PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
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[ ] Soliciting Material Pursuant to Section 240.14a-11(c)
or Section 240.14a-12
FRANKLIN FINANCIAL SERVICES CORPORATION
Name of Registrant as Specified in its Charter)
________________________________________________________________
(Name of Person(s) Filing Proxy Statement
if other than the Registrant)
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PROXY STATEMENT
Dated and to be Mailed March 26, 2002
FRANKLIN FINANCIAL SERVICES CORPORATION
20 South Main Street
P. O. Box 6010
Chambersburg, PA 17201-6010
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 23, 2002
Table of Contents Page
GENERAL INFORMATION ....................................... 3
Date, Time, and Place of Meeting ..................... 3
Shareholders Entitled to Vote ........................ 3
Purpose of Meeting ................................... 3
Solicitation of Proxies .............................. 3
Revocability and Voting of Proxies ................... 4
Voting of Shares and Principal Holders Thereof ....... 4
Shareholder Proposals ................................ 6
Recommendation of the Board of Directors ............. 6
INFORMATION CONCERNING THE ELECTION OF DIRECTORS .......... 6
General Information .................................. 6
Information about Nominees and Continuing Directors .. 7
Meetings and Committees of the Board of Directors .... 10
Compensation of Directors ............................ 11
Executive Officers ................................... 11
Executive Compensation and Related Matters ........... 12
Audit Committee Report ............................... 18
Transactions with Directors and Executive Officers ... 19
Compliance with Section 16(a) of the Exchange Act .... 19
PROPOSAL TO APPROVE THE INCENTIVE STOCK OPTION
PLAN OF 2002 ............................................ 19
Introduction ......................................... 19
Administration ....................................... 20
Eligibility .......................................... 21
Reservation of Shares ................................ 21
Benefits Under the Plan .............................. 22
Description of Options ............................... 22
Certain United States Federal Income Tax
Consequences ....................................... 23
Termination of Options on Liquidation, Merger or
Sale of Assets ..................................... 25
Amendment, Suspension, or Termination of the Plan;
Share and Option Adjustment ........................ 25
Recommendation of the Board of Directors ............. 26
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTS ............. 26
General Information .................................. 26
Information About Fees ............................... 27
ADDITIONAL INFORMATION .................................... 27
OTHER MATTERS ............................................. 28
EXHIBIT A - INCENTIVE STOCK OPTION PLAN OF 2002
FRANKLIN FINANCIAL SERVICES CORPORATION
20 South Main Street
P. O. Box 6010
Chambersburg, PA 17201-6010
(717) 264-6116
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 23, 2002
TO THE SHAREHOLDERS OF FRANKLIN FINANCIAL SERVICES CORPORATION:
Notice is hereby given that, pursuant to the call of its
directors, the regular Annual Meeting of Shareholders of
FRANKLIN FINANCIAL SERVICES CORPORATION, Chambersburg,
Pennsylvania, will be held on Tuesday, April 23, 2002, at
10:30 A.M. at the Lighthouse Restaurant, 4301 Philadelphia
Avenue, Chambersburg, Pennsylvania, for the purpose of
considering and voting upon the following matters:
1. ELECTION OF DIRECTORS. To elect the five nominees
listed in the accompanying Proxy Statement for the term
specified.
2. INCENTIVE STOCK OPTION PLAN. To consider and vote upon
a proposal to approve the Incentive Stock Option Plan
of 2002.
3. OTHER BUSINESS. To consider such other business as may
properly be brought before the meeting and any
adjournments thereof.
Only those shareholders of record at the close of business
on March 8, 2002, shall be entitled to notice of and to vote at
the Annual Meeting.
Please mark, date and sign the enclosed Proxy and return it
in the enclosed postpaid envelope as soon as possible, whether
or not you plan to attend the meeting. You are cordially
invited to attend the meeting and the luncheon to be held
following the meeting. If you attend the meeting, you may
withdraw your proxy and vote your shares in person.
A copy of the Annual Report of Franklin Financial Services
Corporation is enclosed.
BY ORDER OF THE BOARD OF DIRECTORS
BONNIE J. CLUGSTON
Secretary
Enclosures
March 26, 2002
GENERAL INFORMATION
Date, Time, and Place of Meeting
The regular Annual Meeting of the shareholders of Franklin
Financial Services Corporation (hereinafter, "Franklin
Financial") will be held on Tuesday, April 23, 2002, at
10:30 a.m. at the Lighthouse Restaurant, 4301 Philadelphia
Avenue, Chambersburg, Pennsylvania.
Shareholders Entitled to Vote
Shareholders of record at the close of business on March 8,
2002, are entitled to notice of and to vote at the meeting.
Purpose of Meeting
Shareholders will be asked to consider and vote upon the
following matters at the Annual Meeting: (1) the election of
five directors, (2) a proposal to approve the Incentive Stock
Option Plan of 2002, and (3) such other business as may be
properly brought before the meeting and any adjournments
thereof.
Solicitation of Proxies
This Proxy Statement is furnished in connection with the
solicitation of proxies, in the accompanying form, by the Board
of Directors of Franklin Financial for use at the Annual Meeting
and any adjournments thereof.
The expense of soliciting proxies will be borne by Franklin
Financial. In addition to the use of the mails, directors,
officers, and employees of Franklin Financial and of any
subsidiary may, without additional compensation, solicit proxies
personally or by telephone.
Farmers and Merchants Trust Company of Chambersburg
(hereinafter, "F&M Trust") is a wholly owned subsidiary of
Franklin Financial. This Proxy Statement, while prepared in
connection with the Annual Meeting of Shareholders of Franklin
Financial, contains certain information relating to F&M Trust
which will be identified where appropriate.
Revocability and Voting of Proxies
The execution and return of the enclosed proxy will not
affect a shareholder's right to attend the meeting and to vote
in person. Any proxy given pursuant to this solicitation may be
revoked by delivering written notice of revocation to Bonnie J.
Clugston, Secretary of Franklin Financial, at any time before
the proxy is voted at the meeting. Unless revoked, any proxy
given pursuant to this solicitation will be voted at the meeting
in accordance with the instructions thereon of the shareholder
giving the proxy. In the absence of instructions, all proxies
will be voted FOR the election of the five nominees identified
in this Proxy Statement and for the proposal to approve the
Incentive Stock Option Plan of 2002. The enclosed proxy confers
upon the persons named as proxies therein discretionary
authority to vote the shares represented thereby on all matters
that may come before the meeting in addition to the scheduled
items of business, including unscheduled shareholder proposals
and matters incident to the conduct of the meeting. Although
the Board of Directors knows of no other business to be
presented, in the event that any other matters are brought
before the meeting, the shares represented by any proxy given
pursuant to this solicitation will be voted in accordance with
the recommendations of the management of Franklin Financial.
Shares held for the account of shareholders who participate
in the Dividend Reinvestment Plan will be voted in accordance
with the instructions of each shareholder as set forth in his
proxy. If a shareholder who participates in the Dividend
Reinvestment Plan does not return a proxy, the shares held for
his account under the Dividend Reinvestment Plan will not be
voted.
Voting of Shares and Principal Holders Thereof
At the close of business on December 31, 2001, Franklin
Financial had issued and outstanding 2,708,160 shares of common
stock; there is no other class of stock outstanding. As of such
date, 149,961 shares of Franklin Financial common stock were
held by the Trust Department of F&M Trust as sole fiduciary
(representing approximately 5.5% of such shares outstanding) and
will be voted FOR the election of the five nominees identified
in this Proxy Statement and for the proposal to approve the
Incentive Stock Option Plan of 2002.
A majority of the outstanding common stock present in
person or by proxy will constitute a quorum for the conduct of
business at the Annual Meeting. Abstentions and broker non-
votes will be treated as shares that are present and entitled to
vote for purposes of determining the presence of a quorum. Each
share is entitled to one vote on all matters submitted to a vote
of the shareholders. A majority of the votes which all
shareholders present in person or by proxy are entitled to cast
at a meeting at which a quorum is present is required to approve
any matter submitted to a vote of the shareholders, unless a
greater vote is required by law or by the Articles of
Incorporation or Bylaws. In the case of the election of
directors, the five candidates receiving the highest number of
votes shall be elected directors of Franklin Financial;
accordingly, in the absence of a contested election, votes
withheld from a particular nominee or nominees will not
influence the outcome of the election. In the case of the
proposal to approve the Incentive Stock Option Plan of 2002, a
majority of the votes which all shareholders present in person
or by proxy are entitled to cast is required for approval.
Accordingly, an abstention will have the same effect as a vote
against the proposal. Pennsylvania law on the treatment of
broker non-votes in this context is at present unclear; if a
broker submits a proxy indicating that it does not have
discretionary authority with respect to the proposal to approve
the Incentive Stock Option Plan of 2002, Franklin Financial
intends to treat the shares represented by such proxy as not
being present and entitled to vote for purposes of determining
the vote required for approval and, accordingly, any such broker
non-vote will have no effect on the outcome of the vote on this
proposal.
