HILLS BANCORPORATION
An Iowa Corporation
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
April 17, 2000
The Annual Meeting of the Shareholders of Hills Bancorporation, an Iowa
corporation (the "Company"), will be held at the Hills Community Center, Hills,
Iowa, on Monday, the 17th day of April, 2000, at 4:00 o'clock p.m., local time,
for the following purposes:
1. To elect five members of the Board of Directors.
2. To approve the Hills Bancorporation 2000 Stock Option and
Incentive Plan.
3. To transact such other business as may properly be brought
before the meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on March 14,
2000, as the record date for the determination of the shareholders entitled to
notice of, and to vote at, the meeting. Accordingly, only shareholders of record
at the close of business on that date will be entitled to vote at the meeting,
or any adjournments thereof.
TO INSURE YOUR REPRESENTATION AT THE MEETING, THE BOARD OF DIRECTORS OF
THE COMPANY SOLICITS YOU TO MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY
IN THE ENCLOSED ENVELOPE. YOUR PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS
EXERCISED AND, IF YOU ARE ABLE TO ATTEND THE MEETING AND WISH TO VOTE YOUR
SHARES PERSONALLY, YOU MAY WITHDRAW YOUR PROXY AND DO SO.
Date: March 27, 2000 By Order of the Board of Directors
/s/ Dwight O. Seegmiller
----------------------------------
Hills Bancorporation Dwight O. Seegmiller, President
131 Main Street
Hills, Iowa 52235
<PAGE>
HILLS BANCORPORATION
131 Main Street
Hills, Iowa 52235
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
To Be Held on April 17, 2000
This Proxy Statement is furnished to shareholders of Hills
Bancorporation (the "Company") in connection with the solicitation of proxies by
the Board of Directors of the Company for the Annual Meeting of Shareholders to
be held April 17, 2000, and any adjournments thereof. This Proxy Statement and
form of Proxy enclosed herewith are first sent to the shareholders of the
Company entitled thereto on or about March 20, 2000.
If the accompanying Proxy is properly signed and returned and is not
withdrawn or revoked, the shares represented thereby will be voted in accordance
with the specifications thereon. If the manner of voting such shares is not
indicated on the Proxy, the shares will be voted FOR the election of the
nominees for directors named herein and FOR approval of the Hills Bancorporation
2000 Stock Option and Incentive Plan. Election of any nominee as a director and
approval of the Hills Bancorporation 2000 Stock Option and Incentive Plan
requires a majority of the votes cast by the shares entitled to vote at a
meeting at which a quorum is present.
Only shareholders of record at the close of business on March 14, 2000,
are entitled to notice of and to vote at the meeting. There were 1,495,941
shares of Common Stock of the Company outstanding at the close of business on
that date, all of which will be entitled to vote. The presence, in person or by
proxy, of the holders of a majority of such outstanding shares is necessary to
constitute a quorum for the transaction of business at the meeting. Holders of
the shares of Common Stock are entitled to one vote per share standing in their
names on the record date on all matters. Shareholders do not have cumulative
voting rights. If the holder of shares abstains from voting on any matter, or if
shares are held by a broker which has indicated that it does not have
discretionary authority to vote on a particular matter, those shares will be
counted for quorum purposes, but will not be counted as votes cast with respect
to any matter to come before the meeting and will not affect the outcome of any
matter.
The Company will bear the cost of solicitation of proxies. In addition
to the use of the mails, proxies may be solicited by officers, directors and
regular employees of the Company, without extra compensation, by telephone,
facsimile or personal contact. It will greatly assist the Company in limiting
expense in connection with the meeting if shareholders who do not expect to
attend in person will return signed proxies promptly whether they own a few or
many shares.
A shareholder may revoke his or her Proxy at any time prior to the
voting thereof by filing with the Secretary of the Company at the Company's
principal office at 131 Main Street, Hills, Iowa 52235, a written revocation or
a duly executed Proxy bearing a later date. A shareholder may also withdraw the
Proxy at the meeting at any time before it is exercised.
<PAGE>
INFORMATION CONCERNING NOMINEES FOR ELECTION AS DIRECTORS
The Company has ten directors with staggered terms of office. Effective
on April 17, 2000, Earl M. Yoder will have reached the mandatory retirement age
of 72 established by the Board of Directors and will not serve beyond the Annual
Meeting. One director is to be elected to fill the newly created vacancy by the
retirement of Mr. Yoder and serve the remaining year of his unexpired term. In
addition, four directors are to be elected at the 2000 Annual Meeting of
shareholders to serve for a three-year term. The Board of Directors has no
reason to believe that any nominee will be unable to serve as a director, if
elected. However, in case any nominee should become unavailable for election,
the proxy will be voted for such substitute, if any, as the Board of Directors
may designate.
Each director of the Company also serves as a director of each of the
Company's wholly-owned subsidiaries which are three commercial banks. The
commercial banks are Hills Bank and Trust Company ("Hills"), Hills Bank, which
has offices in Cedar Rapids, Lisbon and Mount Vernon ("Hills Bank"), and Hills
Bank Kalona ("Kalona"). The Company anticipates that, following the election of
the nominees set forth below, all directors of the Company will continue to
serve as directors of the Banks, being elected to such positions by the vote of
the Company as the sole shareholder of the Banks.
Set forth below are the names of the five persons nominated by the Board
of Directors for election as directors at the 2000 Annual Meeting along with
certain other information concerning such persons.
Name and Year Positions & Principal Occupation or
First Became Offices Held Employment During
a Director Age With Company the Past Five Years
- ------------- ----- ------------ ---------------------------
Nominee for Director to Serve Until the 2001 Annual Meeting
Michael D. Hodge (1) 46 Nominee for President and shareholder
Director of Hodge Construction
Company
Note:
(1) Michael D. Hodge is a nominee for director to fill the unexpired term of
Earl M. Yoder. Mr Hodge is the owner of approximately fifty-five percent (55%)
of Hodge Construction Company. In 1999, the Company entered into two cost-plus
contracts with Hodge Construction Company for construction management services
for construction projects slated to start in the second quarter of 2000 in
Hills, Iowa and Coralville, Iowa. During 1999, the Company made no payments for
construction management services performed for the Company under these cost-plus
contracts. Although these contracts were not entered into as a result of
competitive bidding, the contracts were entered into in the ordinary course of
business of the Company and, in the opinion of management, the amounts to be
paid under such contracts for the services performed will be at least as
favorable to the Company as prices generally charged by similar businesses in
the area for such services. If Mr. Hodge becomes a director of the Company,
management anticipates that any future contracts between the Company and Hodge
Construction Company will be entered into as a result of competitive bidding.
Directors Serving Until the 2003 Annual Meeting
Willis M. Bywater 61 Director & Executive officer and
1984-Company Vice President shareholder of Economy
1979-Bank Advertising Company
(commercial printing
and sales of advertising
specialties)
Thomas J. Gill, D.D.S. 53 Director Dentist - Private Practice
1993-Company
1993-Bank
Donald H. Gringer 65 Director Executive officer and
1988-Company shareholder of Gringer Feed
1988-Bank and Grain (grain elevator)
Dwight O. Seegmiller 47 Director & President of the Company
1986-Company President and the Bank
1986-Bank
<PAGE>
INFORMATION CONCERNING DIRECTORS OTHER THAN NOMINEES
The following table sets forth certain information with respect to
directors of the Company who will continue to serve subsequent to the 2000
Annual Meeting and who are not nominees for election at the 2000 Annual Meeting.
Name and Year Positions & Principal Occupation or
First Became Offices Held Employment During
a Director Age With Company the Past Five Years
- ------------- ----- ------------ ---------------------------
Directors Serving Until the 2001 Annual Meeting
Richard W. Oberman 64 Director President,
1984-Company Oberman Farms, Inc.
1980-Bank
Sheldon E. Yoder, D.V.M. 47 Director President
1997-Company and shareholder of
1997-Bank Kalona Veterinary Clinic
Directors Serving Until the 2002 Annual Meeting
Theodore H. Pacha 51 Director President and owner of THEO
1990-Company Resources (Business
1990-Bank Investment and Consulting),
May, 1999 to present;
previously executive
officer and owner of
Hawkeye Medical Supply,
Inc. (medical supplies)
Ann Marie Rhodes 46 Director Vice President for
1993-Company University Relations - The
1993-Bank University of Iowa
Ronald E. Stutsman 60 Director Executive officer and
1984-Company shareholder of Eldon C.
