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SCHEDULE 14A - INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Heritage Financial Corporation
- --------------------------------------------------------------------------------
(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)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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HERITAGE FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 15, 1998
NOTICE IS HEREBY GIVEN that, pursuant to call of its directors, the Annual
Meeting of Shareholders of Heritage Financial Corporation ("Heritage") will be
held at The Worthington Center, 5300 Pacific Avenue S.E., Lacey, Washington,
on October 15, 1998 at 11:00 a.m., to consider and to vote upon the following
matters:
1. ELECTION OF DIRECTORS. Election of three (3) persons to serve on the
Board of Directors until the Annual Meeting of Shareholders in 2001.
2. APPROVAL OF 1998 STOCK OPTION AND RESTRICTED STOCK AWARD PLAN.
Approval of Heritage's 1998 Stock Option and Restricted Stock Award Plan, a
copy of which is included as Exhibit A to the attached Proxy Statement.
3. WHATEVER OTHER BUSINESS as may properly be brought before the Annual
Meeting or any adjournment thereof.
Only those shareholders of record at the close of business on August 31,
1998 are entitled to notice of and to vote at the Annual Meeting or any
adjournment thereof.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Wendy K. Gauksheim
Wendy K. Gauksheim
Secretary
Olympia, Washington
September 14, 1998
WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON. IF YOU DO
ATTEND THE ANNUAL MEETING, YOU THEN MAY WITHDRAW YOUR PROXY AND VOTE IN
PERSON. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE.
<PAGE>
HERITAGE FINANCIAL CORPORATION
201 5TH AVENUE S.W.
OLYMPIA, WASHINGTON 98501
PROXY STATEMENT
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This Proxy Statement and the accompanying Proxy are being first sent to
shareholders on or about September 14, 1998, in connection with the Annual
Meeting of Shareholders of Heritage Financial Corporation ("Heritage") to be
held on Thursday, October 15, 1998, at 11:00 a.m. at The Worthington Center,
5300 Pacific Avenue S.E., Lacey, Washington (the "Annual Meeting"). Only
holders of record of Heritage's common stock, no par value, at the close of
business on August 31, 1998 (the "Record Date") are entitled to notice of and
to vote at the Annual Meeting. The number of shares of common stock
outstanding and entitled to vote at the Annual Meeting is 9,863,708.
The enclosed Proxy is solicited by the Board of Directors of Heritage. The
costs of solicitation will be borne by Heritage. In addition to the use of the
mails, solicitation may be made by telephone, facsimile and personal contact,
by directors and officers of Heritage and regular employees of Heritage or its
banking subsidiaries, Heritage Savings Bank ("Heritage Bank") and North
Pacific Bank ("North Pacific"). Such persons will receive no compensation for
their solicitation of Proxies other than their regular compensation for the
positions they hold. Heritage does not intend to pay any compensation to any
other persons for the solicitation of proxies, although it will reimburse
brokers, nominees and similar non-beneficial record holders for reasonable
expenses to mail proxy materials to beneficial owners.
Under Washington law, a quorum must be present, in person or represented by
proxy, at the Annual Meeting for matters properly to come before the meeting
and to be voted upon. Holders of a majority of the outstanding shares of
Heritage common stock as of the Record Date will constitute a quorum at the
Annual Meeting.
On each matter that properly comes before the Annual Meeting, shareholders
are entitled to cast one vote for each share of common stock held, including
one vote for each director to be elected. Shareholders are not entitled to
cumulate their votes in the election of directors. The three (3) nominees for
election as directors who receive the greatest number of votes will be elected
directors. Votes may be cast in favor of some or all of the nominees for
election to the Board of Directors or withheld as to some or all of the
nominees; votes withheld will have the same effect as a negative vote.
Approval of the 1998 Stock Option and Restricted Stock Award Plan requires the
affirmative vote of holders of a majority of the shares of Heritage common
stock present in person or by Proxy and entitled to vote at the Annual
Meeting.
Abstentions may be specified on all proposals other than the election of
directors. An abstention from voting will have the practical effect of voting
against a proposal, since the shares represented by the abstention will be
considered present and entitled to vote but will not be voted in favor of the
proposal.
If shares are held in "street name" through a broker or other nominee (that
is, the broker or nominee is the record holder but not the beneficial owner),
and if the broker or nominee is not given specific voting instructions, the
broker or nominee is permitted to exercise voting discretion regarding the
matters to be acted upon at the Annual Meeting.
If the enclosed Proxy is duly executed by a record holder and received in
time for the Annual Meeting, it is the intention of the persons named in the
Proxy to represent the holder to vote such holder's shares "FOR" the nominees
for director listed in this Proxy Statement and "FOR" approval of the 1998
Stock Option and Restricted Stock Award Plan, unless otherwise instructed. Any
Proxy given by a shareholder may be revoked before its exercise by notice to
Heritage in writing, or by a subsequently dated Proxy, or by the shareholder's
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presence and vote at the Annual Meeting. Shares represented by properly
executed Proxies not revoked will be voted in accordance with the instructions
indicated in such Proxies, or, if no instructions are given, in accordance
with the recommendation of management described above.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of August 31, 1998 with
respect to beneficial ownership of Heritage's common stock by (a) each
director and director nominee; (b) each person who served as chief executive
officer of Heritage during the 1998 fiscal year and each of Heritage's three
other most highly compensated executive officers whose aggregate cash and cash
equivalent forms of compensation exceeded $100,000 during the 1998 fiscal year
(collectively, "Named Executives"); and (c) all directors and executive
officers of Heritage as a group. Except as noted, Heritage believes that the
beneficial owners of the shares listed below, based on information furnished
by such owners, have sole voting and investment power with respect to such
shares. The percentages shown are based on the number of shares of Heritage
common stock outstanding on August 31, 1998, plus, as to each such person and
all officers and directors as a group, all rights to acquire shares within 60
days thereafter, including all stock options exercisable within such 60-day
period. As of August 31, 1998, there were no shareholders known by Heritage to
be the beneficial owners of more than 5% of Heritage's outstanding shares of
common stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AT AUGUST 31, 1998
--------------------------------
PERCENT OF OUTSTANDING
NAME NUMBER COMMON STOCK
- ---- --------- ----------------------
<S> <C> <C>
Lynn M. Brunton (1)........................... 109,823 1.1%
John A. Clees (2)............................. 85,024 *
James Hastings (3)............................ 43,176 *
Daryl D. Jensen (4)........................... 115,270 1.2%
H. Edward Odegard (5)......................... 99,823 1.0%
John D. Parry (6)............................. 64,610 *
Donald V. Rhodes (7).......................... 243,812 2.5%
James P. Senna (8)............................ 71,577 *
Brian L. Vance (9)............................ 58,494 *
Peter K. Wallerich............................ -0- -0-
Philip S. Weigand (10)........................ 112,852 1.1%
Directors and executive officers as a group
(12 persons) (11)............................ 1,041,189 10.4%
</TABLE>
- --------
* Represents less than 1.0% of Heritage's outstanding common stock.
(1) Includes 12,585 shares issuable upon exercise of options, 10,298 of which
are exercisable at $1.94 per share, and 2,287 of which are exercisable at
$3.58 per share.
(2) Includes 12,585 shares issuable upon exercise of options, 10,298 of which
are exercisable at $1.94 per share, and 2,287 of which are exercisable at
$3.58 per share.
(3) Includes 28,320 shares issuable upon exercise of options, 25,746 of which
are exercisable at $1.94 per share, and 2,574 of which are exercisable at
$3.58 per share.
(4) Includes 6,585 shares issuable upon exercise of options, 4,298 of which
are exercisable at $1.94 per share, and 2,287 of which are exercisable at
$3.58 per share.
(5) Includes 12,585 shares issuable upon exercise of options, 10,298 of which
are exercisable at $1.94 per share, and 2,287 of which are exercisable at
$3.58 per share.
(6) Includes (a) 25,728 shares issuable upon exercise of options, 17,146 of
which are exercisable $2.33 per share, and 8,582 of which are exercisable
at $3.58 per share; and (b) 150 shares owned by a corporation controlled
by Mr. Parry's spouse, of which 150 shares Mr. Parry disclaims beneficial
ownership.
(7) Includes 1,441 shares owned as joint tenant with his son, for which Mr.
Rhodes disclaims beneficial ownership.
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(8) Includes 2,287 shares issuable upon exercise of options at $3.58 per
share.
(9) Includes 25,746 shares issuable upon exercise of options, 17,164 of which
are exercisable at $3.11 per share, and 8,582 of which are exercisable at
$3.58 per share.
(10) Includes 10,268 shares issuable upon exercise of options, 7,981 of which
are exercisable at $1.94 per share, and 2,287 of which are exercisable at
$3.58 per share.
(11) Includes 139,263 shares issuable upon exercise of options.
EXECUTIVE OFFICERS
The following table sets forth certain information about the executive
officers of Heritage. See also, "PROPOSAL 1: ELECTION OF DIRECTORS" for
background information concerning Mr. Rhodes.
<TABLE>
<CAPTION>
HAS SERVED AS AN
EXECUTIVE OFFICER
NAME AGE POSITION OF HERITAGE SINCE
---- --- -------- -----------------
<C> <C> <S> <C>
Donald V. Rhodes........ 62 Chairman, President and Chief 1998
Executive Officer
James Hastings (1)...... 46 Vice President and Treasurer 1998
John D. Parry (2)....... 52 Executive Vice President-- 1998
Administration, Heritage Bank
Brian L. Vance (3)...... 44 Executive Vice President-- 1998
Loan Administration, Heritage
Bank
Wendy K. Gauksheim (4).. 38 Vice President and Secretary 1998
</TABLE>
- --------
(1) Mr. Hastings has been employed by Heritage Bank since 1985, and currently
serves as the Senior Vice President and Treasurer of Heritage Bank. Mr.
Hastings is a Certified Public Accountant with over 20 years of banking
and thrift experience either in public accounting or with financial
institutions.
(2) Mr. Parry has been employed by Heritage Bank since 1994. Prior to joining
Heritage Bank, Mr. Parry was the Senior Vice President in charge of
Washington banking operations of the Washington Division of Great American
First Savings Bank, a California headquartered thrift institution.