To the knowledge of Franklin Financial, no person owned of
record or beneficially on December 31, 2001 more than five
percent (5%) of the outstanding common stock of Franklin
Financial, except as set forth in the table which follows.
Amount and Nature of
Name and Address of Beneficial Ownership Percent of
Title of Class Beneficial Owner as of 12/31/01 Class
-------------- ------------------- -------------------- ----------
Common stock, Farmers and Merchants Trust 149,961 shares(1) 5.5%
$1.00 par value Company of Chambersburg
per share Trust Department
20 South Main Street
P.O. Box 6010
Chambersburg, PA 17201-6010
(1) Shares are held on behalf of various trusts, estates and other accounts, with respect
to which F&M Trust acts as sole fiduciary. The Trust Department of F&M Trust also
holds shared voting or dispositive authority with respect to an additional 17,453
shares.
Shareholder Proposals
Pursuant to Rule 14a-8 promulgated by the Securities and
Exchange Commission (hereafter the "SEC") and Section 2.4 of the
Bylaws of Franklin Financial, shareholder proposals intended to
be presented at the 2003 Annual Meeting of the shareholders of
Franklin Financial must be received at the executive offices of
Franklin Financial no later than November 26, 2002, in order to
be eligible for inclusion in the proxy statement and proxy form
to be prepared by Franklin Financial in connection with the 2003
Annual Meeting. A shareholder proposal which does not satisfy
the notice and other requirements of SEC Rule 14a-8 and the
Bylaws of Franklin Financial is not required to be included in
Franklin Financial's proxy statement and proxy form and may not
be presented at the 2003 Annual Meeting. All shareholder
proposals should be sent to: Franklin Financial Services
Corporation, Attention: President, 20 South Main Street,
P.O. Box 6010, Chambersburg, Pennsylvania 17201-6010.
Recommendation of the Board of Directors
The Board of Directors recommends that the shareholders
vote FOR the election of the five nominees identified in this
Proxy Statement and for the proposal to approve the Incentive
Stock Option Plan of 2002.
INFORMATION CONCERNING THE ELECTION OF DIRECTORS
General Information
The Bylaws of Franklin Financial provide that the Board of
Directors shall consist of not less than five nor more than
25 persons and that the directors shall be classified with
respect to the time they shall severally hold office by dividing
them into three classes, each consisting as nearly as possible
of one-third of the number of the whole Board of Directors. The
Bylaws further provide that the directors of each class shall be
elected for a term of three years so that the term of office of
one class of directors shall expire in each year. Finally, the
Bylaws provide that the number of directors in each class of
directors shall be determined by the Board of Directors.
A majority of the Board of Directors may increase the
number of directors between meetings of shareholders. Any
vacancy occurring in the Board of Directors, whether due to an
increase in the number of directors, resignation, retirement,
death, or any other reason, may be filled by appointment by the
remaining directors. Any director who is appointed to fill a
vacancy shall hold office until his successor is duly elected by
the shareholders at the next Annual Meeting at which directors
in his class are elected.
The Board of Directors has determined that the Board shall
consist of 13 directors. There are five directors whose terms
of office will expire at the 2002 Annual Meeting and eight
continuing directors whose terms of office will expire at the
2003 or 2004 Annual Meeting. The Board of Directors proposes to
nominate the following five persons for election to the Board of
Directors for the term specified below:
CLASS A
For a Term of
Three Years
G. Warren Elliott Martha B. Walker
Dennis W. Good, Jr. Robert G. Zullinger
William E. Snell, Jr.
In the event that any of the foregoing nominees is unable
to accept nomination or election, the shares represented by any
proxy given pursuant to this solicitation will be voted in favor
of such other persons as the management of Franklin Financial
may recommend. However, the Board of Directors has no reason to
believe that any of its nominees will be unable to accept
nomination or to serve as a director if elected.
Section 3.5 of Article III of the Bylaws of Franklin
Financial requires, among other things, that a shareholder who
wishes to nominate a candidate for election to the Board of
Directors must provide advance written notice to Franklin
Financial, which notice must contain certain prescribed
information and must be delivered to the President of Franklin
Financial not less than 90 days prior to the anniversary date of
the immediately preceding Annual Meeting. The Chairman of the
meeting must determine whether a nomination has been made in
accordance with the requirements of the Bylaws and, if he
determines that a nomination is defective, such nomination and
any votes cast for the nominee shall be disregarded.
Information about Nominees and Continuing Directors
Information concerning the five persons to be nominated for
election to the Board of Directors of Franklin Financial at the
2002 Annual Meeting and concerning the eight continuing
directors is set forth in the table which follows. The table
also includes information concerning shares of Franklin
Financial common stock owned beneficially by executive officers
who are named in the Summary Compensation Table appearing
elsewhere in this Proxy Statement and by all directors and
executive officers as a group.
Shares of Stock of
Franklin Financial
Beneficially Owned and
Business Experience, Including Principal Percentage of Total
Occupation for the Past 5 Years, and Director Outstanding Stock as
Name and Age Other Directorships(1) Since(2) of 12/31/01(3)
------------ ---------------------------------------- -------- ----------------------
CLASS A - NOMINEES
G. Warren Elliott (47) Franklin County Commissioner; Regional 1994 1,338 *
Representative, General Code Publishers
(legal publisher)
Dennis W. Good, Jr. (66) Retired; formerly Partner, McGuire Woods 1998 30,629 1.13%
LLP (law firm)
William E. Snell, Jr. (53) President and Chief Executive Officer, 1995 23,215 *
Franklin Financial and F&M Trust
Martha B. Walker (55) Partner, Walker & MacBride, a Division of 1979 5,593 *
Barley, Snyder, Senft & Cohen, LLC (law
firm)
Robert G. Zullinger (69) Chairman of the Board, Franklin Financial 1981 31,693 1.17%
and F&M Trust; formerly President and
Chief Executive Officer, Franklin Financial
and F&M Trust (1981-1996)
CLASS B - CONTINUING DIRECTORS - TERM EXPIRES IN 2004
Charles S. Bender, II (57) Executive Vice President, Franklin 1981 58,909 2.18%
Financial and F&M Trust
Allan E. Jennings, Jr. (52) President, Jennings Chevrolet Oldsmobile 2002 500 *
Cadillac, Inc.; Vice President, Jennings
Pontiac Buick GMC, Inc. (car dealerships)
Jeryl C. Miller (61) Vice President and Secretary, Charles W. 1983 15,403 *
Karper, Inc. (trucking industry)
Stephen E. Patterson (57) Shareholder, Patterson & Kiersz, PC 1998 800 *
(law firm)
CLASS C - CONTINUING DIRECTORS - TERM EXPIRES IN 2003
Donald A. Fry (52) President, ANDOCO, Inc., trading as 1988 945 *
Cumberland Valley Rental (uniform rental)
H. Huber McCleary (63) President, McCleary Oil Co. (service 1990 41,165 1.52%
station operator and fuel oil distributor)
Kurt E. Suter (60) President, Carlisle Mobile Homes, Inc. and 2002 1,000 *
Days Inn/Carlisle; Partner, Hooke & Suter
(real estate firm)
Charles M. Sioberg (61) Vice President, Martin & Martin, Inc. 1982 5,126 *
(engineers)
All directors and executive
officers as a group (16
persons) 232,358 8.57%
* The number of shares shown represents less than one percent of the total number of shares of common stock
outstanding.
(1) No nominee or continuing director is a director of any other company which has one or more classes of
securities registered with the Securities and Exchange Commission pursuant to Section 12 or which is
required to file periodic reports with the Securities and Exchange Commission pursuant to Section 15(d) of
the Securities Exchange Act of 1934.
(2) Reflects service as a director of Franklin Financial and service as a director of F&M Trust, predecessor
of Franklin Financial.
(3) Beneficial ownership of shares of the common stock of Franklin Financial is determined in accordance with
Securities and Exchange Commission Rule 13d-3d(1), which provides that a person shall be deemed to own any
stock with respect to which he, directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which includes the power to vote or to direct
the voting of the stock, or (ii) investment power, which includes the power to dispose or to direct the
disposition of the stock.
(4) Each director and executive officer has sole voting and investment power with respect to the shares shown
above, except that voting and investment power with respect to a total of 12,115 shares is shared with
spouses, children or other family members. The shares shown above include a total of 55,931 shares which
are held by spouses, children or other family members or by trusts or estates with respect to which a
director or executive officer serves as trustee or executor and shares subject to a power of attorney in
favor of a director or executive officer, beneficial ownership of which is in each case disclaimed. Also
included in the shares shown above are a total of 2,438 shares issuable under the Employee Stock Purchase
Plan.
Meetings and Committees of the Board of Directors
The Board of Directors of Franklin Financial has standing
Audit, Nominating and Personnel Committees.
Members of the Audit Committee during 2001 were Jeryl C.
