of stock
dividends, recapitalizations, mergers, consolidations, split-ups, combinations
or exchanges of shares and the like, as determined by the Board of Directors.
If any non-employee director ceases to be a director as a result of death
or total disability while holding an option that has not expired and has not
been fully exercised, such person or such person's executors, administrators,
heirs, personal representative, conservator, or distributees may, at any time
within one year after the date of such death or total disability, exercise the
option in its entirety with respect to all remaining shares covered by that
option.
The options under the Directors' Plan are nonstatutory options intended not
to qualify as incentive stock options under Section 422 of the Internal Revenue
Code. The grant of options will not result in taxable income to the non-employee
director or a tax deduction to the Company. The exercise of an option by a
non-employee director will result in taxable ordinary income to the non-employee
director and a corresponding deduction for the Company, in each case equal to
the difference between the option price and the fair market value of the shares
on the date the option is exercised.
The Directors' Plan will be administered by the Board of Directors who will
be authorized to interpret the Plan but will have no authority with respect to
the selection of directors to receive options or the option price for shares
subject to the Directors' Plan. The Board shall have no authority to materially
increase the benefits under the plan. The Board may amend the Directors' Plan as
it shall deem advisable but may not, without further shareholder
12
16
approval, increase the maximum number of shares under the plan or options
granted thereunder, reduce the minimum option price, extend the period during
which options may be granted or exercised, or change the class of persons
eligible to receive options.
The Board of Directors believes that it is in the best interest of the
Company and its shareholders to adopt the Directors' Plan to help attract and
retain directors of outstanding competence and to further the identity of their
interest with those of the Company's shareholders generally. A majority of the
votes cast is necessary for approval of this proposal. The Board of Directors
recommends a vote FOR approval of the Outside Directors' Stock Option Plan.
PROPOSAL V
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors proposes for the ratification of the shareholders at
the Annual Meeting the appointment of Heathcott and Mullaly, P.C., Brentwood,
Tennessee, certified public accountants, as Independent Public Accountants for
the Company and its affiliates for the fiscal year ending December 31, 1998.
Heathcott and Mullaly, P.C. has served as Independent Public Accountants for the
Company or Bank since 1990. In the event Heathcott and Mullaly, P.C. is not
ratified by the Shareholders, the Board of Directors will consider appointment
of other independent public accountants for the fiscal year ending December 31,
1998.
The Board of Directors of the Company recommends a vote FOR the
raitification of Heathcott and Mullaly, P.C. as Independent Public Accountants
for the Company.
PROPOSAL VI
OTHER MATTERS
Management of the Company is not aware of any other matters to be brought
before the Annual Meeting. However, if any other matters are properly brought
before the Annual Meeting, the persons named in the enclosed form of proxy will
have discretionary authority to vote all proxies with respect to such matters in
accordance with their judgment.
EXECUTIVE COMPENSATION
The executive officers of the Company receive cash compensation from the
Bank in connection with their positions as executive officers and directors of
the Bank and the Company. The Company generally does not separately compensate
its executive officers.
No executive officer ceased to serve as such at any time during the fiscal
year ended December 31, 1997. The following table sets forth the compensation
for services in all capacities to the Company for the fiscal years ending
December 31, 1997, 1996 and 1995, of Earl O. Bradley, III, the Company's
President and Chief Executive Officer, and John T. Halliburton, the only other
executive officer whose total annual salary and bonus equaled or exceeded
$100,000 in 1997.
13
17
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL OFFICE YEAR SALARY BONUS OTHER
- ------------------------- ---- -------- ------- -------
Earl O. Bradley, III 1997 $144,000 $28,770 $21,666
President and Chief 1996 125,000 14,036 21,265
Executive Officer 1995 100,000 46,722 (1) 18,315
John T. Halliburton 1997 122,000 31,958 21,137
Executive Vice President 1996 106,250 261 21,904
and Secretary 1995 85,000 30,036 (1) 20,280
(1) Includes bonuses for both fiscal 1994 and 1995.
Total 1997 compensation of the seven Executive Officers as a group,
including those named above, amounted to $808,154.
1989 EMPLOYEES STOCK OPTION PLAN
The Company maintains an employee stock option plan to advance the
interests of the Bank and its shareholders by attracting and retaining in the
employment of the Company key professional and management employees, by
providing such employees with the incentive for outstanding performance inherent
in stock options, and by increasing their proprietary interest in the Company
through stock ownership.
The plan is administered, interpreted and applied by the Human Resources
Committee of the Board, none of which are eligible to receive options. The
Committee is authorized to select key employees (including executive officers
and directors who are salaried employees) of the Company to whom options are to
be granted under the plan; to determine the number of shares subject to each
option; to fix the period or periods during which the option may be exercised
(not to exceed ten years); and to fix the prices at which shares subject to
options may be purchased. The plan provides for a total of 150,000 options,
which may be granted through May 24, 1999, (termination date of the plan). As of
December 31, 1997, 116,119 shares have been granted, 81,500 shares have been
exercised, and 8,000 shares are currently exercisable.
The right to exercise an option generally expires three months after
employment is terminated. In the event of any change in the outstanding shares
of stock by reason of stock dividend, split or combination, recapitalization or
reclassification, or a reorganization, merger, etc., the number and class of
shares then subject to options shall be appropriately adjusted by the Committee
to reflect such change.
14
18
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
Value of
Unexercised
Unexercised in-the-Money
Options Options
at Fiscal at Fiscal
Acquired Year End Year End(2)
on Value Exercisable/ Exercisable/
Name Exercise Realized(1) Unexercisable Unexercisable
- ---- -------- ----------- ------------- -------------
Earl O. Bradley, III 2,200 $ 85,800 500/3,887 $ 32,500/177,921
John T. Halliburton 2,000 78,000 3,000/3,295 195,000/150,875
Seven Executive Officers
as a group, including
those named above 12,700 475,300 8,000/26,619 505,000/1,265,967
(1) Represents the difference between the last trade price for the Common Stock
on the date of exercise and the option price paid upon exercise.