(3) Mr. Vance has been employed by Heritage Bank since 1996. Prior to joining
Heritage Bank, Mr. Vance was employed for over 20 years with West One
Bank, an Idaho headquartered commercial bank, in both Idaho and
Washington. Prior to leaving West One, he was the Senior Vice President
and Regional Manager of banking operations for the South Puget Sound
Region. On August 17, 1998, the Board of Directors of Heritage Bank
approved the appointment of Mr. Vance as President and Chief Operating
Officer of Heritage Bank, to be effective as of October 1, 1998.
(4) Ms. Gauksheim has been employed by Heritage Bank since 1987, and currently
serves as Senior Vice President--Corporate Services Officer of Heritage
Bank.
All officers are appointed by the Board of Directors and serve at the
pleasure of the Board for an unspecified term.
PROPOSAL 1: ELECTION OF DIRECTORS
Heritage's Articles of Incorporation provide that the number of directors to
be elected by the shareholders shall be not less than five (5) nor more than
twenty-five (25) and that, within such minimum and maximum, the exact number
of directors shall be fixed by resolution of the Board of Directors. The Board
of Directors has fixed the number of directors at eight (8).
Directors are divided into three classes, each class serving for a period of
three years. Approximately one-third of the members of the Board of Directors
are elected by the shareholders annually. The directors whose terms will
expire at the 1998 Annual Meeting are John A. Clees, James P. Senna, and Peter
K. Wallerich, all of whom have been nominated by the Board of Directors for
re-election at the 1998 Annual Meeting. If elected,
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such directors will hold office until the Annual Meeting of Shareholders in
the year 2001 and until their successors are elected and qualified.
Each nominee has indicated that he is able and willing to serve on the Board
of Directors. If any nominee hereafter should become unable or unwilling to
serve, the Proxy will be voted for such person as is designated by the Board
of Directors to replace such nominee. The Board of Directors presently has no
knowledge that any of the nominees will be unable or unwilling to serve.
Information regarding the nominees for election as directors at the Annual
Meeting, whose terms will expire in 2001, and regarding all other incumbent
directors, is provided below, including their respective names, ages,
principal occupations during the past five years, and years first elected a
director of Heritage or Heritage Bank. The address for all of the nominees and
other incumbent directors is 201 5th Avenue S.W., Olympia, Washington 98501.
All of the nominees are presently directors of Heritage and, with the
exception of Mr. Wallerich, of Heritage Bank and North Pacific.
NOMINEES FOR ELECTION TO TERMS EXPIRING IN 2001
JOHN A. CLEES Director since 1990
Mr. Clees, 50, has been the President of Clees Miles CPA Group, Olympia,
Washington, since October 1995. Prior to that time he was an officer of
Gattis, Clees and Company, an accounting firm with offices in Seattle and
Olympia, Washington.
JAMES P. SENNA Director since 1976
Mr. Senna, 63, has been the President and Chief Executive Officer of Shee
Atika, Incorporated (an Alaska Native Corporation), Sitka, Alaska, since 1987.
PETER K. WALLERICH Director since June 1998
Mr. Wallerich, 67, is presently a private investor. Mr. Wallerich was the
Chairman, President and Chief Executive Officer of North Pacific
Bancorporation, the parent company of North Pacific Bank, located in Tacoma,
Washington, from 1970 until June 1998, when that company was acquired by
Heritage.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THESE NOMINEES.
INCUMBENT DIRECTORS WHOSE TERMS EXPIRE IN 1999
DONALD V. RHODES Director since 1989
Mr. Rhodes, 62, has served as President and Chief Executive Officer of
Heritage Bank since 1989. He was elected Chairman of the Board in 1990. Mr.
Rhodes is also the Chairman, President and Chief Executive Officer of Heritage
and the Chairman and Chief Executive Officer of North Pacific. Since 1985, Mr.
Rhodes also has served as Chairman, President and Chief Executive Officer of
Washington Independent Bancshares, Inc. and as Chairman and Chief Executive
Officer of that company's wholly owned subsidiary, Central Valley Bank, N.A.,
a commercial bank headquartered in Toppenish, Washington, which, at June 30,
1998, had approximately $55 million in assets.
DARYL D. JENSEN Director since 1985
Mr. Jensen, 59, has been the President and a director of Sunset Life
Insurance Company of America since 1973. Mr. Jensen also has served as a
director of that company's parent company, Kansas City Life Insurance Company,
since 1978.
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H. EDWARD ODEGARD Director since 1987
Mr. Odegard, 67, has been a private investor since 1993. Prior to that time,
he was the co-owner and manager of The Valley Athletic Club, Tumwater,
Washington.
INCUMBENT DIRECTORS WHOSE TERMS EXPIRE IN 2000
LYNN M. BRUNTON Director since 1990
Ms. Brunton, 60, is presently a community volunteer. As a community
volunteer, she serves as a member of the St. Peter Hospital Community Board
and is actively involved in several local and community organizations.
PHILIP S. WEIGAND Director since 1985
Mr. Weigand, 60, is a retired Lieutenant Colonel of the U.S. Marine Corps.,
with 20 years of active service. Since 1988, Mr. Weigand has been a real
estate agent with Virgil Adams Real Estate, located in Olympia, Washington.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors of Heritage has established certain standing
committees, including an Audit and Finance Committee and a Personnel and
Compensation Committee. There presently is no standing nominating committee.
Audit and Finance Committee. The main functions performed by the Audit and
Finance Committee include reviewing and approving the services of the
independent auditors, reviewing the plan, scope, and audit results of the
internal auditors and the independent auditors, and reviewing the reports of
bank regulatory authorities. The Audit and Finance Committee also is
responsible for reviewing the annual and other reports to the Securities and
Exchange Commission and the annual report to Heritage shareholders. Current
members of the Committee, none of whom are officers or employees of Heritage
or Heritage Bank, are Messrs. Clees (Chairman), Weigand and Odegard and Ms.
Brunton. There were four (4) meetings of the Audit and Finance Committee
during the fiscal year ended June 30, 1998.
Personnel and Compensation Committee. The Personnel and Compensation
Committee reviews and recommends remuneration arrangements for senior
management. Current members of the Personnel and Compensation Committee, none
of whom are officers or employees of Heritage or Heritage Bank, are Messrs.
Jensen (Chairman) and Clees and Ms. Brunton. There was one (1) meeting of the
Personnel and Compensation Committee during the fiscal year ended June 30,
1998.
Board of Directors Meetings. There were sixteen (16) meetings of the Board
of Directors of Heritage during the 1998 fiscal year. All directors attended
at least 75% of the total meetings of the Board and all committees of which
they were members during the 1998 fiscal year.
Director Compensation. During the fiscal year ended June 30, 1998,
Heritage's non-officer directors received an annual retainer of $6,000 and a
monthly fee of $500 for each Board meeting attended. Non-officer directors
also received $100 for each committee meeting attended, with the Chairman of
the committee receiving $150 per meeting attended. Directors who are officers
or employees of Heritage or its subsidiaries receive no additional
compensation for service as directors or members of Board committees.
In January 1994 and pursuant to Heritage's 1994 Stock Option Plan, directors
Brunton, Clees, Jensen, Odegard, Senna and Weigand each were granted a
nonqualified stock option to purchase 10,298 shares of Heritage common stock
at an exercise price of $1.94 per share (as adjusted for the mutual holding
company conversion). In January 1997 and pursuant to Heritage's 1997 Stock
Option Plan, directors Brunton, Clees,
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Jensen, Odegard, Senna and Weigand each were granted a nonqualified stock
option to purchase 6,863 shares of Heritage common stock at an exercise price
of $3.58 per share (as adjusted for the mutual holding company conversion).
All director options vest and become exercisable in annual one-third
increments beginning one year after the date of grant. The options are
exercisable for a period of five years after they vest.
Shareholder Nominees for Election to Board of Directors at 1998 Annual
Meeting. In accordance with Heritage's Articles of Incorporation, any
shareholder nominations of candidates for election to the Board of Directors
at the 1998 Annual Meeting of Shareholders must be made in writing not less
than 14 nor more than 50 days prior to the Annual Meeting and must be
delivered or mailed to the Chairman of Heritage, provided, however, that if
less than 21 days' notice of the Annual Meeting is given to shareholders,
shareholder nominations must be mailed or delivered to the Chairman not later
than the close of business on the seventh day following the day on which
notice of the Annual Meeting was mailed. Shareholder nominations should
contain the following information to the extent known to the nominating
shareholder: (a) the name and address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the total number of shares
of stock of Heritage that will be voted for each proposed nominee; (d) the
name and address of the nominating shareholder; and (e) the number of shares
of stock of Heritage owned by the nominating shareholder. Nominations not made
in accordance with the foregoing requirements may be disregarded by the
Chairman of the Annual Meeting, in his discretion; upon the Chairman's
instruction, if the foregoing requirements are not satisfied, the vote teller
may disregard all votes cast for such a nominee.
EXECUTIVE COMPENSATION
REPORT OF THE PERSONNEL AND COMPENSATION COMMITTEE
REGARDING EXECUTIVE COMPENSATION
This report of Heritage's Personnel and Compensation Committee (the
"Committee") describes in general terms the process the Committee undertakes
and the factors it considers in determining the appropriate compensation for
Heritage's executive officers, including the executive officers who are named
in the Summary Compensation Table which follows (the "Named Executives").
GENERAL
The Committee is responsible for establishing and monitoring compensation
programs for executive officers of Heritage and its subsidiaries. The
Committee reviews and approves individual executive officer salaries, bonus
plan allocations, and stock option grants and other equity-based awards. The
Committee is responsible for establishing the compensation and evaluating the
performance of the Chief Executive Officer, while the Chief Executive Officer
evaluates the performance of the other executive officers and recommends
individual compensation levels for approval by the Committee. None of the
members of the Committee are officers or employees of Heritage, Heritage Bank
or North Pacific.
