<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
VAIL BANKS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
6712 84-1250561
COLORADO (Primary Standard (I.R.S. Employer
Industrial Identification Number)
(State or Other Classification Code
Jurisdiction of Number)
Incorporation or
Organization)
108 S. FRONTAGE ROAD WEST
SUITE 101
VAIL, COLORADO 81657
(970) 476-2002
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
---------------
E.B. CHESTER, JR.
CHAIRMAN
108 S. FRONTAGE ROAD WEST
SUITE 101
VAIL, COLORADO 81657
(970) 476-2002
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
COPIES TO:
JAN M. DAVIDSON WILLIAM T. LUEDKE IV
KILPATRICK STOCKTON LLP BRACEWELL & PATTERSON, L.L.P.
1100 PEACHTREE STREET, SUITE 2800 SOUTH TOWER PENNZOIL PLACE
ATLANTA, GEORGIA 30309 711 LOUISIANA STREET, SUITE 2900
(404) 815-6500 HOUSTON, TEXAS 77002
(404) 815-6555 (FAX) (713) 223-2900
(713) 221-1212 (FAX)
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$1.00................. 1,426,000 $16.00 $22,816,000 $6,730.72
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 186,000 shares subject to the exercise of the Underwriter's over-
allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
1,240,000 SHARES
Vail Banks, Inc.
COMMON STOCK
-----------
Of the 1,240,000 shares of common stock, par value $1.00 per share (the
"Common Stock"), of Vail Banks, Inc. ("Vail Banks") offered hereby (the
"Offering"), 1,100,000 shares are being sold by Vail Banks and 140,000 shares
are being sold by shareholders of Vail Banks (the "Selling Shareholders").
Prior to the Offering, there has been no public market for the Common Stock. It
is currently anticipated that the Offering price of the Common Stock will be
between $14.00 and $16.00 per share. See "Underwriting" for information
relating to the factors considered in determining the Offering price. Vail
Banks has filed an application for the Common Stock to be approved for
quotation on The Nasdaq Stock Market's National Market ("Nasdaq National
Market") under the symbol "VAIL."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ISSUANCE AND SALE OF THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
("FEDERAL RESERVE"), THE OFFICE OF THE COMPTROLLER OF THE CURRENCY (THE
"OCC"), THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"), OR THE STATE
OF COLORADO DIVISION OF BANKING (THE "CDB"), NOR HAS THE FEDERAL RESERVE,
THE OCC, THE FDIC OR THE CDB PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. THESE SECURITIES ARE NOT DEPOSITS AND WILL NOT BE INSURED BY
THE FDIC, THE BANK INSURANCE FUND, ANY OTHER GOVERNMENT AGENCY, OR
OTHERWISE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO THE
PUBLIC DISCOUNT(1) VAIL BANKS(2) SELLING SHAREHOLDERS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............ $ $ $ $
- -------------------------------------------------------------------------------
Total(3)............. $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Vail Banks and the Selling Shareholders have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by Vail Banks estimated to be
approximately $700,000.
(3) Vail Banks has granted the Underwriter a 30-day over-allotment option to
purchase up to 186,000 additional shares of Common Stock solely to cover
over-allotments, if any, at the Price to Public, less Underwriting Discount
shown above on the same terms and conditions as set forth above. If the
Underwriter exercises this option in full, the total Price to Public,
Underwriting Discount, Proceeds to Vail Banks and Proceeds to the Selling
Shareholders will be $ , $ , $ , and $ respectively. See
"Underwriting."
-----------
The shares of Common Stock to be distributed to the public are offered by the
Underwriter, subject to prior sale, when, as and if received and accepted by
the Underwriter, subject to the approval of certain legal matters by counsel
for the Underwriter and certain other conditions. The Underwriter reserves the
right to withdraw, cancel or modify such offer and reject orders in whole or in
part. It is expected that delivery of the certificates for the shares of Common
Stock will be made against payment therefor on or about , 1998.
-----------
HOEFER & ARNETT
INCORPORATED
The date of this Prospectus is , 1998
<PAGE>
[COLOR PICTURES OF CUSTOMERS IN BANK LOBBY]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
VAIL BANKS, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES AND THE IMPOSITION OF A PENALTY BID, DURING
AND AFTER THE OFFERING. IN ADDITION, IN CONNECTION WITH THIS OFFERING, THE
UNDERWRITER (AND SELLING GROUP MEMBERS) ALSO MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET, IN
ACCORDANCE WITH RULE 103 OF REGULATION M. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
GATEFOLD
[MAP OF COLORADO WITH INSET PICTURES OF BANK FACILITIES AT CERTAIN BANK
LOCATIONS AND VAIL BANKS LOGO AT BANK LOCATIONS]
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY VAIL BANKS OR BY THE UNDERWRITER. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CRE-
ATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF VAIL BANKS
SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITA-
TION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 8
Recent and Proposed Mergers.............................................. 13
Unaudited Pro Forma Combined Condensed Financial Statements.............. 16
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 25
Business................................................................. 27
Selected Financial Data.................................................. 33
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
Management............................................................... 55
Principal and Selling Shareholders....................................... 59
Certain Transactions..................................................... 61
Shares Eligible for Future Sale.......................................... 62
Supervision and Regulation............................................... 63
Description of Capital Stock............................................. 66
Underwriting............................................................. 69
Legal Matters............................................................ 70
Experts.................................................................. 70
Additional Information................................................... 71
Index to Financial Statements............................................ 72
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. All share numbers in this Prospectus reflect a 10-for-one stock
split in the form of a share dividend effected on , 1998, and the conversion
into Common Stock of Vail Banks' outstanding Series A Preferred Stock and
Series I and Series II Convertible Notes ("Mandatorily Convertible
Debentures"). Except as otherwise indicated, all information in this Prospectus
assumes no exercise of the Underwriter's over-allotment option. See
"Underwriting."
THE COMPANY
GENERAL
Vail Banks is a bank holding company headquartered in Vail, Colorado with
total assets of approximately $240 million at June 30, 1998. Vail Banks' wholly
owned subsidiary, WestStar Bank ("WestStar"), is a Colorado state bank with 17
retail offices primarily in the western slope region of Colorado. Vail Banks
has entered into merger agreements with (i) Telluride Bancorp, Ltd.
("Telluride"), a bank holding company, which, through its subsidiaries, Bank of
Telluride and Western Colorado Bank, both Colorado state banks, serves Ouray,
San Miguel and Montrose Counties, and (ii) Independent Bankshares, Inc.
("Independent"), a bank holding company, which, through its subsidiary,
Glenwood Independent Bank ("Glenwood"), a Colorado state bank, serves Garfield
County. Telluride and Independent had assets of approximately $121 million and
$30 million, respectively, at June 30, 1998. See "Recent and Proposed Mergers."
The merger of Independent will occur prior to the consummation of the Offering,
and the merger of Telluride will close at approximately the same time as the
Offering. Assuming the completion of such acquisitions and consummation of the
Offering, as of June 30, 1998, the pro forma total assets of Vail Banks would
have been approximately $408 million.
WestStar was formed in 1977 as a community bank to serve the local residents
and businesses of Vail, and in 1993, Vail Banks was formed as a bank holding
company for WestStar. Vail Banks has maintained WestStar's position as an
institution offering a broad range of convenient banking services, delivered
with personalized customer service. WestStar currently has offices in the
region of Colorado locally referred to as the "Western Slope" region,
including, Summit County (which includes the Breckenridge and Keystone ski
resorts), Eagle County (which includes the Vail and Beaver Creek ski resorts),
Delta and Montrose Counties, and offices in Denver. These areas of Colorado are
home to a variety of commercial, recreational, entertainment, cultural and
tourist enterprises. Upon completion of the merger with Telluride, Vail Banks'
market will also include Ouray County and San Miguel County (which includes the
town and ski resort of Telluride). Upon completion of the merger with
Independent, Vail Banks' market will include the Glenwood Springs area, a
growing bedroom and support community for the Aspen and Snowmass ski resorts.
The Western Slope has experienced significant growth in recent years,
primarily as a result of an expanding market for first and second homes and
summer and winter tourism. As the year-round population of this region has
grown, local businesses have prospered by servicing this growth. Consequently,
a large concentration of Vail Banks' business is in construction lending and
providing banking services for small-to-medium size businesses. To meet the
growing needs of its customers and to prepare for future growth throughout the
Western Slope, Vail Banks has developed infrastructure by expanding its
capabilities in computer technology, entering emerging growth markets by
building and staffing new facilities and centralizing certain administrative,
processing, accounting and other operations functions into regional facilities.
Although this investment in infrastructure has adversely affected net income
since 1994, management believes that the desired infrastructure is now
substantially in place to absorb growth in existing markets and to allow for
the efficient integration of retail offices in new markets and that these
extraordinary expenses will be reduced in the future.
4
<PAGE>
Vail Banks' growth has been designed to maintain customer loyalty, through
continuity of operations and personnel. Historically, shareholders of entities
merged into Vail Banks, who are typically members of the local community, elect
to hold ownership stakes in Vail Banks after the merger. Also, local executives
and employees of banks and branches merged into Vail Banks are generally
interested in, and encouraged to, continue their employment with Vail Banks.
The addition of Bank of Telluride (founded in 1969), Western Colorado Bank
(founded in 1950) and Glenwood (founded in 1955) will provide Vail Banks with
the opportunity to expand its presence in Western Slope markets through
established community banks which have significant local sponsorship. Several
directors of WestStar and its president have been associated with WestStar for
more than ten years. Two of the three directors of Telluride and Independent
who will join the Board of Vail Banks have also been associated with those
banks for more than ten years. Vail Banks anticipates that Bank of Telluride,
Western Colorado Bank and WestStar (consolidated with Glenwood) will continue
to operate as subsidiaries for the immediate future. As local acceptance of
WestStar as a participant in the new markets increases and integration plans
are developed, these subsidiaries may be consolidated with WestStar.
GROWTH STRATEGIES
Vail Banks' strategy is to enhance and solidify its position as a major
provider of community banking services for individuals and small-to-medium size
businesses on the Western Slope. As a result of its significant investment in
retail offices, technology and administration infrastructure, management
believes that Vail Banks' growth, both internally and by merger or acquisition,
can be quickly and efficiently integrated. The following are the key elements
of this strategy:
EXPANSION OF EXISTING MARKET SHARE. Vail Banks intends to continue to
increase its overall market share in its existing markets by solidifying
relationships with current customers and attracting new customers who desire a
local banking relationship. Management believes that this can be accomplished
by (i) evaluating the needs of its existing and potential customers to
determine ways to enhance services and products; (ii) continuing a focus on
training and motivating its employees; (iii) providing personalized customer
service; and (iv) further implementing technological advances to make banking
more efficient and convenient.
DE NOVO ESTABLISHMENT OF RETAIL OFFICES. Vail Banks intends to continue to
expand its existing business by opening new retail offices in markets where it
identifies the potential for growth. Management believes that initially
establishing a small presence in a growing community positions Vail Banks to
expand with the community, thereby fostering a local identity with existing
businesses and consumers in the community as well as offering new customers an
alternative to impersonal, institutional banks.
MERGERS AND ACQUISITIONS. Vail Banks' merger and acquisition strategy is to
increase its overall market share in its existing markets by utilizing the
existing operations of acquired banking operations and to enter new markets by
merging with well established community banks. In assessing potential mergers,
Vail Banks focuses on prospects of the merger candidate, credit quality, past
financial performance, management, location, community demographics, relative
health of the local economy and the terms of the transaction. Management
believes that there are a number of community banks that meet Vail Banks'
criteria and whose owners may be interested in merging with a community-based
organization like Vail Banks. Additionally, management believes that merging
with established banks and then methodically integrating their operations and
retail offices into Vail Banks allows Vail Banks to offer its broad range of
services while maintaining the merged bank's reputation and community ties.
Vail Banks' underlying strategy is to streamline operations judiciously, in
order to optimize the balance between the potentially conflicting effects of
operational integration (which may provide cost savings) and individual
community-focused service (which may provide market share and revenue growth).
5
<PAGE>
THE OFFERING
Common Stock offered by Vail 1,100,000 shares
Banks...............................
Common Stock offered by Selling 140,000 shares(1)
Shareholders........................
Common Stock to be outstanding 5,300,070 shares(2)
after the Offering..................
Use of Proceeds..................... To fund the cash portion of the purchase
price of Telluride, to repay long-term
debt and for general corporate purposes,
which may include mergers and
acquisitions of banking operations or
other financial institutions.
Risk Factors........................ In addition to the other information
contained in this Prospectus, prospective
investors should consider carefully a
number of factors that could affect Vail
Banks' operations and financial results.
See "Risk Factors" beginning on page 8
for a discussion of such factors.
Proposed Nasdaq National Market VAIL
symbol..............................
- --------
(1) VBI Employee Limited Partnership (hereinafter "VBILP"), a Selling
Shareholder, will sell 100,000 shares of Common Stock in the Offering in
order to repay indebtedness owed to E.B. Chester, Jr., the Chairman of
Vail Banks, pursuant to the Promissory Note (as defined in "Certain
Transactions"). James M. Griffin, a director of Vail Banks, will sell
40,000 shares of Common Stock in the Offering. See "Principal and Selling
Shareholders."
(2) Assumes the issuance of 749,340 shares of Common Stock in the Telluride
Merger (as defined in "Risk Factors") and 317,790 shares of Common Stock
in the Independent Merger (as defined in "Risk Factors"), which is subject
to adjustment under those agreements, and excludes 319,000 shares of
Common Stock issuable upon exercise of stock options outstanding under the
Vail Banks Stock Incentive Plan. See "Recent and Proposed Mergers" and
"Management--Stock Incentive Plan."
----------------
Vail Banks' principal executive offices are located at 108 S. Frontage Road
West, Suite 101, Vail, Colorado 81657, where its telephone number is (970) 476-
2002.
6
<PAGE>
SUMMARY FINANCIAL DATA
The summary historical data set forth below should be read in conjunction
with "Recent and Proposed Mergers," "Use of Proceeds," "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the consolidated financial statements and notes thereto and
other financial data contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS
ENDED JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income......... $ 9,836 $ 6,511 $ 14,022 $ 11,655 $ 8,582 $ 5,041 $ 4,417
Interest expense(1)..... 3,622 2,200 4,514 4,210 3,045 1,452 1,256
--------- --------- --------- --------- --------- --------- ---------
Net interest income.... 6,214 4,311 9,508 7,445 5,537 3,589 3,161
Provision for loan loss-
es..................... 0 0 232 154 40 (125) (200)
--------- --------- --------- --------- --------- --------- ---------
Net interest income af-
ter provision for loan
losses................ 6,214 4,311 9,276 7,291 5,497 3,714 3,361
Noninterest income...... 1,059 577 1,273 1,071 911 733 1,052
Noninterest expenses.... 5,993 4,314 9,787 7,334 5,482 3,553 2,989
--------- --------- --------- --------- --------- --------- ---------
Income before unusual
operational items and
income taxes........... 1,280 574 762 1,028 926 894 1,424
Unusual operational in-
come (loss)............ 0 0 0 (406) (139) 0 0
--------- --------- --------- --------- --------- --------- ---------
Income before income
taxes................. 1,280 574 762 622 787 894 1,424
Income tax expense...... 445 218 288 257 266 377 271
--------- --------- --------- --------- --------- --------- ---------
Net income............. 835 356 474 365 521 517 1,153
Income tax benefit of
net operating loss
carryforwards.......... 419 205 274 242 264 368 271
--------- --------- --------- --------- --------- --------- ---------
Total increase in
shareholders' equity
after benefit of loss
carryforwards.......... $ 1,254 $ 561 $ 748 $ 607 $ 785 $ 885 $ 1,424
========= ========= ========= ========= ========= ========= =========
COMMON SHARE DATA(2):
Earnings per common
share (basic).......... $ 0.32 $ 0.18 $ 0.23 $ 0.21 $ 0.30 $ 0.39 $ 0.87
Earnings per share (di-
luted)................. 0.30 0.17 0.21 0.19 0.27 0.36 0.79
Book value per common
share.................. 6.42 5.82 5.91 5.29 5.16 3.95 3.75
Tangible book value per
common share........... 4.77 5.08 4.19 4.35 4.14 3.95 3.75
Cash dividends per com-
mon share.............. 0.00 0.00 0.00 0.22 0.34 0.51 0.00
Weighted average common
shares outstanding (ba-
sic)................... 2,285,628 1,947,370 2,100,423 1,778,373 1,763,021 1,320,390 1,306,930
Weighted average common
shares outstanding (di-
luted)................. 3,065,654 2,084,816 2,266,099 1,915,819 1,900,467 1,457,836 1,444,376
End of period common
shares outstanding..... 2,285,820 2,250,980 2,250,980 1,782,510 1,766,050 1,320,390 1,306,930
BALANCE SHEET DATA (END
OF PERIOD):
Total assets............ $ 240,113 $ 147,794 $ 231,191 $ 157,194 $ 136,931 $ 82,366 $ 75,165
Investment securities... 16,546 14,816 19,732 18,843 22,094 28,297 29,606
Net loans............... 160,976 111,145 153,549 105,963 78,067 31,896 28,467
Allowance for loan loss-
es..................... 1,335 837 1,364 823 620 361 353
Deposits................ 216,573 131,361 206,215 144,350 125,564 75,028 68,112
Note payable............ 1,100 1,300 1,200 1,400 1,600 1,800 1,950
Shareholders' equity.... 19,229 13,093 17,868 9,429 9,121 5,222 4,904
PERFORMANCE RATIOS:
Return on average as-
sets(3)................ 0.70% 0.45% 0.29% 0.26% 0.49% 0.70% 1.66%
Return on average share-
holders' equity(3)..... 8.98 6.36 3.71 3.94 5.78 10.21 18.52
Net interest margin(3).. 6.28 6.28 6.80 6.14 6.09 4.87 4.55
Operating efficiency ra-
tio(4)................. 81.07 86.90 89.54 84.56 83.84 82.21 70.95
Shareholders' equity to
total assets........... 8.01 8.86 7.73 6.00 6.66 6.34 6.52
Loan to deposit ratio... 74.33 84.61 74.46 73.41 62.17 42.51 41.79
ASSET QUALITY RATIOS
(END OF PERIOD):
Nonperforming assets to
total assets(5)........ 0.04% 0.10% 0.09% 0.04% 0.35% 0.03% 0.58%
Nonperforming loans to
total loans(6)......... 0.07 0.14 0.14 0.06 0.45 0.00 0.18
Net loan charge-offs
(recoveries) to average
total loans............ 0.02 (0.01) 0.03 (0.05) (0.05) (0.43) (0.79)
Allowance for loan
losses to total loans.. 0.82 0.75 0.88 0.77 0.79 1.12 1.22
Allowance for loan
losses to nonperforming
loans.................. 1247.66 547.06 637.38 1266.15 174.16 NM* 666.04
CAPITAL RATIOS (END OF
PERIOD)(7):
Leverage ratio.......... 6.15% 7.69% 7.33% 6.23% 7.22% 9.11% 9.70%
Tier 1 risk-based capi-
tal ratio.............. 8.67 9.70 8.26 8.59 9.93 17.22 20.51
Total risk-based capital
ratio.................. 10.43 10.41 10.15 9.37 10.62 18.12 21.57
</TABLE>
- --------
* "NM" represents a number that is not calculable because there were no
nonperforming loans.