1981-Bank Stutsman, Inc. (fertilizer
plant)
None of the nominees or directors serves as a director of another company whose
securities are registered under the Securities Exchange Act of 1934 or a company
registered under the Investment Company Act of 1940.
INFORMATION CONCERNING THE BOARDS OF DIRECTORS
Board of Directors of Company
The Board of Directors of the Company meets on a regularly scheduled
basis. During 1999, the Board of Directors of the Company held an annual meeting
and thirteen regular meetings. The Board of Directors of the Company has
established a committee consisting of the nine non-employee directors (all
directors but Mr. Seegmiller) to administer and grant awards under the Hills
Bancorporation 1993 Incentive Stock Plan (the "Incentive Stock Plan"). During
1999, the Incentive Stock Committee held one meeting. The Board of Directors of
the Company has not established any standing executive, audit, nominating or
compensation committees or committees performing similar functions. During 1999,
all directors of the Company attended at least seventy-five percent of the total
number of meetings of the Board and the Incentive Stock Committee. Directors are
compensated for attending meetings of the Board of Directors of the Company at
the rate of $100 per meeting. The Directors are not compensated for meetings of
the Incentive Stock Committee.
Upon approval of the Incentive Stock Plan by the Company's shareholders
at the 1993 Annual Meeting, options to purchase up to 2,055 shares of Company
Common Stock were granted in accordance with the terms of the plan to each
non-employee director of the Company (all directors but Mr. Seegmiller). The
options were immediately exerciseable upon grant at an exercise price of $25.34
per share. The options were granted in tandem with dividend equivalents,
entitling the holder of the option to receive, upon exercise of the option, a
cash payment equal to the dividends paid with respect to the shares purchased
from the date the option was granted through the date the option is exercised.
The options will expire on the earlier of April 19, 2003 or two years after the
director's term of service on the Board of Directors of the Company ends.
<PAGE>
Boards of Directors of Banks
The business and affairs of the Banks are managed directly by the Board
of Directors of the Banks, the membership of which is identical to that of the
Board of Directors of the Company. The Board of Directors of each of the Banks
holds regular monthly meetings. In 1999, the Board of Directors of Hills had
twelve regular meetings and one special meeting. The Board of Directors of Hills
has established the Trust Committee, Audit Committee, Loan Committee and
Employee Stock Ownership Plan ("ESOP") Committee as standing committees of the
Board of Directors. Directors Gringer and Pacha serve on the Trust Committee;
Directors Bywater, Gill and Rhodes on the Audit Committee; Directors Bywater,
Oberman, Pacha, Stutsman, Sheldon Yoder and Earl Yoder on the Loan Committee;
and Director Rhodes serves on the ESOP Committee. The three directors not
appointed to the Loan Committee are invited to attend meetings of that committee
and are compensated at the normal rate for each meeting attended. Hills has
established no standing executive, nominating or compensation committees of the
Board of Directors or committees performing similar functions.
The Trust Committee is responsible for overseeing and annually reviewing
the status of all trusts for which the Hills' Trust Department acts in a
fiduciary capacity. The Trust Committee met twelve times during 1999. The Audit
Committee held six meetings during 1999 and is responsible for coordinating the
audit service with McGladrey & Pullen, LLP and addressing internal audit
functions. The Loan Committee held eleven meetings during 1999 and is
responsible for review and oversight of the loan activities of Hills. The ESOP
Committee, which is responsible for overseeing the ESOP in connection with which
Hills' Trust Department serves as trustee, had two meetings during 1999. During
1999, all of the directors of Hills attended at least 75% of the total number of
meetings of the Board of Directors and the committees to which each director was
appointed.
Directors of Hills who are not employees of Hills (all directors but Mr.
Seegmiller) receive a retainer of $5,000 per year and $250 for each meeting of
the Board of Directors attended. Willis M. Bywater, the Chairman of the Board of
Hills, receives an additional $1,500 per year as a retainer fee. Directors of
Hills who are not employees of Hills are compensated for serving on the various
Hills committees at the rate of $150 per meeting attended.
The membership of the Board of Directors of Hills Bank, formerly Lisbon
Bank and Trust Company and Kalona is identical to the membership of the Boards
of Directors of the Company and Hills. The directors of Hills Bank and Kalona
are compensated at the rate of $50.00 for each meeting attended. During 1999,
there were no committees of the Board of Directors of Hills Bank or the Board of
Directors of Kalona. The Board of Directors of Hills Bank held twelve regular
meetings during 1999. The Board of Directors of Kalona held twelve regular
meetings during 1999. All directors of the Hills Bank and Kalona attended at
least 75% of the meetings held.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Set forth in the following table is certain information on each person
who is known to the Board of Directors to be the beneficial owner as of March
10, 2000 of more than 5% of the Company's Common Stock, which is the only class
of equity securities which the Company has outstanding.
Amount and Nature of Beneficial Ownership
Total Shares Sole Voting Shared Voting
Name and Address of Beneficially and Investment and Investment Percent of
Beneficial Owner Owned Power Power Class
- --------------------- ------------ -------------- -------------- ----------
Hills Bank and Trust 154,474 0 154,474 (1) 10.33%
Company, as trustee
of the Hills Bank
and Trust Company
Employee Stock
Ownership Plan
131 Main Street
Hills, Iowa 52235
NOTE:
(1) Consists of shares of Company Common Stock allocated to the accounts of
employees of the Banks eligible to participate in the Hills Bank and Trust
Company Employee Stock Ownership Plan. Employees are entitled to direct the
trustee how to vote shares allocated to their accounts.
The following table sets forth certain information as of March 10, 2000
as to the number of shares of the Company's Common Stock beneficially owned by
each director, nominee for director, executive officer and by the executive
officers and directors as a group.
<PAGE>
Amount and Nature of Beneficial Ownership
Total Shares Sole Voting Shared Voting
Beneficially and Investment and Investment Percent of
Name Owned Power Power Class (3)
- --------------------- ------------ -------------- -------------- ----------
Directors
Willis M. Bywater 26,715 (1) 15,355 11,360 1.78%
Thomas J. Gill, D.D.S. 2,055 (1) 2,055 0 .14%
Donald H. Gringer 2,679 (1) 2,679 0 .18%
Richard W. Oberman 15,255 (1) 4,275 10,980 1.02%
Theodore H. Pacha 2,655 2,655 0 .18%
Ann Marie Rhodes 2,055 (1) 2,055 0 .14%
Dwight O. Seegmiller 40,815 (2) 39,615 1,200 2.73%
Ronald E. Stutsman 14,958 (1) 14,769 189 1.00%
Earl M. Yoder 16,164 16,164 0 1.08%
Sheldon E. Yoder 2,364 (1) 2,364 0 .16%
Nominee for Director
Michael D. Hodge 900 0 900 .06%
Non-Director Executive Officers
Thomas J. Cilek 21,249 (2) 16,629 4,620 1.42%
James G. Pratt 23,339 (2) 18,419 4,920 1.56%
All Directors and 171,203 (3) 137,034 34,169 11.29%
Executive Officers
as a group
(13 persons)
NOTES:
(1) This figure includes 2,055 shares subject to currently exercisable stock
options granted in 1993 for six of the directors of the Company and 2,055 shares
subject to currently exercisable stock options granted in 1997 to one director
pursuant to the Hills Bancorporation 1993 Incentive Stock Plan.
(2) This figure includes shares held by the Hills Bank and Trust Company
Employee Stock Ownership Plan which have been allocated to the executive
officers for voting purposes. The following number of shares have been allocated
under the ESOP to the executive officers for voting purposes: Mr. Seegmiller -
13,689; Mr. Cilek - 8,946; Mr. Pratt - 11,024; all executive officers as a group
- - 33,659. Also includes 6,077 shares subject to currently exercisable stock
options granted in 1993 to two executive officers of the Company. The amount of
stock options for each executive officer: Mr. Cilek - 3,683; and Mr. Pratt -
2,394.
(3) Includes, for each such person, shares that are deemed to be beneficially
owned by such person (a) because such shares are subject to options currently
exercisable by such person or (b) because such shares are held by the Hills Bank
and Trust Company Employee Stock Ownership Plan and have been allocated to such
person with shared voting power, as noted in Notes 1 and 2.