COMPENSATION PHILOSOPHY
The Committee's compensation philosophy is intended to reflect and support
the goals and strategies that Heritage has established. Currently, Heritage's
growth strategy is to broaden its products and services from traditional
thrift products and services to those more closely related to commercial
banking. The key elements of this strategy are geographic and product
expansion, loan portfolio diversification, development of relationship banking
and maintenance of asset quality. The Committee believes these goals, which
are intended to create long-term shareholder value, must be supported by a
compensation program that:
. attracts and retains highly qualified executives;
. provides levels of compensation that are competitive with those offered
by other financial institutions;
. motivates executives to enhance long-term shareholder value by helping
them to build their own ownership in Heritage; and
. integrates Heritage's long-term strategic planning and measurement
processes.
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COMPENSATION PROGRAMS AND PRACTICES
Heritage's compensation program includes competitive salary and benefits,
opportunities for employee ownership of Heritage stock through participation
in an employee stock ownership plan and, for certain employees, an annual
incentive cash bonus based upon attainment of company and individual
performance goals and opportunities for stock ownership of Heritage stock
through stock option and restricted stock programs.
In determining compensation packages for individual executives, the
Committee considers various subjective and objective factors, including (1)
individual job responsibilities and experience; (2) individual performance in
terms of both qualitative and quantitative goals; (3) Heritage's overall
performance, as measured by attainment of strategic and budgeted financial
goals and prior performance; and (4) industry surveys, prepared by an
independent consulting firm, of compensation for comparable positions with
similar institutions in the State of Washington, the Pacific Northwest and the
United States.
It is not anticipated that the limitations on deductibility, under Internal
Revenue Code (S) 162(m), of compensation to any one executive that exceeds
$1,000,000 in a single year will apply to Heritage or its subsidiaries in the
foreseeable future. In the event that such limitation would apply, the
Committee will analyze the circumstances presented and act in a manner that,
in its judgment, is in the best interests of Heritage. This may or may not
involve actions to preserve deductibility.
Components of Heritage's compensation program are the following:
Base Salary. Salary levels of executive officers are designed to be
competitive within the banking industry. In setting competitive salary ranges,
the Committee periodically evaluates current salary levels of other financial
institutions with size, lines of business, geographic dispersion and market
place position similar to Heritage's.
Base salaries for Heritage's executive officers other than the Chief
Executive Officer are based upon recommendations by him, taking into account
the subjective and objective factors described above. The Committee reviews
and approves or disapproves such recommendations.
Annual Incentive Bonus. Executive officers have an annual incentive
opportunity with cash awards (bonuses) based on the overall performance of
Heritage and on attainment of individual performance targets. The annual
awards are determined by formulas established by the Committee following each
fiscal year and is based upon an assessment of Heritage's performance (for
fiscal 1998, primarily with respect to the Company's return on average assets)
as compared to both budgeted and previous fiscal year performance and upon an
evaluation by the Chief Executive Officer of an executive's individual
performance and contribution to Heritage's overall performance. The Committee
then reviews and approves the bonus recommendations and presents them to the
Board of Directors for approval.
Stock Option and Other Stock-Based Compensation. Equity-based compensation
is intended to more closely align the financial interests of Heritage's
executives with long-term shareholder value, and to assist in the retention of
executives who are key to the success of Heritage and its subsidiaries.
Equity-based compensation generally has been in the form of incentive stock
options and restricted stock awards pursuant to Heritage's existing stock
option plans. The Committee determines from time to time which executives, if
any, will receive stock options or awards and determines the number of shares
subject to each option or award. Grants of stock options and awards are based
on various subjective factors relating primarily to the responsibilities of
individual executives, their expected future contributions to Heritage and
prior option grants.
CHIEF EXECUTIVE OFFICER COMPENSATION
The base compensation for Heritage's President and Chief Executive Officer,
Donald V. Rhodes, was determined by the Committee with final approval by the
Board based on the same criteria as the compensation for the other executive
officers. From July 1, 1997, until September 30, 1997, Mr. Rhodes' annual base
salary was $150,000. In October 1997, in connection with the conversion of
Heritage from a mutual to stock organization, Heritage entered into an
employment agreement with Mr. Rhodes providing for an annual base salary of
$174,000, which may be increased at the discretion of the Board of Directors
or the Committee. In addition, for the fiscal year ended June 30, 1998, Mr.
Rhodes received an annual incentive bonus payment of
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$45,000. The Chief Executive Officer's bonus potential is based on achievement
of certain targeted results of the Company (for fiscal 1998, with respect to
the Company's return on average assets) and is determined by the Committee
with final approval by the Board.
CONCLUSION
The Committee believes that for the 1998 fiscal year, the compensation for
Mr. Rhodes, as well as for the other executive officers, were consistent with
Heritage's overall compensation philosophy and clearly related to the
realization of Heritage's goals and strategies for the year. The Committee
also notes that return to shareholders, as evidenced by the Stock Performance
Graph measurement of Heritage's performance against its industry group, is
further evidence of what the Committee considers to have been highly
satisfactory performance by the Named Executives and other executive officers
during the 1998 fiscal year.
Respectfully submitted by: Daryl D. Jensen, Chairman of the Committee
John A. Clees, Member
Lynn M. Brunton, Member
STOCK PERFORMANCE GRAPH
The chart shown below depicts total return to shareholders during the period
beginning January 8, 1998, when Heritage first issued its shares publicly, and
ending June 30, 1998. Total return includes appreciation in market value of
Heritage common stock as well as actual cash and stock dividends paid to
shareholders. Indices shown below, for comparison purposes only, are the S&P
500(TM) stock index, which is a broad nationally recognized index of stock
performance by publicly traded companies, and the SNL Securities thrift index,
which is comprised of publicly-traded thrift institutions with assets of $250
million to $500 million located throughout the United States. The chart
assumes that the value of the investment in Heritage's common stock and each
of the two indices was $100 on January 8, 1998, and that all dividends were
reinvested.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG HERITAGE FINANCIAL CORP., S&P 500 AND SNL $250M - $500M THIRFT INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION> HERITAGE
Measurement Period FINANCIAL S&P SNL $250M - $500M
(Fiscal Year Covered) CORP. 500 INDEX THRIFT INDEX
- ---------------------- ---------- --------- -----------------
<S> <C> <C> <C>
Measurement Pt- 1/09/1998 $100 $100 $100
FYE 01/31/1998 $101.89 $105.72 $101.59
FYE 02/28/1998 $111.32 $113.35 $106.70
FYE 03/31/1998 $115.09 $119.15 $110.13
FYE 04/30/1998 $118.20 $120.35 $112.00
FYE 05/31/1998 $115.36 $118.28 $108.46
FYE 06/30/1998 $111.58 $123.09 $105.18
</TABLE>
8
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate compensation for services
rendered to Heritage or its subsidiaries in all capacities paid or accrued for
the fiscal years ended June 30, 1996, June 30, 1997 and June 30, 1998, to
Heritage's Chief Executive Officer and each of the three other most highly
compensated executive officers whose aggregate cash and cash equivalent forms
of compensation exceeded $100,000 during the 1998 fiscal year (the "Named
Executives").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------- ------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS AWARDS($)(1) OPTIONS (#) COMPENSATION(2)
- ------------------ ------ -------- ------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Donald V. Rhodes........ 1998 $168,000 $45,000 -0- -0- $20,758
Chairman, President and 1997 148,906 19,470 -0- 10,000 16,350
Chief Executive Officer 1996 135,385 64,350 -0- -0- 15,026
James Hastings.......... 1998 90,600 16,965 -0- -0- 10,850
Vice President and
Treasurer 1997 87,984 11,680 -0- 1,500 10,184
1996 87,684 27,070 -0- -0- 7,883
John D. Parry........... 1998 99,450 20,930 -0- -0- 14,906
Executive Vice
President-- 1997 95,621 3,644 -0- 5,000 13,686
Administration,
Heritage Bank 1996 90,406 28,803 -0- -0- 11,634
Brian L. Vance ......... 1998 99,450 24,786 -0- -0- 14,022
Executive Vice
President-- 1997 91,004 14,994 -0- 5,000 -0-
Loan Administration,
Heritage Bank 1996 -0- -0- -0- 5,000 -0-
</TABLE>
- --------
(1) In 1995, Mr. Rhodes was granted, for no cash consideration, a restricted
stock award of 5,000 shares with a fair market value at the date of grant
of $50,000. At June 30, 1998, the value of the aggregate restricted stock
holdings outstanding was estimated at $380,000. Dividends are paid on
outstanding shares of restricted stock.
(2) Amounts in fiscal 1998 represent, for Messrs. Rhodes, Hastings, Parry and
Vance: (i) matching contributions under Heritage's 401(k) plan in the
amount of $4,800, $1,200, $3,528 and $3,434, respectively; (ii)
contributions under Heritage's defined contribution retirement plan in the
amount of $9,600, $6,198, $7,056, and $6,869, respectively; (iii)
contributions under Heritage's ESOP of approximately $4,462, $2,881,
$3,280, and $3,192, respectively; and (iv) life insurance premiums paid by
Heritage for the benefit of each executive in the amount of $1,896, $571,
$1,041 and $526, respectively.
OPTION GRANTS IN FISCAL YEAR 1998
There were no grants of stock options to the Named Executives in the fiscal
year ended June 30, 1998.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table summarizes option exercises during the 1998 fiscal year
by each of the Named Executives and the 1998 fiscal year-end value of
unexercised options granted to the Named Executives:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
SHARES UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT JUNE 30, 1998 JUNE 30, 1998(1)
NAME EXERCISE REALIZED (EXERCISABLE/UNEXERCISEABLE) (EXERCISABLE/UNEXERCISABLE)
- ---- ----------- -------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Donald V. Rhodes........ -0- -0- 68,656 / 34,328 $851,334 / 383,444
John D. Parry........... 8,600 $106,812 25,728 / 17,164 $308,814 / 191,722
Brian L. Vance.......... -0- -0- 25,746 / 25,746 $295,650 / 291,616
James Hastings.......... -0- -0- 28,320 / 5,149 $358,558 / 57,514
</TABLE>
- --------
(1) Values are calculated by subtracting the exercise price from the fair
market value of the underlying stock. For purposes of this table, fair
market value is deemed to be $14.75, the last sale price of Heritage's
common stock on the Nasdaq National Market on June 30, 1998.