(1) Includes expenses associated with Mandatorily Convertible Debentures.
(2) Adjusted for the 10-for-one stock split. Does not include conversion of the
Series A Preferred Stock and the Mandatorily Convertible Debentures except in
diluted computations.
(3) Interim periods annualized.
(4) Calculated by dividing total noninterest expenses, excluding intangible
asset amortization, by net interest income plus noninterest income.
(5) Nonperforming assets consist of nonaccrual loans, loans past due 90 days or
more, restructured loans and other real estate owned.
(6) Nonperforming loans consist of nonaccrual loans, loans past due 90 days or
more and restructured loans.
(7) Leverage and risk-based capital ratios are defined in "Supervision and
Regulation."
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a degree
of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock. This Prospectus contains certain forward-
looking statements (as such term is defined in the Securities Act of 1933, as
amended (the "Securities Act")) concerning Vail Banks' proposed mergers,
operations, performance and financial condition, including, in particular, the
likelihood of Vail Banks' success in developing and expanding its business.
These statements are based upon a number of assumptions and estimates which
are inherently subject to significant uncertainties, many of which are beyond
the control of Vail Banks. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to,
those set forth below.
RISKS INVOLVED IN MERGER AND ACQUISITION STRATEGY
Vail Banks believes that a portion of its growth will come from mergers with
and acquisitions of banks and other financial institutions. Vail Banks has not
previously consummated mergers on the same scale as the recent and proposed
mergers. Such mergers, including the merger of Telluride (the "Telluride
Merger"), which will be consummated at approximately the same time as the
closing of the Offering, and the merger of Independent (the "Independent
Merger"), currently expected to be consummated prior to the consummation of
the Offering, involve risks of changes in results of operations, unforeseen
liabilities relating to the merged institutions or arising out of the merger
transaction, asset quality problems of the merged entity and other conditions
not within the control of Vail Banks, such as adverse personnel relations,
loss of customers because of change of identity, deterioration in local
economic conditions and other risks affecting the merged institutions. If any
merger or acquisition is completed, there can be no assurance that such merger
or acquisition will enhance Vail Banks' business, results of operations or
financial condition, and such mergers or acquisitions may have an adverse
effect upon Vail Banks' results of operations, particularly during periods in
which the mergers or acquisitions are being integrated into Vail Banks'
operations. Vail Banks must compete with a variety of individuals and
institutions, including bank holding companies with resources greater than
Vail Banks, for suitable merger and acquisition candidates. Furthermore,
merger and acquisition candidates may not be available or available on terms
favorable to Vail Banks. Such competition could affect Vail Banks' ability to
pursue mergers and acquisitions. See "Recent and Proposed Mergers."
In addition, as a result of the growth from mergers, Vail Banks' management
must successfully integrate the operations of merged institutions with those
of Vail Banks. Operational areas requiring significant integration include the
consolidation of data processing operations, the combination of employee
benefit plans, the creation of joint account and lending products, the
development of unified marketing plans and other related areas. Accomplishment
of these goals will require additional expenditures by Vail Banks which could
negatively impact Vail Banks' net income. Completion of these tasks could
divert management's attention from other important issues. In addition, the
process of merging and acquiring banks and other financial institutions could
have a material adverse effect on the operation of their businesses, which
could have an adverse effect on combined operations. Vail Banks may also incur
additional unexpected costs in connection with the integration of merged and
acquired banks that could negatively impact Vail Banks' net income. See
"Recent and Proposed Mergers."
NEED FOR ADDITIONAL FINANCING
Vail Banks' ability to merge with and acquire banks and other financial
institutions may depend on its ability to obtain additional debt and equity
funding. Other than as described in this Prospectus, Vail Banks has no
commitments for additional borrowings or sales of equity capital, and there
can be no assurance that Vail Banks will be successful in consummating any
such future financing transactions. Factors which could affect Vail Banks'
access to the capital markets, or the costs of such capital, include changes
in interest rates, general economic conditions and the perception in the
capital markets of Vail Banks' business, results of operations, leverage,
financial condition and business prospects. Each of these factors is to a
large extent subject to economic, financial, competitive and other factors
beyond Vail Banks' control. Borrowing restrictions contained
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in certain regulations which apply to Vail Banks and its subsidiary banks may
also have an effect on Vail Banks' ability to obtain additional financing.
Vail Banks' future credit facilities may significantly restrict Vail Banks'
ability to incur additional indebtedness. Vail Banks' ability to repay any
then outstanding indebtedness at maturity may depend on its ability to
refinance such indebtedness, which could be adversely affected if Vail Banks
does not have access to capital markets for the sale of additional debt or
equity securities through public offerings or private placements on terms
reasonably satisfactory to Vail Banks.
NO PRESENT INTENTION TO PAY DIVIDENDS; RESTRICTIONS ON ABILITY TO PAY
DIVIDENDS
Vail Banks presently intends to retain its earnings to finance its growth
and expansion and for general corporate purposes. In the future, the
declaration and payment of dividends on the Common Stock, if any, will depend
upon Vail Banks' profitability and financial condition, capital requirements,
future growth plans and other factors deemed relevant by Vail Banks' Board of
Directors. Further, certain regulations provide that a bank holding company
should not maintain a level of cash dividends that undermines the bank holding
company's ability to serve as a source of strength to its banking
subsidiaries. See "Dividend Policy."
Vail Banks' principal source of funds to pay dividends on the shares of
Common Stock will be cash dividends that Vail Banks receives from WestStar and
its future bank subsidiaries. Under regulations of the State of Colorado
Division of Banking (the "CDB") and the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), approval of regulators is required if
the total of all dividends declared by WestStar in any calendar year exceeds
the total of its net profits of that year combined with its retained net
profits of the preceding two years, less any required transfers to surplus or
transfers to a fund for the retirement of preferred stock. As of June 30,
1998, an aggregate of approximately $2.4 million was available for payment of
dividends by WestStar to Vail Banks under applicable restrictions. See
"Supervision and Regulation."
The federal banking statutes prohibit federally insured banks from making
any capital distributions (including a dividend payment) if, after making the
distribution, the institution would be "undercapitalized" as defined by
statute. In addition, the relevant federal regulatory agencies also have
authority to prohibit an insured bank from engaging in an unsafe or unsound
practice, as determined by the agency, in conducting an activity, which could
include the payment of dividends. See "Supervision and Regulation."
LOCAL ECONOMIC CONDITIONS
The success of Vail Banks depends to a great extent upon general economic
conditions in the communities it serves. Vail Banks primarily operates on the
Western Slope, some parts of which are largely dependent on seasonal tourism
that particularly affects small-to-medium size businesses, which are a
significant portion of Vail Banks' borrowers. The seasonality of Vail Banks'
business in those areas results in fluctuations in deposit and credit needs.
In some of Vail Banks' markets (Eagle and Summit Counties), seasonal deposits
can run as high as 15% to 20% of total deposits, with deposits peaking during
the ski season, increasing in December and declining in April of each year. In
addition, a decline in the economy of these areas could have a material
adverse effect on Vail Banks' business, including the demand for new loans,
refinancing activity, the ability of borrowers to repay outstanding loans and
the value of loan collateral, and could adversely affect asset quality and net
income. See "Business--General."
DEPENDENCE UPON KEY PERSONNEL
The continued success of Vail Banks is substantially dependent upon the
efforts of the directors and executive officers of Vail Banks, in particular
E.B. Chester, Jr. and Lisa M. Dillon. The success of Vail Banks depends in
large part on the retention of present key management personnel and upon the
ability to hire and retain additional qualified personnel in the future.
Although Mr. Chester and Ms. Dillon have employment agreements with Vail
Banks, Vail Banks does not maintain key-person life insurance coverage on
either of them. See "Management--Employment Agreements."
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CERTAIN ANTI-TAKEOVER PROVISIONS
Vail Banks' Articles of Incorporation and Bylaws contain certain provisions
which may delay, discourage or prevent an attempted acquisition or change in
control of Vail Banks. These provisions include (i) a Board of Directors
classified into three classes of directors with the directors of each class
having staggered, three-year terms and providing for the removal of directors
only for cause; (ii) a provision establishing certain advance notice
procedures for nomination of candidates for election as directors and for
shareholders' proposals to be considered at an annual or special meeting of
shareholders; and (iii) noncumulative voting for directors. Vail Banks'
Articles of Incorporation authorize the Board of Directors of Vail Banks to
issue shares of preferred stock of Vail Banks without shareholder approval and
upon such terms as the Board of Directors may determine. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible mergers, acquisitions, financings and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from acquiring, a controlling interest in Vail
Banks. See "Description of Capital Stock--Certain Provisions of Vail Banks'
Articles of Incorporation and Bylaws."
GOVERNMENT REGULATION
The banking industry is regulated by federal and state regulatory
authorities. Vail Banks and its subsidiary bank are subject to supervision and
regular examinations by the Federal Reserve and the CDB. Under federal and
state banking law, Vail Banks and its subsidiary bank are subject to
supervision and limitations with respect to extending credit, purchasing
securities, paying dividends, making acquisitions, branching and many other
aspects of the banking business. Banking laws are designed primarily to
protect depositors and customers, not investors, and include, among other
things, minimum capital requirements, limitations on products and services
offered, geographical limits, consumer credit regulations, community
investment requirements and restrictions on transactions with affiliated
parties. Financial institution regulation has been the subject of significant
legislation in recent years, and may be the subject of further significant
legislation in the future, none of which is within the control of Vail Banks.
This regulation substantially affects the business and financial results of
all financial institutions and holding companies, including Vail Banks and its
subsidiary bank, and Vail Banks is not able to predict the impact of changes
in such regulations on Vail Banks' business and profitability, some of which
may be materially adverse. See "Supervision and Regulation."
COMPETITION
The banking business is highly competitive, and the profitability of Vail
Banks depends principally upon Vail Banks' ability to compete in the market
areas in which its banking operations are located. Vail Banks competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other
nonfinancial institutions, including retail stores which may maintain their
own credit programs and certain governmental organizations which may offer
more favorable financing than Vail Banks. Many of such competitors may have
greater financial and other resources than Vail Banks. Vail Banks has been
able to compete effectively with other financial institutions by emphasizing
customer service, technology and local office decision-making, by establishing
long-term customer relationships and building customer loyalty, and by
providing products and services designed to address the specific needs of its
customers. Although Vail Banks has been able to compete effectively in the
past, no assurance may be given that Vail Banks will continue to be able to
compete effectively in the future. Further, changes in government regulation
of banking, particularly recent legislation which removes restrictions on
interstate banking and permits interstate branching, are likely to increase
competition by out-of-state banking organizations or by other financial
institutions in Vail Banks' market areas. See "Business--Competition."
CONTROL BY MANAGEMENT
Following completion of the Offering the directors and officers of Vail
Banks will beneficially own approximately 36% of the outstanding Common Stock
(approximately 35% if the Underwriter's over-allotment option is exercised in
full). Furthermore, following the Offering, E. B. Chester, Jr., Chairman of
Vail Banks'
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Board of Directors will beneficially own approximately 24% of the outstanding
Common Stock (approximately 23% if the Underwriter's over-allotment option is
exercised in full). Accordingly, these persons will have substantial influence
over the business, policies and affairs of Vail Banks, including the ability
potentially to control the election of directors and other matters requiring
shareholder approval by simple majority vote. See "Principal and Selling
Shareholders."
NO PRIOR TRADING MARKET; NO GUARANTEE OF LIQUID MARKET
Prior to the Offering, there has been no public market for the shares of
Common Stock. Application has been made for the shares of Common Stock to be
approved for quotation on the Nasdaq National Market under the symbol "VAIL."
The Underwriter has advised Vail Banks that it intends to make a market in the
Common Stock as long as the volume of trading activity in the Common Stock and
certain other market making conditions justify doing so. Nonetheless, there
can be no assurance that an active public market will develop or be sustained
after the Offering or that if such a market develops, investors in the Common
Stock will be able to resell their shares at or above the Offering price.
Making a market involves maintaining bid and asked quotations for the Common
Stock and being available as principal to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and
other regulatory requirements. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence
in the marketplace of willing buyers and sellers of the Common Stock at any
given time, which presence is dependent upon the individual decisions of
investors over which neither Vail Banks, the Underwriter nor any market maker
has any control.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. Upon consummation of the Offering, Vail Banks will have a total of
5,300,070 shares of Common Stock outstanding (5,486,070 if the Underwriter's
over-allotment option is exercised in full). Of these shares, the 1,240,000
shares offered hereby (1,426,000 if the Underwriter's over-allotment option is
exercised in full) will be freely tradable without restrictions under the
Securities Act. All of the remaining shares are "restricted securities" as
that term is defined by Rule 144 promulgated under the Securities Act and will
be eligible for sale in compliance with Rule 144 volume and other
requirements. Shares held by a nonaffiliate for at least two years prior to
sale are freely tradeable under Rule 144(k) without compliance with the volume
and other restrictions of Rule 144. In addition, (i) Vail Banks has entered
into an agreement with the holders of 749,340 shares (subject to adjustment in
accordance with the Telluride Agreement) to be issued in the Telluride Merger
to register those shares for resale (the "Resale Registration") immediately
following consummation of the Offering and the Telluride Merger and (ii) Vail
Banks currently intends to register for resale the 161,512 shares of Common
Stock outstanding less than two years prior to the Offering in connection with
the Resale Registration. The number of outstanding shares of Common Stock
available for sale in the public market will be limited by lock-up agreements
under which Vail Banks, its executive officers, directors, the related
interests of such directors and executive officers and its principal
shareholders have agreed not to sell or otherwise dispose of any of their
shares of Common Stock for a period of 120 days after the date of this
Prospectus without the prior written consent of the Underwriter. Vail Banks
also intends to register for issuance or resale approximately 800,000 shares
of Common Stock reserved for issuance under the Stock Incentive Plan on a
registration statement on Form S-8 approximately 30 days after the date of
this Prospectus. Although Vail Banks has filed an application for its Common
Stock to be approved for quotation on the Nasdaq National Market, there can be
no assurance that an active trading market for the Common Stock will develop
or be sustained after the Offering. Following the Offering, sales of
substantial amounts of Common Stock in the public market, pursuant to Rule
144, the Resale Registration, or otherwise, or even the potential of such
sales, could adversely affect the prevailing market price of the Common Stock
or impair Vail Banks' ability to raise additional capital through equity
issuances. See "Management--Stock Incentive Plan," "Shares Eligible for Future
Sale" and "Underwriting."
DETERMINATION OF MARKET PRICE AND POSSIBLE VOLATILITY OF STOCK PRICE
The Offering price of the shares of Common Stock will be determined by
negotiations between Vail Banks and the Underwriter and will not necessarily
bear any relationship to Vail Banks' book value, past operating results,
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financial condition or other established criteria of value and may not be
indicative of the market price of the Common Stock after the Offering. Among
the factors considered in such negotiations were prevailing market and general
economic conditions, the market capitalizations, trading histories and stages
of development of other traded companies that Vail Banks and the Underwriter
believed to be comparable to Vail Banks, the results of operations of Vail
Banks in recent periods, the current financial position of Vail Banks,
estimates of business potential of Vail Banks and the present state of Vail
Banks' development and the availability for sale in the market of a
significant number of shares of Common Stock. Additionally, consideration was
given to the general status of the securities market, the market conditions
for new issues of securities and the demand for securities of comparable
companies at the time the Offering was made. The stock market has from time to
time experienced price and volume volatility. These market fluctuations may be
unrelated to the operating performance of particular companies whose shares
are traded and may adversely affect the market price of the Common Stock.