<PAGE>
EXECUTIVE COMPENSATION AND BENEFITS
Summary Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued by the Company and the Bank for the last three
fiscal years with respect to Mr. Seegmiller, as President of the Company, and to
the other two executive officers of the Company:
<TABLE>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
Name and Securities
Principal Underlying All Other
Position Year Salary($) Bonus($)(1) Options Compensation($)(2)
- -------------------- ---- --------- ----------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Dwight O. Seegmiller .........1999 206,428 43,143 0 47,407
President of 1998 206,428 33,743 0 42,644
Company and 1997 206,428 28,043 0 29,663
Bank
Thomas J. Cilek ..............1999 159,512 18,650 0 21,116
Secretary of 1998 159,512 12,550 0 20,813
Company; Senior 1997 159,512 10,150 0 17,168
Vice President
of Bank
James G. Pratt ...............1999 159,512 28,550 0 22,295
Treasurer of 1998 159,512 20,250 0 21,795
Company; 1997 159,512 10,150 0 17,520
Senior Vice
President of Bank
</TABLE>
Notes:
(1) Consists of a $35,000 cash bonus for Mr. Seegmiller, a $17,000 cash bonus to
Mr. Cilek and a $26,000 cash bonus to Mr. Pratt and additional compensation that
represents the contributions, which were limited due to statutory and
administrative rules, for the Hills Bank and Trust Company Employee Stock
Ownership Plan and Profit Sharing Plan.
(2) For each of the named executive officers, the figures shown consist
partially of contributions in the following amounts made by the Bank to the
Hills Bank and Trust Company Employee Stock Ownership Plan and Profit Sharing
Plan for the specified year and partially of above-market returns on deferred
compensation accrued during the specified year. The difference between the
figures shown and the contributions to the Hills Bank and Trust Company Employee
Stock Ownership Plan and Profit Sharing Plan in the table below are the
above-market returns:
Year Contribution Amounts
---- --------------------
1999 $14,400
1998 14,400
1997 13,500
For 1999 and 1998 the above-market returns were based on the change in
the value of the Company's common stock. For 1997 such returns were based on the
change in the value of the Standard & Poor's 500 index.
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option
Values
<TABLE>
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options at In-the Money Options at
Acquired on Value FY-End(#) FY-End ($)
Name Exercise(#) Realized($)(1) Exercisable/Unexercisable(2)(3) Exercisable/Unexercisable(4)
------ ----------- -------------- ------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Dwight O. Seegmiller ....8,886 $390,984 -0-/-0- $ -0-/-0-
Thomas J. Cilek .........4,000 $177,747 3,683/-0- $161,426/-0-
James G. Pratt ..........5,001 $220,027 2,394/-0- $104,929/-0-
</TABLE>
Notes:
(1) Value realized is the difference between the fair market value of the stock
when the options were exercised and the option price of $26.17. Added to this
value is the dividend equivalents paid on the option shares exercised which was
$6.17 per share. Each participant paid ordinary income taxes rates on these
non-qualified stock options for the value realized and the company received an
income tax deduction.
(2) Options were granted in tandem with dividend equivalents. Dividend
equivalents entitle the holder of the option to receive, upon exercise of the
option, a cash payment equal to the dividends paid with respect to the shares
purchased from the date the option was granted through the date the option was
exercised.
(3) All options granted were subject to a five-year vesting requirement and are
now fully vested.
(4) These dollar values were calculated by determining the difference between
the fair market value of the securities underlying the options and the exercise
or base price of the options at fiscal year-end. Options were granted at an
exercise price equal to the then fair market value of the underlying stock which
was determined by the Incentive Stock Committee of the Board of Directors to be
equal to the then book value per share ($26.17) of the stock. The fair market
value of stock as of December 31, 1999 is $70.00 per share. Since no established
trading market exists for the Company's common stock the price of $70.00 is
based on the last known selling price in December, 1999. The book value per
share of the stock as of December 31, 1999 is $47.61 computed on the same method
as the $26.17 book value used at the date the options were granted.
Employee Stock Ownership Plan
Hills sponsors a tax-qualified income plan for the employees of Hills
Bank and Trust Company, Hills Bank and Hills Bank Kalona known as the Hills Bank
and Trust Company Employee Stock Ownership Plan (the "ESOP"). The ESOP is
described in and operated in accordance with the provisions of the written plan
document. Hills is the trustee of the ESOP assets. The ESOP is a defined
contribution plan designed primarily to reward eligible employees for long and
loyal service by providing them with retirement benefits. The ESOP is designed
and intended to invest primarily in Common Stock issued by the Company and, in
so doing, to provide for employee participation in the equity ownership of the
Company. The ESOP may also provide benefits in the event of death, disability or
other termination of employment prior to retirement. Any benefits payable under
the ESOP will be based solely upon the amounts contributed for the benefit of a
participant and any changes in the value of those contributions while they are
held in the ESOP. The total number of participants in the ESOP as of January 1,
2000, was 226.
Participating employees are entitled to direct the trustee of the ESOP
how to vote the Common Stock of the Company held for their benefit and allocated
to their accounts under the ESOP. The trustee of the ESOP will have voting
discretion with regard to all other Common Stock of the Company owned by the
ESOP, if any. All common stock owned by the ESOP has been allocated to
participating employees.
Each calendar year Hills, as plan sponsor, contributes to the ESOP such
amount as may be determined by the Board of Directors of Hills or as may be
required to make any payments of principal and interest due on any loan made to
the trustee of the ESOP. The ESOP does not require or allow contributions by
participating employees. Distributions of benefits from the ESOP to plan
participants or their beneficiaries can be made either in cash or in Common
Stock of the Company. In recent years, distributions have been made partly in
cash and partly in Common Stock of the Company. Subject to certain exceptions,
contributions to the ESOP are fully vested after seven (7) years of service with
Hills, Hills Bank or Kalona.
<PAGE>
The following table indicates the amount accrued pursuant to the ESOP
for each named executive officer or group during 1999:
Name of Individual Capacities in Amounts
or Number in Group Which Served Accrued
- ------------------ ------------- -------
Dwight O. Seegmiller Director and President of the $ 1,600
Company; Director and President
of the Bank
Thomas J. Cilek Secretary of the Company; $ 1,600
Senior Vice President of the Bank
James G. Pratt Treasurer of the Company; $ 1,600
Senior Vice President of the Bank
All Executive Officers
as a group (3 persons) $ 4,800
All Other Participating
Employees (223 persons) $58,838
Profit Sharing Plan
Hills began sponsoring a new profit sharing plan in December, 1994.
Hills is the trustee of the Hills Bank and Trust Company Profit Sharing Plan
(the "Profit Sharing Plan"). The Profit Sharing Plan is operated in accordance
with the provisions of the written plan document. Employees of Hills Bank and
Trust Company, Hills Bank and Hills Bank Kalona are eligible to participate in
the Profit Sharing Plan. The Profit Sharing Plan, like the ESOP, is designed
primarily to reward eligible employees for long and loyal service by providing
them with retirement benefits. The Profit Sharing Plan is a defined contribution
plan and is invested in assets other than equity securities of the Company. Any
benefits payable under the Profit Sharing Plan will be based solely upon the
amounts contributed for the benefit of a participant and any changes in the
value of those contributions while they are held in the Profit Sharing Plan. The
Profit Sharing Plan does not require or allow contributions by participating
employees. Subject to certain exceptions, contributions to the Profit Sharing
Plan are fully vested after seven (7) years of service with the Banks.
The following table indicates the amount accrued pursuant to the Profit
Sharing Plan for each named executive officer or group during 1999:
Name of Individual Capacities in Amounts
or Number in Group Which Served Accrued
- ------------------- -------------------------------- --------
Dwight O. Seegmiller Director and President of the
Company; Director and President
of the Bank $12,800
Thomas J. Cilek Secretary of the Company;
Senior Vice President of the Bank $12,800
James G. Pratt Treasurer of the Company;
Senior Vice President of the Bank $12,800
All Executive Officers
as a Group (3 persons) $38,400
All Other Participating
Employees (223 persons) $470,700
Performance Graph
The graphical presentation omitted herein provides information regarding
cumulative, five year shareholder returns on an indexed basis of the Company's
Common Stock as compared with NASDAQ Market Index and the Regional-Southwest
Banks Index prepared by Media General Financial Services of Richmond, Virginia.
The latter index reflects the performance of forty bank holding companies
operating principally in the Midwest as selected by Media General Financial
Services. The indexes assume the investment of $100 on December 31, 1994 in
Company Common Stock, the NASDAQ Index and the Regional-Southwest Banks Index,
with all dividends reinvested.