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<PAGE>
OTHER EMPLOYEE BENEFITS
Heritage maintains a defined contribution retirement plan. The plan allows
participation of all employees, including executive officers, upon completion
of one year of service and attainment of 21 years of age. It is Heritage's
policy to fund plan costs as accrued. Employee vesting occurs over a period of
seven years, at the end of which period they become fully vested. Heritage
accrued a contribution in the amount of $240,000 to the pension plan in fiscal
1998.
Heritage maintains a salary savings 401(k) plan for its employees, including
executive officers. All persons employed as of July 1, 1994 automatically
participate in the plan. All employees hired after that date who are at least
21 years of age and have one year of service may participate in the plan.
Employees who participate may contribute a portion of their salary, which is
matched 50% by the employer, up to certain specified limits. Employee vesting
in employer matching contributions is similar to the retirement plan vesting
described above.
Heritage sponsors an Employee Stock Ownership Plan ("ESOP") which is
intended to satisfy the requirements for an employee stock ownership plan
under the Internal Revenue Code of 1986, as amended ("Code"), and the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Full-time
employees who have been credited with at least 1,000 hours of service during a
12-month period and who have attained age 21 are eligible to participate in
the ESOP. The ESOP owned 259,461 shares of Heritage common stock at June 30,
1998, of which 130,884 were allocated to participants' accounts and 128,577
were held in a suspense account. Shares held in the suspense account are
released to participant accounts on a pro rata basis as Heritage's loan to the
ESOP is repaid. Heritage's contribution to the ESOP is not fixed so benefits
payable under the ESOP cannot be estimated.
EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENTS
Heritage and Heritage Bank have entered into an employment agreement with
Mr. Donald V. Rhodes, effective as of October 1, 1997. The agreement with Mr.
Rhodes provides for his service as President and Chief Executive Officer of
Heritage and Heritage Bank at an annual base salary of $174,000, which may be
increased at the discretion of the Board of Directors or by an authorized
committee thereof. In addition to base salary, the agreement provides for Mr.
Rhodes' participation in employee benefit plans and other fringe benefits
applicable to senior executives of Heritage Bank. The term of the agreement
will run until Mr. Rhodes attains age 65 (March 14, 2001), and then will be
automatically renewed for additional terms of one year each unless notice is
given one year prior to the expiration date of any term that renewal will not
be effected. In the event the employment of Mr. Rhodes is terminated by
Heritage at any time for "cause" or by Mr. Rhodes without "good reason", both
as defined in the agreement, no termination benefit will be payable. If Mr.
Rhodes is terminated without cause or he terminates the agreement for good
reason, a severance benefit will be payable in an amount equal to two times
the amount of his then-current annual base salary, or the amount of such
salary which would otherwise have been paid to him during the then remaining
term of the agreement, whichever is greater.
The agreement with Mr. Rhodes also provides for the payment of a severance
benefit to Mr. Rhodes in the event of his termination of employment in certain
cases preceding, and for any reason following by up to two years, a change of
control of Heritage or Heritage Bank. Under the terms of the agreement, Mr.
Rhodes is entitled to receive his then-current base salary for three years
following such termination or until the end of the term of the agreement,
whichever is longer ($522,000 based on Mr. Rhodes' current salary and assuming
a three-year payment). In such circumstances, he also is entitled to all
benefits in his agreement, to be fully vested as to unvested options, and to
have restrictions lapse with regard to any restricted stock or other
restricted securities.
Heritage Bank has entered into severance agreements with Messrs. John Parry,
Executive Vice President-Administration, and Brian Vance, Executive Vice
President-Loan Administration. The term of each of these severance agreements
is five years. The agreements provide that Messrs. Parry and Vance each would
receive a severance benefit in an amount equal to two times the amount of
their then-current annual base salary ($204,000 each based on their current
salaries), if their employment is terminated in certain cases preceding, and
for any
10
<PAGE>
reason following by up to two years, a change of control of Heritage or
Heritage Bank. Heritage Bank also has entered into a severance agreement with
Mr. Hastings that provides Mr. Hastings with a severance equal to his then-
current annual base salary (an aggregate amount of $92,400 based on his
current salary) in the event his employment is terminated for any reason
within up to two years following a change in control of Heritage or Heritage
Bank.
For purposes of the agreements, "change of control" includes, among other
things, the acquisition by any person of 25% or more of the outstanding
securities of Heritage replacement of incumbent directors or election of newly
elected directors constituting a majority of the Board of Heritage where such
replacement or election has not been supported by the Board; dissolution, or
sale of 50% or more in value of the assets, of either Heritage or Heritage
Bank or any of their respective subsidiaries; or the merger of Heritage into
any corporation, 25% or more of the outstanding common stock of which is owned
by other than owners of the common stock of Heritage prior to such merger.
The employment agreement with Mr. Rhodes and the severance agreements with
Messrs. Parry and Vance provide that in the event any of those executives
receive an amount under the provisions of the agreements that results in
imposition of a tax on the executive under the provisions of the Code Section
4999 (relating to Golden Parachute payments), the employer is obligated to
reimburse the executive for that amount, exclusive of any tax imposed by
reason of receipt of reimbursement under the employment agreements.
The agreements also restrict the right of Messrs. Rhodes, Parry and Vance to
compete against Heritage or Heritage Bank in the State of Washington for a
period of two years in the case of Mr. Rhodes and one year in the case of
Messrs. Parry and Vance following termination of employment, except in the
case of Mr. Rhodes if employment is terminated without cause or good reason.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Heritage is a reporting company pursuant to Section 12 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Pursuant to Section 16(a) of the
Exchange Act, and the rules promulgated thereunder, directors, officers,
greater than ten percent shareholders, and certain other key personnel are
required to report their ownership and any changes in ownership of Heritage
securities to the Securities and Exchange Commission (the "SEC"). Except as
described below, Heritage believes that all Section 16(a) filing requirements
applicable to its directors, officers and greater than ten percent
shareholders were complied with. In making these disclosures, Heritage has
relied solely upon written representations of its directors and executive
officers and copies of the reports they have filed with the SEC. During fiscal
year 1998, the initial Form 3 reports for each of Heritage's executive
officers and directors, with the exception of Mr. Wallerich, were filed 7 days
late. In addition, a Form 4 reporting a single transaction by Mr. Vance was
filed 14 days late.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
In addition to his position as Chairman, President and Chief Executive
Officer of Heritage and Heritage Bank, Mr. Donald V. Rhodes is the Chairman of
the Board and Chief Executive Officer of Washington Independent Bancshares,
Inc. ("WIB"), a closely held bank holding company, and its subsidiary, Central
Valley Bank, N.A. ("CVB"), which is headquartered in Toppenish, Washington.
Mr. Daryl D. Jensen, a director of Heritage and Heritage Bank, is also a
director of WIB and CVB. WIB had total assets of approximately $55 million at
June 30, 1998. CVB serves a market area in central Washington approximately
150 miles east of Olympia. Mr. Rhodes beneficially owns 7.82% of WIB's common
stock and Mr. Jensen beneficially owns 3.87% of such common stock.
During fiscal year 1998, certain directors and executive officers of
Heritage, Heritage Bank and North Pacific, and their associates, were
customers of Heritage Bank and/or North Pacific, and it is anticipated that
11
<PAGE>
such individuals will continue to be customers of Heritage Bank and/or North
Pacific in the future. All transactions between Heritage Bank, North Pacific
Bank, and their executive officers and directors, and their associates, were
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and, in the opinion of management,
did not involve more than the normal risk of collectability or present other
unfavorable features.
PROPOSAL 2: APPROVAL OF 1998 STOCK OPTION AND
RESTRICTED STOCK AWARD PLAN
BACKGROUND
In September 1994, Heritage Bank's shareholders approved the adoption of the
1994 Stock Option Plan ("1994 Plan"), providing for the award of restricted
stock to a key officer, incentive stock options to employees and nonqualified
stock options to directors of Heritage Bank, all at the discretion of the
Board of Directors. In September 1996, the shareholders of Heritage Bank
approved the adoption of the 1997 Stock Option Plan ("1997 Plan"), which
generally is similar to the 1994 Plan. The 1997 Plan does not affect options
granted under the 1994 Plan.
Under both of these stock option plans, the exercise price for option shares
is determined by the administrator of the plan, currently Heritage's Personnel
and Compensation Committee, provided that the exercise price for any incentive
stock options granted under the plans must be at least equal to the market
value per share of Heritage common stock on the date of grant. The 1994 Plan
provides for the grant of options and stock awards of up to 344,996 shares (as
adjusted for the recent mutual holding company conversion). The 1997 Plan
provides for the grant of options and stock awards for up to 257,460 shares
(as adjusted for the conversion). All shares reserved under the 1994 Plan are
subject to grants and awards already made; and all options are fully vested,
with the exception of options to purchase 12,013 shares granted to four
employees in 1996, which options will become fully vested by June 30, 1999. A
total of 25,746 shares under the 1994 Plan and 3,000 shares under the 1997
Plan were issued as restricted stock awards subject to lapse provisions that
end in 1999 and 2003, respectively. A total of 3,028 shares remains available
for grant under the 1997 Plan. All stock option awards made under the 1997
Plan require vesting over a three-year period beginning January 31, 1997.
Under both plans, options must be exercised within five years of vesting.
THE 1998 PLAN
Subject to shareholder approval, the Board of Directors has terminated the
1994 and 1997 Plans as to future grants and has adopted a 1998 Stock Option
and Restricted Stock Award Plan ("1998 Plan"). The Board of Directors
recommends that shareholders approve the 1998 Plan. The Board believes that
the 1998 Plan will benefit Heritage and its existing and any future
subsidiaries by providing employees and directors of, and persons offered
employment by, Heritage and its subsidiaries with a proprietary interest in
Heritage as an incentive to contribute to the success of Heritage, and to
reward employees for outstanding performance and attainment of targeted
objectives. The purpose of the 1998 Plan is to promote Heritage's success by
aligning employee and director financial interests with long-term shareholder
value. A copy of the 1998 Plan is attached to this Proxy Statement as EXHIBIT
A.
