United Tennessee Bankshares, Inc.
P.O. Box 458
Newport, TN 37822-0458
April 18, 2003
Dear Fellow Shareholder:
We invite you to attend the 2003 annual meeting of shareholders of United
Tennessee Bankshares, Inc., the holding company for Newport Federal Bank, to be
held at the Bank's main office, 344 W. Broadway, Newport, Tennessee on Tuesday,
May 20, 2003 at 5:00 p.m.
The accompanying notice and proxy statement describe the formal business to
be transacted at the meeting. During the meeting, we will also report on our
operations during the fiscal year ended December 31, 2002. Our directors and
officers will be present to respond to any questions the shareholders may have.
ON BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO SIGN, DATE AND RETURN
THE ACCOMPANYING FORM OF PROXY AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO
ATTEND THE ANNUAL MEETING. Your vote is important, regardless of the number of
shares you own. This will not prevent you from voting in person but will assure
that your vote is counted if you are unable to attend the meeting.
Sincerely,
/s/ Richard G. Harwood
Richard G. Harwood
President
UNITED TENNESSEE BANKSHARES, INC.
344 W. Broadway
Newport, Tennessee 37821-0249
(423) 623-6088
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on May 20, 2003
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders (the "Annual
Meeting") of United Tennessee Bankshares, Inc. (the "Company") will be held at
the main office of Newport Federal Bank, 344 W. Broadway, Newport, Tennessee on
Tuesday, May 20, 2003 at 5:00 p.m.
A proxy statement and form of proxy for the Annual Meeting accompany this
notice.
The Annual Meeting is for the purpose of considering and acting upon:
1. The election of three directors for three-year terms; and
2. The transaction of such other business as may properly come
before the Annual Meeting or any adjournments thereof.
The Board of Directors is not aware of any other business to come before
the Annual Meeting.
Any action may be taken on any one of the foregoing proposals at the Annual
Meeting on the date specified above or on any date or dates to which, by
original or later adjournment, the Annual Meeting may be adjourned. Shareholders
of record at the close of business on April 1, 2003 are the shareholders
entitled to vote at the Annual Meeting and any adjournments thereof.
You are requested to fill in and sign the accompanying form of proxy which
is solicited by the Board of Directors and to mail it promptly in the
accompanying envelope. The proxy will not be used if you attend and vote at the
Annual Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Peggy B. Holston
PEGGY B. HOLSTON
Secretary
Newport, Tennessee
April 18, 2003
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE
OF FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. THE ACCOMPANYING
FORM OF PROXY IS ACCOMPANIED BY A SELF-ADDRESSED ENVELOPE FOR YOUR CONVENIENCE.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
PROXY STATEMENT
OF
UNITED TENNESSEE BANKSHARES, INC.
344 W. BROADWAY
NEWPORT, TENNESSEE 37821-0249
ANNUAL MEETING OF SHAREHOLDERS
May 20, 2003
GENERAL
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of United Tennessee Bankshares, Inc. (the
"Company") to be used at its annual meeting of shareholders (the "Annual
Meeting") which will be held at the main office of Newport Federal Bank (the
"Bank"), 344 W. Broadway, Newport, Tennessee, on Tuesday, May 20, 2003 at 5:00
p.m. This proxy statement and the accompanying notice and proxy card are being
first provided to shareholders on or about April 18, 2003.
VOTING AND REVOCABILITY OF PROXIES
Shareholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by such proxies will be voted at
the Annual Meeting and all adjournments thereof. Proxies may be revoked by
written notice to Peggy B. Holston, Corporate Secretary, at the address shown
above, by filing a later dated proxy prior to a vote being taken on a particular
proposal at the Annual Meeting or by attending the Annual Meeting and voting in
person.
Proxies solicited by the Company's Board of Directors will be voted in
accordance with the directions given therein. Where no instructions are
indicated, proxies will be voted for each of the nominees for director set forth
below. The proxy confers discretionary authority on the persons named therein to
vote with respect to the election of any person as a director where the nominee
is unable to serve or for good cause will not serve, and matters incident to the
conduct of the Annual Meeting. If any other business is presented at the Annual
Meeting, proxies will be voted by those named therein in accordance with the
determination of a majority of the Board of Directors. Proxies marked as
abstentions, and shares held in street name which have been designated by
brokers on proxies as not voted, will not be counted as votes cast. Proxies
marked as abstentions or as broker non-votes will, however, be treated as shares
present for purposes of determining whether a quorum is present.