The following are the data points utilized in the omitted graph:
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
Hills Bancorporation $ 100.00 $ 109.36 $ 134.93 $ 166.14 $ 205.75 $ 253.83
<PAGE>
Compensation Committee Interlocks and Insider Participation
Except as otherwise noted below, all compensation decisions affecting
the executive officers of the Company and the Banks are made by the Board of
Directors of the Banks, as the executive officers are employees of the Banks.
The Board of Directors of the Banks has not established a compensation
committee. Mr. Seegmiller, President of the Banks, serves on the Board of
Directors of the Banks, but does not participate in deliberations or voting on
decisions concerning compensation of executive officers. Although Mr. Seegmiller
does make a recommendation to the Board of Directors regarding the compensation
of Mr. Cilek and Mr. Pratt, no recommendation is made by Mr. Seegmiller
regarding his own compensation. After making such recommendations, Mr.
Seegmiller is excused from the meeting and the Board of Directors deliberates
and votes upon the compensation to be paid to each of the three executive
officers. Decisions regarding the award of stock options to the three executive
officers pursuant to the Company's Incentive Stock Plan are made by an Incentive
Stock Committee of the Board of Directors of the Company consisting of the nine
non-employee directors (all directors but Mr. Seegmiller).
Willis M. Bywater and Theodore H. Pacha, both members of the Board of
Directors of the Banks and the Incentive Stock Committee, participated in
deliberations concerning executive compensation matters during 1998. Under rules
of the Securities and Exchange Commission, the Banks are required to disclose
that it has had certain business relationships during 1999 with Economy
Advertising Company, a commercial printing and specialty advertising firm and
Hawkeye Medical Supply, a medical and office supply store. Mr. Bywater is an
executive officer and principal shareholder of Economy Advertising Company and
Mr. Pacha was an executive officer and owner of Hawkeye Medical Supply until
May, 1999 when he sold his interest in the company and ended his employment.
During 1999, the Banks paid the sum of $194,464 to Economy Advertising Company
for commercial printing services and for the purchase of calendars and other
specialty advertising items and $24,035 to Hawkeye Medical Supply for office
equipment and supplies. The Banks contemplates that it will purchase a similar
amount of goods and services from Economy Advertising Company during 2000. Such
business relationships have been entered into in the ordinary course of business
of the Banks and, in the opinion of management, the prices charged for the goods
and services provided by Economy Advertising Company and Hawkeye Medical Supply
Company are at least as favorable to the Banks as prices generally charged by
similar businesses in the area for such goods and services. The Board of
Directors of the Banks does not believe that the participation by Mr. Bywater
and Mr. Pacha in the deliberations concerning executive compensation has
provided the executive officers of the Banks with more favorable compensation
arrangements than would have been the case absent their participation.
<PAGE>
REPORT ON EXECUTIVE COMPENSATION
Under rules established by the Securities and Exchange Commission, the
Company is required to provide certain data and information in regard to the
compensation and benefits provided to Dwight Seegmiller, as President of the
Company and the Banks, and the other two executive officers of the Company and
the Banks. The disclosure requirements for these three individuals (the
"executive officers") include information set forth in various compensation
tables contained in this Proxy Statement and a report explaining the rationale
and matters considered in making fundamental executive compensation decisions
affecting those individuals. Decisions regarding executive officer salaries,
bonuses and contributions to the ESOP and, beginning in 1994, the Profit Sharing
Plan are made by the Board of Directors of the Banks, with Mr. Seegmiller
abstaining from deliberations and voting on such matters. Decisions regarding
the grant of awards to executive officers pursuant to the Incentive Stock Plan
are made by the Incentive Stock Committee of the Board of Directors of the
Company, consisting of the nine non-employee directors (all directors but Mr.
Seegmiller). In fulfillment of the disclosure requirements, the Board of
Directors of the Banks and the Incentive Stock Committee of the Company have
prepared the following report.
Compensation Policy
This report describes the current compensation policy as endorsed by the
Board of Directors of the Banks and the Incentive Stock Committee and the
resulting actions taken in arriving at 1999 compensation as reported in the
various compensation tables. The executive compensation program of the Banks has
been designed to:
* provide a pay for performance policy that differentiates compensation
amounts based upon corporate and individual performance;
* provide compensation opportunities which are comparable to those offered
by other Iowa-based financial institutions, thus allowing the Banks to
compete for and retain talented executives who are essential to the
long-term success of the Company and the Banks; and
* align the interest of the executive officers with the long-term interest
of the Company's shareholders through the ownership of Company Common
Stock.
The executive compensation program is comprised of salary, opportunities
for annual cash bonuses, participation in the ESOP and opportunities for
long-term incentives pursuant to awards granted under the Incentive Stock Plan
and, beginning in 1994, participation in the Profit Sharing Plan. An executive
officer's salary is based on a number of factors, including the Banks'
performance as compared to internally established goals for the most recently
ended fiscal year and to the performance of other Iowa-based financial
institutions, the individual officer's level of responsibility within the Banks
and comparisons to salaries paid to officers holding similar positions in other
Iowa-based financial institutions. The award of an annual cash bonus is made in
the discretion of the Board of Directors and not pursuant to any formal plan or
formula. A bonus, if granted, is based on the individual performance of the
executive officer and the achievement of financial performance goals of the
Banks, as established in the Banks' annual budget and business plan. The Banks,
as plan sponsor of the ESOP, makes an annual ESOP contribution which is
allocated among all participating employees of the Banks, including the
executive officers, based on their annual salaries. In 1999, the Banks, as
sponsor of the Profit Sharing Plan, made a Profit Sharing Plan contribution
which was allocated among all participating employees of the Banks, including
the executive officers, based on their annual salaries. The amount of the ESOP
contribution and the amount of the Profit Sharing Plan contribution are
determined in the discretion of the Board of Directors and are based on the
achievement of financial performance goals of the Banks as established in the
Banks' annual budget and business plan. The Incentive Stock Committee uses the
award of stock options to executive officers (as well as the award of restricted
stock to other Banks employees) to align their interests with those of the
shareholders; however, significant vesting periods are also used to encourage
retention as employees. The amount of options granted is determined by reviewing
the practices of other financial institutions based on information provided by
an outside consultant to the Board of Directors.
In 1993, Section 162(m) of the Internal Revenue Code was amended to
place limits on the deductibility of compensation in excess of $1 million paid
to executive officers of publicly held companies. The Board of Directors of the
Banks does not believe, however, that the amendment has had or will have any
impact on the compensation policies followed by the Board.
<PAGE>
President's Compensation
Mr. Seegmiller's base salary was unchanged at $206,428 for 1999 from the
prior year. The base salary reflected consideration of (i) an assessment of the
Banks' performance during 1998 as compared to goals set in the Banks' annual
budget and business plan for 1998, (ii) a comparison of the Banks' performance
as compared with that of other Iowa-based financial institutions, and (iii)
compensation data provided by comparative industry surveys. Each year,
management of the Banks prepares, and the Board of Directors approves, an annual
budget and business plan containing financial performance goals measured
primarily in terms of earnings per share, asset quality, return on assets and
return on stockholders' equity. In setting Mr. Seegmiller's salary for 1999, the
Board reviewed the goals established for 1998 and determined that such goals had
been achieved by the Banks. The Board also reviewed the Banks' performance as
compared to that of other Iowa-based financial institutions of similar asset
size. Compensation data for other Iowa-based financial institutions of similar
asset size is also provided through surveys independently prepared by the Iowa
Bankers Association. The survey reviewed by the Board in setting 1999 salary
contained information on salaries paid during 1998 to the chief executive
officers of 11 Iowa-based banks with deposits in excess of $225 million. While
the foregoing factors are not specifically weighted in the decision-making
process, primary emphasis is placed on the Banks' performance during the
previous year as compared to the internally-established goals. Review of
comparable compensation data is used primarily as a check to ensure that the
salary established is within the range of salaries paid to other chief executive
officers of Iowa-based financial institutions. Although the Board reviewed a
number of objective factors as described above in setting Mr. Seegmiller's
salary for 1999, the amount was based on a subjective determination by the
Board.