There can be no assurance that the market price of the Common Stock will not
decline below the Offering price. See "Underwriting."
IMMEDIATE DILUTION
Based on an assumed Offering price of $15.00 per share, purchasers of Common
Stock in the Offering will incur dilution of $5.51 per share in shareholders'
equity, or book value per share, and $9.80 in the tangible book value of a
share of Common Stock immediately following the Offering. Current shareholders
will receive an increase in the net tangible and net book value of their
shares as a result of the Offering. If Vail Banks issues additional Common
Stock in the future, including shares that may be issued in connection with
mergers, acquisitions and stock options, purchasers of Common Stock in the
Offering may experience further dilution in net book value and net tangible
book value per share of the Common Stock. See "Dilution."
INTEREST RATE RISK
Vail Banks' earnings depend to a great extent on "rate differentials," which
are the differences between interest income earned on loans and investments
and the interest expense paid on deposits and other borrowings. These rates
are highly sensitive to many factors that are beyond Vail Banks' control,
including general economic conditions and the policies of various governmental
and regulatory authorities. Increases in the federal funds rate by the Federal
Reserve usually lead to rising interest rates, which affect Vail Banks'
interest income, interest expense and investment portfolio. Also, governmental
policies such as the creation of a tax deduction for individual retirement
accounts can increase savings and affect the cost of funds. From time to time,
maturities of assets and liabilities are not balanced, and a rapid increase or
decrease in interest rates could have an adverse effect on the net interest
margin and results of operations of Vail Banks. The nature, timing and effect
of any future changes in federal monetary and fiscal policies on Vail Banks
and its results of operations are not predictable.
YEAR 2000 COMPLIANCE
The advent of the year 2000 presents significant issues regarding how a
company's software and operating systems will deal with the numerical value
representing the year 2000 ("Y2K"). This issue extends beyond individual
companies to include the effect on other companies with which they do
business, or by which they may be affected. Vail Banks has responded
proactively to address this issue with respect to its own systems and has
already invested in excess of $2 million to convert critical mainframe and PC
based operating systems and software to Y2K compliant hardware and software.
Management believes that all Vail Banks' remaining operations affected by Y2K
issues will be tested and compliant in advance of the year 2000. In addition,
the financial impact to Vail Banks to complete systems projects and ensure Y2K
compliance is not anticipated by management to be material to the financial
position, results of operations or cash flow of Vail Banks. There can be no
assurance, however, that there will not be any Y2K operating problems or
expenses that will arise with Vail Banks' computer systems and software, or in
connection with Vail Banks' interface with the computer systems and software
of its suppliers, clients and other financial institutions with which it
interacts. Because such third-party systems or software may not be Y2K-
compliant, Vail Banks could be required to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on Vail Banks'
business, results of operations and financial condition.
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RECENT AND PROPOSED MERGERS
The information contained in this Prospectus with respect to the mergers
described below is qualified in its entirety by reference to the complete text
of the respective merger agreements, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
GENERAL
Vail Banks will use a significant portion of the proceeds of the Offering to
fund the cash portion of the purchase price for the Telluride Merger, which
Vail Banks anticipates consummating at approximately the same time as the
Offering. Vail Banks anticipates completing the Independent Merger on or
before July 31, 1998, and has completed, in December of 1997, the merger with
Cedaredge Financial Services, Inc. ("Cedaredge" and the "Cedaredge Merger").
Each merger is described below. Management of Vail Banks believes that the
mergers will (i) expand Vail Bank's market area to desirable locations; (ii)
broaden the base of operations for Vail Banks and diversify risks that may
exist in Vail Banks' markets; (iii) improve profitability as a result of the
economies of scale achieved in the combination of resources; (iv) result in a
larger organization that should better enable management to attract well-
qualified employees and provide opportunities to broaden access to capital
markets and merger opportunities; and (v) allow each of Vail Banks' subsidiary
banks to access products, services, talents and capabilities of the other
subsidiary banks and their management and employees. See "Business--Growth
Strategies."
TELLURIDE BANCORP, LTD. MERGER.
Vail Banks and Telluride entered into a Merger Agreement and Plan of
Reorganization, dated April 16, 1998 (the "Telluride Merger Agreement"),
pursuant to which Telluride will merge with and into Vail Banks, with Vail
Banks being the surviving corporation and Bank of Telluride and Western
Colorado Bank becoming wholly-owned subsidiaries of Vail Banks. Under the
terms of the Telluride Merger Agreement, all applicable regulatory approvals
must be received prior to consummation. Following the Telluride Merger, Vail
Banks expects to continue operations of Bank of Telluride and Western Colorado
Bank, Telluride's wholly-owned banking subsidiaries, in a manner substantially
consistent with past practice and plans to retain their existing management.
Pursuant to the Telluride Merger Agreement, Garner F. Hill, Chairman of the
Board of Directors of Telluride, and one other person to be appointed by
Telluride will be elected to the Board of Directors of Vail Banks.
Telluride began operations as a bank holding company for Bank of Telluride
in October 1988. It owns all of the issued and outstanding capital stock of
Bank of Telluride, which it acquired in 1988, and Western Colorado Bank, which
it acquired in 1991. Bank of Telluride, with assets of approximately $75
million at June 30, 1998, engages in commercial and consumer banking
activities primarily in San Miguel County. Western Colorado Bank, with assets
of approximately $45 million at June 30, 1998, engages in commercial and
consumer banking activities primarily in Ouray and Montrose Counties.
BUSINESS OF BANK OF TELLURIDE AND WESTERN COLORADO BANK. Both Bank of
Telluride and Western Colorado Bank provide a wide range of commercial and
consumer banking products and services for small-to-medium size businesses and
consumers. At June 30, 1998, Bank of Telluride's loan portfolios were
comprised approximately as follows: commercial, financial and agricultural
(15%); real estate--construction (18%); real estate--mortgage (63%); and
installment loans (4%). At the same date, Western Colorado Bank's loan
portfolios were comprised as follows: commercial, financial and agricultural
(35%); real estate--construction (8%); real estate--mortgage (50%); and
installment loans (7%). The lending activities of Bank of Telluride are
principally in San Miguel County, and the lending activities of Western
Colorado Bank are principally in Ouray and Montrose Counties. Both Bank of
Telluride and Western Colorado Bank provide their customers with a competitive
variety of deposit products and services, installment and home equity line of
credit loans, credit cards and other customary banking services.
Bank of Telluride owns its main office, which consists of approximately
12,000 square feet and is located at 238 East Colorado in Telluride. In
October 1997, Western Colorado Bank entered into an agreement for the
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construction of a new 10,000 square foot banking headquarters, scheduled to
open in August 1998. Currently, its main office is located in a modular
building, consisting of approximately 1,500 square feet, pursuant to a month-
to-month lease. Western Colorado Bank operates two other retail offices--one
in Norwood and one in a grocery store in Montrose--which offices consist of
8,500, and 450 square feet, respectively. Management believes that Bank of
Telluride's and Western Colorado Bank's respective facilities, including its
new main office, are adequate to meet its foreseeable needs. As of June 30,
1998, Telluride, Bank of Telluride and Western Colorado Bank employed an
aggregate of 70 persons, 59 on a full-time basis and 11 on a part-time basis.
TERMS OF THE TELLURIDE MERGER. Under the Telluride Merger Agreement, the
shareholders of Telluride will receive aggregate consideration consisting of
both cash and Vail Banks Common Stock equal to the lesser of (i) 300% of
Telluride's shareholders' equity or (ii) $33 million ("Telluride Assumed
Value"). Under the terms of the Telluride Merger Agreement, the assumed value
of one share of Common Stock to be received by the Telluride shareholders will
be equal to (i) 250% of Vail Banks' shareholders' equity as of the day
immediately preceding the consummation of the Telluride Merger Agreement and
including the proceeds of the Offering divided by (ii) the fully diluted
number of shares of Common Stock outstanding (including the shares issued in
this Offering) immediately prior to consummation (the "Vail Banks Assumed Per
Share Value").
The Telluride Merger Agreement provides that cash will be delivered to the
Telluride shareholders in an amount equal to 45% of the Telluride Assumed
Value (the "Cash Portion"), and shares of Common Stock will be delivered to
the Telluride shareholders for the remaining portion of the purchase price,
subject to upward adjustment of the number of shares of Common Stock to be
delivered if the value of the Common Stock to be delivered determined by
multiplying the number of shares of Common Stock to be delivered by the
Offering price (the "Stock Portion") is less than 45% of the Telluride Assumed
Value. In such event, the Telluride shareholders shall receive that number of
additional shares of Vail Banks Common Stock ("Additional Common Stock") which
will cause the sum of (i) the Stock Portion and (ii) the Additional Common
Stock multiplied by the Offering price (the "Adjusted Stock Portion") to equal
45% of the Telluride Assumed Value. Vail Banks has the right to terminate the
Telluride Merger Agreement if the Offering price is less than the equivalent
of $135 per share on a pre-stock split basis ($13.50 per share on a post-stock
split basis).
Under the terms of the Telluride Merger Agreement, at the closing of the
Telluride Merger, Vail Banks will enter into a Registration Rights Agreement
with each Telluride shareholder who receives Vail Banks Common Stock. The
Registration Rights Agreement provides that promptly after the effective date
of the Registration Statement filed by Vail Banks with respect to this
Offering, of which this Prospectus is part, Vail Banks will use its best
efforts to cause the Resale Registration statement to become effective, which
will include all of the shares of Vail Banks Common Stock delivered to the
Telluride shareholders under the terms of the Telluride Merger Agreement.
The Telluride Merger Agreement provides that prior to the closing of the
Telluride Merger Agreement Vail Banks will have entered into two year
employment agreements with seven employees of Telluride, which will provide
that Vail Banks will maintain each employee's level of compensation during the
two year term. Under the terms of the employment agreements, Vail Banks will
pay annual aggregate salaries to such employees of $505,000. The agreements
provide that Vail Banks' obligation to pay each employee's salary continues
unless that employee's employment is terminated by Vail Banks for cause.
The Telluride Merger Agreement contains customary representations and
warranties of both parties, including due organization, due authorization,
capitalization and financial statements and other matters. The Telluride
Merger Agreement also contains customary covenants obligating Telluride, Bank
of Telluride and Western Colorado Bank to conduct their operations pending
closing of the Telluride Merger in the ordinary course of business and in
compliance with various restrictions intended to protect their financial
condition.
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INDEPENDENT BANKSHARES, INC. MERGER
Vail Banks and Independent anticipate consummating on or before July 31,
1998, both the merger of Independent into Vail Banks and the merger of
Glenwood, the wholly-owned banking subsidiary of Independent, into WestStar,
pursuant to a Merger Agreement and Plan of Reorganization dated March 10,
1998, by and among Vail Banks, Independent, WestStar, Glenwood and the
shareholders of Independent (the "Independent Merger Agreement"). Under the
terms of the Independent Merger Agreement, all applicable regulatory approvals
must be received prior to consummation. Following the Independent Merger, Vail
Banks expects to continue operations of Glenwood in a manner substantially
consistent with past practice and plans to retain its existing management.
Pursuant to the Independent Merger Agreement, Donald L. Vanderhoof, the
Chairman of the Board of Independent, will be elected to the Board of
Directors of Vail Banks.
Independent began operations as a bank holding company in 1993. It owns all
of the issued and outstanding capital stock of Glenwood, which it acquired in
1993. Glenwood, with assets of approximately $30 million at June 30, 1998,
engages in commercial and consumer banking activities primarily in Garfield
County.
BUSINESS OF GLENWOOD. Glenwood provides a wide range of commercial and
consumer banking products and services for small-to-medium size businesses,
consumers and professionals. At June 30, 1998, Glenwood's loan portfolio was
composed as follows: commercial, financial and agricultural (12%); real
estate--construction (8%); real estate--mortgage (53%); and installment loans
(27%).
Glenwood provides its customers with a competitive variety of deposit
products and services, installment and home equity loans, credit cards and
other customary banking services. A majority of Glenwood's business is
originated in Garfield County, which includes Glenwood Springs.
Glenwood leases its main office, consisting of approximately 6,600 square
feet, located in Glenwood Springs. Glenwood operates retail offices in
Glenwood Springs and New Castle, which offices consist of 600 and 400 square
feet, respectively. Management believes Glenwood's facilities are adequate to
meet its foreseeable needs. As of June 30, 1998, Independent and Glenwood
employed an aggregate of 18 persons, 15 on a full-time basis and three on a
part-time basis.
TERMS OF THE INDEPENDENT MERGER. Under the terms of the Independent Merger
Agreement, the shareholders of Independent will receive aggregate
consideration consisting of both cash and Vail Banks Common Stock. The amount
of cash and the number of shares of Vail Banks Common Stock to be delivered to
the Independent shareholders will be determined by assuming that the value of
Independent is (i) equal to 300% of Independent's shareholders' equity
immediately prior to consummation ("Independent Bankshares Assumed Value") or,
(ii) in the event that Independent Bankshares Assumed Value exceeds
$7,500,000, the greater of (A) $7,500,000 plus 100% of the amount by which
Independent's shareholders' equity exceeds $2,500,000 or (B) $7,500,000 plus
300% of the product of 8.9% multiplied by the amount by which the customer
deposits of Glenwood immediately prior to consummation exceed $28,150,000.
Under the terms of the Independent Merger Agreement, the value of one share of
Vail Banks Common Stock to be received by the Independent shareholders will be
equal to the Vail Banks' shareholders' equity divided by the total number of
shares of Vail Banks Common Stock outstanding immediately prior to Closing
(which will include treating all convertible instruments as converted
immediately prior to Closing) multiplied by 175% (the "Vail Banks Assumed Per
Share Value"). The aggregate consideration to be delivered to the Independent
shareholders will consist of cash in an amount equal to 50% of the Independent
Bankshares' Assumed Value, and shares of Vail Banks Common Stock will be
delivered to the Independent shareholders for the remaining portion of the
purchase price. The Company currently intends to register the resale of the
Common Stock to be issued to the Independent shareholders pursuant to the
Resale Registration.
The Independent Merger Agreement contains customary representations and
warranties of both parties, including due organization, due authorization,
capitalization and financial statements and other matters. The Independent
Merger Agreement also contains customary covenants obligating Independent and
Glenwood to
15
<PAGE>
conduct their operations pending closing of the Independent Merger in the
ordinary course of business and in compliance with various restrictions
intended to protect their financial condition.
CEDAREDGE FINANCIAL SERVICES, INC. MERGER.
In the Cedaredge Merger, consummated on December 1, 1997, Vail Banks
purchased all of the issued and outstanding capital stock of Cedaredge for
$3.25 million in cash, and assumed $1.6 million of Cedaredge's Mandatorily
Convertible Debentures and $550,000 in other obligations. Cedaredge was merged
into Vail Banks, with Vail Banks being the surviving corporation, and Western
Community Bank, Cedaredge's wholly-owned subsidiary, was merged into WestStar,
with WestStar being the survivor.
UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
set forth the consolidated balance sheets at June 30, 1998 and at December 31,
1997 and the consolidated income statements of Vail Banks for the six month
period ended June 30, 1998 and for the year ended December 31, 1997, and
adjustments reflecting the Cedaredge Merger, the private offering of $2.0
million of Common Stock consummated in July 1998, the 10-for-one Common Stock
split to be effective on 1998, the Independent Merger and the Telluride
Merger, the effects of the Offering and the application of the proceeds
thereof and the pro forma combined information following all such
transactions. The Independent Merger and the Telluride Merger will be
accounted for as purchases, and the assets acquired and liabilities assumed in
the mergers will be recorded at their estimated fair values, with the excess
of the respective purchase prices over the net fair values recorded as an
intangible asset. None of the pro forma income statement information regarding
Vail Banks for the year ended December 31, 1997 has been adjusted to reflect
the merger of VNB Building Corp. into Vail Banks in December 1997 which, in
the opinion of Vail Banks' management, did not have a material effect on Vail
Banks from a financial viewpoint. The information with respect to Vail Banks,
Independent and Telluride as of June 30, 1998 and the pro forma information
are unaudited. The pro forma balance sheets assume that the Independent Merger
and the Telluride Merger and the Offering were consummated on the balance
sheet date. The pro forma income statements assume that the Independent Merger
and the Telluride Merger and the Offering were consummated at the beginning of
the period indicated. The pro forma financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus. The pro forma combined balance sheet
and statements of income are not necessarily indicative of the combined
financial position at consummation of the Independent Merger and the Telluride
Merger or the results of operation following consummation of the Independent
Merger, the Telluride Merger and the Offering.
16
<PAGE>
VAIL BANKS, INC.