VOTING SECURITIES AND BENEFICIAL OWNERSHIP
Shareholders of record as of the close of business on April 1, 2003 (the
"Record Date") are entitled to one vote for each share then held. At the Record
Date, the Company had 1,273,124 shares of common stock, no par value (the
"Common Stock"), issued and outstanding. The presence, in person or by proxy, of
at least a majority of the total number of shares of the Common Stock
outstanding and entitled to vote will be necessary to constitute a quorum at the
Annual Meeting.
Persons and groups owning in excess of 5% of the Common Stock are required
to file certain reports regarding such ownership pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based on these reports,
the following tables sets forth, as of the Record Date, certain information as
to shares of the Common Stock known by management to be beneficially owned by
persons owning in excess of 5% of the Common Stock and by all of the Company's
directors and executive officers as a group.
Amount and Percent of
Nature of Shares of
Name and Address Beneficial Common Stock
of Beneficial Owner Ownership Outstanding (1)
- ------------------- --------- -----------
Richard G. and Margaret R. Harwood
344 W. Broadway
Newport, Tennessee 37821-0249 112,632 (2) 8.8%
United Tennessee Bankshares, Inc.
Employee Stock Ownership Plan ("ESOP")
344 W. Broadway
Newport, Tennessee 37821-0249 153,156 (3) 12.0%
Trust Agreement I under
United Tennessee Bankshares, Inc.
1999 Stock Option Plan
("Stock Option Plan Trust I")
344 W. Broadway
Newport, Tennessee 37821-0249 101,850 (4) 8.0%
All directors and executive officers as a group (10 persons) 414,298 (5) 32.5%
- -------------
(1) Based on 1,273,124 shares issued and outstanding at March 31, 2003.
(2) Includes 17,942 shares of which Mr. Harwood is the sole owner and 300
shares of which Mrs. Harwood is the sole owner. Also includes 10,250 shares
in Mr. Harwood's IRA, 11,718 shares held in his account in the Company's
401(k) Plan, 18,500 shares allocated to his account in the ESOP and 53,922
shares which he has the right to acquire pursuant to options issued under
the 1999 Stock Option Plan.
(3) Includes 98,573 allocated shares and 54,583 unallocated shares. Unallocated
shares are held in a suspense account for future allocation among
participating employees as the loan used to purchase the shares is repaid.
The ESOP trustees, currently Directors Henry, Overholt and Self, vote all
allocated shares in accordance with instructions of the participants.
Subject to their common law and statutory fiduciary duties, the ESOP
trustees vote unallocated shares and shares for which no instructions have
been received in the same ratio as participants directing the voting of
allocated shares or, in the absence of such direction, as directed by the
Board of Directors.
(4) Consists of shares held in trust to satisfy potential obligations of the
Company under the United Tennessee Bankshares, Inc. 1999 Stock Option Plan.
Voting rights with respect to Common Stock held by Stock Option Plan Trust
I are exercised by the trustees, Directors Bible and Hooper in accordance
with the terms of the ESOP.
(5) Reflects shares over which one or more directors and executive officers
have sole or shared voting and/or dispositive power. Excludes 54,583
unallocated shares in the ESOP which are voted as described in note 3. Also
excludes 175,321 shares held by Stock Option Plan Trusts I and II, 4,591
unvested shares held by the Company's Management Recognition Plan ("MRP")
Trust and 19,326 shares held in a grantor trust for the Bank's directors'
retirement plan. The trustees of these trusts vote all such shares in the
same proportions on all matters as the ESOP trustees vote the ESOP shares.
Includes 135,329 shares which directors and executive officers have the
right to acquire pursuant to options exercisable within 60 days of the
Record Date.