Mr. Seegmiller was awarded a cash bonus in 1999 in the amount of $35,000
based on a determination by the Board of Directors that the Banks had
accomplished certain goals as established in the budget and business plan for
1998. Those goals were measured primarily in terms of earnings per share, asset
quality, return on assets and return on stockholders' equity. The amount of the
bonus was based on a subjective determination by the Board. In addition to the
cash bonus, Mr. Seegmiller received additional compensation that represents the
contributions, which were limited due to statutory and administrative rules, for
the Hills Bank and Trust Company Employee Stock Ownership Plan and Profit
Sharing Plan.
A contribution of $14,400 was made to Mr. Seegmiller's ESOP and profit
sharing accounts during 1999. The size of the contribution was determined as a
function of Mr. Seegmiller's 1999 salary (not including bonus) and the size of
the contribution made by the Banks, as plan sponsors, to the ESOP and profit
sharing plan for the benefit of all employees of the Banks eligible to
participate in the ESOP and profit sharing plans limited to a maximum of 15% of
$160,000 or $24,000 established by the Internal Revenue Service. For 1999, the
ESOP and profit sharing plan contributions made by the Banks amounted to 9% of
the aggregate salaries paid to all Banks employees eligible to participate in
the plans. The size of the ESOP and profit sharing contributions are determined
by the Board of Directors in its discretion based on its assessment of whether
the Banks achieved the goals established in the annual budget and business plan
for 1999. Once the size of the ESOP and profit sharing contributions were
determined, such contributions were allocated among the ESOP and profit sharing
accounts of all eligible employees of the Banks, including Mr. Seegmiller, based
on their annual salaries for 1999.
Compensation for Other Executive Officers
Effective January 1, 1999, the Board of Directors made no changes in the
salaries paid to the two other executive officers of Hills as reflected in the
compensation table appearing herein. The Board of Directors awarded a cash bonus
of $17,000 and $26,000 respectively to each of the other two executive officers
in 1999, and bonuses as discussed for Mr. Seegmiller and appearing on the
compensation table. The bonus awards were based on the same considerations as
the compensation decisions for the President of the Banks. Additionally,
contributions were made to the ESOP accounts and the Profit Sharing Plan
accounts of the other two executive officers, the size of which were determined
in accordance with the same procedure as used for all employees of the Banks.
BOARD OF DIRECTORS
HILLS BANK AND TRUST COMPANY
INCENTIVE STOCK COMMITTEE
HILLS BANCORPORATION
Willis M. Bywater Ann Marie Rhodes
Thomas J. Gill, D.D.S. Ronald E. Stutsman
Donald H. Gringer Earl M. Yoder
Richard W. Oberman Sheldon E. Yoder
Theodore H. Pacha
<PAGE>
LOANS TO AND CERTAIN OTHER TRANSACTIONS WITH
EXECUTIVE OFFICERS AND DIRECTORS
Certain of the officers and directors of the Company, their associates
or members of their families, were customers of, and have had transactions with,
the Banks from time to time in the ordinary course of business, and additional
transactions may be expected to take place in the ordinary course of business in
the future. All loans and commitments included in such transactions have been
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons.
In the opinion of management of the Banks, such loan transactions do not involve
more than the normal risk of collectibility or present other unfavorable
features.
During the past year, the Banks and the Company have maintained business
relationships with certain companies partially owned or operated by members of
the Board of Directors of the Company through the purchase of varying amounts of
goods and services from such companies. All such business relationships have
been entered into in the ordinary course of business of the Banks and the
Company and, in the opinion of management, the prices charged for such goods and
services have been at least as favorable to the Banks and the Company as prices
generally charged by similar businesses in the area for such goods and services.
Management of the Company anticipates that the Banks and the Company will
continue to maintain such business relationships on a similar basis to the
extent that such goods and services are required by the Banks and the Company in
the future.
Michael D. Hodge is a nominee for director to fill the unexpired term of
Earl M. Yoder. Mr Hodge is the owner of approximately fifty-five percent (55%)
of Hodge Construction Company. In 1999, the Company entered into two cost-plus
contracts with Hodge Construction Company for construction management services
for construction projects slated to start in the second quarter of 2000 in
Hills, Iowa and Coralville, Iowa. During 1999, the Company made no payments for
construction management services performed for the Company under these cost-plus
contracts. Although these contracts were not entered into as a result of
competitive bidding, the contracts were entered into in the ordinary course of
business of the Company and, in the opinion of management, the amounts to be
paid under such contracts for the services performed will be at least as
favorable to the Company as prices generally charged by similar businesses in
the area for such services. If Mr. Hodge becomes a director of the Company,
management anticipates that any future contracts between the Company and Hodge
Construction Company will be entered into as a result of competitive bidding.
Approval of the Hills Bancorporation 2000
Stock Option and Incentive Plan
Summary of the Proposal
The Board of Directors of the Company has adopted the Hills
Bancorporation 2000 Stock Option and Incentive Plan in the form attached hereto
as an Exhibit A (for purposes of the Section of the proxy statement, the
"Plan"), subject to approval of the Plan by the stockholders of the Company. The
description that follows is qualified in its entirety by reference to the Plan
as set forth in such exhibit. Subject to stockholder approval, the Plan is
intended to succeed the Hills Bancorporation 1993 Stock Incentive Plan which
expired in 1999 (the "1993 Plan"). In general, the proposed Plan authorizes the
Company to award to select key employees and non-directors, stock options,
shares of the Company's common stock or an amount based on the value thereof.
The number of shares of common stock reserved for all awards under the plan is
66,000.
Stockholder approval of the Plan requires the affirmative vote of a
majority of the shares present or represented and entitled to vote at the
meeting.
The Board of Directors recommends a vote for the Hills Bancorporation 2000 Stock
option and incentive plan.
Description of the Plan
Purpose. The Board believes that, like the 1993 Plan, the proposed Plan
will successfully advance the Company's long-term financial success by enabling
it to attract and retain outstanding talent and motivate superior performance by
encouraging and providing a means for participating employees to obtain an
ownership interest in the Company.
Administration. The Plan will be administered by a committee of the
Board (the "Committee") which shall consist of two or more members of the Board.
The Company presently intends for each of these directors to be a "nonemployee
director" within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934 (the "Exchange Act"). The Committee is responsible for interpreting and
administering the Plan, including making all determinations necessary or
advisable for such administration.
<PAGE>
Eligibility and Participation. The Committee is authorized from time to
time to grant awards under the Plan to such salaried employees (including
executive officers) and non-employee directors of the Company and its
subsidiaries as the Committee, in its discretion, selects. Since its inception,
approximately 81 participants received grants under the 1993 Plan covering
approximately 65,000 shares. These awards are not necessarily indicative of the
number of participants or the number of awards which might be made under the
proposed Plan. The Company cannot at this time identify the persons to whom
awards will be granted, or would have been granted if the Plan had been in
effect during 1999; nor can the Company state the form or value of any such
awards.
Share Limits. The aggregate number of shares of the Company's common
stock issuable under all awards under the Plan is approximately 66,000. Shares
awarded under the Plan will be made available from authorized but unissued
common stock or from common stock held in the treasury.
Options. The Plan authorizes the Committee to grant to employees options
to purchase the Company's common stock which may be in the form of statutory
stock options, including "incentive stock options" ("ISOs") or in the form of
non-statutory options. The Plan authorizes the Committee to grant only options
other than ISOs to non-employee directors. The exercise price of options granted
under the Plan (subject to amendment as discussed herein under the caption
"Amendment and Adjustment") may not be less than the fair market value of such
stock at the time the option is granted and once established may not be
modified. Fair market value on any given date for this and other purposes of the
Plan will be the mean between the highest and the lowest sale prices reported on
such date or if there were no sales on such date, then the fair market value
will be the mean between the bid and asked price on such date, or, if there is
no bid and asked price on such date, then on the next prior business day on
which there was a bid and asked price. If no such bid and asked price is
available, then the fair market value will be as determined by the Committee in
its sole and absolute discretion.
The Plan permits optionees, with certain exceptions, to pay the exercise
price of options in cash, common stock of the Company (valued at its fair market
value on the date of exercise and including stock received upon exercise of
options under any Company option plan) or a combination thereof. Accordingly,
any optionee who owns any Company common stock may generally, by using stock in
payment of the exercise price of an option, receive, in one transaction or a
series of essentially simultaneous transactions, without any cash payment of the
purchase price, (i) Company common stock equivalent in value to the excess of
the fair market value of the shares subject to exercised option rights over the
exercise price of the option, plus (ii) a number of shares equal to that used to
pay the exercise price.