Miller, Chairman, Mrs. Walker and Messrs. Good, McCleary and
Sioberg. Robert G. Zullinger, who was Chairman of the Board in
2001, was an ex-officio member of the Audit Committee. The
Audit Committee met four times during 2001. The Audit Committee
is responsible for overseeing the internal accounting and
auditing methods and procedures of Franklin Financial and its
subsidiaries and for recommending annually to the Board of
Directors the engagement of an independent public accounting
firm to examine the consolidated financial statements of
Franklin Financial. The Audit Committee operates under a
charter adopted by the Board of Directors. All members of the
Audit Committee were at all times during 2001 "independent
directors" as such term is defined in the listing standards of
the National Association of Securities Dealers, Inc.
Members of the Nominating Committee during 2001 were
Robert G. Zullinger, Chairman, and Messrs. Bender, Elliott,
McCleary, Patterson, Sioberg and Snell. The Nominating
Committee met twice during the past year. The Nominating
Committee is responsible, among other things, for recommending
to the Board of Directors persons to be nominated for election
to the Board, persons to be appointed to fill vacancies on the
Board and persons to be elected as officers of the Board. The
Nominating Committee will consider qualified nominees who are
recommended by shareholders, although no formal procedures have
been adopted for addressing shareholder recommendations.
Members of the Personnel Committee during 2001 were
Robert G. Zullinger, Chairman, and Messrs. Elliott, Fry, Good
and Miller. The Personnel Committee met three times during the
past year. The Personnel Committee is responsible, among other
things, for administering the Long-Term Incentive Plan of 1990
and the Employee Stock Purchase Plan and overseeing the
administration of Franklin Financial's compensation policies and
employee benefits plans. If approved by the shareholders at the
Annual Meeting, the Personnel Committee will be responsible for
administering the Incentive Stock Option Plan of 2002.
The Board of Directors of Franklin Financial met six times
during 2001. All incumbent directors attended at least
75 percent of the meetings of the Board of Directors and the
committees on which they served.
Compensation of Directors
With the exception of the Chairman of the Board, each
director of Franklin Financial who is not a salaried
officer of Franklin Financial or one of its subsidiaries is paid
an annual retainer of $3,800 and receives a fee of $150 for each
committee meeting attended. The Chairman of the Board receives
an annual retainer of $21,000, but does not receive a fee for
attending committee meetings.
Executive Officers
The following persons are the executive officers of
Franklin Financial:
Name Age Office Held
---- --- -----------
William E. Snell, Jr. 53 President and Chief Executive
Officer of Franklin Financial
and F&M Trust since 1996,
President of Franklin Financial
and F&M Trust since 1995
Charles S. Bender, II 57 Executive Vice President of
Franklin Financial since 1983
and of F&M Trust since 1981
Theodore D. McDowell 51 Executive Vice President of
Franklin Financial and F&M Trust
since 1999
Elaine G. Meyers 54 Treasurer and Chief Executive
Officer of Franklin Financial
and Senior Vice President/
Finance of F&M Trust since 1988
Kenneth D. Sauders 57 Investment and Asset/Liability
Manager of Franklin Financial
since 1997 and Senior Vice
President of F&M Trust since
1995
Executive Compensation and Related Matters
Summary of Cash and Certain Other Compensation
The following table provides certain summary information
concerning compensation paid or accrued by Franklin Financial
and F&M Trust to William E. Snell, Jr., the Chief Executive
Officer of Franklin Financial, and to each of the other most
highly compensated executive officers of Franklin Financial
whose combined 2001 salary and bonus compensation exceeded
$100,000.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
--------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------- --------------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Name Other Underly- All
And Annual Restricted ing Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Awards SARs Payouts(1) sation(2)
($) ($) ($) ($) (#) $) ($)
-------- ---- ------ ----- ------ ---------- ---------- ---------- ---------
William E. Snell, Jr. 2001 $173,400 $ 3,400 None None None $272,478 $7,829
President and Chief
Executive Officer 2000 170,000 3,295 None None None None 5,280
1999 164,788 1,648 None None None None 5,964
Theodore D. McDowell, 2001 $122,408 $ 2,400 None None None None $6,966
Executive Vice President
2000 120,000 -0- None None None None 1,751
1999 46,538 $10,000 None None None None -0-
(1) Consists of the dollar value of shares of restricted stock granted to Mr. Snell in 1996 pursuant to an award under
a long-term incentive plan in which Mr. Snell and seven other senior officers participated, which shares vested on
December 31, 2001.
(2) Consists exclusively of matching contribution and discretionary contribution to Section 401(k) Profit Sharing
Plan.
Defined Benefit Pension Plan
The defined benefit pension plan maintained by F&M Trust
(the "Plan") was amended on November 14, 1997, effective
January 1, 1998, to reduce future benefit accruals under the
Plan's benefit formula. The following table shows, for the
salary levels and years of service indicated, the annual pension
benefit, before a Social Security offset of 0.6 percent (0.6%)
of covered compensation for each year of service to a maximum of
35 years (but without reflecting the maximum pension benefit
limitations established under Section 415 of the Internal
Revenue Code), payable under the Plan commencing at age 65 under
the pension benefit formula effective January 1, 1998 (and
assuming all years of service are earned after January 1, 1998):
PENSION PLAN TABLE
YEARS OF SERVICE
Covered -------------------------------------------------------------------
Remuneration 5 10 15 20 25 30 35
------------ -------------------------------------------------------------------
$75,000 $ 5,625 $11,250 $16,875 $22,500 $28,125 $33,750 $39,375
$100,000 7,500 15,000 22,500 30,000 37,500 45,000 52,500
$125,000 9,375 18,750 28,125 37,500 46,875 56,250 65,625
$150,000 11,250 22,500 33,750 45,000 56,250 67,500 78,750
$160,000 12,000 24,000 36,000 48,000 60,000 72,000 84,000
$170,000 and Over 12,750 25,500 38,250 51,000 63,750 76,500 89,250
Compensation covered by the Plan is calculated by
determining the average of a participant's highest five
consecutive years' compensation (generally, salary and bonus as
reported in the Summary Compensation Table appearing above) in
the ten years preceding normal retirement. A participant's
compensation for these purposes is limited by Section 401(a)(17)
of the Internal Revenue Code of 1986, as amended (the "Code")
for each calendar year. Current compensation covered by the
plan for the year ended December 31, 2001 for Messrs. Snell and
McDowell was $164,000 and $134,759, respectively. As of
December 31, 2001, Messrs. Snell and McDowell were credited with
6.67 and 2.33 years of service, respectively, for benefit
accrual purposes under the Plan.
The normal retirement benefit under the Plan is a single-
life annuity equal to the sum of the following:
(i) 1.15 percent (1.15%) of the average of the highest five
consecutive years' compensation in the 10 years preceding
normal retirement, multiplied by a participant's number of
years of service from the date of employment to
December 31, 1997, plus
(ii) 0.90 percent (0.90%) of such compensation multiplied by a
participant's number of years of service from January 1,
1998, through the date of retirement, plus
(iii) 0.60 percent (0.60%) of such compensation in excess of
Social Security covered compensation (the taxable wage
base averaged over the 35-year period ending with the last
day of the calendar year in which the participant attains
Social Security retirement age), multiplied by a
participant's total number of years of service (up to a
maximum of 35 years) from the date of employment to the
retirement date.
This benefit is limited by the maximum benefit as specified
under Section 415 of the Code.
The Plan was amended November 24, 1999, effective
January 1, 2000, to give a cost-of-living adjustment to retirees
and beneficiaries with a retirement date on or before January 1,
1999. The increase is equal to 1.50% of the retiree's and
beneficiary's monthly pension payment for each complete year
measured from the later of October 1, 1994 and the retiree's and
beneficiary's retirement date to January 1, 2000. The Plan was
also amended and restated on November 9, 2001 to conform the
Plan to reflect changes required by law, up to and including the
IRS Restructuring and Reform Act of 1998.
Compensation Committee Report on Executive Compensation
The Personnel Committee of the Board of Directors of
Franklin Financial (the "Committee") administers the executive
compensation programs of Franklin Financial and its
subsidiaries. The Committee consisted of five independent
directors in 2001.
Executive Compensation Policies
Executive compensation at Franklin Financial consists of
two components: base salary and incentive programs. The
Committee has established an executive compensation policy to
assist it in administering these two components of executive
compensation.
The Franklin Financial's executive compensation policy is
designed to provide its executives with a total compensation
package that is fair in light of competitive compensation
practices, that attracts and retains qualified executives, that
places a portion of total pay at risk (to be earned through the
achievement of performance goals), and that helps to align
management's interests with those of shareholders. Fair pay is
defined as pay levels that are at or approach the median of
competitive compensation practices.
Competitive compensation practices are determined from time
to time, as follows. The Committee uses data from banking
industry compensation surveys to determine median pay practices
for similar positions at comparably sized organizations.