(2) Last trade price of underlying securities at December 31, 1997 ($75.00)
less the exercise price.
In 1997, the Company granted 2,347, 1,995 and 11,069 stock options to
Messrs. Bradley and Halliburton and all executive officers as a group (including
Messrs. Bradley and Halliburton), respectively. In 1996, the Company granted
1,540, 1,300 and 10,050 stock options to Messrs. Bradley and Halliburton and all
executive officers as a group (including Messrs. Bradley and Halliburton) ,
respectively. No options were granted in 1995.
EMPLOYEE STOCK OWNERSHIP PLAN
The Heritage Bank Employee Stock Ownership Plan & Trust (ESOP) is an
employee stock ownership plan which is designed to invest primarily in the
Company's Common Stock. In general, all employees of the Company and the Bank
are covered under this plan and employees are fully vested in their benefits
after five years of participation in the plan. Company contributions are
determined by the Board of Directors each year and are allocated among
participants on the basis of their total annual compensation. Operating expense
included contributions of $143,750 (1997), $131,250 (1996) and $110,000 (1995)
to the ESOP. The amount contributed in 1997 for the 1996 plan year was $10,282,
$8,000 and $44,439 for Messrs. Bradley and Halliburton, and all executive
officers as a group (including Messrs. Bradley and Halliburton), respectively.
The ESOP trustees are empowered to borrow money to purchase the Company's Common
Stock. In 1997, the ESOP purchased 2,813 shares of the Company's Common Stock at
an average cost of $50.90 per share. The ESOP owned 22,518 shares (3.95% of
outstanding shares) of the Company's Common Stock as of the Record Date. The
average cost of the shares of the Common Stock held by the ESOP at year-end 1997
was approximately $25.70 per share.
15
19
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Certain of the Bank's officers and directors are at present, as in the
past, customers of the Bank, and are directors or officers of corporations, or
members of partnerships, which are customers of the Bank. As such customers,
they had transactions in the ordinary course of business with the Bank,
including borrowings, all of which are on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and did not involve more than normal
risk of collectability or present any other unfavorable features.
James W. Russell, Sr. is President of Russell, Russell and Waddle, Inc.
(RR&W). During 1997, RR&W received $12,095 for remodeling certain offices of the
Bank.
Jeffrey V. Bibb is a partner in the firm of Bibb, Lott and Fryer
Marketing/Advertising. During 1997, the Bank paid $85,400 to the firm for
services rendered.
James G. Holleman is President of Conroy, Marable & Holleman Real Estate,
Inc. (CM&H). During 1997, the Bank leased office space from CM&H in the amount
of $15,000.
William G. Beach is the President of Beach Oil Company. During 1997, the
Bank paid Beach Oil Company $10,000 to lease automated teller machine space at
various convenience markets, and $3,380 for fuel costs related to the
construction of the new main office building.
Messrs. Bradley, Mabry, Halliburton, Russell, Holleman, Farris, Thomas and
Fleming are partners in Riverside Partners. During 1997, the Bank leased office
space from Riverside Partners in the amount of $27,200.
INDEBTEDNESS OF RELATED PARTIES
Certain directors and officers of the Company, businesses with which they
are associated, and members of their immediate families are customers of the
Bank and had transactions with the Bank in the ordinary course of its business
during the Bank's fiscal years ended December 31, 1997 and 1996. As of December
31, 1997, the aggregate principal amount of indebtedness (including unfunded
commitments) owed to the Bank by Company management and these related parties
was $5,239,000. In the opinion of the Board of Directors, such transactions were
made in the ordinary course of business, were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and do not involve more than the
normal risk of collectibility or present other unfavorable features.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers, and any person beneficially owning more than ten percent of
the Company's Common Stock to file reports of securities ownership and changes
in that ownership with the Commission. Officers, directors and greater than ten
percent shareholders also are required by rules
16
20
promulgated by the Commission to furnish the Company with copies of all Section
16(a) forms they file.
Based upon a review of the copies of such forms furnished to the Company
for fiscal 1997, the Company believes that during the fiscal year ended December
31, 1997, its officers, directors and greater than ten percent beneficial owners
complied with all applicable Section 16(a) filing requirements.
AVAILABILITY OF ANNUAL REPORT ON FORM 10 KSB
The annual report to shareholders containing financial statements for the
Company's 1997 fiscal year accompanies this Proxy Statement. However, the annual
report does not form any part of the material for the solicitation of proxies.
Upon the written request of any record holder or beneficial owner of the
shares entitled to vote at the Annual Meeting, the Company, without charge, will
provide a copy of its annual report on Form 10-KSB for the year ended December
31, 1997 which will be filed with the Securities and Exchange Commission on
Tuesday, March 31, 1998. Requests should be mailed to Earl O. Bradley, III,
President and Chief Executive Officer, Heritage Financial Services, Inc., 25
Jefferson Street, Clarksville, Tennessee 37040.
17
21
APPENDIX A
ARTICLES OF AMENDMENT TO THE CHARTER OF HERITAGE FINANCIAL SERVICES, INC.
CORPORATE CONTROL NUMBER: 0248379
Pursuant to the provisions of Section 48-20-106 of the Tennessee Business
Corporation Act, as Amended, the undersigned, Heritage Financial Services, Inc.,
a Tennessee corporation (the "Corporation"), adopts the following Articles of
Amendment to its Charter:
1. The current name of the Corporation is Heritage Financial Services, Inc.
2. The Charter is hereby amended by deleting Section 2 in its entirety and
by substituting in lieu thereof the following new Section 2:
"2. The number of shares of stock the Corporation is authorized to
issue is:
(A) Three Million (3,000,000) shares of Common Stock, $2.00 par
value per share.