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
VAIL ------------------ PRO FORMA
BANKS INDEPENDENT TELLURIDE DEBIT CREDIT COMBINED
-------- ----------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks.................. $ 16,516 $ 2,288 $ 6,230 $ 2,020(A) $17,548(B) $ 23,051
14,645(D) 1,100(D)
Federal funds sold...... 19,450 1,250 4,060 24,760
Investment securities... 16,546 7,647 23,321 47,514
Loans................... 162,311 17,248 77,390 256,949
Less allowance for loan
losses................. (1,335) (199) (856) (2,390)
-------- ------- -------- ------- ------- --------
160,976 17,049 76,534 254,559
Bank premises and equip-
ment................... 19,287 993 8,583 526(B) 29,389
Accrued interest receiv-
able................... 1,335 201 952 2,488
Intangible assets....... 3,764 -- -- 18,963(B) 22,727
Investment in subsidi-
ary.................... -- -- -- 31,966(B) 31,966(B) --
Other assets............ 2,239 160 1,041 3,440
-------- ------- -------- ------- ------- --------
$240,113 $29,588 $120,721 $68,120 $50,614 $407,928
======== ======= ======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits.............. $216,573 $26,658 $108,795 $352,026
Note payable by Vail
Banks................ 1,100 -- -- $ 1,100(D) --
Federal funds
purchased and
repurchase
agreements........... 1,083 -- -- 1,083
Other liabilities..... 1,555 386 1,993 3,934
-------- ------- -------- ------- ------- --------
Total liabilities... 220,311 27,044 110,788 1,100 357,043
Minority interest....... 573 -- -- 573
Shareholders' equity
Series A preferred
stock................ 2,960 -- -- 2,960(C) --
Series B preferred
stock................ -- -- -- --
Mandatorily
Convertible
Debentures........... 1,600 -- -- 1,600(C) --
Common stock.......... 2,286 20 17 37(B) $ 204(A) 5,300
1,067(B)
643(C)
1,100(D)
Capital in excess of par
value.................. 11,369 1,066 1,800 2,866(B) 1,816(A) 43,998
13,351(B)
3,917(C)
13,545(D)
Retained earnings....... 989 1,455 8,044 9,499(B) 989
Accumulated other
comprehensive income... 25 3 72 75(B) 25
-------- ------- -------- ------- ------- --------
Total shareholders'
equity............. 19,229 2,544 9,933 17,037 35,643 50,312
-------- ------- -------- ------- ------- --------
Total liabilities
and shareholders'
equity............. $240,113 $29,588 $120,721 $18,137 $35,643 $407,928
======== ======= ======== ======= ======= ========
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Statements.
17
<PAGE>
VAIL BANKS, INC.
PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
VAIL ------------------ PRO FORMA
BANKS INDEPENDENT TELLURIDE DEBIT CREDIT COMBINED
-------- ----------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks.................. $ 16,680 $ 2,595 $ 5,963 $ 2,020(A) $17,548(B) $ 23,155
14,645(D) 1,200(D)
Federal funds sold...... 17,063 600 240 17,903
Investment securities... 19,732 6,997 17,491 44,220
Loans................... 154,913 17,644 71,334 243,891
Less allowance for loan
losses................. (1,364) (213) (843) (2,420)
-------- ------- -------- ------- ------- --------
153,549 17,431 70,491 241,471
Bank premises and equip-
ment................... 17,836 1,005 7,772 526(B) 27,139
Accrued interest receiv-
able................... 1,377 -- 813 2,190
Intangible assets....... 3,883 -- -- 19,722(B) 23,605
Investment in subsidi-
ary.................... -- -- -- 31,966(B) 31,966(B) --
Other assets............ 1,071 334 1,571 2,976
-------- ------- -------- ------- ------- --------
$231,191 $28,962 $104,341 $68,879 $50,714 $382,659
======== ======= ======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits................ $206,215 $26,114 $ 93,747 $326,076
Note payable by Vail
Banks.................. 1,200 -- -- $ 1,200(D) --
Federal funds purchased
and repurchase
agreements............. 308 -- --
Other liabilities....... 5,034 544 1,180 6,758
-------- ------- -------- ------- ------- --------
Total liabilities....... 212,757 26,658 94,927 1,200 333,142
Minority interest....... 566 -- -- 566
Shareholders' equity
Series A preferred
stock.................. 2,960 -- -- 2,960(C) --
Series B preferred
stock.................. -- -- -- --
Mandatorily Convertible
Debentures............. 1,600 -- -- 1,600(C) --
Common stock............ 2,251 20 17 37(B) $ 204(A) 5,265
1,067(B)
643(C)
1,100(D)
Capital in excess of par
value.................. 10,778 1,066 1,800 2,866(B) 1,816(A) 43,407
13,351(B)
3,917(C)
13,545(D)
Retained earnings....... 253 1,215 7,531 8,746(B) 253
Accumulated other
comprehensive income... 26 3 66 69(B) 26
-------- ------- -------- ------- ------- --------
Total shareholders' eq-
uity................... 17,868 2,304 9,414 16,278 35,643 48,951
-------- ------- -------- ------- ------- --------
Total liabilities and
shareholders' equity... $231,191 $28,962 $104,341 $17,478 $35,643 $382,659
======== ======= ======== ======= ======= ========
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Statements.
18
<PAGE>
VAIL BANKS, INC.
PRO FORMA CONDENSED STATEMENT OF EARNINGS
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
VAIL --------------- PRO FORMA
BANKS INDEPENDENT TELLURIDE DEBIT CREDIT COMBINED
------ ----------- --------- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Interest and fees on
loans................ $8,508 $ 953 $3,926 $13,387
Interest on investment
securities........... 524 199 542 1,265
Interest on federal
funds sold and
deposits in banks.... 804 31 136 971
------ ----- ------ -------
Total interest in-
come............... 9,836 1,183 4,604 15,623
Interest expense
Deposits.............. 3,475 482 1,737 5,694
Other borrowings...... 147 7 29 $132(G) 51
------ ----- ------ -------
Total interest ex-
pense.............. 3,622 489 1,766 5,745
------ ----- ------ -------
Net interest income..... 6,214 694 2,838 9,878
Provision for loan loss-
es..................... -- 5 75 80
------ ----- ------ -------
Net interest income
after provision for
loan losses........ 6,214 689 2,763 9,798
Other income............ 1,059 251 465 1,775
$379(E)
Other expenses.......... 5,993 578 2,472 7(F) 9,429
------ ----- ------ -------
Income before income
taxes.............. 1,280 362 756 2,144
Income tax expense...... 445 121 242 43(H) 851
------ ----- ------ -------
NET INCOME.......... 835 241 514 1,293
Income tax benefit of
net operating loss
carryforwards.......... 419 -- -- 53(H) 472
------ ----- ------ -------
TOTAL INCREASE IN
SHAREHOLDERS' EQUITY
AFTER BENEFIT OF LOSS
CARRYFORWARDS........ $1,254 $ 241 $ 514 $ 1,765
====== ===== ====== =======
Net income per common
share.................. $ 0.32 $ 0.24
Diluted net income per
common share........... 0.30 (I) 0.24
Common shares
outstanding
Weighted average
shares............... 2,286 5,300
Dilutive shares....... 3,066 (I) 5,438
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Statements.
19
<PAGE>
VAIL BANKS, INC.
PRO FORMA CONDENSED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
VAIL --------------- PRO FORMA
BANKS CEDAREDGE INDEPENDENT TELLURIDE DEBIT CREDIT COMBINED
------- --------- ----------- --------- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
Interest and fees on
loans................ $12,570 $3,060 $1,850 $7,272 $24,752
Interest on investment
securities........... 956 276 370 1,230 2,832
Interest on federal
funds sold and
deposits in banks.... 496 32 54 137 719
------- ------ ------ ------ -------
Total interest in-
come............... 14,022 3,368 2,274 8,639 28,303
Interest expense
Deposits.............. 4,251 1,248 836 3,031 9,366
Other borrowings...... 263 144 46 256 $274(G) 435
------- ------ ------ ------ -------
Total interest ex-
pense.............. 4,514 1,392 882 3,287 9,801
------- ------ ------ ------ -------
Net interest income..... 9,508 1,976 1,392 5,352 18,502
Provision for loan loss-
es..................... 232 79 -- 164 475
------- ------ ------ ------ -------
Net interest income
after provision for
loan losses........ 9,276 1,897 1,392 5,188 18,027
Other income............ 1,273 574 437 897 3,181
$881(E)
Other expenses.......... 9,787 2,218 1,146 4,871 25(F) 18,928
------- ------ ------ ------ -------
Income before income
taxes.............. 762 253 683 1,214 2,314
Income tax expense...... 288 50 171 360 85(H) 954
------- ------ ------ ------ -------
NET INCOME.......... 474 203 512 854 1,326
Income tax benefit of
net operating loss
carryforwards.......... 274 -- -- -- 147(H) 421
------- ------ ------ ------ -------
TOTAL INCREASE IN
SHAREHOLDERS'
EQUITY AFTER
BENEFIT OF LOSS
CARRYFORWARDS...... $ 748 $ 203 $ 512 $ 854 $ 1,747
======= ====== ====== ====== =======
Net income per common
share.................. $ 0.23 $ 0.25
Diluted net income per
common share........... 0.21 (I) 0.25
Common shares
outstanding
Weighted average
shares............... 2,100 5,265
Dilutive shares....... 2,266 (I) 5,403
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Statements.
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(A) Issuance of 204,540 shares of Common Stock at a price of $10.00 per share
for $2,045,400, less estimated selling expenses of $25,000.
(B) Merger of Independent and Telluride as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
----------------------------- -----------------------------
INDEPENDENT TELLURIDE TOTAL INDEPENDENT TELLURIDE TOTAL
----------- --------- ------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSIDERATION PAID (IN
THOUSANDS):
Cash
Paid to sellers....... $3,772 $13,410 $17,182 $3,772 $13,410 $17,182
Additional direct
merger costs
(estimated).......... 100 266 366 100 266 366
------ ------- ------- ------ ------- -------
3,872 13,676 17,548 3,872 13,676 17,548
Common stock issued to
(giving effect to 10-
for-one stock split)
Independent
shareholders (317,790
shares valued at
$10.00 per share).... 3,178 -- 3,178 3,178 -- 3,178
Telluride shareholders
(749,340 shares
valued at $15.00 per
share)............... -- 11,240 11,240 -- 11,240 11,240
------ ------- ------- ------ ------- -------
3,178 11,240 14,418 3,178 11,240 14,418
------ ------- ------- ------ ------- -------
Total cost of merg-
ers................ 7,050 24,916 31,966 7,050 24,916 31,966
Less equity............. 2,544 9,933 12,477 2,304 9,414 11,718
------ ------- ------- ------ ------- -------
Excess cost............. $4,506 $14,983 $19,489 $4,746 $15,502 $20,248
====== ======= ======= ====== ======= =======
ALLOCATION OF EXCESS
COST (IN THOUSANDS):
Bank premises and equip-
ment (estimate)
Land.................. -- 135 135 -- 135 135
Buildings and improve-
ments................ -- 391 391 -- 391 391
Intangible assets..... 4,506 14,457 18,963 4,746 14,976 19,722
------ ------- ------- ------ ------- -------
$4,506 $14,983 $19,489 $4,746 $15,502 $20,248
====== ======= ======= ====== ======= =======
</TABLE>
Reflects consolidating adjustments for Independent and Telluride
eliminating equity accounts of acquirees and Vail Banks' investment.
(C) Conversion of Series A Preferred Stock and the Mandatorily Convertible
Debentures into shares of Common Stock, 342,580 and 300,000 shares,
respectively.
(D) Net proceeds from the Offering of $14,645,000 are based on an assumed
sale by Vail Banks of 1,100,000 shares of Common Stock at a price of
$15.00 per share (the midpoint of the estimated Offering range), net of
underwriting discounts and commissions of $1,155,000, and other Offering
expenses of $700,000.
Vail Banks will utilize a portion of the proceeds from the Offering to
retire a note payable.
21
<PAGE>
(E) Estimated amortization of intangible assets acquired in mergers (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
----------------------------- ---------------------------------------
INDEPENDENT TELLURIDE TOTAL CEDAREDGE INDEPENDENT TELLURIDE TOTAL
----------- --------- ------- --------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Intangible assets
Resulting from
purchase
transactions......... $4,406 $14,191 $18,597 $1,831 $4,646 $14,710 $21,187
Estimated additional
direct merger costs.. 100 266 366 689 100 266 1,055
------ ------- ------- ------ ------ ------- -------
Total............... $4,506 $14,457 $18,963 $2,520 $4,746 $14,976 $22,242
====== ======= ======= ====== ====== ======= =======
Amortization for period
based on a 25 year
life................... $ 90 $ 289 $ 379 $ 92 $ 190 $ 599 $ 881
====== ======= ======= ====== ====== ======= =======
</TABLE>
(F) Depreciation on the excess of the estimated fair market value of bank
premises and equipment over the net book value (in thousands):
<TABLE>
<S> <C>
Six months ended June 30, 1998.......................................... $ 7
===
Year ended December 31, 1997............................................ $25
===
</TABLE>
(G) Adjustments to interest expense to reflect the effect of pro forma
adjustments (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Elimination of interest expense on Mandatorily
Convertible Debentures converted into Common
Stock.............................................. $ 77 $151
Elimination of interest expense on note payable
retired with proceeds of the Offering.............. 55 123
---- ----
$132 $274
==== ====
</TABLE>
(H) Adjustments to income tax expense represent the tax effect of the above
adjustments, except for amortization of intangibles which is not
deductible for tax purposes. Income tax loss carryforwards available to
offset pro forma taxable income of Telluride will be restricted. Pro forma
adjustments to the income tax benefit of net operating loss carryforwards
take this factor into account.
(I) Stock options were granted in April 1998 to acquire 319,000 shares of
Common Stock. Shares of Common Stock outstanding for the computation of
diluted earnings per share include shares of Common Stock to be issued
under stock options, computed under the treasury stock method, which
amounted to 137,446 shares.
22
<PAGE>
USE OF PROCEEDS
The net proceeds to Vail Banks at an assumed Offering price of $15.00 per
share (the midpoint of the estimated Offering range) are estimated to be
approximately $14.6 million (approximately $17.2 million if the Underwriter's
over-allotment option is exercised in full) after deduction of the
underwriting discount and estimated Offering expenses payable by Vail Banks.
The Common Stock constitutes "Tier 1" capital under applicable regulatory
definitions.
Vail Banks intends to use $13.7 million of the net proceeds of the Offering
to fund the cash portion of the purchase price for the Telluride Merger and
$1.0 million to repay the outstanding indebtedness of Vail Banks as of the
date of consummation of the Offering to Barnett Bank. The indebtedness bears
interest per annum at a rate equal to prime plus 1% (currently 9.5%), and, if
not prepaid, will mature in December 1998. The remainder, if any, of the net
proceeds will be used for general corporate purposes, including for working
capital and to finance growth, which may include retail office openings and
mergers and acquisitions of other financial institutions. Vail Banks has no
agreements or understandings and is not presently engaged in discussions
relating to any other possible mergers or acquisitions. See "Recent and
Proposed Mergers." Vail Banks will not receive any of the proceeds from the
sale of shares of Common Stock by the Selling Shareholders. See "Principal and
Selling Shareholders."
Pending application of the net proceeds as described above, Vail Banks will
invest the net proceeds in a money market account at WestStar.
DIVIDEND POLICY
Holders of Common Stock will be entitled to receive dividends when, as and
if declared by Vail Banks' Board of Directors out of funds legally available
therefor. Vail Banks presently intends to retain its earnings to finance its
growth and expansion and for use in general corporate purposes. It has not
paid cash dividends on its Common Stock since 1996. The final determination of
the timing, amount and payment of dividends on the Common Stock is at the
discretion of the Board of Directors and will depend on conditions then
existing, including Vail Banks' profitability, financial condition, capital
requirements, future growth plans and other relevant factors. The principal
source of Vail Banks' income is dividends from WestStar and the other banking
subsidiaries. The payment of dividends by WestStar is subject to certain
restrictions imposed by the federal and state banking laws and regulations.
See "Supervision and Regulation."
Vail Banks' ability to pay cash dividends on the Common Stock is also
subject to statutory restrictions, including banking regulations, and
restrictions arising under the terms of securities or indebtedness which may
be issued or incurred in the future. The terms of such securities or
indebtedness may restrict payment of dividends on Common Stock until required
payments and distributions are made on such securities or indebtedness. Under
regulations of the CDB and the Federal Reserve, approval of the regulators
will be required if the total of all dividends declared by WestStar in any
year exceeds the total of its net profits of that year combined with its
retained net profits of the preceding two years.
23
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1998, (i) the actual
consolidated capitalization of Vail Banks, and (ii) the pro forma consolidated
capitalization of Vail Banks giving effect to the Telluride Merger and the
Independent Merger, a $2.0 million private offering of Common Stock
consummated in July 1998, the Offering at an anticipated Offering price of
$15.00 per share (the midpoint of the estimated Offering range) and the
application of the net proceeds from the Offering. The data set forth below
should be read in conjunction with "Selected Financial Data," "Recent and
Proposed Mergers," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated financial
statements and notes thereto and the other financial data included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Indebtedness:
Notes payable.................................... $ 1,100 $ --
Federal funds purchased and repurchase
agreements...................................... 1,083 1,083
Accrued interest payable and other liabilities... 1,555 3,934
----------- -----------
Total indebtedness................................. 3,738 5,017
Shareholders' equity:
Series A Preferred Stock......................... 2,960 --
Series B Preferred Stock......................... -- --
Mandatorily Convertible Debentures............... 1,600 --
Common Stock--$1.00 par value; 20,000,000 shares
authorized, 2,285,820 shares issued and
outstanding, 5,300,070 shares issued and
outstanding as adjusted(1)...................... 2,286 5,300
Capital in excess of par value................... 11,369 43,998
Retained earnings................................ 989 989
Accumulated other comprehensive income........... 25 25
----------- -----------
Total shareholders' equity......................... 19,229 50,312
----------- -----------
Total capitalization............................. $ 22,967 $ 55,329
=========== ===========
Regulatory capital ratios:
Total capital to risk-weighted assets............ 10.43% 11.08%
Tier 1 capital to risk-weighted assets........... 8.67 10.21
Tier 1 capital to tangible assets................ 6.15 7.43
</TABLE>
- --------
(1) Does not include 319,000 shares of Common Stock reserved for issuance upon
exercise of options granted under Vail Banks' Stock Incentive Plan.