Compensation disclosures made by a peer group of comparably
sized Pennsylvania banks are also used to determine competitive
pay practices at the top management level. This group of
Pennsylvania banking organizations bears no direct relationship
to those companies represented in the Media General Regional
Northeast Bank Index appearing in the stock performance graph
set forth elsewhere in this Proxy Statement because the
companies represented in this Index are too numerous and because
some are too small and others too large for appropriate and
meaningful compensation comparisons. Additionally, the
Committee's analysis of competitive salary increases is used in
estimating competitive pay levels.
The Committee uses incentive programs to link total
executive compensation to the performance of Franklin Financial.
These programs provide executives with an opportunity to earn a
combination of cash and stock awards contingent upon the
achievement of corporate earnings objectives.
Relationship of Performance to Executive Compensation
The Committee employs a short-term incentive plan to link
senior officer compensation to the success in meeting annual
goals based upon the net income of the corporation. The 2000
plan included a range of net income targets and within that
range of targets, senior officer incentive payouts could range
from 1% to 15% of annual salary, with an additional 401(k)
Profit Sharing Plan discretionary contribution ranging from 1/2%
to 2% of salary (up to applicable limitations under the Internal
Revenue Code). Messrs. Snell and McDowell each participated in
this program. Based upon Franklin Financial's financial
performance in 2001, awards will be payable to both
Messrs. Snell and McDowell. The exact amount of those awards
cannot be determined at this time because certain necessary peer
group data is not yet publicly available. The awards paid to
Messrs. Snell and McDowell under the short-term incentive plan
in 2001, based upon the financial performance of Franklin
Financial in 2000, were $3,400 and $2,400, respectively, and are
reported in the Summary Compensation Table which appears above.
The Committee administers a long-term incentive plan for
members of senior management. Under the plan, participants were
granted awards of restricted stock and cash in 1996, which
awards are subject to accelerated vesting if Franklin Financial
meets or exceeds certain annual and/or cumulative net income
performance goals established at the time of grant of the
awards. To the extent not previously vested, the restricted
stock portion of the awards vest in full upon the expiration of
10 years from the date of grant. The cash portion of an award,
to the extent not vested after the expiration of five years, is
forfeited.
Achievement of an annual or cumulative net income
performance goal results in the vesting of a portion of the
restricted stock award and a distribution of a portion of the
cash award. Failure to meet either goal in a given year results
in the permanent forfeiture of that year's portion of the cash
award. Furthermore, failure to meet the annual or cumulative
net income goals for a given year means that no restricted
shares vest that year. After the expiration of ten years from
the date of the award, however, all unvested shares of
restricted stock vest, provided that the participant remains an
employee of Franklin Financial or one of its subsidiaries.
In 2001 Franklin Financial had net income of
$5.594 Million. This resulted in basic earnings per share of
$2.09, return on assets of 1.14%, and return on equity of
12.51%. This level of earnings, when combined with net income
for the prior five years (1996-2000), met the cumulative net
income goal of $23.850 Million set under the long-term incentive
plan. Accordingly, all restricted stock awards outstanding
under this long-term incentive plan vested as of December 31,
2001.
2001 Compensation of the Chief Executive Officer
The Committee at its December 2000 meeting discussed its
compensation policy as summarized above, reviewed competitive
pay practices, and considered both in light of Franklin
Financial's strategic initiative to control overhead expenses.
After considering these factors, the Committee determined that
Mr. Snell's base salary would be increased to $173,400 in 2001.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code, enacted in
1993, brought about a limitation on the deductibility for
federal income tax purposes of annual compensation in excess of
$1 million payable to certain senior officers of publicly held
companies. Qualifying performance-based compensation is not
subject to this limitation if certain conditions are met. The
Committee does not foresee current compensation arrangements
exceeding this level. Accordingly, the Committee has no plans
to modify the compensation policies of Franklin Financial in
response to the provisions of Section 162(m) of the Code. The
Committee will evaluate this matter on an ongoing basis.
The foregoing report is submitted by Robert G.
Zullinger, Chairman of the Personnel Committee,
and Messrs. Elliott, Good, Fry and Miller, who
served as members of the Personnel Committee
during 2001.
Compensation Committee Interlocks and Insider Participation
The members of the Personnel Committee of the Board of
Directors during 2001 were those persons who are named in the
Compensation Committee Report on Executive Compensation which
appears above. No member of the Personnel Committee was an
employee of Franklin Financial or F&M Trust at any time during
2001, although Mr. Zullinger served as President and Chief
Executive Officer of Franklin Financial and F&M Trust until his
retirement in 1996. There were no compensation committee
"interlocks" at any time during 2001, which in general terms
means that no executive officer or director of Franklin
Financial served as a director or member of the compensation
committee of another entity, one of whose executive officers
served as a director of Franklin Financial.
Performance Graph
The Securities and Exchange Commission requires that a
publicly held company include in its proxy statement a stock
performance graph comparing its five-year cumulative total
return to shareholders with the returns generated by an
industry-specific index (or peer group index) and with the
return generated by a broad market index.
The following graph compares the cumulative total return to
shareholders of Franklin Financial with the NASDAQ - Total U.S.
Index (a broad market index prepared by the Center for Research
in Security Prices at the University of Chicago Graduate School
of Business) and with the Northeast Pink Banks Index (an
industry-specific index prepared by SNL Securities LC) for the
five year period ended December 31, 2001, in each case assuming
an initial investment of $100 on December 31, 1996 and the
reinvestment of all dividends.
[Graph]
Period Ending
----------------------------------------------------------
Index 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
----- -------- -------- -------- -------- -------- --------
Franklin Financial Services Corporation 100.00 158.41 146.65 107.35 86.39 138.95
NASDAQ - Total US*
SNL Northeast BB and Pink Banks
Audit Committee Report
The Audit Committee has reviewed the audited financial
statements of Franklin Financial for the year ended December 31,
2001 and has discussed these financial statements with
management and with Franklin Financial's independent
accountants, Beard Miller Company LLP ("Beard Miller Company").
The Audit Committee also has discussed with Beard Miller Company
the matters required to be discussed by Statement of Auditing
Standards No. 61.
The Audit Committee has received from Beard Miller Company
the written disclosures and letter required by the Independence
Standards Board Standard No. 1 and the Audit Committee has
discussed with Beard Miller Company their independence from
Franklin Financial and from Franklin Financial's management.
Based upon the review and discussions described above, the
Audit Committee recommended to the Board of Directors that
Franklin Financial's audited financial statements for the year
ended December 31, 2001 be included in Franklin Financial's
Annual Report on Form 10-K for that year.
In connection with the standards for accountant's
independence adopted by the Securities and Exchange Commission,
the Audit Committee will undertake to consider in advance of the
provision of any non-audit services by Franklin Financial's
independent accountants whether the provision of such services
is compatible with maintaining the independence of such
accountants.
The foregoing report is submitted by Jeryl C.
Miller, Chairman of the Audit Committee,
Mrs. Walker and Messrs. Good, McCleary, Sioberg
and Zullinger, who served as members of the Audit
Committee during 2001.
Transactions with Directors and Executive Officers
Some of the directors and executive officers of Franklin
Financial and F&M Trust and the companies with which they are
associated were customers of and had banking transactions with
F&M Trust in the ordinary course of business during 2001. All
loans and commitments to loan made to such persons and the
companies with which they are associated were made on
substantially the same terms, including interest rates,
collateral, and repayment terms, as those prevailing at the time
for comparable transactions with other persons and did not
involve more than a normal risk of collectibility or present
other unfavorable features. It is anticipated that F&M Trust
will enter into similar transactions in the future.
Martha B. Walker, a member of the Boards of Directors of
Franklin Financial and F&M Trust, is a partner in the law firm
of Barley, Snyder, Senft & Cohen (hereafter, "BSS&C"). BSS&C
has provided legal services to Franklin Financial and F&M Trust
for many years and is expected to continue to do so in the
future.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934
requires that the directors and certain officers of Franklin
Financial file with the Securities and Exchange Commission
reports of ownership and changes in ownership with respect to
shares of Franklin Financial common stock beneficially owned by
them. Based solely upon its review of copies of such reports
furnished to it and written representations made by its
directors and those officers who are subject to such reporting
requirements, Franklin Financial believes that during the
calendar year ended December 31, 2001, all filing requirements
applicable to its directors and officers were complied with.
PROPOSAL TO APPROVE THE INCENTIVE STOCK OPTION PLAN OF 2002
Introduction
The following is a description of the Incentive Stock
Option Plan of 2002 (the "Plan"), which was adopted by the Board
of Directors on March 7, 2002 for purposes of replacing the
Long-Term Incentive Plan of 1990, which was approved by the
shareholders in 1990. If approved by the shareholders as
proposed herein, the Plan will allow the grant of incentive
stock options to officers of Franklin Financial and its
subsidiaries. An incentive stock option (hereinafter referred
to as an "ISO" or as an "Option") is a stock option which is
qualified under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). The Plan is not subject to the
Employee Retirement Income Security Act of 1974 and is not
qualified under Section 401(a) of the Code, which relates to the
qualification of certain pension, profit-sharing and stock bonus
plans.