Options will become exercisable six months or longer after the date of
grant and the term shall not extend later than ten years after the date of
grant. Unless the Committee establishes otherwise at the time of the award, in
the event of termination of employment because of death, stock options may be
exercised by the participant's beneficiary within two years after death without
regard to any holding period. Unless the Committee establishes otherwise at the
time of the award, in the event of termination of employment because of
disability, options generally may be exercised by the participant within one
year after the termination of employment upon the same terms as if the holder
remained an employee of the Company. In the event of termination for just cause,
a participant's options immediately expire. In the event of any other kind of
termination, a participant may exercise the options within three (3) months of
such termination.
Stockholder Rights. Each participant shall have the right to receive
dividends upon and to vote shares of common stock awarded during any restriction
period. Optionees however, will not have rights as a stockholder prior to
exercise. With limited exceptions, participants may not transfer, assign,
pledge, or encumber awards under the Plan. Awards under the Plan shall be
evidenced by written agreements.
Change in Control. In the event of a change in control of the Company,
as defined in the Plan, the restrictions and vesting requirements of awards will
lapse for a period of 60 days beginning on the date of the change in control and
the value of awards may be paid to participants in cash.
The lapse of limitations and payments of the value of incentive shares
in cash in the event of a change in control may have the incidental effect of
increasing the net cost of such change in control and thus theoretically could
render more difficult or discourage such a change in control, even if such
change in control would be beneficial to stockholders generally.
Amendment and Adjustment. The Committee may suspend or terminate the
Plan or any portion thereof at any time. No amendment, suspension or termination
of the Plan may materially and adversely affect outstanding awards without the
consent of the participant.
The Plan provides that in the event of a stock dividend or stock split,
or a combination or other increase or reduction in the number of issued shares
of the Company's common stock, the Board of Directors or the Committee may make
adjustments in the number and type of shares authorized by the Plan and covered
by outstanding awards under the Plan.
<PAGE>
Duration of the Plan. The effective date of the Plan is the date upon
which the Plan was adopted by the Board of Directors of the Company. The Plan
terminates upon the expiration of ten years following the effective date of the
Plan, unless sooner terminated by the Committee.
Federal Income Tax Consequences of Stock Options and Stock Appreciation
Rights. The following briefly summarizes the federal income tax consequences of
the issuance and exercise of stock options under the Plan. The following
discussion does not purport to be complete and does not cover, among other
things, the state, local, and foreign tax treatment associated with the grant
and exercise of options.
Nonstatutory Options. With respect to nonstatutory options granted under
the Plan, the Company understands that under existing federal income tax law:
(i) no income will be recognized to the optionee at the time of grant; (ii) upon
exercise of an option, the optionee will be required to treat as ordinary income
the difference between the option price and fair market value of the stock
purchased on the date of exercise, and the Company will be entitled to a
deduction equal to such amount; and (iii) assuming the shares received upon
exercise of such option constitute capital assets in the optionee's hands, any
gain or loss upon disposition of the shares (measured by reference to the fair
market value of the shares on the date of exercise) will be treated as capital
gain or loss, which will be long-term if the shares have been held longer than
one year. Any costs incurred in disposing of the shares will reduce the gain or
increase the loss upon disposition of the shares.
Incentive Stock Options. ISOs under the Plan are intended to constitute
"incentive stock options" under Section 422 of the Code. The Company understands
that, if shares purchased pursuant to the exercise of an incentive stock option
for cash are not disposed of by the optionee within two years from the date of
grant of the option or within one year after the transfer of the shares to him,
then for federal income tax purposes: (i) no income will be recognized to the
optionee upon either the grant or the exercise of the option; (ii) any gain or
loss will be recognized to the optionee only upon ultimate disposition of the
shares, and assuming the shares constitute capital assets in the optionee's
hands, will be treated as long-term capital gain or loss; and (iii) the Company
will not be entitled to a federal income tax deduction in connection with the
grant or the exercise of the option. The difference between the option price and
the fair market value of the shares acquired upon exercise of such an option is
considered an item of adjustment for purposes of the Alternative Minimum Tax
under the Code.
The Company further understands that, if the optionee disposes of the
shares acquired by exercise of an incentive stock option before the expiration
of the required holding period, the optionee must treat as ordinary income in
the year of such disposition an amount equal to the difference between the
option price and the lesser of the fair market value of the shares on the date
of exercise or the selling price. The balance of the optionee's gain on such
disposition, if any, will be taxed as capital gain. The Company will be entitled
to a deduction in the year of the disposition equal to the amount of ordinary
income recognized to the optionee.
Exercise by Delivery of Previously Acquired Shares. Generally, no gain
or loss will be recognized by an optionee upon the transfer to the Company of
previously acquired shares of common stock (the "Old Shares") in payment of all
or a portion of the exercise price of shares of common stock (the "New Shares")
acquired through the exercise of an option. The optionee's basis and holding
period in the Old Shares are transferred to that number of New Shares that
equals the number of Old Shares tendered in payment of the exercise price.
Additional New Shares have a basis equal to any income recognized by the
optionee on exercise plus any cash paid in payment of the exercise price.
However, if Old Shares are used to exercise and incentive stock option, the
disposition of the Old Shares will be taxable generally in accordance with the
rules discussed above if the Old Shares were acquired pursuant to the exercise
of an incentive stock option and have not been held for the requisite holding
period.
Tax Withholding. Under the Code, tax withholding by the Company is
required with respect to the amount of compensation realized by optionees under
the Plan. Under the Plan, the Company may permit the optionee to have the
Company withhold all or a portion of the shares of the Company which the
optionee acquires upon the exercise of an option to satisfy estimated or actual
federal, state or local income taxes. The Company may also permit the optionee
to deliver other previously acquires shares for the purpose of tax withholding.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
McGladrey & Pullen, LLP, Certified Public Accountants, provided
accounting services to the Company during the Company's fiscal year ended
December 31, 1999. The Board of Directors of the Company has selected McGladrey
& Pullen, LLP to provide accounting services to the Company for the fiscal year
ending December 31, 2000. A representative of McGladrey & Pullen, LLP is
expected to be present at the Annual Meeting with the opportunity to make a
statement if he desires to do so and he is also expected to be available to
respond to appropriate questions.
<PAGE>
PROPOSALS BY SHAREHOLDERS
Shareholder proposals intended to be presented at the Annual Meeting of
Shareholders to be held in 2001 must be received by the Company no later than
December 8, 2000 for inclusion in the Company's proxy statement and form of
proxy relating to that meeting. Proposals should be submitted to the Company at
its principal executive offices at 131 Main Street, Hills, Iowa 52235.
AVAILABILITY OF FORM 10-K REPORT
Copies of the Company's Annual Report to the Securities and Exchange
Commission (Form 10-K) including the financial statements and schedules thereto
for the fiscal year of the Company ended December 31, 1999, will be mailed when
available without charge (except for exhibits) to a holder of shares of the
Common Stock of the Company upon written request to James G. Pratt, Treasurer,
Hills Bancorporation, 131 Main Street, Hills, Iowa 52235.
OTHER MATTERS
Management of the Company knows of no other matters which will be
presented for consideration at the Annual Meeting of Shareholders other than
those stated in the Notice of Annual Meeting which is part of this Proxy
Statement, and management does not intend itself to present any such other
business. If any other matters do properly come before the meeting, it is
intended that the persons named in the accompanying proxy will vote thereon in
accordance with their judgment. The proxy will also have the power to vote for
the adjournment of the meeting from time to time.
A copy of the Annual Report of the Company for the year ended December
31, 1999, is mailed to shareholders together with this Proxy Statement. Such
report is not incorporated in this Proxy Statement and is not to be considered a
part of the proxy soliciting material.
By Order of the Board of Directors
/s/ Dwight O. Seegmiller
--------------------------------
Dwight O. Seegmiller
President
March 27, 2000
Hills, Iowa
<PAGE>
Exhibit A
HILLS BANCORPORATION
2000 STOCK OPTION AND INCENTIVE PLAN
1. Purpose of the Plan.
The purpose of this Hills Bancorporation 2000 Stock Option and Incentive
Plan (the "Plan") is to advance the interests of the Company through providing
select key Employees and Directors of the Company and its Affiliates with the
opportunity to acquire Shares. By encouraging such stock ownership, the Company
seeks to attract, retain and motivate the best available personnel for positions
of substantial responsibility and to provide additional incentive to Directors
and key Employees of the Company or any Affiliate to promote the success of the
business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in
accordance with Paragraph 5(c).