(B) One Million (1,000,000) shares of Preferred Stock, no par
value. Shares of the Preferred Stock may be issued from time
to time in one or more series, each such series to be so
designated as to distinguish the shares thereof from the
shares of all other series and classes. The Board of
Directors is hereby vested with the authority to divide any
or all classes of Preferred Stock into series and to fix and
determine the relative rights and preferences of the shares
of any series so established."
3. This Amendment is to be effective when filed by the Secretary of State.
4. The Amendment was duly adopted on April 21, 1998 by the Shareholders of
the Corporation.
Dated: April 21, 1998 HERITAGE FINANCIAL SERVICES, INC.
By:
-------------------------------
Earl O. Bradley, III, President
A-1
22
APPENDIX B
HERITAGE FINANCIAL SERVICES, INC.
1998 STOCK OPTION PLAN
1. Purpose. The purpose of the Heritage Financial Services, Inc. 1998 Stock
Option Plan (the "Plan") is to advance the growth and prosperity of Heritage
Financial Services, Inc. (the "Company") and its subsidiaries by providing key
employees with an additional incentive to contribute to the best interests of
the Company. Without prejudice to other compensation programs approved from time
to time by the Board of Directors (the "Board") and/or shareholders of the
Company, such additional incentive is to be given key employees by means of
stock options provided for under the Plan. In the discretion of the Committee
hereinafter provided for and the Board, such options may be "Incentive Stock
Options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or "non-statutory" stock options.
2. Administration of the Plan.
(a) The Plan shall be administered by the Board unless and until such time
as the Board delegates administration to a committee pursuant to subparagraph
2(c) (the "Committee"). The Board shall administer the Plan only if a majority
of the entire Board, and a majority of the directors acting with respect to each
matter pertaining to the administration of the Plan, is comprised of
disinterested persons. For the purposes of this paragraph 2, disinterested
person shall mean a person who has not at any time within one year prior to the
date in question been eligible for participation in the Plan or any other plan
of the Company or any of its subsidiaries entitling the participants therein to
acquire stock or stock options of the Company or any of its subsidiaries.
(b) The Board shall have the power, subject to, and within, the limits of
the express provisions of the Plan:
(i) To determine from time to time which of the eligible persons shall
be granted options under the Plan, the term of each granted option, the time or
times during the term of each option within which all or portions of each option
may be exercised, whether the options granted shall be Incentive Stock Options
or non-statutory options, and the number of shares for which each option shall
be granted.
(ii) To construe and interpret the Plan and options granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the exercise of this power, shall generally determine all
questions of policy and expediency that may arise and may correct any defect,
omission or inconsistency in the Plan or in any option agreement in a manner and
to the extent it shall deem necessary or expedient to make the Plan fully
effective.
B-1
23
(iii) To prescribe the terms and provisions of each option granted
(which need not be identical).
(iv) To amend the Plan as provided herein.
(v) Generally, to exercise such powers and to perform such acts as are
deemed necessary or expedient to promote the best interests of the Company.
(c) The Board, by resolution, may delegate administration of the Plan
(including, without limitation, the Board's powers under subparagraph 2(b)) to a
Committee composed of not less than three (3) members, all of whom shall be
disinterested persons. If administration is delegated to a Committee, the
Committee shall have, in connection with the administration of the Plan, the
powers theretofore possessed by the Board, subject, however, to such
constraints, not inconsistent with the provisions of the Plan, as may be adopted
from time to time by the Board. The Board at any time may remove members from or
add members to the Committee or may abolish the Committee and re-vest in the
Board the administration of the Plan. Vacancies on the Committee, however
caused, shall be filled by the Board.
(d) The interpretation and construction by the Board of any provisions of
the Plan or of any option granted under it shall be final, and the
interpretation of construction by any Committee appointed pursuant to
subparagraph 2(c) or any such provisions or option shall also, unless otherwise
determined by the Board, be final. No member of such Committee or the Board
shall be liable for any action or determination made in good faith with respect
to the Plan or any option granted under it.
3. Eligible Employees. The Board or the Committee shall determine from time
to time those officers and key employees of the Company and its subsidiaries to
whom options shall be granted and, pursuant to the provisions of the Plan, the
amount thereof and the terms and conditions, including requirements as to
continued employment by participant, upon which such options are granted and are
exercisable. Directors of the Company who are not also employees of the Company
or its subsidiaries shall not be eligible to participate in the Plan.
4. The Stock. The stock subject to the options shall be shares of the
Company's authorized and unissued Common Stock, $2.00 par value, or reacquired
Common Stock held in the treasury. The total number of shares of the Company's
Common Stock that may be transferred pursuant to the exercise of stock options
under the Plan shall not exceed in the aggregate 150,000 shares. Shares subject
to options which terminate or expire prior to exercise shall be available for
further option hereunder.
Each option granted under this Plan shall be subject to the requirement
that if at any time the Board or the Committee shall determine that the listing,
registration or qualification of the shares subject thereto upon any securities
exchange or under any state or Federal law, or the consent or approval of any
governmental regulatory body are necessary or desirable in connection with the
issue or transfer of shares subject thereto, no such option may be exercised in
whole or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Board or Committee. If required at any time by the Board or
the Committee, an option may not be exercised until the optionee has delivered
an investment letter to the Company containing the representations that all
shares being purchased are being acquired for investment and not with a view to,
or for resale in connection with, any distribution of such shares.
B-2
24
5. Terms and Conditions of Options. All stock options granted pursuant to
the Plan shall be in such form as the Board or the Committee shall from time to
time determine, shall clearly indicate whether such option is an Incentive Stock
Option or a non-statutory stock option, and shall be subject to the following
terms and conditions:
(a) Option Price. The price per share for Common Stock under each option
granted under the Plan shall be determined and fixed by the Board or the
Committee but, in the case of Incentive Stock Options, shall in no event be less
than 100% of the fair market value of the Common Stock on the date of grant of
such option, and, in the case of non-statutory stock options, shall in no event
be less than 85% of the fair market value of the Common Stock on the date of
grant of such option. In the case of the grant of an Incentive Stock Option to
an individual who, at the time of the grant, owns more than 10% of the total
combined voting power of all classes of stock of the Company, such price per
share shall not be less than 110% of the fair market value of the Common Stock
on the date of grant of the option.