2
PROPOSAL I -- ELECTION OF DIRECTORS
General
The Company's Board of Directors currently consists of seven members. The
Company's Charter requires that directors be divided into three classes, as
nearly equal in number as possible, with approximately one-third of the
directors elected each year. The Board has nominated directors William B. Henry,
J. William Myers and Tommy C. Bible for reelection to serve as directors for
three-year terms. Under Tennessee law, directors are elected by a plurality of
all votes cast at a meeting at which a quorum is present. If any of the nominees
are unable to serve, the shares represented by all valid proxies will be voted
for the election of such substitute as the Board may recommend or the size of
the Board may be reduced to eliminate the vacancy. At this time, the Board knows
of no reason why the nominees might be unavailable to serve.
The following table sets forth the names of the nominees for election as
directors and the directors whose terms expire in future years. Also set forth
is certain other information with respect to each person's age, the year he
first became a director of the Bank, the Company's principal subsidiary, on
whose board each director of the Company also serves, the expiration of his term
as a director and the number and percentage of shares of the Common Stock
beneficially owned. With the exception of Messrs. Bible and Hooper who first
became directors in 1998, each director first became a director of the Company
upon its incorporation in 1997.
Year First Shares of Common
Elected as Current Stock Beneficially
Director of Term Owned at the Record Percent
Name Age the Bank to Expire Date (2) of Class (1)
---- --- -------- --------- ------ ----------
BOARD NOMINEES FOR TERMS TO EXPIRE IN 2006
William B. Henry 72 1978 2003 43,176 3.39%
J. William Myers 61 1975 2003 43,346 3.40
Tommy C. Bible 49 1998 2003 26,707 2.10
DIRECTORS CONTINUING IN OFFICE
Robert L. Overholt 59 1983 2004 24,869 1.95
Ben W. Hooper, III 38 1998 2004 5,107 0.40
Richard G. Harwood 56 1989 2005 110,752 8.70
Robert D. Self 72 1978 2005 28,325 2.22
- -------------
(1) Based on 1,273,124 shares issued and outstanding at April 1, 2003.
(2) Reflects shares over which the named individuals have sole or shared voting
and/or dispositive power; excludes unallocated shares held by the ESOP and
certain shares held by the Company's defined contribution thrift plan and
its directors' retirement plan (see "Voting Securities and Beneficial
Ownership") above. Includes 53,922 shares which Mr. Harwood has the right
to acquire pursuant to options exercisable within 60 days of the Record
Date, 16,161 shares which each of Messrs. Myers, Henry, Overholt and Self
have the right to acquire pursuant to such options and 3,707 shares of
which each of Messr. Bible and Hooper have the right to acquire pursuant to
such options.
Set forth below is information concerning the Board's nominees for election
as director and continuing directors. Unless otherwise stated, all directors
have held the positions indicated for at least the past five years.
William B. Henry retired in 2001 after having been a practicing optometrist
in Newport, Tennessee since 1961. He is presently serving as the secretary of
the Newport Utilities Board.
3
J. William Myers is a partner in the law firm of Myers & Bell in Newport,
Tennessee. He has practiced law in Newport, Tennessee since 1966. Mr. Myers
serves as the Chairman of the Board for the Company and the Bank. He is active
with the Habitat for Humanity.
Tommy C. Bible is the General Manager of the Jefferson-Cocke County Gas
Utility District that serves natural and propane gas to the Jefferson County and
Cocke County areas. Prior to joining Jefferson-Cocke, he worked 15 years for
Newport Utilities Board as the Administrative Manager. Mr. Bible is a member of
the Cocke County Election Commission and is a director for the Newport/Cocke
County Economic Development Commission.
Robert L. Overholt retired in 1999 after having been the owner/manager of
Home Supply of Newport, Tennessee, Inc., a building supply establishment, since
1966. Mr. Overholt is active with the Shriners and Habitat for Humanity.
Ben W. Hooper, III is an attorney in general practice with Campbell &
Hooper in Newport, Tennessee. Mr. Hooper also serves as legal counsel to the
Cocke County Amvets and the Cocke County Education Foundation. He is the past
President of the Cocke County Bar Association.
Richard G. Harwood serves as President and Chief Executive Officer of the
Company and the Bank. Mr. Harwood joined the Bank as Senior Vice President in
1984. He has acted as the Chairman of the Newport/Cocke County Economic
Development Commission. Mr. Harwood also is a member of the Newport Lions Club.