(c) "Awards" shall mean Options, including ISO and Non-ISO Options as
the context indicates.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Change in Control" shall mean any one of the following events:
(i) the acquisition (A) of ownership, holding or power to vote more than 50% of
the Company's voting stock, (B) of the ability to control the election of the
a majority of the Company's directors, or (C) of a controlling influence over
management or policies of the Company by any person or by persons acting as a
group (within the meaning of Section 13(d) of the Securities Exchange Act of
1934), or (ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of the Company
(the Continuing Directors) cease for any reason to constitute at least
two-thirds thereof, provided that any individual whose election or nomination
for election as a member of the Board was approved by a vote of at least
two-thirds of the Continuing Directors then in office shall be considered a
Continuing Director. For purposes of this subparagraph only, the term "person"
refers to an individual or a corporation, partnership, trust, association, joint
venture, pool, syndicate, sole proprietorship, unincorporated organization or
any other form of entity not specifically listed herein. The decision of the
Committee as to whether a change in control has occurred shall be conclusive and
binding.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Committee" shall mean the Stock Option Committee appointed by
the Board in accordance with Paragraph 5(a) hereof.
(h) "Common Stock" shall mean any class of the common stock, no par
value per share, of the Company.
(i) "Company" shall mean Hills Bancorporation.
(j) "Continuous Service" shall mean the absence of any interruption
or termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the case
of sick leave, military leave or any other leave of absence approved by the
Company or in the case of transfers between payroll locations of the Company or
between the Company, an Affiliate or a successor.
(k) "Director" shall mean any member of the Board, and any member of
the board of directors of any Affiliate.
(l) "Disinterested Person" shall mean any non-employee member of the
Board of Directors of the Company. For purposes of this Plan, a non-employee
member of the Board of Directors shall have the same meaning as the term
"Non-Employee Director" defined in Rule 16b-3.
(m) "Effective Date" shall mean the date specified in Paragraph 13
hereof.
(n) "Employee" shall mean any person employed by the Company or an
Affiliate.
(o) "Exercise Price" shall mean the price per Optioned Share at which
an Option may be exercised.
(p) "ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan, and which is intended to be and is
identified as an "incentive stock option" within the meaning of Section 422 of
the Code.
(q) "Market Value" shall mean the fair market value of the Common
Stock, as determined under Paragraph 7(b) hereof.
(r) "Non-ISO" means an option to purchase Common Stock which meets
the requirements set forth in the Plan but which is not intended to be and is
not identified as an ISO.
(s) "Option" means an ISO and/or a Non-ISO.
(t) "Optioned Shares" shall mean Shares subject to an Award granted
pursuant to this Plan.
(u) "Participant" shall mean any person who receives an Award
pursuant to the Plan.
(v) "Plan" shall mean this Hills Bancorporation 2000 Stock Option and
Incentive Plan.
(w) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
(x) "Share" shall mean one share of Common Stock.
<PAGE>
3. Term of the Plan and Awards.
(a) Term of the Plan. The Plan shall continue in effect for a term of
ten years from the Effective Date, unless sooner terminated pursuant to
Paragraph 15 hereof. No Award shall be granted under the Plan after ten years
from the Effective Date.
(b) Term of Awards. The term of each Award granted under the
Plan shall be established by the Committee, but shall not exceed 10 years;
provided, however, that in the case of an Employee who owns Shares
representing more than 10% of the outstanding Common Stock at the time an
ISO is granted, the term of such ISO shall not exceed five years.
4. Shares Subject to the Plan.
Except as otherwise required by the provisions of Paragraph 10 hereof,
the aggregate number of Shares deliverable pursuant to Awards shall not exceed
66,000 Shares, which equals 4.35% of the Shares currently issued and outstanding
on a fully diluted basis. If any Awards should expire, become unexercisable, or
be forfeited for any reason without having been exercised or become vested in
full, the Optioned Shares shall, unless the Plan shall have been terminated, be
available for the grant of additional Awards under the Plan.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by the
Committee, which shall consist of not less than two (2) members of the Board who
are Disinterested Persons. Members of the Committee shall serve at the pleasure
of the Board. In the absence at any time of a duly appointed Committee, the Plan
shall be administered by the members of the Board who are Disinterested Persons.
(b) Powers of the Committee. Except as limited by the express provisions
of the Plan or by resolutions adopted by the Board, the Committee shall have
sole and complete authority and discretion to: (i) select Participants and grant
Awards, (ii) determine the form and content of Awards to be issued in the form
of Agreements under the Plan, (iii) interpret the Plan, (iv) prescribe, amend
and rescind rules and regulations relating to the Plan, and (v) make other
determinations necessary or advisable for the administration of the Plan. The
Committee shall have and may exercise such other power and authority as may be
delegated to it by the Board from time to time. A majority of the entire
Committee shall constitute a quorum and the action of a majority of the members
present at any meeting at which a quorum is present, or acts approved in writing
by a majority of the Committee without a meeting, shall be deemed the action of
the Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement
containing such provisions as may be approved by the Committee. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such Agreement. The terms
of each such Agreement shall be in accordance with the Plan, but each Agreement
may include such additional provisions and restrictions by the Committee, in its
discretion, provided that such additional provisions and restrictions are not
inconsistent with the terms of the Plan. In particular, the Committee shall set
forth in each Agreement: (i) the Exercise Price of an Option, (ii) the number of
Shares subject to, and the expiration date of, the Award, (iii) the manner, time
and rate (cumulative or otherwise) of exercise or vesting of such Award, and
(iv) the restrictions, if any, to be placed upon such Award or upon Shares which
may be issued upon exercise of such Award.
The Chairman of the Committee and such other Directors and officers as
shall be designated by the Committee are hereby authorized to execute Agreements
on behalf of the Company and to cause them to be delivered to the recipients of
Awards.
(d) Effect of the Committee's Decisions. All decisions, determinations
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
(e) Indemnification. In addition to such other rights of indemnification
as they may have, the members of the Committee shall be identified by the
Company in connection with any claim, action, suit or proceeding relating to any
action taken or failure to act under or in connection with the Plan or any Award
granted hereunder to the full extent provided for under the Company's governing
instruments with respect to the indemnification of Directors.
<PAGE>
6. Grant of Options.
(a) General Rule. Only Employees shall be eligible to receive
discretionary grants of ISO Options pursuant to the Plan. The Committee may make
discretionary grants of Non-ISO Options to those Employees and Non-Employee
Directors of the Company or its Affiliates who, in the opinion of the Committee,
have the capacity for contributing to the successful performance of the Company
or its Affiliates. Committee members may make grants of Non-ISO Options to
themselves provided that such grants are approved by the vote of the entire
Board of Directors. All grants of Non-ISO Options shall be subject to an
Agreement with the Participants whereby one or more of the exemptions to Rule
16b-3 is met, which may include a requirement that the Participant not sell or
otherwise dispose of such Option or Optioned Shares within six months from the
date of grant of the Option to the Participant.
(b) Special Rules for ISOs. The aggregate Market Value, as of the date
the Option is granted, of the Shares with respect to which ISOs are exercisable
for the first time by an Employee during any calendar year (under all incentive
stock option plans, as defined in Section 422 of the Code, of the Company or any
present or future Parent or Subsidiary of the Company) shall not exceed
$100,000. Notwithstanding the foregoing, the Committee may grant Options in
excess of the foregoing limitations, in which case such Options granted in
excess of such limitation shall be Options which are Non-ISOs.
7. Exercise Price for Options.
(a) Limits on Committee Discretion. The Exercise Price as to any
particular Non-ISO shall not be less than 100% of the Market Value of the
Optioned Shares on the date of grant. The Exercise Price as to any particular
ISO shall not be less than Market Value of the Optioned Shares on the date of
grant. In the case of an Employee who owns Shares representing more than 10% of
the Company's outstanding Shares of Common Stock at the time an ISO is granted,
the Exercise Price shall not be less than 110% of the Market Value of the
Optioned Shares at the time the ISO is granted.