24
<PAGE>
DILUTION
At June 30, 1998, the per share shareholders' equity, or book value per
share, of Vail Banks was $8.49 per share, and tangible book value was $5.58
per share. Book value per share represents Vail Banks' total assets less total
liabilities divided by the total number of shares of Common Stock outstanding.
Tangible book value reflects book value under generally accepted accounting
principles reduced by $3,764,000 in intangible assets.
Book value dilution per share represents the difference between the amount
per share paid by the purchasers of Common Stock in the Offering and the pro
forma book value per share of Common Stock immediately after the completion of
the Offering, the Telluride Merger, the Independent Merger, and the $2.0
million private offering of Common Stock consummated in July 1998. After
giving effect to the Telluride Merger, the Independent Merger and the $2.0
million private offering of Common Stock, including approximately $19.0
million of intangible assets, the sale by Vail Banks of 1,100,000 shares of
Common Stock offered hereby at the Offering price of $15.00 per share (the
midpoint of the estimated Offering range), and the application by Vail Banks
of the proceeds therefrom, the pro forma book value per share and tangible
book value per share of Vail Banks at June 30, 1998, would have been $9.49 per
share and $5.20 per share, respectively. This represents an immediate decrease
in book value per share of $5.51 per share and an immediate decrease in
tangible book value per share of $9.80 per share to purchasers of shares in
the Offering, as illustrated by the following tables:
DILUTION IN BOOK VALUE PER SHARE TO NEW INVESTORS
<TABLE>
<S> <C> <C>
Offering price per share (the midpoint of the estimated Offering
range).......................................................... $15.00
Book value per share at June 30, 1998(1)......................... $8.49
Increase in pro forma book value per share attributable to new
investors in the Offering....................................... 1.00
-----
Pro forma book value per share after the Offering................ 9.49
------
Dilution in book value per share to new investors................ $ 5.51
======
</TABLE>
DILUTION IN NET TANGIBLE BOOK VALUE PER SHARE TO NEW INVESTORS
<TABLE>
<S> <C> <C>
Offering price per share (the midpoint of the estimated Offering
range)......................................................... $15.00
Net tangible book value per share at June 30, 1998(2)........... $5.58
Decrease in net tangible book value per share attributable to
the Telluride Merger and Independent Merger(3)................. (2.50)
Increase in pro forma net tangible book value per share
attributable to new investors in the Offering.................. 2.12
-----
Pro forma net tangible book value per share after the Offering.. 5.20
------
Dilution in net tangible book value per share to new investors.. $ 9.80
======
</TABLE>
- --------
(1) Per share amount reflects the $2.0 million private offering of Common
Stock, the conversion of Series A Preferred Stock and the Mandatorily
Convertible Debentures into Common Stock, the Independent Merger and the
Telluride Merger.
(2) Per share amount reflects the $2.0 million private offering of Common
Stock and the conversion of Series A Preferred Stock and the Mandatorily
Convertible Debentures into Common Stock.
(3) Per share amount reflects the issuance of an estimated 1,067,130 shares of
Common Stock, the Independent Merger and the Telluride Merger for a total
value of $14,418,000 less total intangible assets of $18,963,000.
The foregoing computations do not take into account the possible exercise of
outstanding stock options granted under Vail Banks Stock Incentive Plan, or
the possible issuance of up to an additional 186,000 shares of Common Stock to
new investors pursuant to the exercise of an option granted by Vail Banks to
the Underwriter
25
<PAGE>
solely to cover over-allotments, if any, in connection with the Offering. See
"Underwriting." Options to purchase a total of 319,000 shares of Common Stock
were outstanding under Vail Banks' Stock Incentive Plan at June 30, 1998, none
of which were exercisable. See "Management--Stock Incentive Plan." If the
186,000 shares of Common Stock issuable pursuant to the Underwriter's over-
allotment option were included in the foregoing calculation, the pro forma
book and net tangible book value of the Common Stock would be $9.64 and $5.50
per share, respectively, and the per share dilution to new investors would be
$5.36 and $9.50, respectively. Vail Banks' present shareholders will have an
increase in the book value and net tangible book value of their shares as a
result of the Offering. The Telluride Merger and Independent Merger will
result in a dilution in the net tangible book value of Vail Banks' present
shareholders although such dilution will be less than the dilution to new
investors.
26
<PAGE>
BUSINESS
GENERAL
Vail Banks is a bank holding company headquartered in Vail, Colorado with
total assets of approximately $240 million at June 30, 1998. Vail Banks'
wholly owned subsidiary, WestStar, is a Colorado state bank with 17 retail
offices primarily in the Western Slope region of Colorado. Vail Banks has
entered into merger agreements with (i) Telluride, a bank holding company,
which, through its subsidiaries, Bank of Telluride and Western Colorado Bank,
both Colorado state banks, serves Ouray, San Miguel and Montrose Counties, and
(ii) Independent, a bank holding company, which, through its subsidiary,
Glenwood, a Colorado state bank, serves Garfield County. Telluride and
Independent had assets of approximately $121 million and $30 million,
respectively, at June 30, 1998. See "Recent and Proposed Mergers." The merger
of Independent will occur prior to the consummation of the Offering, and the
merger of Telluride will close at approximately the same time as the Offering.
Assuming the completion of such acquisitions and consummation of the Offering,
as of June 30, 1998, the pro forma total assets of Vail Banks would have been
approximately $408 million.
WestStar was formed in 1977 as a community bank to serve the local residents
and businesses of Vail, and in 1993, Vail Banks was formed as a bank holding
company for WestStar. Vail Banks has maintained WestStar's position as an
institution offering a broad range of convenient banking services, delivered
with personalized customer service and convenience. WestStar currently has
offices in the region of Colorado locally referred to as the "Western Slope"
region, including Summit County (which includes the Breckenridge and Keystone
ski resorts), Eagle County (which includes the Vail and Beaver Creek ski
resorts), Delta and Montrose Counties, and Denver. These areas of Colorado are
home to a variety of commercial, recreational, entertainment, cultural and
tourist enterprises. Upon completion of the merger with Telluride, Vail Banks'
market will also include Ouray County and San Miguel County (which includes
the town and ski resort of Telluride). Upon completion of the merger with
Independent, Vail Banks' market will include the Glenwood Springs area, a
growing bedroom and support community for the Aspen and Snowmass ski resorts.
The Western Slope has experienced significant growth in recent years,
primarily as a result of an expanding market for first and second homes and
summer and winter tourism. As the year-round population of this region has
grown, local businesses have prospered by servicing this growth. Consequently,
a large concentration of Vail Banks' business is in construction lending and
providing banking services for small-to-medium size businesses. To meet the
growing needs of its customers and to prepare for future growth throughout the
Western Slope, Vail Banks has developed infrastructure by expanding its
capabilities in computer technology, entering emerging growth markets by
building and staffing new facilities and centralizing certain administrative,
processing, accounting and other operations functions into regional
facilities. Although this investment in infrastructure has adversely affected
net income since 1994, management believes that the desired infrastructure is
now substantially in place to absorb growth in existing markets and to allow
for the efficient integration of retail offices in new markets and that these
extraordinary expenses will be reduced in the future.
Vail Banks' growth has been designed to maintain customer loyalty through
continuity of operations and personnel. Historically, shareholders of entities
merged into Vail Banks, who are typically members of the local community,
elect to hold ownership stakes in Vail Banks after the merger. Also, local
executives and employees of banks and branches merged into Vail Banks are
generally interested in, and encouraged to, continue their employment with
Vail Banks. The additions of Bank of Telluride (founded in 1969), Western
Colorado Bank (founded in 1950) and Glenwood (founded in 1955) will provide
Vail Banks with the opportunity to expand its presence in Western Slope
markets through established community banks which have significant local
sponsorship. Several directors of WestStar and its president have been
associated with WestStar for more than ten years. Two of the three directors
of Telluride and Independent who will join the Board of Vail Banks have also
been associated with those banks for more than ten years. Vail Banks
anticipates that Bank of Telluride, Western Colorado Bank and WestStar
(consolidated with Glenwood) will continue to operate as subsidiaries for the
immediate future. As local acceptance of WestStar as a participant in the new
markets increases and integration plans are developed, these subsidiaries may
be consolidated with WestStar.
27
<PAGE>
GROWTH STRATEGIES
Vail Banks' strategy is to enhance and solidify its position as a major
provider of community banking services for individuals and small-to-medium
size businesses on the Western Slope. As a result of its significant
investment in retail offices, technology and administration infrastructure,
management believes that Vail Banks' growth, both internally and by merger or
acquisition, can be quickly and efficiently integrated. The following are the
key elements of this strategy:
EXPANSION OF EXISTING MARKET SHARE. Vail Banks intends to continue to
increase its overall market share in its markets by solidifying relationships
with current customers and attracting new customers who desire a local banking
relationship. Management believes that this can be accomplished by (i)
evaluating the needs of its existing and potential customers to determine ways
to enhance services and products; (ii) continuing a focus on training and
motivating its employees; (iii) providing personalized customer service; and
(iv) further implementing technological advances to make banking more
efficient and convenient.
DE NOVO ESTABLISHMENT OF RETAIL OFFICES. Vail Banks intends to continue to
expand its existing business by opening new retail offices in markets where it
identifies the potential for growth. Management believes that initially
establishing a small presence in a growing community positions Vail Banks to
expand with the community, thereby fostering a local identity with existing
businesses and consumers in the community as well as offering new customers an
alternative to impersonal, institutional banks.
MERGERS AND ACQUISITIONS. Vail Banks' merger and acquisition strategy is to
increase its overall market share in its markets by utilizing the existing
operations of acquired banking operations and to enter new markets by merging
with well established community banks. In assessing potential mergers, Vail
Banks focuses on prospects of the merger candidate, credit quality, past
financial performance, management, location, community demographics, relative
health of the local economy and the terms of the transaction. Management
believes that there are a number of community banks that meet Vail Banks'
criteria and whose owners may be interested in selling their banks to a
community-based organization like Vail Banks. Additionally, management
believes that merging with established banks and then methodically integrating
their operations and retail offices into Vail Banks allows Vail Banks to offer
its broad range of services while maintaining the merged bank's reputation and
community ties. Vail Banks' underlying strategy is to streamline operations
judiciously, in order to optimize the balance between the potentially
conflicting effects of operational integration (which may provide cost
savings) and individual community-focused service (which may provide market
share and revenue growth).
COMMUNITY BANKING PHILOSOPHY
WestStar is a community bank that provides a broad range of banking services
to consumers and businesses in all of the communities served by its retail
offices. WestStar and its retail offices are operated with the goal of
offering individualized customer service and providing superior financial
services. Many administrative operations, such as data processing, loan
paperwork and documentation, account reconciliation and maintenance,
accounting, compliance and overall policy decisions are centralized or will be
centralized in order to ensure consistency, accuracy and efficiency and to
free retail office personnel to concentrate on providing superior customer
service. The managers and employees of each retail office focus on day-to-day
customer service, including providing financial services to existing
customers, evaluating and working with customers to help choose loan and
account options and striving to present a favorable impression of WestStar to
the community to attract new customers. Management of Vail Banks believes that
this organizational structure allows retail offices to offer the friendly,
individualized customer service of a community bank, while maximizing the
benefits of technological expertise, operating synergies and other cost saving
administrative efficiencies.
Management also believes that community banks should invest a portion of
their financial and human resources in the communities within which they
operate. Executive officers and market managers live in the communities served
by their retail offices, and WestStar encourages board members, bank officers
and retail office managers to become actively involved in civic and public
service activities in their communities.
28
<PAGE>
Management believes that this involvement and the substantial resources
available at the retail office level for close interaction with customers
results in a stronger community and increases WestStar's visibility in the
community, thereby enhancing WestStar's marketing efforts and growth
strategies.
HISTORY
In December 1993, Vail Banks commenced operations by acquiring 100% of the
outstanding shares of WestStar, which opened in December 1977. Since that
time, Vail Banks has grown through a combination of internal growth, including
the establishment of retail offices in Western Slope communities, and external
growth, including the acquisition of community banks. In 1994, WestStar
converted from a national bank to a state bank. In January 1994, WestStar
opened a retail office in Avon to begin serving that growing community located
west of Vail. In June 1995, Vail Banks acquired Snow Bancorp, a bank holding
company located in Dillon, and merged its bank subsidiary into WestStar. Also
in 1995, taking advantage of changes to Colorado bank branching laws that
permitted subsidiary banks of Colorado bank holding companies to branch into
additional locations, WestStar applied for regulatory approval to open retail
offices in Frisco and Edwards, which opened in mid-1996. Opportunities to
serve more of the Western Slope prompted the merger in 1997 with Cedaredge, a
bank holding company owning retail offices in Basalt, Cedaredge, Delta and
Montrose that were converted to WestStar retail offices. WestStar's Gypsum,
Breckenridge and Eagle retail offices were opened in 1997. The acquisition of
Independent will add retail offices in Glenwood Springs and New Castle, and
the acquisition of Telluride will add Bank of Telluride and Western Colorado
Bank, with retail offices in Norwood and Montrose. See "Recent and Proposed
Mergers."
SERVICES AND PRODUCTS
Through WestStar and its retail offices, Vail Banks serves the banking needs
of its business and consumer customers by providing a broad range of
commercial and consumer banking products and services in all of the
communities served by its retail offices. These services include short-term
and medium-term loans, revolving credit facilities, inventory and accounts
receivable financing, equipment financing, short-term commercial mortgage
lending, installment loans, home improvement loans, short-term loans for the
purchase or refinancing of principal residences or second homes, personal
banking through computer and telephone access, safe deposit box services and
various savings accounts, money market accounts, time certificates of deposit
and checking accounts, automated teller machines and night depository
services.
LENDING. Vail Banks offers loans for business and consumer purposes and
focuses its lending activities on individuals and small-to-medium size
businesses in its market areas. Lending activities are funded primarily from
WestStar's core deposit base gathered from the local community. Loan products
are concentrated in relatively short-term, variable rate loans, and a majority
of the loans at June 30, 1998 have a committed term of less than two years. At
June 30, 1998 approximately 38% of loans had an average term greater than one
and less than five years, and less than 14% percent of loans had a term
greater than five years. Collateral for loans is concentrated in real estate,
operating business assets and other personal and business assets. Prior to the
Independent Merger and the Telluride Merger, lending was primarily focused on
small-to-medium size businesses; however, these acquisitions will foster
continued expansion in consumer loan activity. Vail Banks also participates in
many Small Business Administration ("SBA") programs. It has experienced
significant growth in its SBA lending division since 1995, and on February 13,
1997 the SBA designated WestStar as one of the top 25 SBA lenders in Colorado
during 1996. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition."
DEPOSITS. Vail Banks offers the usual and customary range of depository
products provided by commercial banks to both consumers and businesses,
including checking, savings and money market accounts and certificates of
deposit. Deposits are insured by the Federal Deposit Insurance Corporation up
to statutory limits. Generally, deposits are short-term in nature with
approximately 65% of deposits having a term in excess of three months, and
approximately 20% having a term in excess of one year. Within ranges set by
policies determined on a
29
<PAGE>
centralized basis, retail office managers have local autonomy to determine the
type, mix and pricing of the depository products offered to best compete in a
retail office's particular marketplace and to provide appropriate funding for
Vail Banks' assets. Additionally, because some of Vail Banks' markets (Eagle
and Summit Counties) are located in resort areas, seasonality of deposits can
run as high as 15% to 20% of deposits, with deposits peaking during the ski
season, increasing in December and declining in April of each year. Management
believes that deposits in non-resort, Western Slope markets, including the
Montrose market in which Vail Banks will have a greater presence after the
Telluride Merger, will serve to reduce the overall impact of such seasonality.
OTHER SERVICES. WestStar's centralized administrative operations and use of
advanced technology allow it to offer its customers the option and flexibility
of monitoring their loan and account activity and conducting some banking
transactions 24 hours a day through personal computers from their home or
business. Telephone access allows customers to receive up-to-the-minute
account balances, deposit status, checks paid, withdrawals made, loan status,
loan amounts due and other specifics relating to services provided by
WestStar. WestStar has a total of 12 automated teller machines available to
its customers, six of which are located at retail offices and six of which are
located elsewhere in WestStar's market area. Through agreements with other
banks and ATM networks, customers have access to automated teller machines
throughout the world.
ADMINISTRATION OF WESTSTAR
WestStar and its retail offices operate through a customer driven
organization. Market managers and retail office managers operate with
significant customer service-oriented local autonomy, within criteria
established by WestStar, to provide financial services to existing customers,
to make lending decisions with respect to potential customers, to price
deposit products and to present a favorable impression of WestStar to the
community in order to attract new customers. Many functions that can be
centralized with common administration have been placed in operations centers.