Robert D. Self retired in 1999 after having been the owner of Bob Self Auto
Parts, an auto parts supplier located in Newport, Tennessee, since 1969. Mr.
Self is active with the Newport Lions Club and serves on the board of directors
of the Stokley Memorial Library.
Meetings and Committees of the Board of Directors
The Company's Board of Directors holds regular meetings and special
meetings as needed. During the year ended December 31, 2002, the Board met 12
times. No nominee for election as a director or continuing director attended
fewer than 75% in the aggregate of the total number of Board meetings held while
he was a member during the year ended December 31, 2002 and the total number of
meetings held by committees on which he served during such fiscal year.
The Board of Directors has appointed Ms. Nancy L. Bryant and Directors
Hooper and Self as the Audit Committee. The Audit Committee met four times in
this capacity in connection with the independent audit for fiscal 2002. All of
the members of the Audit Committee are "independent," as "independent" is
defined in Rule 4200(a)(15) of the National Association of Securities Dealers'
listing standards except for Ms. Bryant who serves as Vice President of the
Bank. The Company's Board of Directors has adopted a written charter for the
Audit Committee. A copy of the Audit Committee's charter was attached as
Appendix A to the Company's Proxy Statement relating to the 2001 Annual Meeting
of Shareholders.
The Board of Directors has an Executive Committee, which consists of
Chairman Myers and Directors Bible, Harwood and Henry and acts as a compensation
committee. This committee reviews the performance of the Company's officers and
met 13 times for fiscal 2002.
The Board of Directors does not have a standing nominating committee. Under
the Company's Bylaws, the full Board of Directors acts as a nominating committee
and met once in this capacity to select the nominees for election at the Annual
Meeting.
Director Compensation
Fees. Directors currently receive fees of $6,000 per year, plus $400 per
regular board meeting attended and $100 per executive committee meeting
attended. Directors serving on the Audit Committee and the ALCO Committee
receive an additional $100 for each meeting of those committees. In addition,
the Chairman receives a salary of $10,800 per year. For fiscal 2002, directors'
fees totaled $91,400. Directors do not receive additional compensation for
service as directors of the Company.
4
Long-Term Incentive Plan. The Bank has adopted a long-term incentive plan
for directors in order to provide competitive compensation to directors,
attract, retain and motivate directors and to encourage the long-term financial
success of the Bank. The long-term incentive plan was designed to provide a
means by which directors may accrue additional retirement benefits based on the
Bank's performance. Pursuant to the plan, a bookkeeping account has been
established in the name of each director. In recognition of past service, the
account of each director serving on the effective date of the plan was credited
with an amount equal to the product of (i) $1,291 and (ii) the director's full
years of services as a director, up to 20 years. On each December 31, the
account of each participant who is then a director and has 20 or fewer years of
service is credited with an amount equal to the product of $1,291 and the safe
performance factor, which is determined based on the Bank's actual performance
as compared to budgeted goals for return on average equity, non-performing
assets and composite regulatory rating. The safe performance factor may not
exceed 1.2. All amounts credited to participants' accounts are fully vested at
all times. Until distributed in accordance with the terms of the plan, each
participant's account will be credited with a rate of return equal to either the
Bank's highest rate of interest paid on certificates of deposit having a term of
one year or the dividend-adjusted rate of return on the Common Stock as elected
by the participant. Beginning with the fiscal year following a participant's
termination of service, the participant's account will be credited with an
investment return measured by the participant's election between up to two
different mutual funds (or other investments) selected by the Board of
Directors.
Each participant may elect to receive plan benefits in a lump sum or over a
period shorter than ten years, and in the absence of an election will receive
payments in five substantially equal installments. In the event of a
participant's death, the balance of his plan account will be paid in a lump sum
(unless the participant elects a distribution period up to ten years) to his
designated beneficiary or, if none, his estate.
Any benefits accrued under the plan will be paid from the Bank's general
assets. To provide a funding mechanism, the Bank has established a grantor trust
in order to hold assets with which to pay benefits. Trust assets would be
subject to claims of the Bank's general creditors. In the event of a change in
control, the Bank will contribute to the grantor trust an amount sufficient to
fund the aggregate account balances in the plan.