DESCRIPTION OF 1998 PLAN
The following is a summary of the principal provisions of the 1998 Plan and
is subject to and qualified in its entirety by the express terms of the 1998
Plan, which is incorporated herein by reference.
Purpose. The purpose of the 1998 Plan is to (i) enhance the long-term
profitability and shareholder value of Heritage by offering stock-based
incentives and rewards to employees and directors of, and individuals to whom
an offer of employment has been made by, Heritage or its subsidiaries; (ii)
attract and retain the best
12
<PAGE>
available personnel for positions of responsibility with Heritage and its
subsidiaries; and (iii) encourage employees and directors to acquire and
maintain stock ownership in Heritage.
Administration. The 1998 Plan presently is administered by Heritage's
Personnel and Compensation Committee (the "Committee"). The Committee has been
authorized by the Board of Directors to act in this capacity, and all members
of the Committee serve for such terms as the Board of Directors determines and
may be removed by the Board of Directors. In addition to its authority to
grant stock options and make restricted stock awards (collectively "Awards"),
as described below, the Committee is authorized to administer and interpret
the 1998 Plan, subject to its express provisions. To be consistent with recent
changes to the securities laws, the 1998 Plan directs that the Board of
Directors consider appointing individuals to the Committee who qualify as
"non-employee directors" or "outside directors" as defined in the securities
laws and the Internal Revenue Code of 1986, as amended (the "Code").
Shares Subject to 1998 Plan. Under the 1998 Plan, a maximum of 395,000
shares of common stock would be reserved for issuance upon the exercise of
stock options and, as part of a Management Recognition Plan, up to an
additional 66,125 shares of common stock would be reserved for award as
restricted stock. In addition, any shares of common stock that would be
available for reissuance under the 1994 or 1997 Plans due to forfeiture,
termination and cancellation of options and awards thereunder will be added to
the aggregate number of shares available for issuance under the 1998 Plan. To
the extent permitted by applicable law, expired, forfeited, terminated or
canceled Award shares under the 1998 Plan will become available again for
delivery as Awards pursuant to the Plan.
Limitations. Not more than 20% of the aggregate number of shares available
for delivery pursuant to an Award granted under the Plan may be issued to any
participant during any one calendar year. In addition, in the case of
incentive stock options, the aggregate fair market value of all shares
becoming exercisable in any one year shall not exceed $100,000.
Persons Who May Participate. Awards may be granted under the 1998 Plan to
those employees and directors of, and persons offered employment by, Heritage
or its subsidiaries as the Committee from time to time selects, provided that
only employees may be granted incentive stock options. If the 1998 Plan is
approved by shareholders at the Annual Meeting, there will be approximately
200 employees, including executive officers, and seven nonemployee directors
eligible to participate in the 1998 Plan.
Types of Awards. Awards granted under the 1998 Plan may include Incentive
Stock Options ("ISOs") intended to meet all of the requirements of an
"Incentive Stock Option" as defined in Section 422 of the Code, nonqualified
stock options ("NSOs"), and restricted stock awards.
TERMS AND CONDITIONS OF AWARDS
Agreements. Each Award granted under the 1998 Plan must be evidenced by a
written agreement duly executed on behalf of Heritage. Each agreement will
comply with and be subject to the terms and conditions of the 1998 Plan. An
agreement also may contain such other terms, provisions and conditions not
consistent with the 1998 Plan as may be determined by the Committee.
Stock Option Grants. The exercise price for each option granted under the
1998 Plan will be determined by the Committee, but will not be less than 100%
of the fair market value of Heritage's common stock on the date of grant of an
ISO. For purposes of the 1998 Plan, "fair market value" means the closing
transaction price of the common stock on the date of grant as reported on the
Nasdaq National Market. As of September 2, 1998, the closing sales price for
Heritage's common stock as reported on the Nasdaq National Market was $10.50
per share.
The exercise price of an option must be paid in cash or such other
consideration of comparable value deemed acceptable by the Committee,
including already-owned shares of Heritage common stock, other
13
<PAGE>
securities, other options or other property. The Committee may also, in its
discretion, allow for the cashless exercise of an option whereby an optionee
can authorize a third party to sell shares of Heritage common stock acquired
upon exercise of an option and remit to Heritage a sufficient amount of the
sale proceeds to pay the exercise price and any applicable tax withholding.
The term of outstanding options will be fixed by the Committee. No ISO
granted pursuant to the 1998 Plan will be exercisable after 10 years from the
date of grant. Each option will be exercisable pursuant to a vesting schedule
to be determined by the Committee.
The 1998 Plan provides that options generally will be exercisable for up to
one year after termination of service as a result of a death or disability,
and for up to three months after all other terminations except for
terminations for "cause" as defined in the 1998 Plan (in which case an option
will immediately terminate). The 1998 Plan further authorizes the Committee to
establish later expiration dates for options in certain circumstances,
provided that the Committee may not extend an option beyond the original term
of such option.
Restricted Stock Awards. As part of a Management Recognition Plan, the
Committee is authorized to make awards of common stock on such terms and
conditions and subject to such restrictions, if any (whether based on
performance standards, periods of service or otherwise), as the Committee may
determine. Restrictions may include repurchase or forfeiture rights in favor
of Heritage.
Transferability. No Award under the 1998 Plan will be assignable or
otherwise transferable, other than by will or the laws of descent and
distribution, and, during the recipient's lifetime, may be exercised only by
the recipient of the Award.
Amendment and Termination of the 1998 Plan. The 1998 Plan may be modified,
amended or terminated by the Board of Directors, except that shareholder
approval is required for any amendment that(i) increases the number of shares
subject to the 1998 Plan (other than in connection with certain automatic
adjustments such as stock splits) or (ii) requires shareholder approval under
applicable law or regulation.
Adjustment of Shares. In the event of any changes in the outstanding stock
of Heritage by reason of stock dividends, stock splits, or any other increase
or decrease in the number of shares of Heritage's common stock effected
without receipt of consideration by Heritage (except conversion of convertible
securities), the Committee, subject to any required action by the
shareholders, shall make proportional adjustments in (i) the maximum number of
shares subject to the 1998 Plan; (ii) the number of securities subject to any
outstanding Award; and (iii) the per share price of such securities. The
determination by the Committee of the applicable adjustments is final.
Corporate Transactions. In the event of a merger or consolidation or a sale
of substantially all the assets or a liquidation or dissolution of Heritage,
all outstanding options will immediately vest and all restricted stock award
shares will be released from escrow. The Committee may, in certain
circumstances and in its sole discretion, terminate all outstanding Awards
after proper notice affording holders a 60-day period in which to exercise
their options.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences to Heritage and to any person granted an
Award under the 1998 Plan under the existing applicable provisions of the Code
and the regulations thereunder are substantially as follows:
Nonqualified Stock Options. No income will be recognized by a participant
upon the grant of NSO so long as the exercise price is equal to the fair
market value of Heritage common stock on the date of grant. On the exercise of
an NSO, the optionee will recognize taxable ordinary income in an amount equal
to the excess of the fair market value of the shares acquired over the option
price and Heritage will be allowed a deduction in such amount. Upon a later
sale of those shares, the optionee will have short-term or long-term capital
gain or loss, as
14
<PAGE>
the case may be, in an amount equal to the difference between the amount
realized on such sale and the tax basis of the shares sold. If payment of the
option exercise price is made entirely in cash, the tax basis of the shares
will be equal to their fair market value on the exercise date (but not less
than the option price), and the shares' holding period will begin on the day
after the exercise date. If the optionee uses already-owned shares to exercise
an option in whole or in part, the transaction will not be considered to be a
taxable disposition of the already owned shares. The optionee's tax basis of
the already-owned shares will be carried over to the equivalent number of
shares received upon exercise; the tax basis of the additional shares received
upon exercise will be the fair market value of the shares on the exercise date
(but not less than the amount of cash, if any, used in payment), and the
holding period for such additional shares will begin on the date after the
exercise date.
Under Section 162(m) of the Code, certain compensation payments in excess of
$1 million are subject to a limitation on deductibility for Heritage. The
limitation on deductibility applies with respect to that portion of a
compensation payment for a taxable year in excess of $1 million to either
Heritage's Chief Executive Officer or any one of the other four most highly
compensated executive officers. Certain performance-based compensation is not
subject to the limitation on deductibility. Options can qualify for this
performance-based exception, but only if they are granted at fair market
value, the total number of shares that can be granted to an executive for any
period is stated, and stockholder and Board of Directors approval is obtained.
The 1998 Plan has been drafted to allow compliance with those performance-
based criteria.
Incentive Stock Options. The same rules apply to an ISO that is exercised
more than three months after the optionee's termination of employment (or more
than twelve months thereafter in the case of permanent and total disability,
as defined in the Code). Upon the exercise of an ISO during employment or
within three months after the optionee's termination of employment (or within
twelve months thereafter in the case of permanent and total disability as
defined in the Code), for federal tax purposes the optionee will recognize no
income at the time of exercise (although the optionee at that time will have
income for alternative minimum income tax purposes as if the option were an
ISO) and no deduction will be allowed to Heritage for federal income tax
purposes in connection with the grant or exercise of the option. If the
acquired shares are sold or exchanged after the later of (a) one year after
the date of exercise of the option and (b) two years after the date of grant
of the option, the difference between the amount realized by the optionee on
that sale or exchange and the option price wilt be taxed to the optionee as a
long-term capital gain or loss. If the shares are disposed of before such
holding period requirements are satisfied, then the optionee will recognize
taxable ordinary income in the year of disposition in an amount equal to the
excess, on the date of exercise of the option, of the fair market value of the
shares received over the option price paid (or, generally, if less, the excess
of the amount realized on the sale of the shares over the price), and the
optionee will have capital gain or loss, long-term or short-term, as the case
may be, in an amount equal to the difference between (i) the amount realized
by the optionee upon that disposition of the shares and (ii) the option price
paid by the optionee (increased by the amount of ordinary income, if any, so
recognized by the optionee on the transaction).