(b) Option Period. The period during which an option may be exercised
shall be determined by the Board or the Committee, provided, however, that in no
event shall an Incentive Stock Option be exercisable after the expiration of 10
years from the date such option was granted; and provided further that in the
case of the grant of an Incentive Stock Option to an individual who, at the time
of the grant, owns more than 10% of the total combined voting power of all
classes of stock of the Company, in no event shall such option be exercisable
more than five years from the date of the grant. Options may be made exercisable
in installments, and such options or installments thereof may be exercised in
part from time to time after they become exercisable. The maturity of any
installment or installments may be accelerated at the discretion of the Board or
the Committee.
In the event that a participant shall cease to be employed by the Company
or one of its subsidiaries for any reason other than his death, all options held
by him pursuant to the Plan and not previously exercised at the date of such
termination shall terminate immediately and become void and of no effect;
provided, however, that the Board or the Committee shall have the right to
extend the exercise period not in excess of three months following the date of
termination of the participant's employment, subject to the further condition,
however, that no Incentive Stock Option shall be exercisable after the
expiration of 10 years from the date it is granted. Notwithstanding the
foregoing, if the termination is due to disability, or to retirement with the
consent of the Company, such disabled or retiring participant shall have the
right to exercise his options which have not previously been exercised at the
date of such termination of employment at any time within three months after
such termination, subject to the condition that no Incentive Stock Option shall
be exercisable after the expiration of 10 years from the date it is granted.
Whether termination of employment is due to disability or is to be considered
retirement with the consent of the Company shall be determined by the Board or
the Committee, which determination shall be final and conclusive.
If the participant should die while in the employ of the Company or a
subsidiary of the Company or within a period of three months after the
termination of his employment by retirement and shall not have full exercised
options granted under the Plan, such options may be exercised in whole or in
part at any time within 12 months after the participant's death by the executors
or administrators of the participant's estate or by any person or persons who
shall have acquired the options directly from the participant by bequest or
inheritance, subject to the
B-3
25
condition that no Incentive Stock Option shall be exercisable after the
expiration of 10 years from the date it is granted.
The exercise of an option granted under the Plan shall not affect the
optionee's right or ability to exercise any other option granted under the Plan
or any other stock option plan of the Company or its subsidiaries.
(c) Limitations on Grants. If any Incentive Stock Option be granted to any
participant under the Plan, the aggregate fair market value (as of the date the
option is granted) of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by the optionee during any calendar
year under this Plan and any other incentive stock option plan of the Company or
any subsidiary shall not exceed $100,000. The foregoing limitation shall be
modified from time to time to reflect any changes in Section 422(b)(7) of the
Code setting forth such limitations.
(d) Limitations on Disposition. To obtain any tax benefits which may become
associated with Incentive Stock Options, the optionee must make no disposition
of shares acquired pursuant to the exercise of an Incentive Stock Option within
two years from the granting of such Incentive Stock Option or within one year
from the date of the exercise of such Incentive Stock Option.
6. Payment for Stock. Payment for shares subject to options granted under
the Plan may be made by the optionee in the form of cash or by means of
unrestricted shares of the Company's Common Stock or any combination thereof
upon the exercise of the option. Payment in currency or by check, bank draft,
cashier's check or postal money order shall be considered payment in cash. In
the event of payment in the Company's Common Stock, the shares used in payment
of the purchase price shall be taken at the fair market value thereof on the
date of the exercise of the option.
7. Non-Assignability. No option shall be transferable otherwise than by
will or the laws of descent and distribution and an option is exercisable during
the lifetime of the optionee only by him.
8. Adjustment Upon Changes in Stock.
The number of shares of Common Stock available for the granting of options
under the Plan and the number of shares and price per share of Common Stock
subject to outstanding options and stock appreciation rights granted pursuant to
the Plan shall be adjusted by the Board or the Committee in an equitable manner
to reflect changes in the capitalization of the Company, including, but not
limited to, such changes as result from exchange, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares and
change in corporate structure. If any adjustment under this paragraph 8 would
create a fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be disregarded and the number
of shares available under the Plan and the number covered under any options
granted pursuant to the Plan shall be the next lower number of shares, rounding
all fractions downward. Any adjustment made by the Board or the Committee under
this paragraph 8 shall be conclusive and binding on all affected persons. No
Incentive Stock Option granted pursuant to the Plan shall be adjusted in a
manner that causes such Incentive Stock Option to fail
B-4
26
to continue to qualify as an Incentive Stock Option within the meaning of
Section 422 of the Code.
9. Amendment. The Board from time to time may amend this Plan, but except
as provided above with respect to dilutions or other adjustments or exchanges or
consolidations, or with the approval of the Company's shareholders, may not (a)
increase the aggregate number of shares available for option hereunder, (b)
change the price at which options may be granted, (c) extend the maximum period
during which an option may be exercised, or (d) change the eligibility
requirements for options hereunder. Rights and obligations under any option
granted before amendment of the Plan shall not be altered or impaired by
amendment of the Plan, except with the consent of the person to whom the option
was granted.
10. Fair Market Value of Stock. Whenever pursuant to the terms of the Plan
the fair market value of the Company's Common Stock is required to be determined
as of a particular date, such fair market value shall equal the mean between the
closing bid and asked price of the Common Stock on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), or if no bid quotation
is available on NASDAQ, the fair market value of such Common Stock as determined
by the Board, in each case, on the business day immediately preceding the date
on which the determination is made. Fair market value shall be determined in all
cases without regard to any restriction other than a restriction which, by its
terms, will never lapse.