At December 31, 2002, the accounts of Messrs. Bible, Harwood, Henry,
Hooper, Myers, Overholt and Self were credited with $1,662, $2,154, $1,231,
$1,662, $1,231, $2,523 and $1,231, respectively, including earnings on their
accounts.
Deferred Compensation Plan. Under the Bank's deferred compensation plan,
each non-employee director may elect to defer receipt of all or part of his fees
for the year, and any other participant may elect to defer receipt of up to 25%
of his or her compensation for the year. Deferred amounts are credited at the
end of the calendar year to a bookkeeping account in the participant's name
along with the investment return which would have resulted if such deferred
amounts had been invested, based upon the participant's choice, between the
dividend-adjusted rate of return on the Common Stock and Bank's highest annual
rate of interest on certificates of deposit having a one-year term. Each
participant may make an election to receive distributions either in a lump sum
or in annual installments over a period up to ten years.
The Bank expects (but is under no legal obligation) to make quarterly
contributions to a grantor trust in an amount equal to the accrued expense
associated with the deferred compensation plan. In the event of a change in
control (as defined in the employment agreement described below), the Bank will
contribute to the trust an amount sufficient to provide the trust with assets
having an overall value equal to the aggregate account balances under the plan.
The trust's assets would remain subject to the claims of the Bank's general
creditors and be available for eventual payments to participants.
5
Executive Compensation
Summary. The following table sets forth compensation for the fiscal years
ended December 31, 2002, 2001 and 2000 awarded to or earned by the Company's
Chief Executive Officer for services rendered in all capacities. No executive
officer received salary and bonus in excess of $100,000 during the fiscal years
2002, 2001 or 2000.
Long-Term Compensation
-----------------------------
Awards
Annual Compensation -----------------------------
-------------------------------------- Restricted Securities
Name and Other Annual Stock Underlying All other
Principal Position Year Salary Bonus Compensation(1) Awards Options Compensation
------------------ ---- ------ ----- -------------- ---------- ---------- ------------
Richard G. Harwood 2002 $91,005 $12,257 $ -- $ -- $ -- $ 57,859 (2)
President and Chief 2001 85,713 9,371 $ -- -- -- 18,862 (3)
Executive Officer 2000 86,363 9,610 $ -- -- -- 25,355 (4)
- ---------
(1) Excludes indirect compensation in the form of certain perquisites and other
personal benefits which did not exceed 10% of salary and bonus.
(2) Consists of director fees ($12,100), allocation to ESOP account ($22,988),
Company contribution to long-term incentive plan ($1,549) and gain on
accounts in long-term incentive and deferred compensation plans ($21,222)
for fiscal 2002; excludes appraisal fees for services to borrowers.
(3) Consists of director fees ($11,700), allocation to ESOP account ($4,268),
Company contribution to long-term incentive plan ($1,549) and loss on
accounts in long-term incentive and deferred compensation plans ($1,345)
for fiscal 2001; excludes appraisal fees for services to borrowers.
(4) Consists of director fees ($11,800), allocation to ESOP account ($4,268),
Company contribution to long-term incentive plan ($1,549) and loss on
accounts in long-term incentive and deferred compensation plans ($7,738)
for fiscal year 2000.
Equity Compensation Plan Information
The following table provides information about our equity compensation plans
Number of securities
to be issued upon Weighted-average Number of securities
exercise of exercise price of remaining available for
outstanding options, outstanding options, future issuance under
Plan Category warrants and rights warrants and rights equity compensation plans
------------- -------------------- -------------------- -------------------------
Equity compensation plans
approved by shareholders 135,329 $8.59 3,312
Equity compensation plans
not approved by
shareholders -0- n/a -0-
------- ----- -----
Total 135,329 $8.59 3,312
======= ===== =====
6
Option Year-End Value Table. The following table sets forth information
concerning the value of options held by the Chief Executive Officer at the end
of fiscal year 2002. The number of shares underlying such options and the
exercise price therefore have been adjusted for the special distribution paid
November 30, 1999. No options were exercised during fiscal year 2002.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year-End At Year End (1)
------------------- -------------
Name Exercisable Unexercisable Exercisable Unexercisable
Richard G. Harwood 53,922 -- $163,923 --
- ----------------
(1) Based on the difference between the closing sale price for the Common
Stock on December 31, 2002 as reported on the Nasdaq SmallCap Market SM ($11.64
per share) and the exercise price per share ($8.60 per share) multiplied by the
number of shares subject to the option. Options are considered in-the-money if
the fair market value of the underlying securities exceeds the exercise price.