Restricted Stock Awards. Upon the receipt of shares under stock awards
subject to vesting and other substantial restrictions, a participant generally
will recognize taxable ordinary income when the shares cease to be subject to
such restrictions in an amount equal to the excess of the fair market value of
the shares at that time over the amount, if any, paid for such shares.
However, within 30 days after the date the shares are received, a participant
may elect under Section 83(b) of the Code to recognize taxable ordinary income
at the time of receipt in an amount equal to the excess of the fair market
value of the shares at such time over the amount, if any, paid for such shares
and any appreciation after the date of the transfer will be taxed as long-term
or short-term capital gain when the shares are sold. In that case, no
additional income will be recognized by a participant upon the lapse of
restrictions on the shares and any appreciation after the date of the transfer
will be taxed as long or short-term capital gain when the shares are sold.
However, if the shares are subsequently forfeited, a participant may not
deduct the ordinary income recognized at the time of receipt of the shares and
the participant will have a capital loss equal to the amount, if any, paid for
such shares.
Upon the receipt of shares that are not subject to restrictions, other than
restrictions on transfer, a participant generally will recognize taxable
ordinary income at the time of receipt. The participant's holding period for
the
15
<PAGE>
shares will begin at the time taxable income is recognized under these rules,
and the tax basis in the shares will be the amount of ordinary income so
recognized plus the amount, if any, paid for the shares. Any dividends
received on the restricted shares prior to the date the participant recognizes
income as described above will be taxable ordinary income when received.
AWARDS UNDER THE 1998 PLAN
No Awards have been made under the 1998 Plan. Since Awards under the 1998
Plan are discretionary, Heritage cannot currently determine the number of
shares that will be subject to Awards in the future pursuant to the 1998 Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE 1998 PLAN.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The firm of KPMG Peat Marwick LLP performed the audit of the consolidated
financial statements of Heritage and its subsidiaries for the year ended June
30, 1998. The Audit and Finance Committee has recommended that KPMG Peat
Marwick LLP be retained as independent auditors of Heritage and its
subsidiaries for the 1999 fiscal year, subject to management approval of the
terms of an engagement letter with that firm. Shareholders are not required to
take action on this retention. Representatives of KPMG Peat Marwick LLP will
be present at the Annual Meeting. They will be given the opportunity to
present a statement if they so desire and will be available to respond to
appropriate questions.
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Shareholder proposals intended to be presented at the 1999 Annual Meeting of
Shareholders of Heritage, expected to be held on October 21, 1999, must be
received by Heritage for inclusion in the Proxy Statement and form of Proxy
relating to that meeting by May 1, 1999.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before the
Annual Meeting. If other matters should properly come before the Annual
Meeting, it is the intention of the persons appointed in the Proxy to vote the
shares represented the Proxy in accordance with recommendations of management
on such matters.
WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON. IF YOU DO
ATTEND THE ANNUAL MEETING, YOU THEN MAY WITHDRAW YOUR PROXY AND VOTE IN
PERSON. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE.
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EXHIBIT A
1998 STOCK OPTION AND RESTRICTED STOCK AWARD PLAN
OF
HERITAGE FINANCIAL CORPORATION
1. PURPOSE OF THE PLAN. The purpose of this Plan is to provide additional
incentives to and recognition of employees and directors of Heritage Financial
Corporation, Heritage Savings Bank, North Pacific Bank and future
Subsidiaries, if any, thereby helping to attract and retain the best available
personnel for positions of responsibility with said corporations and otherwise
promoting the success of the business activities of said corporations. It is
intended that the incentives will be in the form of Options which shall
constitute either "incentive stock options" within the meaning of Section 422
of the Internal Revenue Code or nonqualified stock options, or restricted
stock awards of Common Stock, or both.
2. DEFINITIONS. As used herein, the following definitions shall apply:
a. "Award" means an award or grant made to a Participant pursuant to the
Plan, including awards or grants of Options, Restricted Stock Awards or any
combination of the foregoing.
b. "Board" shall mean the Board of Directors of the Employer.
c. "Bank" shall mean Heritage Savings Bank, a Washington savings bank.
d. "Change in Control" shall mean an event deemed to occur if and when:
(1) an offeror other than the Employer purchases shares of the Common
Stock of the Employer or the Bank pursuant to a tender or exchange
offer for such shares;
(2) any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act) is or becomes the beneficial owner, directly or
indirectly, of securities of the Employer or the Bank representing
twenty five (25%) percent or more of the combined voting power of the
Employer's or the Bank's then outstanding securities;
(3) the membership of the Board of Directors of the Employer or the
Bank changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24)
month period (whether commencing before or after the date of adoption
of this Plan) do not constitute a majority of the Board at the end of
such period; or
(4) shareholders of the Employer or the Bank approve a merger,
consolidation, sale or disposition of all or substantially all of the
Employer's or the Bank's assets or a plan of partial or complete
liquidation. If any of such events (1)-(4) occur, the Board shall
determine the effective date of the Change in Control resulting
therefrom.
e. "Code" shall mean the Internal Revenue Code of 1986, as amended.
f. "Common Stock" shall mean the Employer's no par value common stock.
g. "Committee" shall mean the Board or the Committee appointed by the
Board in accordance with subsection 4.a. of the Plan.
h. "Continuous Status" shall mean the absence of any interruption or
termination of service as an Employee or Director, as the case may be.
Continuous Status shall not be considered interrupted in the case of sick
leave, military leave, or any other approved leave of absence, except, in
the case of Employees, as provided under applicable Incentive Stock Option
Rules.
i. "Director" shall mean any person who has been elected or appointed as
a member of the Board of Directors of the Employer and who occupied that
position at the date an Award was granted to such person.
j. "Employee" shall mean any person employed by the Employer or any
Parent or Subsidiary of the Employer which now exists or is hereafter
organized or is acquired by the Employer.
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k. "Employer" shall mean Heritage Financial Corporation, a Washington
corporation.
l. "Exchange Act" shall mean the Securities Exchange Act of 1934.
m. "Holder" means a Participant to whom an Award is granted or, for a
Holder who has died, the personal representative of the Holder's estate, or
the person(s) to whom the Holder's rights under the Award have passed by
will or the applicable laws of descent and distribution.
n. "Incentive Stock Option" shall mean an Option intended to satisfy
Section 422 of the Code.
o. "Nonqualified Stock Option" shall mean an Option other than an
Incentive Stock Option.
p. "Option" shall mean a stock option granted pursuant to the Plan.
Options shall include both Incentive Stock Options and Nonqualified Stock
Options, as the context requires.
q. "Optioned Stock" shall mean the Common Stock subject to an Option.
r. "Optionee" shall mean a Participant who is granted an Option.
s. "Parent" shall mean any corporation having a relationship with the
Employer as described in Section 424(e) of the Code.
t. "Participant" means an Employee or Director of, and any individual to
whom an offer of employment has been made by, the Employer or any Parent or
Subsidiary of the Employer, and to whom an Award has been made.
u. "Plan" shall mean this Stock Option and Restricted Stock Award Plan.
v. "Restricted Stock Award" shall mean shares of Common Stock granted
under Section 7 of the Plan, the rights of ownership of which are subject
to restrictions prescribed by the Committee.
w. "Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by
the SEC under the Exchange Act, or any successor rule in effect from time
to time.
x. "SEC" shall mean the Securities and Exchange Commission.
y. "Shareholder-Employee" shall mean an Employee who owns, at the time an
Incentive Stock Option is granted, stock representing more than ten percent
(10%) of the total combined voting power of all classes of stock of the
Employer or of any Parent or Subsidiary. For this purpose, the attribution
of stock ownership rules provided in Section 424(d) of the Code shall
apply.
z. "Subsidiary" shall mean any corporation having a relationship with the
Employer as described in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN.
a. NUMBER OF SHARES AVAILABLE FOR DELIVERY. The maximum number of shares
available for delivery to a Participant pursuant to the Plan shall be equal
to the sum of (i) 461,125 shares of the Common Stock of the Employer
(subject to adjustment as provided in Section 9 of the Plan) and (ii) any
shares of Common Stock that are subject to options or awards granted under
any prior stock option or award plan of the Employer which are forfeited,
expire or are canceled without the delivery of shares of Common Stock or
which result in the forfeiture of shares of Common Stock back to the
Employer. The maximum number of shares that may be delivered through
exercise of Options is 395,000 plus any forfeited, expired or canceled
option shares granted under any prior stock option or award plan of the
Employer. The maximum number of shares that may be issued as Restricted
Stock Awards as part of a Management Recognition Plan is 66,125 plus any
forfeited, expired or canceled award shares granted under any prior stock
option or award plan of the Employer. During the term of this Plan, the
Employer will at all times reserve and keep available a sufficient number
of shares of its Common Stock to satisfy the requirements of the Plan.
b. EXPIRED, FORFEITED, TERMINATED OR CANCELED OPTIONS OR AWARDS. All as
may be limited by Rule 16b-3 or Code Section 162(m): (1) if any outstanding
Option expires, is forfeited, canceled, terminated,
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otherwise becomes unexercisable for any reason without having been
exercised in full, or is exercised through the delivery of Common Stock,
the shares of Common Stock allocable to the unexercised portion of such
Option shall again become available for delivery as Awards under the Plan;
(2) any Restricted Stock Award shares granted under the Plan that are
forfeited back to the Employer because of the failure to meet an award
contingency or condition shall again be available for delivery pursuant to
new Awards granted under the Plan; and (3) shares issued under the Plan
through the settlement, assumption or substitution of outstanding Awards,
or obligations to grant future Awards as a result of acquiring another
entity, shall not reduce the maximum number of shares available for
delivery under the Plan.