The purpose of the Plan is to promote the interests of
Franklin Financial and its shareholders by strengthening the
ability of Franklin Financial to attract, motivate and retain
employees and to provide an additional incentive for employees
to promote the financial success and growth of Franklin
Financial and its subsidiaries. Options are the only form of
award authorized under the Plan and have no intrinsic value
unless the price of the underlying shares appreciates over time.
No gain will accrue to an officer who is awarded an Option,
absent appreciation in the price of Franklin Financial common
stock, which will benefit all shareholders.
A summary of the material features of the Plan is set forth
below, but is qualified in its entirety by reference to the full
text of the Plan as set forth in Exhibit A to this Proxy
Statement.
Administration
The Plan will be administered by the Personnel Committee or
by such other committee consisting of at least two "non-employee
directors" (as defined in the Securities Exchange Act of 1934)
as the Board of Directors may designate for such purpose (the
"Committee"). Subject to the limitations set forth in the Plan,
the Committee has the discretionary authority to determine the
persons to whom Options will be granted, the time or times at
which Options will be granted, the number of shares subject to
each Option, the exercise price of an Option, the time or times
at which an Option will vest and thereafter become exercisable,
and the term of the Option. In addition, the Committee has
authority to interpret the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the
terms and provisions (and amendments of the terms and
provisions) of the written agreement to be entered into between
Franklin Financial and each person to whom an Option is granted
(a "Participant") under the Plan (which agreements need not be
identical), including such terms and provisions as may be
required in the Committee's judgment to conform to any change in
any applicable law or regulation, and to make all other
determinations the Committee shall deem necessary or advisable
for the administration of the Plan.
An Option must be evidenced by a written Agreement.
Franklin Financial anticipates that, in the ordinary course,
Options will be granted on an annual basis, although nothing in
the Plan so requires.
Eligibility
All officers of Franklin Financial and its subsidiaries are
eligible to be granted Options under the Plan, as determined
from time to time by the Committee in its sole discretion. The
Plan defines the term "officer" to mean a common law employee of
Franklin Financial or a subsidiary who is designated as such by
the Committee in accordance with the personnel policies of
Franklin Financial as in effect from time to time. In
determining whether to grant an Option, the Committee will
consider the nature and extent of the services rendered by the
officer involved, the past and potential future contributions of
such officer, the financial performance of Franklin Financial
and its subsidiaries, and such other factors as the Committee
may in its discretion determine to be relevant and appropriate.
The Committee is not obligated to grant Options to all officers
and may in its discretion grant Options to some officers and not
to others.
There are at present approximately 12 persons who may be
deemed to be "officers" and, therefore, eligible to receive
Options under the Plan. The number of such persons may vary
from year to year.
Reservation Of Shares
Franklin Financial has reserved, subject to shareholder
approval of the Plan, 200,000 shares of common stock for
issuance under the Plan (equal to approximately 7.4% of the
presently issued and outstanding shares of common stock). The
shares of common stock authorized to be issued under the Plan
will be made available from authorized but unissued shares of
common stock or from treasury shares. If any shares of common
stock that are the subject of an Option are not issued and cease
to be issuable by reason of the expiration or termination of the
Option or for any other reason, such shares may again be made
subject to Options under the Plan. In the event of stock
splits, stock dividends and certain corporate reorganizations,
recapitalizations, or other specified corporate transactions
affecting Franklin Financial or the common stock, proportionate
adjustments will be made to the number of shares available for
issuance under the Plan. As of February 28, 2002, the closing
bid price of Franklin Financial common stock was $24.75 per
share.
Benefits Under the Plan
The benefits or amounts that will be received by or
allocated under the Plan to the Chief Executive Officer, the
executive officers who are named in the Summary Compensation
Table appearing above, all executive officers as a group and all
officers who are not executive officers as a group cannot be
presently determined.
Description of Options
An Option that the Committee grants to a Participant to
purchase shares of common stock must be evidenced by a written
Option agreement (an "Option Agreement"). The Committee will
determine the exercise price of each Option, which exercise
price may not be less than 100% of the fair market value of the
common stock on the grant date (110% in the case of certain ten
percent or greater shareholders), as determined by the Committee
in accordance with rules specified in the Plan. Except as
otherwise provided in the Plan, once vested, an Option may be
exercised in whole or in part at any time and from time to time
during the term of the Option, which term may not extend more
than ten years from the date the Option is granted (five years
in the case of certain ten percent or greater shareholders).
The Committee will impose vesting conditions on the
exercisability of the Options. In general, an Option will vest
upon the earlier of: (i) continuous employment following the
date of grant for the period specified in the Option Agreement
(but not less than six months), and (ii) the occurrence of a
change in control (as defined in the Plan). An Option may vest
in stages over a specified period of time. Unless otherwise
provided in an Option Agreement, a change in control will be
deemed to have occurred, among other events, upon shareholder
approval of an acquisition of Franklin Financial (or of all or
substantially all of its assets).
Unless otherwise provided in an Option Agreement, the
exercise price per share of an Option must be paid in full in
cash upon the exercise of the Option. If the Option Agreement
permits, the exercise price may be paid in whole or in part by
surrendering certain previously owned shares of Franklin
Financial common stock. If shares are used to pay all or part
of the exercise price, the cash and any shares surrendered must
have a fair market value (determined as of the date of exercise)
that is not less than the aggregate exercise price for the
number of shares for which the Option is being exercised.
Shares surrendered in payment of all or a portion of the
exercise price of an Option must have been held for certain
minimum periods of time specified in the Plan.
In accordance with certain Code requirements applicable to
ISO's, the aggregate fair market value (determined at the time
an Option is granted) of the shares of common stock with respect
to which Options are exercisable for the first time by an
individual during any calendar year may not exceed $100,000.
A Participant will not have any rights as a shareholder
with respect to the shares of common stock subject to an Option
until the shares are paid for and issued to the Participant.
An Option granted under the Plan is not assignable or
transferable other than by will or the laws of descent and
distribution and, during a Participant's lifetime, may be
exercised only by the Participant or by his or her duly
appointed legal representative.
A vested Option may be exercised by a Participant only
during its term and only during the term of his employment,
except as provided below. In the event of a Participant's
termination of employment: (i) by reason of death or disability
(as defined in the Plan), a vested Option may be exercised until
the earlier of its expiration or the date which is 12 months
following termination of employment; (ii) by Franklin Financial
for cause (as defined in the Plan), a vested Option will be
forfeited on the date of termination of employment; and
(iii) for any other reason, a vested Option may be exercised
until the earlier of its expiration or the date which is three
months following termination of employment.
Certain United States Federal Income Tax Consequences
The following is a brief summary of the principal United
States Federal income tax consequences of transactions under the
Plan, based upon current law. This summary is not intended to
be exhaustive with respect to all potential Federal income tax
consequences that may affect a particular person. In addition,
this summary does not constitute tax advice and, among other
things, does not discuss state, local or foreign income tax
consequences or address estate or gift tax consequences relating
to the Plan's operation. Participants are urged to consult with
their tax advisors with regard to their participation in the
Plan.
No taxable income is realized by a Participant upon the
grant or exercise of an ISO. If shares of common stock are
issued to a Participant pursuant to the exercise of an ISO and
if no disqualifying disposition of such shares is made by the
Participant within two years after the date of grant or within
one year after the receipt of such shares by the Participant,
then: (i) upon the sale of such shares, any amount realized in
excess of the exercise price will normally be taxed to the
Participant as a long-term capital gain, and (ii) no deduction
will be allowed to Franklin Financial. Additionally, the excess
of the fair market value of the common stock received upon
exercise of an ISO over the exercise price therefor will give
rise to an item of tax preference in the year of exercise that
may result in alternative minimum tax liability for the
Participant.
If shares of common stock acquired upon the exercise of an
ISO are disposed of prior to the expiration of either holding
period described above, such disposition would be a
"disqualifying disposition" and generally: (i) the Participant
will realize ordinary income in the year of disposition in an
amount equal to the excess, if any, of the fair market value of
the shares on the date of exercise (or, if less, the amount
realized on the disposition of the shares) over the Option
exercise price, and (ii) Franklin Financial will be entitled to
deduct such amount. Any other gain realized by the Participant
on such disposition will be taxed as short-term or long-term
capital gain and will not result in any deduction to Franklin
Financial.
If a Participant pays the exercise price in full or in part
with previously owned shares of common stock, the exchange will
not affect the tax treatment of the exercise. Upon such
exchange, no gain or loss generally will be recognized upon the
delivery of the previously owned shares to Franklin Financial
and the shares issued in replacement of the shares tendered to
pay the exercise price will have the same basis and holding
period for capital gains tax purposes as the previously owned
shares. A Participant, however, would not be able to utilize
the holding period for the previously owned shares for purposes
of satisfying the ISO statutory holding period requirements.
Additional shares of common stock will have a basis of zero and
a holding period that commences on the date the common stock is
issued to the Participant upon exercise of the ISO.
Based upon recent Internal Revenue Service pronouncements,
effective January 1, 2003, payroll taxes may have to be withheld
upon the exercise of an ISO, unless such pronouncement is
modified or otherwise overruled by legislation.