Employment Agreement
The Bank has entered into an employment agreement pursuant to which Richard
G. Harwood serves as the Bank's President and Chief Executive Officer. In such
capacities, Mr. Harwood is responsible for overseeing all of its operations and
for implementing the policies adopted by the Board of Directors. The Company has
entered into a guarantee agreement with Mr. Harwood pursuant to which it has
agreed to be jointly and severally liable for the payment of amounts due under
the employment agreement.
The employment agreement became effective on January 1, 1998 and provided
for an initial term of three years with an annual base salary equal to Mr.
Harwood's existing base salary rate in effect on the effective date. On each
anniversary date of the commencement of the employment agreement, the term of
Mr. Harwood's employment may be extended for an additional one-year period
beyond the then-effective expiration date, upon a determination by the Board of
Directors that the performance of Mr. Harwood has met the required performance
standards and that such employment agreement should be extended. Mr. Harwood's
employment agreement has accordingly been extended through August 19, 2005. The
employment agreement provides Mr. Harwood with a salary review by the Board of
Directors not less often than annually, as well as with inclusion in any
discretionary bonus plans, retirement and medical plans, customary fringe
benefits, vacation and sick leave. The employment agreement shall terminate upon
Mr. Harwood's death, may terminate upon Mr. Harwood's disability and is
terminable by the Company for "just cause" (as defined in the employment
agreement). In the event of termination for just cause, no severance payment is
available. If the Company terminates Mr. Harwood without just cause, Mr. Harwood
will be entitled to a continuation of his compensation from the date of
termination through the remaining term of the employment agreement. In addition,
Mr. Harwood is entitled, at his election, to either continued participation in
compensation plans which he would have been eligible to participate in through
his employment agreement's expiration date or the cash equivalent thereof. If
Mr. Harwood's employment is terminated for any reason other than just cause, he
shall be entitled to purchase from the Company, at his own expense which shall
not exceed applicable statutory rates, family medical insurance under any group
health plan that the Company maintains for its employees. This right shall be in
addition to, and not in lieu of, any other rights that Mr. Harwood has under the
employment agreement and shall continue until he first becomes eligible for
participation in Medicare. If the employment agreement is terminated due to Mr.
Harwood's "disability" (as defined in the employment agreement), Mr. Harwood
will be entitled to a continuation of his compensation through the date of such
termination, including any period prior to the establishment of Mr. Harwood's
disability. In the event of Mr. Harwood's death during the term of the
employment agreement, Mr. Harwood's estate will be entitled to receive his
salary through the last day of the calendar month in which Mr. Harwood's death
occurred. Mr. Harwood is able to voluntarily terminate the employment agreement
by providing 90 days' written notice to the Company, in which case Mr. Harwood
would be entitled to receive only his compensation, vested rights and benefits
up to the date of termination.
In the event of (i) Mr. Harwood's involuntary termination of employment
other than for "just cause" during the 12-month period following a change in
control or (ii) Mr. Harwood's voluntary termination within 90 days of the
occurrence of certain specified events occurring during that period, Mr. Harwood
will be paid within 10 days of
7
such termination (or the date of the change in control, whichever is later) an
amount equal to the difference between (a) 2.99 times his base amount, as
defined in Section 280G(b)(3) of the Internal Revenue Code (the "Code"), and (b)
the sum of any other parachute payments, as defined under Section 280G(b)(2) of
the Code, that he receives on account of the change in control. "Change in
control" means any one of the following events: (i) the acquisition of
ownership, holding or power to vote more than 25% of our voting stock, (ii) the
acquisition of the ability to control the election of a majority of the
Company's directors, (iii) the acquisition of a controlling influence over the
Company's management or policies by any person or by persons acting as a "group"
(within the meaning of Section 13(d) of the Exchange Act), or (iv) during any
period of two consecutive years, individuals ("continuing directors") who at the
beginning of such period constituted the Company's Board of Directors (the
"existing board") cease for any reason to constitute at least two-thirds
thereof, provided that any individual whose election or nomination for election
as a member of the existing board was approved by a vote of at least two-thirds
of the continuing directors then in office shall be considered a continuing
director. For purposes of this paragraph only, the term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The payments that would be made
to Mr. Harwood assuming his termination of employment under the foregoing
circumstances at December 31, 2002, would have been approximately $171,426.