4. ADMINISTRATION OF THE PLAN.
a. THE COMMITTEE. The Plan shall be administered by the Board directly,
acting as a Committee of the whole, or, if the Board elects, by a separate
Committee appointed by the Board for that purpose and consisting of at
least three Board members. All references in the Plan to the "Committee"
shall refer to such separate Committee, if any is established, or, if none
is then in existence, shall refer to the Board as a whole. Once appointed,
any such Committee shall continue to serve until otherwise directed by the
Board. From time to time the Board may increase the size of the Committee
and appoint additional members thereof, remove members (with or without
cause), appoint new members in substitution therefor, and fill vacancies
however caused. In appointing members to such Committee, the Board shall
consider whether to appoint individuals qualifying as (1) "outside
directors," as such term is used in Section 162(m) of the Code, and (2)
"non-employee directors" as such term is used in Rule 16b-3.
The Committee shall select one of its members as chairman, and shall hold
meetings at such times and places as the chairman or a majority of the
Committee may determine.
At least annually, the Committee shall present a written report to the
Board indicating the Participants to whom Awards have been granted since
the date of the last such report, and in each case the date or dates of
Awards granted, the number of shares awarded, and the Award price per
share.
At all times, the Board shall have the power to remove all members of the
Committee and thereafter to administer the Plan directly as a Committee of
the whole.
b. POWERS OF THE COMMITTEE. Except for the terms and conditions
explicitly set forth in the Plan, the Committee shall have the authority
and discretion to:
(1) determine the Participants to whom Awards are to be granted, the
type of Awards granted, the times of grant, and the number of shares to
be represented by each Award;
(2) determine the Award price for the shares of Common Stock to be
issued pursuant to each Award, subject to the provisions of subsection
6.b. of the Plan, and the date and other conditions upon which each
Option becomes exercisable (including provisions related to vesting)
and each Restricted Stock Award is granted;
(3) determine all other terms and conditions of each Award granted
under the Plan, which need not be identical;
(4) determine whether, and to what extent, and under what
circumstances, Awards may be settled or exercised in cash, Common
Stock, other securities, other Awards or other property, or canceled,
forfeited or suspended;
(5) modify or amend the terms of any Award previously granted, or to
grant a substitute Award, subject to the provisions of Sections 12 and
13 of the Plan;
(6) interpret the Plan;
(7) authorize any person or persons to execute and deliver Award
agreements or to take any other actions deemed by the Committee to be
necessary or appropriate to effectuate the grant of Awards;
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(8) make all other determinations and take all other actions which
the Committee deems necessary or appropriate, including without
limitation adopting rules and procedures regarding the Plan and
administering the Plan in accordance with its terms and conditions, and
(9) determine whether an Award contemplated to be made by the
Committee might result in the payment of employee remuneration which
might exceed the limit on employee remuneration deductible by the
Employer under Code Section 162(m), and in such event, to elect to
grant such Award and administer the Plan consistent with the
requirements for ensuring deductibility of remuneration associated
therein.
All actions of the Committee shall be either by (i) a majority vote of the
members of the full Committee at a meeting of the Committee, or (ii) by
unanimous written consent of all members of the full Committee without a
meeting thereof, or in such other manner as is authorized by Rule 16b-3.
All decisions, determinations and interpretations of the Committee shall be
final and binding upon all persons, including all Participants receiving
Awards and any other Holders or persons interested in any Awards, unless
otherwise expressly determined by a vote of the majority of the entire Board.
No member of the Committee or of the Board shall be liable for any action or
determination made in good faith regarding the Plan or any Award.
5. ELIGIBILITY. Awards may be granted only to Participants who the
Committee, in its discretion, from time to time selects; provided that only
Employees may be awarded Incentive Stock Options.
Granting of Awards pursuant to the Plan shall be entirely discretionary with
the Committee, without any obligation to provide uniform treatment to
Participants. The adoption of this Plan shall not confer upon any Participant
any right to receive any Award or Awards pursuant to the Plan unless and until
said Awards are granted by the Committee, in its sole discretion. Neither the
adoption of the Plan nor the granting of any Awards pursuant to the Plan shall
confer upon any Participant any right with respect to continuation of
employment or other relationship with the Employer or any Parent or Subsidiary
of the Employer, nor shall same interfere in any way with the Participant's
right or with the right of the Employer or any Parent or Subsidiary of the
Employer to terminate the employment or other relationship at any time.
6. TERMS AND OTHER CONDITIONS OF OPTIONS. All Options granted pursuant to
the Plan must be authorized by the Committee, and must be documented in
written agreements in such form as the Committee shall from time to time
approve, which agreements shall comply with and be subject to all of the
following terms and conditions, unless waived or modified by the Committee:
a. NUMBER OF SHARES; ANNUAL LIMITATION. Each Option agreement shall state
whether the Option is an Incentive Stock Option or a Nonqualified Stock
Option and the number of shares subject to Option. The aggregate number of
shares of common stock that may be issued to any Participant pursuant to
any Award under this Plan, during any one calendar year, shall not exceed
20% of the aggregate number of shares specified in Section 3a, and, in
addition, in the case of Incentive Stock Options, the aggregate fair market
value (determined as of the time each Option is granted) of all shares of
Common Stock with respect to which Incentive Stock Options become
exercisable for the first time by an Employee in any one calendar year
(under all incentive stock option plans of the Employer, its Parent and all
of its Subsidiaries taken together) shall not exceed $100,000.
b. OPTION PRICE AND CONSIDERATION. The Option price for the shares of
Common Stock to be issued pursuant to the Option shall be such price as is
determined by the Committee, but shall in no event be less than the fair
market value of the Common Stock on the date of grant of an Incentive Stock
Option. Further, in the case of an Incentive Stock Option granted to an
Employee who, immediately before the grant of such Incentive Stock Option,
is a Shareholder-Employee, the Incentive Stock Option price shall be at
least 110% of the fair market value of the Common Stock on the date of
grant of the Incentive Stock Option. The fair market value shall be
determined by the Committee in its discretion; provided, however, that in
the event
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that there is a public market for the Common Stock, the fair market value
shall be the closing transaction price of the Common Stock as of the date
of grant as reported on the National Association of Securities Dealers
Automated Quotation System (Nasdaq), or, in the event the Common Stock is
listed on a stock exchange, fair market value shall be the closing
transaction price on the exchange as of the date of grant of the Option.
The Option price shall be payable either:
(1) in United States dollars; or
(2) such other consideration of comparable value deemed to be
acceptable by the Committee, including without limitation Common Stock
(by either actual delivery of shares or by attestation) with such
Common Stock valued at fair market value as of the day of exercise,
other securities, other Options or other property.
c. TERM OF OPTIONS. Notwithstanding anything to the contrary in this Plan
or in any Options, no Incentive Stock Option granted pursuant to the Plan
shall in any event be exercisable after the expiration of ten (10) years
from the date such Option is granted, except that the term of an Incentive
Stock Option granted to an Employee who, immediately before such Incentive
Stock Option is granted, is a Shareholder-Employee, shall be for not more
than five (5) years from the date of grant thereof. Subject to the
foregoing and other applicable provisions of the Plan, including, but not
limited to, subsection 6.e. herein, the term of each Option, and other
conditions with respect to exercise, shall be determined by the Committee
in its discretion.
Except as otherwise specifically provided in this Plan, all Options
granted hereunder:
(1) shall require that the Optionee maintain Continuous Status from
the date of grant through and including the date of exercise; and
(2) shall terminate upon termination of the Optionee's Continuous
Status, notwithstanding any contrary term in the Option, except as such
term is consistent with this Plan.
d. MANNER OF EXERCISE; CASHLESS EXERCISE. An Option shall be deemed to be
exercised when written notice of exercise has been given to the Employer in
accordance with the terms of the Option by the person entitled to exercise
the Option. The full Option price for the shares of Common Stock purchased
upon the exercise of any Option shall be paid at the time of such exercise,
except that, in the case of a cashless exercise arrangement approved by the
Committee (and described below), payment may be made as soon as practicable
after the exercise.
The Committee may, in its discretion, allow for the cashless exercise of
an Option whereby an Optionee can exercise an Option or a portion thereof
by authorizing a third party to sell shares of Common Stock (or a
sufficient portion of the shares) acquired upon exercise of the Option and
remit to the Employer a sufficient portion of the sale proceeds to pay the
entire exercise price and any tax withholding resulting from such exercise.
Any cashless exercise shall be subject to:
(1) the requirements of Rule 16b-3, federal income tax laws, and any
other applicable laws;
(2) the terms of any written agreements executed in connection with
the grant of any such Option; and
(3) any procedures and policies established from time to time by the
Committee.
e. DEATH OF OPTIONEE. In the event of the death of an Optionee who, until
death, had been in Continuous Status since the date of grant of the Option,
the Option shall terminate on the earlier of (1) one year after the date of
death of the Optionee or such later date as may be set in the discretion of
the Committee and (2) the expiration date otherwise provided in the Option
agreement, but in no event sooner than three months following the
Optionee's death. Any Option exercisable under this subsection 6.e., may be
exercised by the Holder.
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f. DISABILITY OF OPTIONEE. If an Optionee's Continuous Status is
terminated at any time during the Option period by reason of a disability
(within the meaning of Section 22(e)(3) of the Code) any Incentive Stock
Option then held by the Optionee shall terminate one year after the date of
termination or, if earlier, the expiration date otherwise provided in the
Option agreement. If the Optionee's Continuous Status terminates by reason
of disability, any Nonqualified Stock Option held by the Optionee shall
terminate on the expiration date provided in the Option, or if no such date
is provided, then such Option shall terminate one year after the date of
termination.
g. TERMINATION OF STATUS AS A PARTICIPANT. If an Optionee's Continuous
Status is terminated at any time after the grant of an Option for any
reason other than death or disability as provided in subsections 6.e. and
f. above, and not by reason of fraud or willful misconduct as provided
below, such Optionee's Option(s) shall terminate on the expiration date(s)
provided in the Option(s), or, if no such date is provided, then such
Option(s) shall terminate on the same day of the third month after the date
of termination.
If an Optionee's Continuous Status is terminated at any time after the
grant of an Option by reason of fraud or willful misconduct, then all of
such Optionee's Options shall terminate on such termination date.
7. TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS
The Committee is authorized to make Restricted Stock Awards as part of a
Management Recognition Plan to Participants on such terms and conditions and
subject to such restrictions, if any (whether based on performance standards,
periods of service or otherwise), as the Committee shall determine, which
terms, conditions and restrictions shall be documented in written agreements
in such form as the Committee shall from time to time approve. The terms,
conditions and restrictions that the Committee shall have the power to
determine shall include, without limitation, the manner in which shares
subject to Restricted Stock Awards are held during the periods they are
subject to restrictions and the circumstances under which forfeiture of
Restricted Stock Award shares shall occur by reason of termination of
Participant's relationship with the Employer or any Parent or Subsidiary of
the Employer.
Notwithstanding any other provisions of the Plan, the Committee may, in its
sole discretion, waive the forfeiture period and any other terms, conditions
or restrictions on any Restricted Stock Award under such circumstances and
subject to such terms and conditions as the Committee shall deem appropriate.
8. NON-TRANSFERABILITY OF AWARDS. No Award granted pursuant to the Plan may
be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Participant, only by the Participant.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any required
action by the shareholders of the Employer, the number of shares of Common
Stock covered by each outstanding Award, the number of shares of Common Stock
available for grant of additional Awards, and the price per share of Common
Stock specified in each outstanding Award, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from any stock split or other subdivision or consolidation of
shares, the payment of any stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such shares of Common Stock
effected without receipt of consideration by the Employer; provided, however,
that conversion of any convertible securities of the Employer shall not be
deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Committee, whose determination in that respect
shall be final, binding and conclusive.
No Incentive Stock Option shall be adjusted by the Committee pursuant to
this Section 9 in a manner that causes the Incentive Stock Option to fail to
continue to qualify as an Incentive Stock Option within the meaning of Section
422 of the Code.
Except as otherwise expressly provided in this Section 9, no Holder of an
Award shall have any rights by reason of any stock split or the payment of any
stock dividend or any other increase or decrease in the number
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of shares of Common Stock. Except as otherwise expressly provided in this
Section 9, any issuance by the Employer of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect the
number of shares or price of Common Stock subject to any Awards, and no
adjustments in Awards shall be made by reason thereof. The grant of an Award
pursuant to the Plan shall not affect in any way the right or power of the
Employer to make adjustments, reclassifications, reorganizations or changes of
its capital or business structure.
10. DATE OF GRANT OF AWARD. The date of grant of an Award shall be, for all
purposes, the date on which the Committee makes the determination granting
such Award. The date of grant shall be specified in the Award agreement
evidencing the Award.
11. CONDITIONS UPON ISSUANCE OF SHARES. Shares of Common Stock shall not be
issued with respect to an Award granted under the Plan unless the issuance and
delivery of such shares pursuant thereto complies with all applicable
provisions of law, including without limitation the Securities Act of 1933, as
amended, the Exchange Act, as amended, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Common
Stock then may be listed, and shall be further subject to the approval of
counsel for the Employer regarding such compliance.
As a condition to the exercise of an Option or release of Restricted Stock
Award shares from escrow, the Employer may require the person exercising such
Option or receiving such Restricted Stock Award to represent and warrant at
the time of exercise or receipt of the shares that the shares of Common Stock
are being acquired only for investment and without any present intention to
sell or distribute such Common Stock if, in the opinion of counsel for the
Employer, such a representation is required by any provisions of law.
12. CHANGE IN CONTROL. Except as otherwise provided in the written agreement
that evidences an Award, in the event of a Change in Control, all then
outstanding Options shall become fully vested and exercisable and all
Restricted Stock Award shares be released from escrow as of the effective date
of the Change in Control. If, in connection with or as a consequence of a
Change in Control the Employer or the Bank is merged into or consolidated with
another corporation, or if the Employer or the Bank sells or otherwise
disposes of substantially all of its assets to another corporation, then,
unless provisions are made in connection with such transaction for the
continuance of the Plan or the assumption or substitution of then outstanding
Awards with new Awards covering the stock of the successor corporation, or
parent or subsidiary thereof, or both, with appropriate adjustments as to the
number and kind of shares and prices, the Committee may, in its sole
discretion, terminate all outstanding Awards as of a date fixed by the
Committee which may be sooner than the originally stated term of the Award. In
such event, the Committee shall notify each Holder of such action in writing
not less than sixty (60) days prior to the termination dated fixed by the
Committee, and each Holder shall have the right to exercise his or her Option
up to and including said termination date.
13. SUBSTITUTE STOCK OPTIONS. In connection with the acquisition or proposed
acquisition by the Employer or any Subsidiary, whether by merger, acquisition
of stock or assets, or other reorganization transaction, of a business any
employees of which have been granted Incentive Stock Options, the Committee is
authorized to issue, in substitution of any such unexercised stock option, a
new Option under this Plan which confers upon the Optionee substantially the
same benefits as the old option; provided, however, that the issuance of any
new Option for an old Incentive Stock Option shall satisfy the requirements of
Section 424(a) of the Code.
14. TAX COMPLIANCE. The Employer, in its sole discretion, may take any
actions reasonably believed by it to be required to comply with any local,
state or federal tax laws relating to the reporting or withholding of taxes
attributable to the grant, exercise, payment or settlement of any Award or the
disposition of any shares of Common Stock issued upon exercise, payment or
settlement of an Award, including, but not limited, to:
(1) withholding from any Employee a number of shares of Common Stock
having a fair market value equal to the amount required to be withheld by
Employer under applicable tax laws, and
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(2) withholding from any form of compensation or other amount due an
Employee or holder of shares of Common Stock issued upon exercise of an
Option or payment of a Restricted Stock Award, any amount required to be
withheld by Employer under applicable tax laws. Withholding or reporting
shall be considered required for purposes of this Section 14 if any tax
deduction or other favorable tax treatment available to Employer is
conditioned upon such withholding or reporting.
15. OTHER PROVISIONS. The agreements evidencing an Award and executed
pursuant to the Plan may contain such other provisions as the Committee shall
deem advisable, provided, in the case of Incentive Stock Options, that the
provisions are not inconsistent with the provisions of Section 422(b) of the
Code or with any of the other terms and conditions of this Plan.
16. TERM OF THE PLAN. The Plan shall become effective (and grants of Awards
may thereafter be made) on the date of adoption of the Plan by the Board or
the date of shareholder approval of the Plan as provided in Section 18 of the
Plan, whichever is earlier. Any Award granted prior to shareholder approval is
fully contingent on such approval being obtained, and shall become void ab
initio if shareholder approval is not timely obtained. The Plan will have no
fixed expiration date, provided, however, that no Incentive Stock Options may
be granted more than ten years after the Plan's effective date.
17. AMENDMENT OR TERMINATION.
a. AMENDMENT OR TERMINATION OF THE PLAN. The Board or shareholders may
terminate the Plan at any time. The Board may amend the Plan at any time
and from time to time in such respects as the Board may deem advisable,
except that, without approval of the holders of a majority of the
outstanding shares of the Common Stock present and entitled to vote at a
duly convened meeting of the shareholders of the Employer, no such revision
or amendment shall:
(1) increase the number of shares of Common Stock subject to the
Plan, other than in connection with an adjustment under Section 9 of
the Plan; or
(2) make any other amendments to the Plan that would require
shareholder approval under any applicable law or regulation.
b. AMENDMENT OR TERMINATION OF OUTSTANDING AWARDS. Except as otherwise
provided in this Plan or in an agreement evidencing an Award pursuant to
the Plan, the Committee may retroactively or prospectively waive any
condition or rights under, amend any terms of, or alter, accelerate,
suspend, discontinue, cancel or terminate, any Award previously granted;
provided, that if any such action would impair the rights of any Holder of
the Option, it shall have no effect without the consent of the affected
Holder.
18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by a
majority of the outstanding shares of Common Stock of the Employer present and
entitled to vote at a duly convened meeting of the shareholders of the
Employer.
CERTIFICATE OF ADOPTION
I certify that the foregoing Plan was adopted by the Board of Directors of
Heritage Financial Corporation, on August 17, 1998 and was approved by its
shareholders on , 1998.
-------------------------------------
Wendy K. Gauksheim, Secretary
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HERITAGE FINANCIAL CORPORATION
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 15, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF
HERITAGE FINANCIAL CORPORATION
PLEASE SIGN AND RETURN IMMEDIATELY
The undersigned shareholder of HERITAGE FINANCIAL CORPORATION ("Heritage")
hereby nominates, constitutes and appoints Donald V. Rhodes the true and lawful
attorney and proxy, with full power of substitution, for me and in my name,
place and stead, to act and vote all the common stock of Heritage standing in
my name and on its books on August 31, 1998 at the Annual Meeting of
Shareholders to be held at The Worthington Center, Lacey, Washington, on
October 15, 1998, at 11:00 a.m., and at any adjournment thereof, with all the
powers the undersigned would possess if personally present, as follows:
1. ELECTION OF DIRECTORS: Election of three (3) persons to serve on the Board
of Directors until 2001.
[_] FOR all nominees listed below.
[_] WITHHOLD AUTHORITY TO VOTE for all
nominees listed below (in the manner described below).
INSTRUCTIONS: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name listed below.
John A. Clees James P. Senna Peter K. Wallerich
2. APPROVAL OF 1998 STOCK OPTION AND RESTRICTED STOCK AWARD PLAN: Approval of
Heritage's 1998 Stock Option and Restricted Stock Award Plan.
[_] FOR [_] AGAINST [_] ABSTAIN
(Continued and to be signed on the other side)
<PAGE>
3. In their discretion, upon such other business as may properly come before
the Annual Meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED ABOVE. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE PROPOSALS SET FORTH ABOVE.
Management knows of no other matters that may properly be, or which are
likely to be, brought before the Annual Meeting. However, if any other matters
are properly presented at the Annual Meeting, this Proxy will be voted in
accordance with the recommendations of management.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Shareholders for the October 15, 1998 Annual Meeting, and the accompanying
documents forwarded therewith, and ratifies all lawful action taken by the
above-named attorneys and proxy.
Date: , 1998
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Signature
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Signature
NOTE: Signature(s) should agree
with name(s) on Heritage stock
certificate(s). Executors,
administrators, trustees and
other fiduciaries, and persons
signing on behalf of corporations
or partnerships should so
indicate when signing. All joint
owners must sign.