Termination of Options on Liquidation, Merger or Sale of Assets
All unexercised Options which are then outstanding under
the Plan will terminate upon a liquidation or dissolution of
Franklin Financial, a merger or consolidation in which Franklin
Financial is not the surviving or resulting corporation, or a
sale of all or substantially all of the assets of Franklin
Financial, except to the extent that another corporation assumes
and continues the Options or substitutes its own Options under
the terms of the transaction involved.
Amendment, Suspension, or Termination of the Plan; Share and
Option Adjustment
The Plan has a term of ten years and will terminate on
March 7, 2012, subject to earlier termination or amendment by
the Board of Directors. The Board of Directors may terminate,
amend, modify or suspend the Plan at any time and from time to
time to ensure that Options granted under the Plan conform to
any changes in the law or for any other reason the Board
determines to be in the best interests of Franklin Financial.
Modifications or amendments to the Plan are not required to be
approved by the shareholders of Franklin Financial, except to
the extent required by certain state or federal law, or by
exchange-related rules. No termination, modification or
amendment of the Plan, without the consent of the Participant to
whom an Option has previously been granted, may adversely affect
such Participant's rights under such Option.
In the event of any change in Franklin Financial common
stock by reason of any stock dividend, stock split, reverse
stock split, recapitalization, combination or exchange of
shares, merger, consolidation or similar action, appropriate
adjustment will be made to: (i) the number of shares authorized
to be issued under the Plan, (ii) the number of shares into
which outstanding Options may be converted upon exercise,
(iii) the exercise price of outstanding Options, and (iv) such
other terms as are appropriate under the circumstances. In
addition, the Board of Directors may in its discretion make
similar changes to outstanding Options in other circumstances
where such changes are deemed to be equitable.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR THE PROPOSAL TO APPROVE THE INCENTIVE STOCK OPTION PLAN OF
2002.
The Board of Directors believes that the adoption of the
Incentive Stock Option Plan of 2002 is in the best interests of
Franklin Financial and its shareholders and recommends that this
proposal be approved by the shareholders. Accordingly, the
following resolutions will be presented to the shareholders at
the Annual Meeting:
RESOLVED, that the adoption by the
Board of Directors of the Incentive Stock
Option Plan of 2002 (the "Plan") be and
is hereby approved and ratified by the
shareholders of the corporation; and
RESOLVED FURTHER, that the officers
and directors of the corporation be and
are hereby authorized and empowered on
behalf of the corporation to take all such
actions as they may determine in the exer-
cise of their discretion to be necessary or
appropriate in connection with the adoption,
implementation and administration of the Plan.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
General Information
For the year ended December 31, 2001, Franklin Financial
engaged Beard Miller Company, independent certified public
accountants, to examine its consolidated financial statements.
It is anticipated that Beard Miller Company will be similarly
engaged for the year 2002. Representatives of Beard Miller
Company are expected to be present at the Annual Meeting, will
have an opportunity to make a statement if they desire to do so,
and will be available to respond to appropriate questions.
Information About Fees
Audit Fees
Fees billed to Franklin Financial by Beard Miller Company
during 2001 for services relating to the audit of Franklin
Financial's annual financial statements and the review of the
financial statements included in Franklin Financial's Quarterly
Reports on Form 10-Q totaled $56,610.
Financial Information Systems Design and Implementation Fees
Franklin Financial did not engage Beard Miller Company to
provide services relating to financial information systems
design and implementation during 2001.
All Other Fees
Fees billed to Franklin Financial by Beard Miller Company
during 2001 for all other non-audit services, including tax
related services, totaled $33,983.
ADDITIONAL INFORMATION
A copy of the Annual Report of Franklin Financial on
Form 10-K as filed with the Securities and Exchange Commission,
including financial statements and financial statement
schedules, is available without charge to shareholders upon
written request addressed to William E. Snell, Jr., President
and Chief Executive Officer, Franklin Financial Services
Corporation, 20 South Main Street, P.O. Box 6010, Chambersburg,
Pennsylvania 17201-6010.
OTHER MATTERS
The Board of Directors of Franklin Financial knows of no
matters, other than those discussed in this Proxy Statement,
which will be presented at the 2002 Annual Meeting. However, if
any other matters are properly brought before the meeting, any
proxy given pursuant to this solicitation will be voted in
accordance with the recommendations of the management of
Franklin Financial.
BY ORDER OF THE BOARD OF DIRECTORS
BONNIE J. CLUGSTON
Secretary
Chambersburg, Pennsylvania
March 26, 2002
EXHIBIT A
FRANKLIN FINANCIAL SERVICES CORPORATION
INCENTIVE STOCK OPTION PLAN OF 2002
TABLE OF CONTENTS
ARTICLE PAGE
ARTICLE 1. PURPOSE OF THE PLAN; TYPE OF OPTIONS 1
ARTICLE 2. DEFINITIONS 1
ARTICLE 3. ADMINISTRATION 3
ARTICLE 4. COMMON STOCK SUBJECT TO THE PLAN 4
ARTICLE 5. ELIGIBILITY 4
ARTICLE 6. OPTIONS IN GENERAL 5
ARTICLE 7. TERM, VESTING AND EXERCISE OF OPTIONS 6
ARTICLE 8. EXERCISE OF OPTIONS FOLLOWING TERMINATION
OF EMPLOYMENT 7
ARTICLE 9. ADJUSTMENT PROVISIONS 7
ARTICLE 10. GENERAL PROVISIONS 8
ARTICLE 1. PURPOSE OF THE PLAN; TYPE OF OPTIONS
1.1 Purpose. The Franklin Financial Services Corporation
Incentive Stock Option Plan of 2002 is intended to provide
selected Officers of Franklin Financial Services Corporation and
its Subsidiaries with an opportunity to acquire Common Stock of
the Corporation. The Plan is designed to help the Corporation
attract, retain and motivate selected Officers to make
substantial contributions to the success of the Corporation's
business and the businesses of its Subsidiaries. Options will
be granted under the Plan based, among other things, on the
financial performance of the Corporation and the Participant's
level of responsibility within the Corporation and its
affiliated companies.
1.2 Authorized Plan Options. Only Incentive Stock Options
may be awarded under the Plan.
ARTICLE 2. DEFINITIONS
2.1 "Agreement". A written instrument evidencing the
grant of an Option. A Participant may be issued one or more
Agreements from time to time, reflecting one or more Options.
2.2 "Board". The Board of Directors of the Corporation.
2.3 "Change in Control". Except as otherwise provided in
an Agreement, the first to occur of any of the following events:
(a) any "Person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act), except for: (i) any
of the Corporation's employee benefit plans, or any entity
holding the Corporation's voting securities for, or
pursuant to, the terms of any such plan (or any trust
forming a part thereof) (the "Benefit Plan(s)"), or (ii) an
entity controlled directly or indirectly by the
Corporation, is or becomes the beneficial owner, directly
or indirectly, of the Corporation's securities representing
19.9% or more of the combined voting power of the
Corporation's then outstanding securities;
(b) a binding written agreement is executed (and, if
legally required, approved by the Corporation's
shareholders) providing for a sale, exchange, transfer or
other disposition of all or substantially all of the assets
of the Corporation or of Farmers and Merchants Trust
Company of Chambersburg, a Pennsylvania-chartered
commercial bank and trust company, to another entity,
except to an entity controlled directly or indirectly by
the Corporation;
(c) the shareholders of the Corporation approve a
merger, consolidation, or other reorganization of the
Corporation, unless:
(i) under the terms of the agreement approved by
the Corporation's shareholders providing for such
merger, consolidation or reorganization, the
shareholders of the Corporation immediately before
such merger, consolidation or reorganization, will
own, directly or indirectly immediately following such
merger, consolidation or reorganization, more than 50%
of the combined voting power of the outstanding voting
securities of the Corporation resulting from such
merger, consolidation or reorganization (the
"Surviving Corporation") in substantially the same
proportion as their ownership of the voting securities
immediately before such merger, consolidation or
reorganization; and
(ii) under the terms of the agreement approved
by the Corporation's shareholders providing for such
merger, consolidation or reorganization, the
individuals who were members of the Board immediately
prior to the execution of such agreement will
constitute a majority of the members of the board of
directors of the Surviving Corporation after such
merger, consolidation or reorganization;
(d) a plan of liquidation or dissolution of the
Corporation, other than pursuant to bankruptcy or
insolvency laws, is adopted; or
(e) during any period of two consecutive years,
individuals, who at the beginning of such period,
constituted the Board cease for any reason to constitute at
least a majority of the Board unless the election, or the
nomination for election by the Corporation's shareholders,
of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were
directors at the beginning of the period.
2.4 "Code". The Internal Revenue Code of 1986, as
amended.
2.5 "Committee". The committee which the Board appoints
to administer the Plan.
2.6 "Common Stock". The common stock of the Corporation
($1.00 par value) as described in the Corporation's Articles of
Incorporation, or such other stock as shall be substituted
therefor.