These provisions may have an anti-takeover effect by making it more expensive
for a potential acquirer to obtain control of the Company. If Mr. Harwood were
to prevail over the Company, or obtain a written settlement, in a legal dispute
as to the employment agreement, he would be entitled to be reimbursed for his
legal and other expenses.
Certain Transactions
The Company offers loans to directors, officers and employees through the
Bank. These loans are made in the ordinary course of business with the same
collateral, interest rates and underwriting criteria as those of comparable
transactions prevailing at the time and do not involve more than the normal risk
of collectibility or present other unfavorable features, except each director,
officer and employee may obtain one mortgage loan and one consumer loan with
waived origination fees and a 1% discount on the interest rate (on
adjustable-rate loans, the discounted rate applies only until the rate adjusts).
At December 31, 2002, the Company's loans to directors and executive officers
totaled approximately $1,832,063 or 12% of its shareholders' equity and 1.70% of
its total assets at that date. Except as disclosed below, no director or
executive officer had more than $60,000 of preferential loans from the Company
at any time during fiscal year 2002.
Highest Balance at
Name & Relation Balance Since December 31,
to Company Type of Loan Date Originated Interest Rate January 1, 2002 2002
---------- ------------ --------------- ------------- --------------- ----
Lonnie R. Jones Residential 10/14/00 6.00% $325,000 $312,680
Vice President of Mortgage
Operations
Ben W. Hooper, III Residential 04/01/98 5.50% $280,000 $218,522
Director Mortgage 08/02/02 5.75% $85,500 $84,984
Nancy L. Bryant Residential 05/31/01 6.00% $275,000 $167,747
Vice President Mortgage
J. William Myers Real Estate 12/05/00 6.00% $900,000 $890,000
Director 12/31/01 7.00% $200,000 $35,000
Chris Triplett Real Estate 03/31/01 5.00% $129,200 $123,130
Controller Mortgage
J. William Myers is a principal in the law firm of Myers & Bell, Newport,
Tennessee, which performs routine legal services on behalf of the Company and
its borrowers, principally in connection with the closing of mortgage loans. In
fiscal 2002, the law firm's fees for such services totaled $96,560.
Richard G. Harwood, the Company's President and Chief Executive Officer,
and Nancy L. Bryant and Peggy B. Holston, the Company's Vice President and
Treasurer and its Secretary and Branch Manager, respectively, are licensed real
estate appraisers. They perform routine appraisal services on behalf of the
Bank's borrowers principally in connection with the closing of mortgage loans.
In fiscal 2002, Mr. Harwood's and Mses. Bryant's and Holston's fees for such
services totaled $27,573, $20,916 and $18,171, respectively.
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INDEPENDENT AUDITORS
Pugh & Company, P.C. was the Company's independent auditor for the 2002
fiscal year and has been retained by the Board of Directors to be its auditor
for the 2003 fiscal year. A representative of Pugh & Company, P.C. is expected
to be present at the Annual Meeting to respond to shareholders' questions and
will have the opportunity to make a statement if he or she so desires.
Audit Fees. During the fiscal year ended December 31, 2002, the aggregate
fees billed for professional services rendered for the audit of the Company's
annual financial statements and the reviews of the financial statements included
in the Company's Quarterly Reports on Form 10-QSB filed during the fiscal year
ended December 31, 2002 were $51,025.
Financial Information Systems Design and Implementation Fees. The Company
did not engage Pugh & Company, P.C. to provide advice to the Company regarding
financial information systems design and implementation during the fiscal year
ended December 31, 2002.