11. No Rights as Shareholder. A participant in the Plan shall have no
rights as a shareholder with respect to any shares covered by his option until
the date of the issuance of a stock certificate to him. No adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights for which the record date is
prior to the date such stock certificate is issued.
12. Indemnification of Committee. In addition to such other rights of
indemnification as they may have as directors or as members of the Committee,
the members of the Committee shall be indemnified by the Company against the
reasonable expenses, including attorney's fees actually and necessarily incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
plan or any option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such
Committee member is liable for negligence or misconduct in the performance of
his duties; provided that within 60 days after institution of any such action,
suit or proceeding, the Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
13. Termination. This Plan shall terminate on February 28, 2008, unless
sooner terminated by action of the Board. No option may be granted hereunder
after termination of the Plan, but such termination shall not affect the
validity of any option then outstanding.
14. Shareholder Approval. The Plan shall be subject to approval by the
holders of a majority of the outstanding shares of Common Stock of the Company
present and voting at a meeting of shareholders, which approval must occur
within the period beginning 12 months
B-5
27
before and ending 12 months after the date the Plan is adopted by the Board,
provided, however, that options may be granted thereunder when all the
conditions (other than shareholder approval) precedent to the granting of
options under the Plan have been completed by the Company.
15. Change in Control Provisions.
(a) Impact of Event. Any Stock Option awarded under the Plan not previously
exercisable and vested shall become fully exercisable and vested in the event
of:
(1) a "Change in Control" as defined in Section 15(b) or
(2) a "Potential Change in Control" as defined in Section 15(c), but
only if and to the extent so determined by the Committee or the Board at or
after grant (subject to any right of approval expressly reserved by the
Committee or the Board at the time of such determination).
(b) Definition of "Change in Control". For purposes of Section 15(a), a
"Change in Control means the happening of any of the following:
(i) any person or entity, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, other than the Company or
a wholly-owned subsidiary thereof or any employee benefit plan of the
Company or any of its Subsidiaries, becomes the beneficial owner of the
Company's securities having 20% or more of the combined voting power of the
then outstanding securities of the Company that may be cast for the
election of directors of the Company (other than as a result of an issuance
of securities initiated by the Company in the ordinary course of business);
or
(ii) as a result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transaction less
than a majority of the combined voting power of the then outstanding
securities of the Company or any successor corporation or entity entitled
to vote generally in the election of the directors of the Company or such
other corporation or entity after such transaction are held in the
aggregate by the holders of the Company's securities entitled to vote
generally in the election of directors of the Company immediately prior to
such transaction; or
(iii) during any period of two consecutive years, individuals who at
the beginning of any such period constitute the Board cease for any reason
to constitute at least a majority thereof, unless the election, or the
nomination for election by the Company's stockholders, of each director of
the Company first elected during such period was approved by a vote of at
least two-thirds of the directors of the Company then still in office who
were directors of the Company at the beginning of any such period.
(c) Definition of Potential Change in Control. For purposes of Section
15(a), a "Potential Change in Control" means the happening of any one of the
following:
(i) The approval by stockholders of an agreement by the Company, the
consummation of which would result in a Change in Control of the Company as
defined in Section 15(b); and
B-6
28
(ii) The acquisition of beneficial ownership, directly or indirectly,
by an entity, person or group (other than the Company or a Subsidiary or
any Company employee benefit plan (including any trustee of such plan
acting as such trustee)) of securities of the Company representing 5% or
more of the combined voting power of the Company's outstanding securities
and the adoption by the Board of a resolution to the effect that a
Potential Change in Control of the Company has occurred for purposes of
this Plan.
B-7
29
APPENDIX C
HERITAGE FINANCIAL SERVICES, INC.
1998 OUTSIDE DIRECTORS'
STOCK OPTION PLAN
SECTION 1. PURPOSE; DEFINITIONS
The purpose of the Heritage Financial Services, Inc. 1998 Outside
Directors' Stock Option Plan (the "Plan") is to advance the long-term success of
Heritage Financial Services, Inc. and its shareholders by attracting and
retaining highly qualified non-employee directors. The Plan will provide
non-employee directors with the ability to increase their proprietary interest
in the Company's long term prospects and more closely align themselves with the
interests of the Company's shareholders by the grant to such directors of
Non-Qualified Stock Options of the Company.
For purposes of the Plan, the following terms shall be defined as set forth
below:
A. "Board" means the Board of Directors of the Company.
B. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
C. "Committee" means the Stock Option Committee of the Board, as from time
to time constituted, or any successor committee of the Board with similar
functions, which shall consist of two or more members, each of whom shall be a
Disinterested Person.
D. "Common Stock" shall mean the common stock of the Company ($2.00 par
value), subject to adjustments pursuant to Section 3(b) below.
E. "Company" means Heritage Financial Services, Inc., a corporation
organized under the laws of the State of Tennessee, or any successor
corporation.
F. "Disability" means permanent and total disability of an Eligible
Director within the meaning of Section 22(e)(3) of the Code.
G. "Disinterested Person" shall have the meanings set forth in Rule
16b-3(c)(2)(i) as promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, or any successor definition adopted by the
Commission.
H. "Eligible Directors" means duly elected directors of the Company who are
not employees of the Company or any Subsidiary thereof.
I. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
J. "Fair Market Value" shall mean, as of any date, (i) if the Common Stock
is listed or admitted to unlisted trading privileges on any national securities
exchange or is not so listed or admitted but transactions in the Common Stock
are reported by the NASDAQ National
C-1
30
Market System, the closing sale price of the Common Stock on such exchange or by
the NASDAQ National Market System as of such date (or, if no such shares were
traded on such date, as of the next preceding day on which there was such a
trade); (ii) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the NASDAQ National Market System, and bid and
ask prices therefore in the over-the-counter market are reported by the NASDAQ
system or the National Quotation Bureau, Inc. (or any comparable reporting
service), the mean of the closing bid and ask prices of the Common Stock as of
such date, as so reported; or (iii) if no quotations are available by any
reporting services, the fair market value of such Common Stock as determined by
the Board, in each case, on the business day immediately preceding the date on
which the determination is made.