2.7 "Corporation". Franklin Financial Services
Corporation, a Pennsylvania corporation.
2.8 "Employee". A common law employee of the Corporation
or a Subsidiary.
2.9 "Exchange Act". The Securities Exchange Act of 1934,
as amended.
2.10 "Incentive Stock Option". A Stock Option intended to
satisfy the requirements of Code Section 422(b).
2.11 "Officer". An Employee designated as such by the
Committee in accordance with the Corporation's personnel
policies in effect from time to time.
2.12 "Optionee". A Participant who is awarded a Stock
Option pursuant to the provisions of the Plan.
2.13 "Participant". An Officer to whom an Option has been
granted and remains outstanding.
2.14 "Plan". The Franklin Financial Services Corporation
Incentive Stock Option Plan of 2002, as set forth in this
document and as the same may be amended from time to time.
2.15 "Securities Act". The Securities Act of 1933, as
amended.
2.16 "Stock Option" or "Option". A grant of a right to
purchase Common Stock pursuant to the provisions of the Plan.
2.17 "Subsidiary". A subsidiary corporation, as defined
in Code Section 424(f), that is a subsidiary of a relevant
corporation.
ARTICLE 3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered by a
committee of the Board composed of two or more members of the
Board, all of whom are "non-employee directors" as such term is
defined under the rules and regulations adopted from time to
time by the Securities and Exchange Commission pursuant to
Section 16(b) of the Exchange Act. The Board may from time to
time remove members from, or add members to, the Committee.
Vacancies on the Committee, howsoever caused, shall be filled by
the Board.
3.2 Powers of the Committee.
(a) The Committee shall be vested with full authority
to make such rules and regulations as it deems necessary or
desirable to administer the Plan and to interpret the
provisions of the Plan. Any determination, decision or
action of the Committee in connection with the
construction, interpretation, administration or application
of the Plan shall be final, conclusive and binding upon all
Participants and any person claiming under or through a
Participant.
(b) Subject to the terms, provisions and conditions
of the Plan, the Committee shall have exclusive
jurisdiction to:
(i) determine and select the Officers to be
granted Options (it being understood that more than
one Option may be granted to the same person);
(ii) determine the number of shares subject to
each Option;
(iii) determine the date or dates when the
Options will be granted;
(iv) determine the exercise price of shares
subject to Options in accordance with Article 6;
(v) determine the date or dates when an Option
will vest and may thereafter be exercised within the
term of the Option specified pursuant to Article 7;
and
(vi) prescribe the form, which shall be
consistent with the Plan document, of the Agreement
evidencing any Options granted under the Plan.
3.3 Liability. No member of the Committee shall be liable
for any action or determination made in good faith by the
Committee with respect to this Plan or any Options granted under
this Plan.
ARTICLE 4. COMMON STOCK SUBJECT TO THE PLAN
4.1 Common Stock Authorized. The aggregate number of
shares of Common Stock for which Options may be awarded under
the Plan shall not exceed 200,000. The limitation established
by the preceding sentence shall be subject to adjustment as
provided in Article 9.
4.2 Shares Available. The Common Stock to be issued under
the Plan shall be the Corporation's Common Stock which shall be
made available at the discretion of the Board, either from
authorized but unissued Common Stock or from Common Stock
acquired by the Corporation, including shares purchased in the
open market. In the event that any outstanding Option under the
Plan for any reason expires, terminates or is forfeited, the
shares of Common Stock allocable to such expiration, termination
or forfeiture may thereafter again be made subject to an Option
under the Plan.
ARTICLE 5. ELIGIBILITY
5.1 Participation. Options shall be granted by the
Committee only to persons who are Officers on the grant date.
5.2 Certain Option Limitations. Notwithstanding any other
provision of the Plan to the contrary, an individual who owns
more than ten percent of the total combined voting power of all
classes of outstanding stock of the Corporation shall not be
eligible for the grant of an Option unless the special
requirements set forth in Sections 6.1 and 7.1 are satisfied.
For purposes of this section, in determining stock ownership, an
individual shall be considered as owning the stock owned,
directly or indirectly, by or for his brothers and sisters
(whether by the whole or half blood), spouse, ancestors and
lineal descendants. Stock owned, directly or indirectly, by or
for a corporation, partnership, estate or trust shall be
considered as being owned proportionately by or for its
shareholders, partners or beneficiaries. "Outstanding stock"
shall include all stock actually issued and outstanding
immediately before the grant of the Option. "Outstanding stock"
shall not include shares authorized for issue under outstanding
Options held by the Optionee or by any other person.
ARTICLE 6. OPTIONS IN GENERAL
6.1 Exercise Price. The exercise price of an Option to
purchase a share of Common Stock shall be not less than 100% of
the fair market value of a share of Common Stock on the date the
Option is granted, except that the exercise price shall be not
less than 110% of such fair market value in the case of an
Option granted to any individual described in Section 5.2. The
exercise price shall be subject to adjustment as provided in
Article 9.
6.2 Limitation on Options. The aggregate fair market
value (determined as of the date an Option is granted) of the
Common Stock with respect to which Options are exercisable for
the first time by any individual in any calendar year (under the
Plan and all other plans maintained by the Corporation and
Subsidiaries) shall not exceed $100,000.
6.3 Determination of Fair Market Value. For purposes of
the Plan, the fair market value of the Common Stock shall be
determined as follows:
(a) Exchange Traded. In the event that the Common
Stock is listed on an established stock exchange, the fair
market value per share shall be the closing sale price of
the Common Stock on such exchange on the applicable date
or, if no sale of Common Stock occurred on that day, on the
next preceding day on which a sale occurred.
(b) NASDAQ Listed. In the event that the Common
Stock is not listed on an established stock exchange, but
is then quoted on the NASDAQ National Market, the fair
market value per share shall be the closing sale price of
the Common Stock on the NASDAQ National Market on the
applicable date or, if no sale of Common Stock occurred on
that day, on the next preceding day on which a sale
occurred.
(c) OTC Traded. In the event that the Common Stock
is not listed on an established stock exchange and is not
quoted on the NASDAQ National Market, the fair market value
per share shall be the average of the average of the
closing bid and asked quotations of the Common Stock for
the five trading days immediately preceding the applicable
date as reported by two brokerage firms to be selected by
the Committee which are then making a market in the Common
Stock, except that if no closing bid or asked quotation is
available on one or more of such trading days, fair market
value shall be determined by reference to the five trading
days immediately preceding the applicable date on which
closing bid and asked quotations are available.
(d) Other. In the event that the Common Stock is not
listed on an established stock exchange, is not quoted on
the NASDAQ National Marketr and no closing bid and asked
quotations are available, or that the fair market value per
share cannot otherwise be determined as contemplated above,
then fair market value per share shall be determined in
good faith by the Committee.
6.4 Transferability of Options. An Option granted
hereunder shall not be transferable other than by will or the
laws of descent and distribution, and such Option shall be
exercisable, during the Optionee's lifetime, only by him or her.
ARTICLE 7. TERM, VESTING AND EXERCISE OF OPTIONS
7.1 Term and Vesting. Each Option granted under the Plan
shall terminate on the date determined by the Committee and
specified in the relevant Agreement; provided, however, that
(i) each Option (other than an Option described in Clause (ii))
shall terminate not later than ten years after the date of
grant, (ii) each Option granted to an individual described in
Section 5.2 shall terminate not later than five years after the
date of the grant. Each Option granted under the Plan shall be
exercisable in whole or in part (i.e., become vested) only after
the earlier of the date on which (i) the Optionee has completed
such period of continuous employment (not less than six months)
with the Corporation or a Subsidiary immediately following the
date of the grant of the Option as may be specified in an
Agreement, or (ii) unless otherwise provided in an Agreement, a
Change in Control occurs.
7.2 Exercise.
(a) Subject to the provisions of Article 8, an Option
may be exercised only during the continuance of the
Optionee's employment.
(b) A person electing to exercise an Option shall
give written notice to the Corporation of such election and
of the number of shares he or she has elected to purchase,
in such form as the Committee shall have prescribed or
approved, and shall at the time of exercise tender the full
exercise price of the shares he or she has elected to
purchase. The exercise price shall be paid in full, in
cash, upon the exercise of the Option; provided, however,
that in lieu of cash, if permitted in the relevant
Agreement, an Optionee may exercise an Option by tendering
to the Corporation shares of Common Stock owned by him or
her and having a fair market value equal to the cash
exercise price applicable to the Option (with the fair
market value of such stock to be determined in the manner
provided in Section 6.3) or by delivering such combination
of cash and such shares as equals the amount of such
exercise price. Notwithstanding the foregoing, Common
Stock acquired pursuant to the exercise of an Incentive
Stock Option may not be tendered as payment unless the
holding period requirements of Code Section 422(a)(1) have
been satisfied, and Common Stock not acquired pursuant to
the exercise of an Incentive Stock Option may not be
tendered as payment unless it has been held, beneficially
and of record, for at least six months (or, as may from
time to time be determined by the Committee, such longer
time as may be required by applicable securities law or
accounting principles to avoid adverse consequences to the
Corporation or a Participant).