(b) If the Common Stock is listed on a national securities exchange
(including the NASDAQ National Market System) on the date in question, then the
Market Value per Share shall be the average of the highest and lowest selling
price on such exchange on such date, or if there were no sales on such date,
then the Exercise Price shall be the Mean between the bid and asked price on
such date. If the Common Stock: is traded otherwise than on a national
securities exchange on the date in question, then the Market Value per Share
shall be the mean between the bid and asked price on such date, or, if there is
no bid and asked price on such date, then on the next prior business day on
which there was a bid and asked price. If no such bid and asked price is
available, then the Market Value per Share shall be its fair market value as
determined by the Committee in its sole and absolute discretion.
8. Exercise of Options.
(a) Generally. Any Option granted hereunder shall be exercisable at such
times and under such conditions as shall be permissible under the terms of the
Plan and of the Agreement granted to a Participant. An Option may not be
exercised for a fractional Share.
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and limitations on its exercise, only
by (1) written notice of intent to exercise the Option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of cash
and Common Stock, of the amount of the Exercise Price for the number of Shares
with respect to which the Option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at the Company's
executive offices. Common Stock utilized in full or partial payment of the
Exercise Price for Options shall be valued at its Market Value at the date of
exercise.
(c) Period of Exercisability. Except to the extent otherwise provided in
the terms of an Agreement, an ISO may be exercised by a Participant only while
he or she is an Employee and has maintained Continuous Service from the date of
the grant of the Option, or within three months after termination of such
Continuous Service (but not later than the date on which the Option would
otherwise expire), except if the Employee's Continuous Service terminates by
reason of:
(1) "Just Cause" which for purposes hereof shall have the meaning
set forth in any unexpired employment or severance agreement between
the Participant and the Company (and, in the absence of any such
agreement, shall mean termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful vilolation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order), then
the Participant's rights to exercise such Option shall expire on the
date of such termination;
<PAGE>
(2) death, then to the extent that the Participant would have
been entitled to exercise the Option immediately prior to his death,
such Option of the deceased Participant may be exercised within two
years from the date of his death (but not later than the date on which
the Option would otherwise expire) by the personal representatives of
his estate or person or persons to whom his rights under such Option
shall have passed by will or by laws of descent and distribution;
(3) Permanent and Total Disability (as such term is defined in
Section 422(e)(3) of the Code), then to the extent that the Participant
would have been entitled to exercise the Option immediately prior to his
Permanent and Total Disability, such Option may be exercised within one
year from the date of such Permanent and Total Disability, but not later
than the date on which the Option would otherwise expire.
Notwithstanding the provisions of any Option which provides for its
exercise in installments as designated by the Committee, such Option shall
become immediately exercisable upon the Participant's death or Permanent and
Total Disability.
(d) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof shall be final and conclusive on all persons affected thereby.
9. Change in Control.
(a) General Rule. Notwithstanding the provisions of any Award which
provides for its exercise or vesting in installments, for a period of 60 days
beginning on the date of a Change in Control, all Options shall be immediately
exercisable and fully vested. The Participant shall, at the discretion of the
Committee, be entitled to receive cash in an amount equal to the excess of the
Market Value of the Common Stock subject to such Option over the Exercise Price
of such Shares, in exchange for the cancellation of such Options by the
Participant.
(b) Exception to General Rule. Notwithstanding subparagraph (a)
of this Paragraph, in no event may an Option be canceled in exchange for
cash within the six-month period following the date of its grant.
10. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of Shares
reserved for issuance under the Plan, and the Exercise Price, number and kind of
Shares subject to outstanding Awards shall be proportionately adjusted for any
increase, decrease, change or exchange of Shares for a different number or kind
of shares or other securities of the Company which results from a merger,
consolidation, recapitalization, reorganization, reclassification, stock
dividend, split-up, combination of shares, or similar event in which the number
or kind of shares is changed without the receipt or payment of consideration by
the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In
the event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding
Awards shall be surrendered. With respect to each Award so surrendered, the
Committee shall in its sole and absolute discretion determine whether the holder
of the surrendered Award shall receive:
(1) for each Share then subject to an outstanding Award the
number and kind of shares into which each outstanding Share (other than
Shares held by dissenting stockholders) is changed or exchanged,
together with appropriate adjustments to the Exercise Price in the case
of Options; or
(2) a cash payment ( from the Company or the successor
corporation), in an amount equal to the Market Value of the Shares
subject to the Award on the date of the Transaction, less the Exercise
Price of the Award in the case of Options.
(c) Special Rule for ISOs. Any adjustment made pursuant to subparagraphs
(a) or (b)(1) hereof shall be made in such a manner as not to constitute, a
modification, within the meaning, of Section 424(h) of the Code, of outstanding
ISOs.
(d) Conditions and Restrictions on New, Additional, or Different Shares
or Securities. If, by reason of any adjustment made pursuant to this Paragraph,
a Participant becomes entitled to new, additional, or different shares of stock
or securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the Shares pursuant to the Award before the adjustment was made.
(e) Other Issuances. Except as expressly provided in this Paragraph, the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefore, shall not affect, and no
adjustment shall be made with respect to, the number, class, or Exercise Price
of Shares then subject to Awards or reserved for issuance under the Plan.
<PAGE>
11. Non-Transferability of Awards.
Awards may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution, or pursuant to the terms of a qualified domestic relations orders
(within the meaning of Section 414(p) of the Code and the regulations and
rulings thereunder).
12. Time of Granting Awards.
The date of grant of an Award shall, for all purposes, be the later of
the date on which the Committee makes the determination of granting such Award,
and the Effective Date. Notice of the determination shall be given to each
Participant to whom an Award is so granted within a reasonable time after the
date of such grant.
13. Effective Date.
The Plan shall become effective upon the adoption of the Plan by the
Board provided that the Plan is ratified by the Shareholders of the Company
within twelve months following the Board's adoption of the Plan.
14. Modification of Awards.
At any time, and from time to time, the Board may authorize the
Committee to direct execution of an instrument providing for the modification of
any outstanding Award, provided no such modification shall confer on the holder
of said Award any right or benefit which could not be conferred on him by the
grant of a new Award at such time, or impair the Award, without the consent of
the holder of the Award.
15. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Awards, suspend or terminate
the Plan.
No amendment, suspension or termination of the Plan shall, without the
consent of any affected holders of an Award, alter or impair any rights or
obligations under any Award theretofore granted.
16. Conditions Upon Issuance of Shares.
(a) Compliance with Securities Laws. Shares of Common Stock shall not be
issued with respect to any Award unless the issuance and delivery of such Shares
shall comply with any relevant provisions of law, including, without limitation,
the Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities law, and the requirements of any
stock exchange upon which the Shares may then be listed. The Plan is intended to
comply with Rule 16b-3, and any provision of the Plan which the Committee
determines in its sole and absolute discretion to be inconsistent with said Rule
shall, to the extent of such inconsistency, be inoperative and null and void,
and shall not affect the validity of the remaining provisions of the Plan.
(b) Special Circumstances. The inability of the Company to obtain
approval from any regulatory body or authority deemed by the Company's counsel
to be necessary to the lawful issuance and sale of any Shares hereund er shall
relieve the Company of any liability in respect of the non-issuance or sale of
such Shares. As a condition to the exercise of an Option, the Company may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(c) Committee Discretion. The Committee shall have the discretionary
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to impose a
right of first refusal or to establish repurchase rights or both of these
restrictions.
17. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep
available a number of Shares sufficient to satisfy the requirements of the Plan.
18. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of Options
shall be subject to the Participant's satisfaction of all applicable federal,
state and local income and employment tax withholding obligations. The
Committee, in its discretion, may permit the Participant to satisfy the
obligation, in whole or in part, by irrevocably electing to have the Company
withhold Shares, or to deliver to the Company Shares that the Participant
already owns, having a value equal to the amount required to be withheld. The
value of Shares to be withheld, or delivered to the Company, shall be based on
the Market Value of the Shares on the date the amount of tax to be withheld is
to be determined. As as alternative, the Company may retain, or sell without
notice, a number of such Shares sufficient to cover the amount required to be
withheld.
<PAGE>
19. No Employment or Other Rights.
In no event shall an Employee's or Director's eligibility to participate
or participation in the Plan create or be deemed to create any legal or
equitable right of the Employee, Director, or any other party to continue
service with the Company or any Affiliate. No Employee or Director shall have a
right to be granted an Award or, having received an Award, the right to again be
granted an Award. However, an Employee or Director who has been granted an Award
may, if otherwise eligible, be granted an additional Award or Awards.
20. Governing Law.
The Plan shall be governed by and construed in accordance with the laws
of the State of Iowa and applicable federal law.