K. "Non-Qualified Stock Option" means any Stock Option that does not comply
with the provisions of Section 422 of the Code.
L. "Plan" means this Heritage Financial Services, Inc. 1998 Outside
Directors' Stock Option Plan, as hereinafter amended from time to time.
M. "Retirement" means the termination of service of an Eligible Director as
a director of the Company pursuant to and in accordance with the Board's tenure
policy or other regular retirement policy or, if approved by the Board for
purposes of this Plan, early retirement or other practice or policy then
covering an Eligible Director.
N. "Stock" means the Common Stock of the Company.
O. "Stock Option" or "Option" means any Non-Qualified Stock Option to
purchase shares of Common Stock granted pursuant to Section 5 below.
P. "Subsidiary" means Heritage Bank (the "Bank") and any corporation (other
than the Company) in an unbroken chain of corporations beginning with the
Company if each of the corporations (other than the last corporation in the
unbroken chain) owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in the chain.
In addition, the terms "Change in Control" and "Potential Change in
Control" shall have meanings set forth, respectively, in Section 6(b), (c) and
(d) below and the term "Cause" shall have the meaning set forth in Section 5(j)
below.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the Committee. The functions of the
Committee specified in the Plan may be exercised by the Committee, and may be
exercised by the Board, if and to the extent that no Committee exists which
otherwise has the authority to so administer the Plan. The Committee shall have
full authority to grant Stock Options, pursuant to the terms of the Plan, to
Eligible Directors under Section 5.
The Committee shall have the authority to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
Stock Options issued under the Plan (and any agreements relating thereto); and
to otherwise supervise the administration of the Plan.
C-2
31
All decisions made by the Committee pursuant to the provisions of the Plan
shall be made in the Committee's sole discretion and shall be final and binding
on all persons, including the Company and Plan participants.
SECTION 3. STOCK SUBJECT TO PLAN
(a) The maximum number of shares of Common Stock reserved and available for
issuance under the Plan shall be 40,000 shares of the Company's Common Stock,
subject to adjustment upon changes in capitalization of the Company as provided
in Section 3(b) below. Such shares may consist in whole or in part, of
authorized and unissued shares of the Company.
If any shares of Stock that have been optioned cease to be subject to a
Stock Option prior to the payment of any dividend, if applicable, with respect
to such Stock, then such shares shall again be available for distribution in
connection with future awards under the Plan.
(b) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, combination of shares, exchange
of shares, split-up, split-off, spin-off, liquidation or other change in
corporate structure affecting the Common Stock subject to the Plan, then
appropriate substitutions or adjustments shall be made in maximum aggregate
number of shares subject to and reserved for issuance under the Plan, in the
number and option price of shares subject to outstanding Options granted under
the Plan, provided that the number of shares subject to any award shall always
be a whole number.
SECTION 4. ELIGIBILITY
All Eligible Directors shall be eligible to participate in the Plan and to
receive Non-Qualified Stock Options (as described in Section 5) under the Plan.
SECTION 5. STOCK OPTIONS
On the first business day following the 1998 Annual Meeting of Shareholders
of the Company (or if no such meeting is held, on April 16th) of each of the
years 1998 through and including 2002, each person who is a duly elected
Eligible Director of the Company immediately following such annual meeting shall
be granted automatically Non-Qualified Stock Options to purchase 500 shares of
Common Stock of the Company.
Stock Options granted under the Plan shall be subject to the following
terms and conditions:
(a) Option Price. The option price per share of Common Stock purchasable
under a Stock Option shall be 100% of the Fair Market Value of the Common Stock
on the day of the annual meeting of shareholders (or, if no such meeting is
held, on April 15th or the first trading day following such date).
(b) Option Term. No Stock Option shall be exercisable more than ten years
after the date the Option is granted.
(c) Vesting. Stock Options granted under the Plan shall vest with an
Eligible Director at a rate of 20% per year on the anniversary date of the
Annual meeting of shareholders (or, if no such meeting is held, on April 15th)
with respect to which the Stock Options were
C-3
32
granted, if an Eligible Director has continued to serve on the Board until that
meeting or date as follows:
Percentage of Stock
Anniversary of Grant Options Vested
-------------------- -------------------
1st . . . . . . . . . . . 20%
2nd . . . . . . . . . . . 40%
3rd . . . . . . . . . . . 60%
4th . . . . . . . . . . . 80%
5th . . . . . . . . . . . 100%
Notwithstanding the foregoing, Stock Options shall become fully vested as
provided in Sections 5(g), 5(h), 5(i) and 6.
(d) Exercisability. No Stock Option shall be exercisable prior to six
months and one day after the date of the granting of the Option, except as
provided in Sections 5(g), (h) and (i) and Section 6.
(e) Method of Exercise. Stock Options, to the extent they are vested, may
be exercised in whole or in part at any time during the option period, by giving
written notice of exercise to the Company specifying the number of shares to be
purchased.
Such notice shall be accompanied by payment in full of the purchase price,
either by check, note or such other instrument as the Committee may accept. As
determined by the Committee, in its sole discretion, at or after grant, payment
in full or in part may also be made in the form of Common Stock already owned by
the Eligible Director based on the Fair Market Value of the Common Stock on the
date the Option is exercised.
No shares of Common Stock shall be issued until full payment therefor has
been made. An Eligible Director shall have the rights to dividends or other
rights of a stockholder with respect to shares subject to the Option when the
Eligible Director has given written notice of exercise, has paid in full for
such shares, and, if requested, has given the representation described in
Section 8(a).