All Other Fees. For the fiscal year ended December 31, 2002, the aggregate
fees paid by the Company to Pugh & Company, P.C., certified public accountants
for all other services (other than audit services and financial information
systems design and implementation services) were $10,725 which were related to
preparation of tax returns, review of OTS Thrift Financial Reports, review of
press release and consulting on various financial, tax and regulatory compliance
issues.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors (the "Audit Committee") has:
1. Reviewed and discussed the audited financial statements for the fiscal year
ended December 31, 2002 with the management of the Company.
2. Discussed with the Company's independent auditors the matters required to
be discussed by Statement of Auditing Standards No. 61, as the same was in
effect on the date of the Company's financial statements; and
3. Received the written disclosures and the letter from the Company's
independent auditors required by Independence Standards Board Standard No.
1 (Independence Discussions with Audit Committees), as the same was in
effect on the date of the Company's financial statements and discussed with
the independent auditors their independence.
Based on the foregoing materials and discussions, the Audit Committee
recommended to the Board of Directors that the audited financial statements for
the fiscal year ended December 31, 2002 be included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2002.
MEMBERS OF THE AUDIT COMMITTEE
Ben W. Hooper, III - Chairman
Nancy Bryant
Robert D. Self
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Annual Meeting other than those matters described above in this proxy statement.
However, if any other matters should properly come before the Annual Meeting, it
is intended that proxies in the accompanying form will be voted in respect
thereof in accordance with the determination of a majority of the Board of
Directors.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMMITTEE
Pursuant to regulations promulgated under the Exchange Act, the Company's
officers, directors and persons who own more than 10% of the outstanding Common
Stock are required to file reports detailing their ownership and changes of
ownership in such Common Stock, and to furnish the Company with copies of all
such reports. Based on the Company's review of such reports which the Company
received during the last fiscal year, or written representations from such
persons that no annual report of change in beneficial ownership was required,
the Company believes that, during the last fiscal year, all persons subject to
such reporting requirements have complied with the reporting requirements.
MISCELLANEOUS
The cost of soliciting proxies will be borne by the Company. The Company
will reimburse brokerage firms and other custodians, nominees and fiduciaries
for reasonable expenses incurred by them in sending proxy materials to
beneficial owners of shares of the Common Stock. In addition to solicitations by
mail, our directors, officers and regular employees may solicit proxies
personally or telephone without additional compensation.
FINANCIAL INFORMATION
The annual report to shareholders, including financial statements, has been
mailed to all shareholders of record as of the close of business on the Record
Date. Any shareholder who has not received a copy of such annual report may
obtain a copy by writing to the Company's Corporate Secretary. Such annual
report is not to be treated as a part of the proxy solicitation material or as
having been incorporated herein by reference. A copy of the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2002 as filed with
the Securities and Exchange Commission will be furnished without charge to each
shareholder as of the Record Date upon written request to the Company's
Corporate Secretary, United Tennessee Bankshares, Inc., 344 W. Broadway,
Newport, Tennessee 37821-0249.
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in the Company's proxy materials for
next year's Annual Meeting of Shareholders, any shareholder proposal to take
action at such meeting must be received at the Company's main office at 344 W.
Broadway, Newport, Tennessee 37821-0249, no later than December 19, 2002. Any
such proposal shall be subject to the requirements of the proxy rules adopted
under the Exchange Act. Shareholder proposals not submitted for inclusion in the
board of director's proxy statement which are received after March 3, 2003 will
be considered untimely. Accordingly, the proxies may exercise their discretion
and vote on these matters in a manner they determine to be appropriate.
Shareholder proposals to be considered at the Annual Meeting, other than
those submitted pursuant to the Exchange Act, must be stated in writing,
delivered or mailed to the Company's Secretary, not less than 30 days nor more
than 60 days prior to the date of the Annual Meeting. If less than 40 days'
notice is given to shareholders, such notice shall be delivered or mailed to the
Secretary not later than the close of business on the 10th day following the day
on which notice of the meeting was mailed to shareholders.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Peggy B. Holston
Peggy B. Holston
Secretary
Newport, Tennessee
April 18, 2003
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