(c) A person holding more than one Option at any
relevant time may, in accordance with the provisions of the
Plan, elect to exercise such Options in any order.
ARTICLE 8.
EXERCISE OF OPTIONS FOLLOWING TERMINATION OF EMPLOYMENT
8.1 Death or Total and Permanent Disability. In the event
of termination of an Optionee's employment due to death or being
"disabled" (within the meaning of Code Section 22(e)(3)), his or
her Option shall lapse at the earlier of (a) the expiration of
the term of the Option, or (b) one year after termination due to
such a cause.
8.2 Termination For Cause. In the event of an Optionee's
termination of employment "for cause," his or her Option shall
lapse on the date of such termination. Termination "for cause"
shall mean the Optionee was terminated after:
(a) any government regulatory agency recommends or
orders in writing that the Corporation or a Subsidiary
terminate the employment of the Optionee or relieve him or
her of his or her duties;
(b) the Optionee is convicted of or enters a plea of
guilty or nolo contendere to a felony, a crime of
falsehood, or a crime involving fraud or moral turpitude,
or the actual incarceration of the Optionee for a period of
45 consecutive days;
(c) the Optionee willfully fails to follow the lawful
instructions of the Board after receipt of written notice
of such instructions, other than a failure resulting from
the Optionee's incapacity because of physical or mental
illness;
(d) a finding is made by the Board that such
termination is otherwise in the best interest of the
Corporation.
8.3 Other Termination. In the event of an Optionee's
termination of employment for any reason other than described
elsewhere in this article, his or her Option shall lapse at the
earlier of (i) the expiration of the term of the Option, or
(ii) three months after such termination.
ARTICLE 9. ADJUSTMENT PROVISIONS
9.1 Share Adjustments.
(a) In the event that the shares of Common Stock of
the Corporation, as presently constituted, shall be changed
into or exchanged for a different number or kind of shares
of stock or other securities of the Corporation, or if the
number of such shares of Common Stock shall be changed
through the payment of a stock dividend, stock split or
reverse stock split, then (i) the shares of Common Stock
authorized hereunder to be made the subject of Options,
(ii) the shares of Common Stock then subject to outstanding
Options and the exercise price thereof, and (iii) the
nature and terms of the shares of stock or securities
subject to Options hereunder shall be increased, decreased
or otherwise changed to such extent and in such manner as
may be necessary or appropriate to reflect any of the
foregoing events.
(b) If there shall be any other change in the number
or kind of the outstanding shares of the Common Stock of
the Corporation, or of any stock or other securities into
which such Common Stock shall have been changed, or for
which it shall have been exchanged, and if a majority of
the members of the Board shall, in its sole discretion,
determine that such change equitably requires an adjustment
in any Option which was theretofore granted or which may
thereafter be granted under the Plan, then such adjustment
shall be made in accordance with such determination.
(c) The grant of an Option pursuant to the Plan shall
not affect in any way the right or power of the Corporation
to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure, to merge, to
consolidate, to dissolve, to liquidate or to sell or
transfer all or any part of its business or assets.
9.2 Corporate Changes. A liquidation or dissolution of
the Corporation, a merger or consolidation in which the
Corporation is not the surviving Corporation or a sale of all or
substantially all of the Corporation's assets, shall cause each
outstanding Option, if not exercised, to terminate, except to
the extent that another corporation may and does, in the
transaction, assume and continue the Options or substitute its
own options.
9.3 Fractional Shares. Fractional shares resulting from
any adjustment in Options pursuant to this article shall be
rounded down to the nearest number of whole shares.
ARTICLE 10. GENERAL PROVISIONS
10.1 Effective Date. The Plan shall become effective upon
its adoption by the Board (March 7, 2002), provided that any
grant of an Option is subject to the approval of the Plan by the
shareholders of the Corporation within 12 months of adoption by
the Board.
10.2 Termination of the Plan. Unless previously
terminated by the Board, the Plan shall terminate on, and no
Option shall be granted after, the day immediately preceding the
tenth anniversary of its adoption by the Board.
10.3 Limitation on Termination, Amendment or Modification.
(a) The Board may at any time terminate, amend,
modify or suspend the Plan, provided that, without the
approval of the shareholders of the Corporation, no
amendment or modification shall be made solely by the Board
which:
(i) increases the maximum number of shares of
Common Stock as to which Options may be granted under
the Plan;
(ii) changes the class of eligible Participants;
or
(iii) otherwise requires the approval of
shareholders under applicable state or federal law, or
by exchange-related rules.
(b) No amendment, modification, suspension or
termination of the Plan shall in any manner affect any
Option theretofore granted under the Plan without the
consent of the Participant or any person validly claiming
under or through the Participant.
10.4 No Right to Grant of Option or Continued Employment.
Nothing contained in this Plan or otherwise shall be construed
to (a) require the grant of an Option to an individual who
qualifies as an Officer, or (b) confer upon a Participant any
right to continue in the employ of the Corporation or any
Subsidiary or limit in any respect the right of the Corporation
or of any Subsidiary to terminate the Participant's employment
at any time and for any reason.
10.5 Withholding Taxes. The Corporation will require, as
a condition to the exercise of an Option where sufficient funds
are not otherwise available, that a Participant (or other
relevant person) pay or reimburse to it any withholding taxes at
such time as withholding is required by law.
10.6 Listing and Registration of Shares.
(a) No Option granted pursuant to the Plan shall be
exercisable in whole or in part, and no share certificate
shall be delivered, if at any relevant time a majority of
the Board shall determine in its discretion that the
listing, registration or qualification of the shares of
Common Stock subject to an Option on any securities
exchange or under any applicable law, or the consent or
approval of any governmental regulatory body, is necessary
or desirable as a condition of, or in connection with, such
Option, until such listing, registration, qualification,
consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Board.
(b) If a registration statement under the Securities
Act with respect to the shares issuable under the Plan is
not in effect at any relevant time, as a condition of the
issuance of the shares, a Participant (or any person
claiming through a Participant) shall give the Committee a
written statement, satisfactory in form and substance to
the Committee, that he or she is acquiring the shares for
his or her own account for investment and not with a view
to their distribution. The Corporation may place upon any
stock certificate for shares issued under the Plan such
legend as the Committee may prescribe to prevent
disposition of the shares in violation of the Securities
Act or other applicable law.
10.7 Gender; Number. Words of one gender, wherever used
herein, shall be construed to include each other gender, as the
context requires. Words used herein in the singular form shall
include the plural form, as the context requires, and vice
versa.
10.8 Applicable Law. Except to the extent preempted by
federal law, this Plan document, and the Agreements issued
pursuant hereto, shall be construed, administered and enforced
in accordance with the domestic internal law of the Commonwealth
of Pennsylvania.
10.9 Headings. The headings of the several articles and
sections of this Plan document have been inserted for
convenience of reference only and shall not be used in the
construction of the same.
APPENDIX
FRANKLIN FINANCIAL SERVICES CORPORATION
PROXY ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
APRIL 23, 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Bonnie J. Clugston and
Mark R. Hollar, and each or either of them, as proxies, with
full power of substitution, to vote as directed below all of the
shares of Franklin Financial Services Corporation common stock
held of record on March 8, 2002 by the undersigned and by the
Plan Agent for the account of the undersigned under the Dividend
Reinvestment Plan at the Annual Meeting of Shareholders to be
held on Tuesday, April 23, 2002, at 10:30 a.m. at the Lighthouse
Restaurant, 4301 Philadelphia Avenue, Chambersburg,
Pennsylvania, and at any adjournment thereof, as follows:
1. ELECTION OF FIVE DIRECTORS FOR A TERM OF THREE YEARS
[ ] FOR all nominees listed below*
[ ] WITHHOLD AUTHORITY to vote for all nominees listed
below
G. Warren Elliott Dennis W. Good, Jr. William E. Snell, Jr.
Martha B. Walker Robert G. Zullinger
*INSTRUCTION: If you wish to withhold authority to vote for any
individual nominee, strike a line through the
nominee's name.
2. PROPOSAL TO APPROVE INCENTIVE STOCK OPTION PLAN OF 2002
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS GIVEN,
THIS PROXY WILL BE VOTED FOR THE NOMINEES IDENTIFIED ABOVE AND
FOR THE PROPOSAL TO APPROVE THE INCENTIVE STOCK OPTION PLAN OF
2002.
This proxy also confers authority as to any other business which
may be brought before the meeting or any adjournment thereof.
If any other business is presented at the meeting, the shares
represented by this proxy will be voted in accordance with the
recommendations of the management of Franklin Financial Services
Corporation.
Dated: ____________________, 2002
__________________________________
Signature
__________________________________
Signature
IMPORTANT: Please sign exactly as
your name or names appear hereon.
Joint owners should each sign. If
you sign as agent or in any other
representative capacity, please
state the capacity in which you
sign.