(f) Non-Transferability of Options. No Stock Option shall be transferable
by an Eligible Director otherwise than by will or by the laws of descent and
distribution, and all Stock Options shall be exercisable, during the Eligible
Director's lifetime, only by the Eligible Director.
(g) Termination by Death. If an Eligible Director's service on the Board
terminates by reason of death, any Stock Option held by such Eligible Director
may thereafter be exercised, to the extent such option was vested and
exercisable at the time of death or on such accelerated basis as the Committee
may determine at or after grant (or as may be determined in accordance with
procedures established by the Committee), by the legal representative of the
estate or by the legatee of the Eligible Director under the will of the Eligible
Director, for a period of one year from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.
C-4
33
(h) Termination by Reason of Disability. If an Eligible Director's service
on the Board terminates by reason of Disability, any Stock Option held by such
Eligible Director may thereafter be exercised by the Eligible Director, to the
extent it was vested and exercisable at the time of termination or on such
accelerated basis as the Committee may determine at or after grant (or as may be
determined in accordance with procedures established by the Committee), for a
period of one year from the date of such termination of service on the Board or
until the expiration of the stated term of such Stock Option, whichever period
is the shorter; provided, however, that, if the Eligible Director dies within
such one year period, any unexercised Stock Option held by such Eligible
Director shall thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of twelve months from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.
(i) Termination by Reason of Retirement. If an Eligible Director's service
on the Board terminates by reason of Retirement, any Stock Option held by such
Eligible Director may thereafter be exercised by the Eligible Director, to the
extent it was vested and exercisable at the time of such Retirement or on such
accelerated basis as the Committee may determine at or after grant (or as may be
determined in accordance with procedures established by the Committee), for a
period of three years from the date of such termination of service on the Board
or the expiration of the stated term of such Stock Option, whichever period is
the shorter; provided, however, that, if the Eligible Director dies within such
three year period, any unexercised Stock Option held by such Eligible Director
shall thereafter be exercisable, to the extent to which it was vested and
exercisable at the time of death, for a period of one year from the date of such
death or until the expiration of the stated term of such Stock Option, whichever
period is the shorter.
(j) Other Termination. If an Eligible Director's service on the Board
terminates for any reason other than death, Disability or Retirement, the Stock
Option shall thereupon terminate, except that such Stock Option may be
exercised, to the extent otherwise then vested and exercisable, for the lesser
of three months or the balance of such Stock Option's term if the Eligible
Director's service on the Board is involuntarily terminated by the Company or
the shareholders of the Company without Cause. For purposes of this Plan,
"Cause" means (a) a felony conviction of an Eligible Director or the failure of
an Eligible Director to contest prosecution for a felony, or an Eligible
Director's willful misconduct or dishonesty, any of which is directly or
materially harmful to the business or reputation of the Company or any
Subsidiary, or (b) the commission of a material violation of any laws and/or
regulations applicable to the Company or any Subsidiary.
SECTION 6. CHANGE IN CONTROL PROVISIONS
(a) Impact of Event. Any stock Option awarded under the Plan not previously
exercisable and vested shall become fully exercisable and vested in the event
of:
(1) a "Change in Control" as defined in Section 6(b) or
(2) a "Potential Change in Control" as defined in Section 6(c), but
only if and to the extent so determined by the Committee or the Board at or
after grant (subject to any right of approval expressly reserved by the
Committee or the Board at the time of such determination).
C-5
34
(b) Definition of "Change in Control". For purposes of Section 6(a), a
"Change in Control means the happening of any of the following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, other than
the Company or a wholly-owned subsidiary thereof or any employee
benefit plan of the Company or any of its Subsidiaries, becomes the
beneficial owner of the Company's securities having 20% or more of the
combined voting power of the then outstanding securities of the
Company that may be cast for the election of directors of the Company
(other than as a result of an issuance of securities initiated by the
Company in the ordinary course of business); or
(ii) as a result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sale of assets
or contested election, or any combination of the foregoing transaction
less than a majority of the combined voting power of the then
outstanding securities of the Company or any successor corporation or
entity entitled to vote generally in the election of the directors of
the Company or such other corporation or entity after such transaction
are held in the aggregate by the holders of the Company's securities
entitled to vote generally in the election of directors of the Company
immediately prior to such transaction; or
(iii) during any period of two consecutive years, individuals who
at the beginning of any such period constitute the Board cease for any
reason to constitute at least a majority thereof, unless the election,
or the nomination for election by the Company's stockholders, of each
director of the Company first elected during such period was approved
by a vote of at least two-thirds of the directors of the Company then
still in office who were directors of the Company at the beginning of
any such period.
(c) Definition of Potential Change in Control. For purposes of Section
6(a), a "Potential Change in Control" means the happening of any one of the
following:
(i) The approval by stockholders of an agreement by the Company,
the consummation of which would result in a Change in Control of the
Company as defined in Section 6(b); and
(ii) The acquisition of beneficial ownership, directly or
indirectly, by an entity, person or group (other than the Company or a
Subsidiary or any Company employee benefit plan (including any trustee
of such plan acting as such trustee)) of securities of the Company
representing 5% or more of the combined voting power of the Company's
outstanding securities and the adoption by the Board of a resolution
to the effect that a Potential Change in Control of the Company has
occurred for purposes of this Plan.
SECTION 7. AMENDMENTS AND TERMINATION
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
Eligible Director under any Stock Option theretofore granted, without the
Eligible Director's consent or which, without the approval of the Company's
stockholders, would:
(a) except as expressly provided in this Plan, increase the total
number of shares reserved for the purpose of the Plan;
C-6
35
(b) change the pricing terms of Section 5(a);
(c) change the class of Eligible Directors eligible to participate in
the Plan; or
(d) extend the maximum option period under Section 5(b) of the Plan.
The Committee may amend the terms of any Stock Option theretofore granted,
prospectively or retroactively, but, subject to Section 3 above, no such
amendment shall impair the rights of any holder without the holder's consent.