At the operations facilities (currently located in Dillon, Vail, Delta and
Avon), WestStar offers administrative services, oversight and support to the
retail offices, including data processing, accounting services, investments,
credit policy formulation, loan documentation and a customer service center to
provide PC banking and other customer service assistance. In early 1999, Vail
Banks intends to further consolidate administrative functions at a new 30,800
square foot facility being built by Vail Banks in Gypsum. See "--Facilities."
Management believes that by standardizing products, services and systems and
providing appropriate holding company support, WestStar's market managers,
retail office managers and other personnel can concentrate on individual
customer service and community relations. Management also believes that
continued centralization of services provided by WestStar will benefit the
individual retail offices by lowering expenses of administration and data
processing services, by streamlining credit policy formulation and supervision
and by facilitating compliance with the requirements of increasingly complex
banking regulations. Ultimately, such standardization and centralization is
intended to contribute to Vail Banks' acquisition strategy by improving the
results of operations of acquired banks and retail offices. Vail Banks
believes that autonomy at the retail office level allows WestStar to better
serve customers in the respective communities, and thus enhances WestStar's
business opportunities and operations. This structure also has served in the
past to ease the integration of banks acquired by Vail Banks because it allows
WestStar generally to maintain customer familiarity (by maintaining existing
management and retail office culture), while at the same time transitioning
new retail offices into WestStar's policies and procedures (by utilizing
WestStar's centralized administrative operations and management personnel) and
providing a higher level of service and expertise through operating
efficiencies generated by centralization.
TECHNOLOGY
WestStar's use of advanced technology enables it to offer customers fast,
efficient services and connects all of Vail Banks' financial service
representatives with on-line, real-time access to information concerning all
customer account data. Additionally, advanced hardware and software has been
installed in Dillon, Avon and
30
<PAGE>
Delta and will be installed in the new operations facility in Gypsum by early
1999 that will "image" or photograph all items (checks, deposit tickets and
payments, etc.) in each local market at the end of each day. The images will
then be transmitted for centralized processing where the various accounts and
items will be balanced and processed. Once processed, the images of checks and
deposit tickets will be simultaneously associated with the appropriate
customer's account, where they will be stored indefinitely and retrieved to be
printed on multi-check pages for statements on a monthly basis. The imaging
system also will allow, via WestStar's data network, instant access at all
retail offices to current and, on a going forward basis, loan files, customer
signature cards and other data that is available currently only on an
originating retail office basis. Upon conversion of Independent's data
processing systems, anticipated to occur immediately following the Independent
Merger, its processing will be integrated into this imaging system.
Telluride's banks have recently converted to a similar, centralized imaging
system. Vail Banks believes that its technology platform is and will be among
the most advanced for banks of Vail Banks' size in Colorado and provides Vail
Banks with the resources to continue to offer leading edge services to current
and new customers. Vail Banks believes that the integrity of client
information is well protected by its data security system and its off-site
disaster back-up storage facilities.
COMPETITION
The banking business is highly competitive, and the profitability of Vail
Banks depends principally upon Vail Banks' ability to compete in the markets
in which its banking operations are located. The financial services industry
is currently highly fragmented, but consolidation in the industry has begun to
reduce the number of independent banks. Vail Banks competes with other
commercial banks, savings banks, savings and loan associations, credit unions,
finance companies, mutual funds, insurance companies, asset-based non-bank
lenders and certain other nonfinancial institutions, including retail stores
which may maintain their own credit programs and certain governmental
organizations which may offer more favorable financing than Vail Banks. Many
competitors of Vail Banks have much greater financial resources, greater name
recognition and more offices. Some of these entities and institutions are not
subject to the same regulatory restrictions as Vail Banks. Vail Banks believes
it has been able to compete effectively with other financial institutions by
emphasizing customer service, technology and local office decision-making, by
establishing long-term customer relationships and building customer loyalty,
and by providing products and services designed to address the specific needs
of its customers.
Legislation permitting full nationwide interstate banking and branching was
recently enacted by Congress. The Colorado legislature has passed a law
permitting interstate branching (the acquisition of a bank in Colorado by an
out-of-state bank without the requirement of maintaining a Colorado banking
charter) that became effective in 1997. These new laws may lead to increased
competition from out-of-state banks in Vail Banks' markets. See "Supervision
and Regulation."
Management believes that WestStar will be able to continue to compete
successfully in its respective communities. Vail Banks believes its
competitive strengths include the reputation it has for developing and
continuing banking relationships, responsiveness to customer needs and
individualized customer service, and skilled and resourceful personnel.
Management believes that large, institutional banks cannot or are unwilling to
offer a high level of individualized customer service, and that WestStar's
customers and potential customers in its markets choose to bank with WestStar
in order to take advantage of this attention while also receiving a range of
banking services at competitive prices. The factors affecting competition
include banking and financial services provided, customer service and
responsiveness, customer convenience and office location. Vail Banks further
believes that the community commitment and involvement of its personnel and
its commitment to providing quality banking and financial services are factors
that should allow it to continue to maintain and improve its competitive
position.
Vail Banks also faces competition in acquiring financial institutions.
Colorado has recently experienced a significant consolidation of its banking
industry, and many large holding companies with greater resources than Vail
Banks (including several out-of-state holding companies) are actively pursuing
acquisitions in Colorado. This competition affects the acquisition
opportunities for Vail Banks and can affect the cost of such acquisitions.
31
<PAGE>
FACILITIES
The following table sets forth information about Vail Banks' banking
offices, including retail offices to be acquired in the Telluride and
Independent Mergers.
<TABLE>
<CAPTION>
LOCATION DEPOSITS AT JUNE 30, 1998
-------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Avon....................$27,965
Basalt....................2,596
Breckenridge..............6,324
Cedaredge--South Grand...23,658
Cedaredge--Mercantile.......***
Delta....................13,153
Denver--17th Street......15,557
Denver--Stout Street......1,567
Dillon...................25,192
Eagle.....................2,867
Edwards...................7,695
Frisco...................13,902
Glenwood Springs**.......21,712
Glenwood Springs--City
Market**.................3,918
Gypsum....................5,132
Montrose--City Market.....4,597
Montrose--City Market*....3,472
Montrose*................18,865
New Castle**..............1,028
Norwood*.................19,486
Telluride*...............66,972
Vail--Main Office........65,114
Vail--West Vail...........1,225
Vail--Vail Village...........20
</TABLE>
- --------
* To be acquired in the Telluride Merger
** To be acquired in the Independent Merger
*** Deposits included in Cedaredge--South Grand
WestStar is in the process of constructing a 30,800 square foot operations
facility in Gypsum. After the Telluride Merger, all of WestStar's
administrative operations in Dillon, Vail, Avon and Glenwood will be
centralized in the new Gypsum facility. Administrative operations of WestStar
located in Delta and those of Telluride may be centralized in Western Colorado
Bank's new 6,000 square foot operations facility in Montrose.
EMPLOYEES
As of June 30, 1998, Vail Banks and its subsidiary employed 179 persons, 166
on a full-time basis and 13 on a part-time basis. Following the Telluride
Merger and the Independent Merger, Vail Banks and its subsidiaries will employ
approximately 267 persons, 240 on a full-time basis and 27 on a part-time
basis. Neither Vail Banks nor WestStar is a party to any collective bargaining
agreement, and Vail Banks believes that its employee relations are good. See
"Management--Employee Agreements."
LEGAL PROCEEDINGS
Vail Banks and WestStar periodically are parties to or otherwise involved in
legal proceedings arising in the normal course of business, such as claims to
enforce liens, claims involving the making and servicing of real property
loans and other issues incident to WestStar's business. Management does not
believe that there is any pending or threatened proceeding against Vail Banks
or WestStar which, if determined adversely, would have a material effect on
the business, results of operations, or financial position of Vail Banks or
WestStar.
32
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for Vail Banks. The
selected historical statements of operations data for each of the years ended
December 31, 1997, 1996, 1995, 1994 and 1993, and the selected historical
balance sheet data for the periods then ended have been derived from the
consolidated financial statements audited by Fortner, Bayens, Levkulich & Co.,
P.C., independent public accountants; such financial statements as of and for
each of the years December 31, 1997, 1996 and 1995 appear elsewhere in this
Prospectus. The selected historical statements of operations data for the six
months ended June 30, 1998 and 1997 have been derived from Vail Banks
unaudited consolidated financial statements and include, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the data for such periods. Operating results for
interim periods are not necessarily indicative of results for the full fiscal
year. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and notes thereto and other
financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED AS OF OR FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income......... $ 9,836 $ 6,511 $ 14,022 $ 11,655 $ 8,582 $ 5,041 $ 4,417
Interest expense(1)..... 3,622 2,200 4,514 4,210 3,045 1,452 1,256
--------- --------- --------- --------- --------- --------- ---------
Net interest income.... 6,214 4,311 9,508 7,445 5,537 3,589 3,161
Provision for loan
losses................. 0 0 232 154 40 (125) (200)
--------- --------- --------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses........... 6,214 4,311 9,276 7,291 5,497 3,714 3,361
Noninterest income...... 1,059 577 1,273 1,071 911 733 1,052
Noninterest expenses.... 5,993 4,314 9,787 7,334 5,482 3,553 2,989
--------- --------- --------- --------- --------- --------- ---------
Income before unusual
operational items and
income taxes........... 1,280 574 762 1,028 926 894 1,424
Unusual operational
income (loss).......... 0 0 0 (406) (139) 0 0
--------- --------- --------- --------- --------- --------- ---------
Income before income
taxes.................. 1,280 574 762 622 787 894 1,424
Income tax expense...... 445 218 288 257 266 377 271
--------- --------- --------- --------- --------- --------- ---------
Net income............. 835 356 474 365 521 517 1,153
Income tax benefit of
net operating loss
carryforwards.......... 419 205 274 242 264 368 271
--------- --------- --------- --------- --------- --------- ---------
Total increase in
shareholders' equity
after benefit of loss
carryforwards.......... $ 1,254 $ 561 $ 748 $ 607 $ 785 $ 885 $ 1,424
========= ========= ========= ========= ========= ========= =========
COMMON SHARE DATA(2):
Earnings per common
share (basic).......... $ 0.32 $ 0.18 $ 0.23 $ 0.21 $ 0.30 $ 0.39 $ 0.87
Earnings per share
(diluted).............. 0.30 0.17 0.21 0.19 0.27 0.36 0.79
Book value per common
share.................. 6.42 5.82 5.91 5.29 5.16 3.95 3.75
Tangible book value per
common share........... 4.77 5.08 4.19 4.35 4.14 3.95 3.75
Cash dividends per
common share........... 0.00 0.00 0.00 0.22 0.34 0.51 0.00
Weighted average common
shares outstanding
(basic)................ 2,285,628 1,947,370 2,100,423 1,778,373 1,763,021 1,320,390 1,306,930
Weighted average common
shares outstanding
(diluted).............. 3,065,654 2,084,816 2,266,099 1,915,819 1,900,467 1,457,836 1,444,376
End of period common
shares outstanding..... 2,285,820 2,250,980 2,250,980 1,782,510 1,766,050 1,320,390 1,306,930
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED AS OF OR FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ ----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END
OF PERIOD):
Total assets............ $240,113 $147,794 $231,191 $157,194 $136,931 $82,366 $75,165
Investment securities... 16,546 14,816 19,732 18,843 22,094 28,297 29,606
Net loans............... 160,976 111,145 153,549 105,963 78,067 31,896 28,467
Allowance for loan
losses................. 1,335 837 1,364 823 620 361 353
Deposits................ 216,573 131,361 206,215 144,350 125,564 75,028 68,112
Note payable............ 1,100 1,300 1,200 1,400 1,600 1,800 1,950
Shareholders' equity.... 19,229 13,093 17,868 9,429 9,121 5,222 4,904
PERFORMANCE RATIOS:
Return on average
assets(3).............. 0.70% 0.45% 0.29% 0.26% 0.49% 0.70% 1.66%
Return on average
shareholders'
equity(3).............. 8.98 6.36 3.71 3.94 5.78 10.21 18.52
Net interest margin(3).. 6.28 6.28 6.80 6.14 6.09 4.87 4.55
Operating efficiency
ratio(4)............... 81.07 86.90 89.54 84.56 83.84 82.21 70.95
Shareholders' equity to
total assets........... 8.01 8.86 7.73 6.00 6.66 6.34 6.52
Loan to deposit ratio... 74.33 84.61 74.46 73.41 62.17 42.51 41.79
ASSET QUALITY RATIOS
(END OF PERIOD):
Nonperforming assets to
total assets(5)........ 0.04% 0.10% 0.09% 0.04% 0.35% 0.03% 0.58%
Nonperforming loans to
total loans(6)......... 0.07 0.14 0.14 0.06 0.45 0.00 0.18
Net loan charge-offs
(recoveries) to average
total loans............ 0.02 (0.01) 0.03 (0.05) (0.05) (0.43) (0.79)
Allowance for loan
losses to total loans.. 0.82 0.75 0.88 0.77 0.79 1.12 1.22
Allowance for loan
losses to nonperforming
loans.................. 1,247.66 547.06 637.38 1266.15 174.16 NM* 666.04
CAPITAL RATIOS (END OF
PERIOD)(7):
Leverage ratio.......... 6.15% 7.69% 7.33% 6.23% 7.22% 9.11% 9.70%
Tier 1 risk-based
capital ratio.......... 8.67 9.70 8.26 8.59 9.93 17.22 20.51
Total risk-based capital
ratio.................. 10.43 10.41 10.15 9.37 10.62 18.12 21.57
</TABLE>
- --------
* "NM" represents a number that is not calculable because there were no
nonperforming loans.
(1) Includes expenses associated with Mandatorily Convertible Debentures.
(2) Adjusted for the 10-for-one stock split. Does not include conversion of
the Series A Preferred Stock and the Mandatorily Convertible Debentures
except in diluted computations.
(3) Interim periods annualized.
(4) Calculated by dividing total noninterest expenses, excluding intangible
asset amortization, by net interest income plus noninterest income.
(5) Nonperforming assets consist of nonaccrual loans, loans past due 90 days
or more, restructured loans and other real estate owned.
(6) Nonperforming loans consist of nonaccrual loans, loans past due 90 days or
more and restructured loans.
(7) Leverage and risk-based capital ratios are defined in "Supervision and
Regulation."
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following discussion and analysis provides information regarding Vail
Banks' historical results of operations and financial condition as of or for
the six months ended June 30, 1998 and 1997 and as of or for the years ended
December 31, 1997, 1996 and 1995. In addition, this discussion includes Vail
Banks' historical results of operations and financial condition as of and for
the six months ended June 30, 1998 and 1997. The following discussion should
be read in conjunction with the consolidated financial statements and related
notes included elsewhere in this Prospectus.
Effective December 1, 1997, Vail Banks consummated the Cedaredge Merger by
paying cash of $3.25 million, and assuming a junior obligation of $500,000 and
the Mandatorily Convertible Debentures totaling approximately $1.6 million. As
of the date of the merger, Cedaredge had total assets of $45.5 million, loans
of $34.3 million, total deposits of $42.0 million and equity capital of $3.0
million. The merger has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based on their estimated fair
values at the date of the merger. The consolidated statements of income
include only the income and expenses of Cedaredge since the date of the
Cedaredge Merger. The excess of purchase price over net assets acquired has
been recorded as an intangible asset, which is amortized over 25 years. The
effect on results of operations for the first eleven months of 1997, had the
purchase transaction occurred at the beginning of the year, would have been
material. See "Recent and Proposed Mergers" for further information on this
transaction.
The Independent Merger, which Vail Banks expects to be consummated by July
31, 1998, and the Telluride Merger, which Vail Banks expects to be consummated
at approximately the same time as the Offering, will substantially affect Vail
Banks' future operations and should have a positive impact on comparisons of
income, expense, and balance sheet items for the 1997 to 1998 third and fourth
quarter periods and 1998 to 1999 first and second quarter periods. As a result
of the mergers, Vail Banks will experience a substantial increase in goodwill
and goodwill amortization. Management believes that following the
aforementioned mergers Vail Banks will be "well capitalized" for purposes of
various banking regulations. The recording of goodwill in connection with
these mergers will result in a significant increase in intangible assets as a
percentage of total equity.
OVERVIEW
Vail Banks' net income for the six months ended June 30, 1998 increased
$479,000, or 135.6%, to $835,000 from $356,000 for the six months ended June
30, 1997. Net income for the year ended December 31, 1997 increased $109,000,
or 29.9%, to $474,000 from $365,000 in 1996. Net income for the year ended
December 31, 1996 decreased $156,000, or 29.9%, to $365,000 from $521,000 in
1995.
Total assets at June 30, 1998 increased $92.3 million, or 62.5%, to $240.1
million from $147.8 million at June 30, 1997. Total assets at December 31,
1997 increased $74.0 million, or 47.1%, from $157.2 million at December 31,
1996, which was an increase of $20.3 million, or 14.8%, over the total assets
at December 31, 1995.
The annualized return on average assets was 0.70% for the six months ended
June 30, 1998 compared to 0.45% for the six months ended June 30, 1997. The
return on average assets was 0.29% for the year ended December 31, 1997
compared to 0.26% and 0.49% for the years ended December 31, 1996 and 1995,
respectively.