The Committee may also substitute new Stock Options for previously granted Stock
Options (on a one for one or other basis), including previously granted Stock
Options having higher option exercise prices.
Subject to the above provisions, the Board shall have broad authority to
amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments. Notwithstanding the
foregoing, no amendment to the Plan may be made more than once every six months,
other than to comport with changes in the Code, the Employee Retirement Income
Security Act, or the rules or regulations promulgated thereunder.
SECTION 8. GENERAL PROVISIONS
(a) The Committee may require each Eligible Director purchasing shares
pursuant to a Stock Option under the Plan to represent to and agree with the
Company in writing that the Eligible Director is acquiring the shares without a
view to distribution thereof.
All certificates or shares of Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Stock is
then listed, and any applicable Federal or state securities law, and the
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any Eligible Director
serving on the Board of the Company any right to continued service as a director
with the Company nor shall it interfere in any way with the right of the Company
or the shareholders of the Company to remove or otherwise terminate his or her
service as a director of the Company.
(d) No later than the date as of which an amount first becomes includable
in the gross income of an Eligible Director for Federal income tax purposes with
respect to any award under the Plan, an Eligible Director shall pay to the
Company, or make arrangement satisfactory to the Committee regarding the payment
of any Federal, state, or local taxes of any kind required by law to be withheld
with respect to such amount. Unless otherwise determined by the Committee,
withholding obligations may be settled with Stock, including Stock that is part
of the award that gives rise to the withholding requirement. The satisfaction of
withholding obligations with Stock at the election of a grantee who is subject
to Section 16 of the Exchange
C-7
36
Act shall be made either (i) during the 10 business day window period described
in Rule 16b-3(e)(3) (or any successor provision) thereunder, if the exercise is
also made during such a period, or (ii) at least six months prior to the date as
of which the income attributable to the exercise of the related award is
recognized under the Code, and shall be irrevocable to the extent required under
such Rule 16b-3(e)(3) (or any successor provision). The obligations of the
Company under the Plan shall be conditional on such payment or arrangements and
the Company shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment of any kind otherwise due to an Eligible Director.
(e) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Tennessee.
(f) It is intended that the Plan shall comply in all respects with Rule
16b-3 (as amended from time to time and including any successor rule or
regulation) of the Securities and Exchange Commission, and in the event that any
provision of the Plan is determined by the Committee, upon advice of counsel, to
not comply with Rule 16b-3, the Committee shall be authorized to nullify and
void any such provision.
SECTION 9. EFFECTIVE DATE OF PLAN
The Plan shall be effective as of March 1, 1998, upon the approval of the
Plan by the holders of the Bank's Common Stock at the 1998 Annual meeting of
shareholders.
SECTION 10. TERM OF PLAN
No Stock Option shall be granted pursuant to the Plan on or after the tenth
anniversary of the date of stockholder approval, but awards granted prior to
such tenth anniversary may extend beyond that date.
C-8
37
Appendix D
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
HERITAGE FINANCIAL SERVICES, INC.
25 JEFFERSON STREET
CLARKSVILLE, TN 37040
The undersigned, having received the Notice of the Annual Meeting of
Shareholders dated April 21, 1998, hereby appoints David Smithfield and Judge
Sam Boaz, either of whom may act as proxies, with full power of substitution,
proxy and attorneys-in-fact of the undersigned to vote all the shares of Common
Stock of Heritage Financial Services, Inc. which the undersigned would be
entitled to vote at the Annual Meeting of Shareholders to be held at the
Volunteer Room, Ramada Inn, 50 College Street, Clarksville, Tennessee on April
21, 1998, at 1:00 p.m. and any adjournments thereof, and the undersigned
instructs said proxies to vote upon the following matters:
Proposal I: To elect to the Board of Directors of the Company, the four(4)
directors named below.
__ FOR ALL NOMINEES LISTED BELOW __ WITHHOLD AUTHORITY TO VOTE FOR ALL
(Except as marked to the NOMINEES LISTED BELOW
contrary below)
INSTRUCTION: To withhold authority for any individual nominee, strike a line
through the nominee's name in the list below.
WILLIAM G. BEACH JEFFREY V. BIBB
JAMES G. HOLLEMAN JAMES E. THOMAS, SR.
Proposal II: To consider and act upon a proposal to amend the Corporation's
Charter to increase the Corporation's authorized Common Stock and
to authorize the Company to issue no par value Preferred Stock.
____ FOR ____ AGAINST ___ ABSTAIN
Proposal III: To consider and act upon a proposal to adopt the Company's 1998
Stock Option Plan.
____ FOR ____ AGAINST ___ ABSTAIN
Proposal IV: To consider and act upon a proposal to adopt the Outside
Directors' Stock Option Plan.
____ FOR ____ AGAINST ___ ABSTAIN
Proposal V: To ratify the appointment of Heathcott & Mullaly, P.C., Brentwood,
Tennessee, as Independent Public Accountants of the Company and its
affiliates for the fiscal year ending December 31, 1998.
____ FOR ____ AGAINST ___ ABSTAIN
Proposal VI: To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
Any proxy heretofore given for said meeting is hereby revoked.
IF NO INSTRUCTIONS ARE GIVEN ABOVE, THE UNDERSIGNED SHAREHOLDER HEREBY
AUTHORIZES THE PROXIES NAMED HEREIN TO VOTE FOR PROPOSALS I, II, III, IV AND V.
________________________ __________ ________________________ __________
Signature Date Signature Date
(See special instructions below)
Please date and sign the above exactly as your name or names
appear on the Stock Certificates. If shares are held by two or
more persons, all must sign. When signing as attorney-in-fact,
executor, administrator, trustee, guardian or other person
acting in a representative or fiduciary capacity, please give
full title as such. If the signer is signing for a corporation,
please sign in full the corporate name by a duly authorized
officer with full title.