The annualized return on average equity was 8.98% for the six months ended
June 30, 1998 compared to 6.36% for the six months ended June 30, 1997. The
return on average equity was 3.71% for the year ended December 31, 1997
compared to 3.94% and 5.78% for the years ended December 31, 1996 and 1995,
respectively.
35
<PAGE>
Vail Banks is utilizing its tax loss carryforward position, obtained from
its merger with Metro National Bank, by taking funds that would normally have
been used to pay taxes and using those funds to expand its banking business
and facilities. Under GAAP requirements, however, net income must be reported
net of an equivalent expense which would have been paid for taxation.
Therefore, both the expenses associated with these investments and the
"equivalent taxation" amount reduce net income. These investments such as de
novo retail offices, advanced real-time information technology networks and
item imaging systems, have increased expenses and put downward pressure on
returns on assets and equity in the current and immediate historical periods.
Vail Banks believes such investments will yield significant returns in future
periods.
RESULTS OF OPERATIONS
Net Interest Income. Vail Banks' net income is derived primarily from net
interest income. Net interest income is the difference between interest
income, principally from loans, investment securities and federal funds sold;
and interest expense, principally on customer deposits. Changes in net
interest income result from changes in volume, net interest spread and net
interest margin. Volume refers to average dollar levels of interest-earning
assets and interest-bearing liabilities. Net interest spread refers to the
difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities. Net interest margin refers to
net interest income divided by average interest-earning assets and is
influenced by the level and relative mix of interest-earning assets, interest-
bearing liabilities and noninterest-bearing liabilities.
36
<PAGE>
The following table sets forth the average balances, net interest income and
expense and average yields and rates for Vail Banks' earning assets and
interest-bearing liabilities for the periods indicated on a nontax-equivalent
basis.
NET INTEREST INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
1998 1997 1997
---------------------------- ---------------------------- ----------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR
BALANCE PAID COST BALANCE PAID COST BALANCE PAID COST
-------- --------- -------- -------- --------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning
assets:
Federal funds
sold............. $ 30,298 $ 804 5.31% $ 13,966 $ 362 5.19% $ 9,396 $ 496 5.28%
Investment secu-
rities
Taxable......... 15,465 456 5.90 17,133 492 5.75 15,780 934 5.92
Tax exempt (1).. 2,952 68 4.64 220 6 5.58 482 22 4.56
Loans (2)........ 153,019 8,508 11.12 106,735 5,651 10.59 115,179 12,570 10.91
Allowance for
loan losses...... (1,355) (832) (848)
-------- ------ -------- ------ -------- ------
Total interest-
earning assets... 200,379 9,836 9.82% 137,222 6,511 9.49% 139,989 14,022 10.02%
Noninterest-earn-
ing assets....... 38,260 20,272 22,039
-------- -------- --------
Total assets..... $238,639 $157,494 $162,028
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQ-
UITY
Interest-bearing
liabilities:
Interest-bearing
deposits
Demand, inter-
est-bearing..... $101,616 1,911 3.76% $ 74,770 1,399 3.74% $ 73,651 2,752 3.74%
Savings......... 14,068 197 2.80 7,991 106 2.66 8,099 219 2.70
Certificates of
deposit......... 47,149 1,367 5.80 20,803 578 5.56 22,775 1,280 5.62
-------- ------ -------- ------ -------- ------
Total interest-
bearing depos-
its.............. 162,833 3,475 4.27% 103,564 2,083 4.02% 104,525 4,251 4.07%
Federal funds
sold and
securities sold
under repurchase
agreements....... 548 15 5.54% 1,794 53 5.87% 1,665 88 5.29%
Note payable..... 1,133 55 9.74 1,325 63 9.56 1,275 123 9.65
Other liabili-
ties............. 0 0 0 22 1 5.00 392 39 9.82
-------- ------ -------- ------ -------- ------
Total interest-
bearing liabili-
ties (3) (4)..... 164,514 3,545 4.31% 106,705 2,200 4.12% 107,857 4,501 4.17%
------ ------ ------
Noninterest-bear-
ing liabilities.. 55,520 39,602 41,388
-------- -------- --------
Total liabilities
(3).............. 220,034 146,307 149,245
-------- -------- --------
Shareholders' eq-
uity (3)......... 18,605 11,187 12,783
-------- -------- --------
Total liabilities
and shareholders'
equity........... $238,639 $157,494 $162,028
======== ======== ========
Net interest in-
come (4)......... $6,291 $4,311 $9,521
====== ====== ======
Net interest mar-
gin.............. 6.28% 6.28% 6.80%
===== ===== =====
Net interest
spread........... 5.51% 5.37% 5.84%
===== ===== =====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities...... 82.10% 77.76% 77.05%
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995
---------------------------- ----------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR
BALANCE PAID COST BALANCE PAID COST
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning
assets:
Federal funds
sold............. $ 6,609 $ 343 5.19% $ 11,734 $ 802 6.83%
Investment secu-
rities
Taxable......... 23,482 1,300 5.54 26,072 1,431 5.49
Tax exempt (1).. 349 19 5.44 394 27 6.85
Loans (2)........ 91,583 9,993 10.91 53,172 6,322 11.89
Allowance for
loan losses...... (680) (498)
--------- --------- --------- ---------
Total interest-
earning assets... 121,343 11,655 9.61% 90,874 8,582 9.44%
Noninterest-earn-
ing assets....... 21,497 16,205
--------- ---------
Total assets..... $142,840 $107,079
========= =========
LIABILITIES AND
SHAREHOLDERS' EQ-
UITY
Interest-bearing
liabilities:
Interest-bearing
deposits
Demand, inter-
est-bearing..... $ 66,089 2,476 3.75% $ 47,139 1,774 3.76%
Savings......... 8,227 231 2.81 6,901 216 3.13
Certificates of
deposit......... 18,595 1,035 5.57 14,363 779 5.42
--------- --------- --------- ---------
Total interest-
bearing depos-
its.............. 92,911 3,742 4.03% 68,403 2,769 4.05%
Federal funds
sold and
securities sold
under repurchase
agreements....... 4,096 210 5.13% 1,467 113 7.70%
Note payable..... 1,500 144 9.60 1,700 163 9.59
Other liabili-
ties............. 2,087 114 5.47 0 0 --
--------- --------- --------- ---------
Total interest-
bearing liabili-
ties (3) (4)..... 100,594 4,210 4.19% 71,570 3,045 4.25%
--------- ---------
Noninterest-bear-
ing liabilities.. 32,973 26,490
--------- ---------
Total liabilities
(3).............. 133,566 98,060
--------- ---------
Shareholders' eq-
uity (3)......... 9,274 9,020
--------- ---------
Total liabilities
and shareholders'
equity........... $142,840 $107,080
========= =========
Net interest in-
come (4)......... $7,445 $5,537
========= =========
Net interest mar-
gin.............. 6.14% 6.09%
======== ========
Net interest
spread........... 5.42% 5.19%
======== ========
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities...... 82.90% 78.76%
</TABLE>
37
<PAGE>
- --------
(1) Yields are calculated using stated rates, not tax-equivalent rates.
(2) Loans are net of unearned discount. Nonaccrual loans are included in
average loans outstanding. Loan fees are included in interest income as
follows: June 30, 1998--$874,000; June 30, 1997--$489,000; December 31,
1997--$1,143,000; December 31, 1996--$960,000; December 31, 1995--
$783,000.
(3) Mandatorily Convertible Debentures are included in the "Shareholders'
equity" account as the Offering will require automatic conversion to
Common Stock.
(4) Expenses associated with the Mandatorily Convertible Debentures are not
reflected in interest expense in this table as the Offering will require
automatic conversion to Common Stock.
Net interest income, on a nontax-equivalent basis, was $6.3 million for the
six months ended June 30, 1998, an increase of $2.0 million, or 45.9%, from
$4.3 million for the same period in 1997. Interest income for the six months
ended June 30, 1998 and 1997 was $9.8 million and $6.5 million, respectively.
The $3.3 million, or 51.1%, increase is primarily due to growth in the loan
portfolio. The Cedaredge Merger in December 1997 added approximately $34.4
million of the $46.3 million increase in average loans reported as of June 30,
1998, with retail office expansion and internal growth accounting for the
remainder of the increase. A balanced blend of fixed and variable rate loans
in the portfolio and relatively stable interest rates over the past twelve
months served to minimize changes due to rate in favor of changes due to
volume. The average yield on interest-earning assets increased to 9.82% during
the first six months of 1998, from 9.49% during the same period in 1997.
Interest expense increased $1.3 million, or 61.1%, to $3.5 million for the
six months ended June 30, 1998, compared to $2.2 million for the same period
in 1997. Increases in the volume of interest-bearing demand deposits and
certificates of deposit accounted for the majority of the increase in interest
expense. The Cedaredge Merger added approximately $10.8 million of the $26.8
million increase in the average interest-bearing demand deposit accounts and
approximately $15.9 million of the $26.3 million increase in average
certificates of deposit. The balance of the increase is attributable to retail
office expansion and internal growth. The average cost of interest-bearing
liabilities increased to 4.31% for the six months ended June 30, 1998, from
4.12% in the same period of 1997.
The net interest margin and net interest spread for the six months ended
June 30, 1998 were 6.28% and 5.51%, respectively, compared to 6.28% and 5.37%,
respectively, for the same period in 1997. Although net interest spread
improved over the periods, largely due to an improvement in loan yields, net
interest margin remained stable due to the offsetting effect of the percentage
of interest-bearing liabilities to interest-earning assets increasing over the
periods.
Net interest income, on a nontax-equivalent basis, was $9.5 million for the
year ended December 31, 1997, an increase of $2.1 million, or 28.4%, from $7.4
million in 1996. Interest income for the years ended December 31, 1997 and
1996 was $14.0 million and $11.7 million, respectively. The increase in
interest income from 1996 to 1997 of $2.4 million is primarily due to an
increase in size of the loan portfolio. The Cedaredge Merger added $2.9
million of the $23.6 million increase in average loans to the December 31,
1997 figure, with retail office expansion and internal growth contributing the
remainder of the increase over the periods. The average yield on interest-
earning assets increased to 10.02% in 1997 from 9.61% in 1996.
Interest expense increased $291,000, or 6.9%, to $4.5 million for the year
ended December 31, 1997 compared to $4.2 million for 1996. Increases in the
volume of interest-bearing demand deposit accounts and certificates of deposit
accounted for the majority of the increase in interest expense over the
periods. The Cedaredge Merger added approximately $900,000 of the $7.6 million
increase in average interest-bearing demand deposit accounts and approximately
$1.3 million of the $4.2 million increase in average certificates of deposit
over the periods. The balance of the increases is attributable to retail
office expansion and internal growth. The increase in interest expense on
deposits was partially offset by reductions in other interest expense due to a
partial retirement of securities sold under repurchase agreements and other
liabilities. Retirement of these liabilities continued through the six months
ended June 30, 1998. The average cost of interest-bearing liabilities
decreased to 4.17% in 1997 from 4.19% in 1996.
Net interest income, on a nontax-equivalent basis, was $7.4 million for the
year ended December 31, 1996, an increase of $1.9 million, or 34.5%, from $5.5
million in 1995. Interest income for the years ended
38
<PAGE>
December 31, 1996 and 1995 was $11.7 million and $8.6 million, respectively.
The increase in interest income from 1995 to 1996 of $3.1 million is primarily
due to an increase in the size of the loan portfolio. Loan growth during this
period is largely attributable to Vail Banks merging with Snow Bancorp in mid-
1995, adding $18.5 million in total loans, and opening two de novo branches in
mid-1996, increasing its market breadth and share. The average yield on
interest-earning assets increased to 9.61% in 1996 from 9.44% in 1995.
Interest expense increased $1.2 million, or 38.3%, to $4.2 million for the
year ended December 31, 1996 compared to $3.0 million for 1995. Increases in
the volume of interest-bearing demand deposit accounts accounted for the
majority of increase in interest expense over the periods. The merger with
Snow Bancorp in mid-1995, adding $25.4 in total deposits, and the opening of
two de novo branches in mid-1996, are the primary factors in this increase.
The average cost of interest-bearing liabilities decreased to 4.19% in 1996
from 4.25% in 1995.
The net interest margin and net interest spread for 1997 were 6.80% and
5.84%, respectively, compared to 6.14% and 5.42%, respectively, for 1996. The
net interest margin and net interest spread for 1996 were 6.14% and 5.42%,
respectively, compared to 6.09% and 5.19%, respectively for 1995.
The following table illustrates, for the periods indicated, the changes in
Vail Banks' net interest income, on a nontax-equivalent basis, due to both
volume and rate changes. Changes in net interest income due to both volume and
rate have been allocated to both volume and rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR ENDED FOR THE YEAR ENDED
ENDED JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO 1997 COMPARED TO 1996 COMPARED TO 1995
-------------------------- -------------------------- ------------------------
INCREASES (DECREASES) INCREASES (DECREASES) INCREASES (DECREASES)
IN NET INTEREST INCOME IN NET INTEREST INCOME IN NET INTEREST INCOME
DUE TO CHANGES IN DUE TO CHANGES IN DUE TO CHANGES IN
-------------------------- -------------------------- ------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------ -------- -------- ------ -------- -------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Federal funds sold...... $ 423 $ 19 $ 442 $ 145 $ 8 $ 153 $ (350) $ (109) $ (459)
Investment securities
Taxable................ (48) 12 (36) (426) 60 (366) (142) 11 (131)
Tax exempt............. 75 (13) 62 7 (4) 3 (3) (5) (8)
Loans................... 2,450 407 2,857 2,575 2 2,577 4,567 (896) 3,671
-------- ------ -------- -------- ----- -------- ------- ------ -------
Total interest income.. 2,900 425 3,325 2,301 66 2,367 4,072 (999) 3,073
-------- ------ -------- -------- ----- -------- ------- ------ -------
INTEREST EXPENSE:
Interest-bearing
deposits
Demand, interest-
bearing............... 502 10 512 283 (7) 276 713 (11) 702
Savings................ 81 10 91 (4) (8) (12) 42 (27) 15
Certificates of
deposit............... 732 57 789 233 12 245 230 26 256
Federal funds purchased
and securities sold
under repurchase
agreements............. (37) (1) (38) (125) 3 (122) 203 (106) 97
Note payable............ (9) 1 (8) (22) 1 (21) (19) -- (19)
Other liabilities....... (1) 0 (1) (93) 18 (75) 114 -- 114
-------- ------ -------- -------- ----- -------- ------- ------ -------
Total interest
expense:.............. 1,268 77 1,345 272 19 291 1,283 (118) 1,165
-------- ------ -------- -------- ----- -------- ------- ------ -------
Change in net interest
income................. $ 1,632 $ 348 $ 1,980 $ 2,029 $ 47 $ 2,076 $ 2,789 $(881) $ 1,908
======== ====== ======== ======== ===== ======== ======= ====== =======
</TABLE>
Provision for Loan Losses. The amount of the provision for loan losses is
based on quarterly evaluations of the loan portfolio, with particular
attention directed toward nonperforming and other potential problem loans.
During these evaluations, consideration is also given to such factors as
management's evaluation of specific loans, the level and composition of
nonperforming loans, historical loan loss experience, results of examinations
by regulatory agencies, an internal asset review process, the market value of
collateral, the strength and availability of guarantees, concentrations of
credit and other judgmental factors.
39
<PAGE>
Vail Banks recorded no provision for loan losses for the six months ended
June 30, 1998 or June 30, 1997. Vail Banks recorded a $232,000 provision for
the year ended December 31, 1997 as compared to $154,000 for the year ended
December 31, 1996 and $40,000 for the year ended December 31, 1995. Provisions
for these periods were increased to reflect growth in the loan portfolio and
to maintain a target allowance to total loans ratio of .75% to 1.50%.
Noninterest Income. The following table sets forth Vail Banks' noninterest
income for the periods indicated.
NONINTEREST INCOME
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------- ------------------
1998 1997 1997 1996 1995
------ ---- ------ ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges................................. $ 219 $161 $ 335 $ 320 $275
NSF and returned check charges.................. 387 269 581 470 396
Other fee income................................ 185 121 220 144 163
Rental income................................... 223 0 12 0 0
Other income.................................... 45 26 125 137 77
------ ---- ------ ------ ----
Total noninterest income...................... $1,059 $577 $1,273 $1,071 $911
====== ==== ====== ====== ====
</TABLE>
During the six months ended June 30, 1998, total noninterest income
increased $482,000, or 83.5%, to $1.1 million from $577,000 for the comparable
period in 1997 due primarily to increases in service charges and fees on
demand deposit accounts in approximate proportion to growth in those deposit
amounts. Also contributing to the increase was rental income from third
parties. Noninterest income for the year ended December 31, 1997 compared to
1996 increased $202,000, or 18.9%, due primarily to increases in service
charges and fees on demand deposit accounts in approximate proportion to
growth in those deposit amounts.
Noninterest income the year ended December 31, 1996 totaled $1.1 million, an
increase of $160,000, from $911,000 for the year ended December 31, 1995. The
primary reason for this increase is due to increases in service charges and
fees on demand deposit accounts in approximate proportion to growth in those
deposit amounts.
Noninterest Expenses. The following table sets forth Vail Banks' noninterest
expenses for the indicated periods.
NONINTEREST EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------- --------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits.............. $3,204 $2,191 $5,086 $3,670 $2,511
Occupancy................................... 738 661 1,325 1,185 959
Furniture and equipment..................... 575 357 852 492 343
Service fees................................ 244 132 366 207 99
Professional fees........................... 165 153 238 178 238
Supplies and printing....................... 175 163 342 336 207
Telephone................................... 169 94 209 130 124
Marketing and promotions.................... 90 127 399 255 256
Postage and freight......................... 86 71 137 125 105
Other....................................... 547 365 833 756 640
------ ------ ------ ------ ------
Total noninterest expenses................ $5,993 $4,314 $9,787 $7,334 $5,482
====== ====== ====== ====== ======
</TABLE>
40
<PAGE>
During the six months ended June 30, 1998, noninterest expenses increased
$1.7 million, or 38.9%, to $6.0 million from $4.3 million for the comparable
period in 1997. This increase is primarily due to salaries and employee
benefits increasing by $1.0 million as a result of the addition of six retail
offices, two through expansion and four from the Cedaredge Merger. The balance
of the increase is also attributable to internal growth and the Cedaredge
Merger. Furniture and equipment expense increased $218,000, or 61.1%, due to
the expansion and acquisition of operating facilities. Service fees increased
$112,000, or 84.4%, due to courier services required to move documents to and
from the new facilities and central backroom operations. Other expenses
increased $182,000, or 49.9%, primarily as a result of expansion of operations
and the Cedaredge Merger. Specific other expenses, which increased over the
periods, include travel, ATM interchange, insurance, loan expenses, software
depreciation and goodwill amortization.
During the year ended December 31, 1997, noninterest expenses increased $2.5
million, or 34.2%, to $9.8 million from $7.3 million in 1996, primarily as a
result of salaries and employee benefits increasing by $1.4 million due to the
addition of seven retail offices, three through expansion and four from the
Cedaredge Merger. The balance of the increase is generally due to continued
growth of the existing operations combined with internal growth.
During the year ended December 31, 1996, total noninterest expenses
increased $1.9 million, or 33.8%, from $5.5 million in 1995. Increases in
noninterest expenses over this period are primarily attributable to the
opening of two de novo branches and the internal growth of existing
operations.
Federal Income Tax. For approximately five years, Vail Banks has utilized a
tax loss carryforward obtained from its merger with Metro National Bank. Under
GAAP requirements, net income includes an equivalent expense which would be
paid for taxation. A federal taxation rate of 34% is used for this purpose.
The taxes saved by use of the tax loss carryforward is then added back to net
income "below the line" to arrive at the "net addition to shareholders'
equity." This results in a depressed retained earnings and an increased
capital surplus in excess of par value.
FINANCIAL CONDITION
Loan Portfolio Composition. The following table sets forth the composition
of Vail Banks' loan portfolio by type of loan at the dates indicated.
Management believes that the balance sheet information as of the dates
indicated should be read in conjunction with the average balance information
in the tables above under "--Net Interest Income." Vail Banks has followed a
policy to manage the loan portfolio composition to hedge risks in specific
markets by diversifying the loan portfolio. However, Vail Banks does have a
concentration of loans in the commercial market. As a result of trends in the
retail, service and real estate markets, balances of Vail Banks' commercial
loans may fluctuate significantly. The mergers with Independent and Telluride
are expected to initially increase the mix of loans in the installment
category. This initial change in loan type mix, however, may only be temporary
as increased lending capacity is utilized across all markets and loan types.
Therefore, the data below is not necessarily indicative of trends within a
particular category.
41
<PAGE>
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------- ------------------------------
1998 1997 1996
-------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................. $ 79,155 48.8% $ 77,801 50.2% $ 46,850 43.9%
Real estate--construction..... 28,654 17.7 25,163 16.2 23,852 22.3
Real estate--mortgage......... 32,522 20.0 31,618 20.4 31,815 29.8
Installment................... 21,980 13.5 20,331 13.1 4,269 4.0
-------- ----- -------- ----- -------- -----
Total loans.................. $162,311 100.0% $154,913 100.0% $106,786 100.0%
======== ===== ======== ===== ======== =====
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................. $33,995 43.2% $14,954 46.7% $12,424 43.1%
Real estate--construction..... 19,524 24.8 8,197 25.6 7,010 24.3
Real estate--mortgage......... 21,479 27.3 7,844 24.5 8,438 29.3
Installment................... 3,690 4.7 1,011 3.2 949 3.3
-------- ----- -------- ----- -------- -----
Total loans.................. $78,688 100.0% $32,006 100.0% $28,821 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
As of June 30, 1998, loans were $162.3 million, which was an increase of
$7.4 million, or 4.8%, over $154.9 million as of December 31, 1997. All
categories of loans increased over this period, primarily due to the cyclical
increase in construction lending during the first two quarters of the year, as
well as core business growth. This increase was partially offset by the
cyclical pay-down of credit lines by commercial customers at the end of their
peak season, which occurs in the late first quarter and early second quarter.
Loans as of December 31, 1997 were up $48.1 million, or 45.1%, compared to
December 31, 1996, primarily due to increases in commercial loans resulting
from Vail Banks' new retail offices and the Cedaredge Merger.
Commercial, financial and agricultural loans principally include loans to
service, real estate and retail businesses. These loans are primarily secured
by real estate and operating business assets. Commercial, financial and
agricultural loans are made on the basis of the financial strength and
repayment ability of the borrower as well as the collateral securing the
loans. As of June 30, 1998, commercial, financial and agricultural loans
represented the largest class of loans at $79.2 million or 48.8% of total
loans, up from $77.8 million or 50.2% of total loans at December 31, 1997.
Commercial, financial and agricultural loans as of December 31, 1997 were up
$31.0 million compared to December 31, 1996, representing an increase in share
of the total loan portfolio of 6.3% from 43.9% at December 31, 1996.
Real estate--construction loans principally include short-term loans to fund
the construction of buildings and residences and/or to purchase land for
planned and near-term commercial or residential development. These loans are
primarily non-revolving lines of credit and secured by real estate, typically
well margined with a first security lien. As of June 30, 1998, real estate--
construction loans totaled $28.7 million or 17.7% of total loans, up from
$25.2 million or 16.2% of total loans at December 31, 1997. Real estate--
construction loans as of December 31, 1997 were up $1.3 million compared to
December 31, 1996, representing a decrease in the share of the total loan
portfolio of 6.1% from 22.3% at December 31, 1996.
Real estate--mortgage loans principally include short-term financing for
existing one to four family residences. The majority of these loans have
maturities of less than one year. These loans are secured by the subject real
estate, typically well margined with a first lien position. As of June 30,
1998, real estate--mortgage loans totaled $32.5 million or 20.0% of total
loans up from $31.6 million or 20.4% of total loans at December 31, 1997. Real
estate--mortgage loans as of December 31, 1997 were down $197,000 compared to
December 31, 1996, representing a decrease in share of the total loan
portfolio of 9.4% from 29.8% at December 31, 1996.
42
<PAGE>
Installment loans to individuals principally include one to five year loans
for consumer items, such as automobiles, snowmobiles, motor homes and other
goods. These loans are secured, at minimum, by the value of the item being
financed. As of June 30, 1998, installment loans totaled $22.0 million or
13.5% of total loans, up from $20.3 million or 13.1% of total loans at
December 31, 1997. Installment loans as of December 31, 1997 were up $16.1
million compared to December 31, 1996, representing an increase in share of
the total loan portfolio of 9.1% from 4.0% at December 31, 1996. The primary
reason for this increase is loans acquired in the Cedaredge Merger.
Vail Banks rarely makes loans at its legal lending limit. Lending officers
are assigned various levels of loan approval authority based upon their
respective levels of experience and expertise. Loans above $500,000 are
evaluated and acted upon by the Directors' Loan Committee of WestStar, which
meets once a week, and are reported to the Board of Directors. Vail Banks'
strategy for approving or disapproving loans is to follow a conservative loan
policies and underwriting practice which includes (i) granting loans on a
sound and collectible basis; (ii) investing funds for the benefit of
shareholders and the protection of depositors; (iii) serving the needs of the
community and Vail Banks' general market area while obtaining a balance
between maximum yield and minimum risk; (iv) ensuring that primary and
secondary sources of repayment are adequate in relation to the amount of the
loan; (v) developing and maintaining diversification of the loan portfolio as
a whole and of the loans within each loan category; and (vi) ensuring that
each loan is properly documented and, if appropriate, insurance coverage is
adequate. Vail Bank's loan review and compliance personnel interact daily with
commercial and consumer lenders to identify potential underwriting or
technical exception variances. In addition, Vail Banks has placed increased
emphasis on early identification of problem loans to aggressively seek
resolution of the situations. Management believes that this strict adherence
to conservative loan policy guidelines has contributed to Vail Banks' below
average level of loan losses compared to its industry peer group.
Loan Maturities. The following tables present, at June 30, 1998 and December
31, 1997, loans by maturity in each major category of Vail Banks' loan
portfolio. Actual maturities may differ from the contractual repricing
maturities shown below as a result of renewals and prepayments. Loan renewals
are evaluated in the same manner as new credit applications.
LOAN MATURITIES
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------------------------
AFTER ONE YEAR
THROUGH FIVE YEARS AFTER FIVE YEARS
------------------------ ------------------------
ONE YEAR
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
-------- ---------- ------------- ---------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural....... $28,378 $15,952 $19,527 $ 7,846 $ 7,452 $ 79,155
Real estate--
construction........... 26,262 939 1,453 0 0 28,654
Real estate--mortgage... 15,948 9,124 4,693 1,816 941 32,522
Installment............. 8,379 9,429 922 1,443 1,807 21,980
------- ------- ------- ------- ------- --------
Total loans........... $78,967 $35,444 $26,595 $11,105 $10,200 $162,311
======= ======= ======= ======= ======= ========
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------
AFTER ONE YEAR
THROUGH FIVE YEARS AFTER FIVE YEARS
------------------------ ------------------------
ONE YEAR
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
-------- ---------- ------------- ---------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural....... $29,593 $17,010 $15,632 $ 8,503 $7,063 $ 77,801
Real estate--
construction........... 23,679 909 575 0 0 25,163
Real estate--mortgage... 15,861 9,313 3,295 2,302 847 31,618
Installment............. 7,254 10,752 656 1,412 257 20,331
------- ------- ------- ------- ------- --------
Total loans........... $76,387 $37,984 $20,158 $12,217 $8,637 $154,913
======= ======= ======= ======= ======= ========
</TABLE>
43
<PAGE>
Nonperforming Assets. Nonperforming assets consist of loans 90 days or more
delinquent and still accruing interest, nonaccrual loans, restructured loans
and other real estate owned. When, in the opinion of management, a reasonable
doubt exists as to the collectibility of interest, regardless of the
delinquency status of the loan, the accrual of interest income is discontinued
and interest accrued during the current year is reversed through a charge to
current year's earnings. While the loan is on nonaccrual status, interest
income is recognized only upon receipt and then only if, in the judgment of
management, there is no reasonable doubt as to the collectibility of the
principal balance. Loans 90 days or more delinquent generally are changed to
nonaccrual status unless the loan is in the process of collection and
management determines that full collection of principal and accrued interest
is probable.
Restructured loans are those for which concessions, including reduction of
interest rate below a rate otherwise available to the borrower or the deferral
of interest or principal, have been granted due to the borrower's weakened
financial condition. Interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur. Vail Banks currently has no restructured loans.
The following table sets forth information concerning the nonperforming
assets of Vail Banks as of the dates indicated.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1998 1997 1996 1995 1994 1993
-------- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans....................... $ 51 $136 $ 0 $353 $ 0 $ 53
Other loans 90 days past due........... 56 78 65 3 0 0
Other real estate owned................ 0 0 0 128 23 386
---- ---- ---- ---- ---- ----
Total nonperforming assets............. $107 $214 $ 65 $484 $ 23 $439
==== ==== ==== ==== ==== ====
Nonaccrual and other loans 90 days past
due to total loans.................... 0.07% 0.14% 0.06% 0.45% 0.00% 0.18%
Nonperforming assets to total loans
plus other real estate................ 0.07% 0.14% 0.06% 0.61% 0.07% 1.50%
Nonperforming assets to total assets... 0.04% 0.09% 0.04% 0.35% 0.03% 0.58%
</TABLE>
Nonperforming assets as a percentage of total loans plus other real estate
outstanding as of June 30, 1998 was 0.07%, compared to 0.14%, 0.06%, and 0.61%
as of December 31, 1997, 1996, and 1995, respectively. The $51,000 in
nonaccrual loans as of June 30, 1998, is made up of several small loans, with
the largest of these equaling $12,400. Management believes Vail Banks is
adequately collateralized to recover the majority of the balance of these
nonaccrual loans. Management generally obtains and maintains appraisals on
real estate collateral. Management is not aware of any adverse trends relating
to Vail Banks' loan portfolio.
As of June 30, 1998, there was no significant balance of loans excluded from
nonperforming loans set forth above, where known information about possible
credit problems of borrowers causes management to have doubts as to the
ability of such borrowers to comply with the present loan repayment terms and
which may result in such loans becoming nonperforming.
Analysis of Allowance for Loan Losses. The allowance for loan losses
represents management's recognition of the risks of extending credit and its
evaluation of the loan portfolio. The allowance is maintained at a level
considered adequate to provide for anticipated loan losses based on
management's assessment of various factors affecting the loan portfolio,
including a review of problem loans, business conditions, historical loss
experience, evaluation of the quality of the underlying collateral, and
holding and disposal costs. The allowance is increased by additional charges
to operating income and reduced by loans charged off, net of recoveries.
44
<PAGE>
The following table sets forth information regarding changes in the allowance
for loan losses for Vail Banks for the periods indicated.
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, ------------------
1998 1997 1996
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average total loans........................... $153,019 $115,179 $ 91,583
======== ======== ========
Total loans at end of period.................. $162,311 $154,913 $106,786
======== ======== ========
Allowance at beginning of year................ $ 1,364 $ 823 $ 620
Charge-offs:
Commercial, financial and agricultural...... 4 6 83
Real estate--construction................... 0 0 0
Real estate--mortgage....................... 0 0 0
Installment................................. 50 52 39
-------- -------- --------
Total charge-offs......................... 54 58 122
Recoveries:
Commercial, financial and agricultural...... 13 17 167
Real estate--construction................... 0 0 0
Real estate--mortgage....................... 0 0 0
Installment................................. 12 7 4
-------- -------- --------
Total recoveries.......................... 25 24 171
-------- -------- --------
Net charge-offs (recoveries).................. 29 34 (49)
Allowance for loan loss--merger............... 0 343 0
Provision for loan losses..................... 0 232 154
-------- -------- --------
Allowance at end of period.................... $ 1,335 $ 1,364 $ 823
======== ======== ========
Net charge-offs (recoveries) to average total
loans........................................ 0.02% 0.03% (0.05)%
Allowance to total loans at end of period..... 0.82% 0.88% 0.77 %
Allowance to nonperforming loans.............. 1,247.66% 637.38% 1,266.15 %
</TABLE>
45
<PAGE>
ALLOWANCE FOR LOAN LOSS ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average total loans............................. $73,183 $30,586 $28,425
======= ======= =======
Total loans at end of period.................... $78,688 $32,006 $28,821
======= ======= =======
Allowance at beginning of year.................. $ 361 $ 353 $ 113
Charge-offs:
Commercial, financial and agricultural........ 31 0 0
Real estate--construction..................... 0 0 0
Real estate--mortgage......................... 0 0 0
Installment................................... 7 6 17
------- ------- -------
Total charge-offs........................... 38 6 17
Recoveries:
Commercial, financial and agricultural........ 54 29 210
Real estate--construction..................... 0 0 0
Real estate--mortgage......................... 20 106 6
Installment................................... 3 4 26
------- ------- -------
Total recoveries............................ 77 139 242
------- ------- -------
Net charge-offs (recoveries).................... (39) (133) (225)
Allowance for loan loss--merger................. 180 0 215
Provision for loan losses....................... 40 (125) (200)
------- ------- -------
Allowance at end of period...................... $ 620 $ 361 $ 353
======= ======= =======
Net charge-offs (recoveries) to average total
loans.......................................... (0.05)% (0.43)% (0.79)%
Allowance to total loans at end of period....... 0.79 % 1.13 % 1.22 %
Allowance to nonperforming loans................ 174.16 % NM * 666.04 %
</TABLE>
- --------
* "NM" represents a number that is not calculable because there were no
nonperforming loans.
Net charge-offs for the six months ended June 30, 1998 totaled $29,000 or
0.02% of average loans. Net charge-offs during 1997 totaled $34,000 or 0.03%
of average loans compared to recoveries of $49,000 or 0.05% of average loans
in 1996.
Vail Banks' lending personnel are responsible for ongoing reviews of the
quality of the loan portfolio. Vail Banks' Credit Committee meets weekly to
review all loans over 15 days past due. A list containing any potential
problem loans is updated monthly and reviewed by management and the Board of
Directors monthly. These reviews assist in the identification of potential and
probable losses, and also in the determination of the level of the allowance
for loan losses. The allowance for loan losses is based primarily on
management's estimates of possible loan losses from the foregoing processes
and historical experience. These estimates involve ongoing judgments and may
be adjusted over time depending on economic conditions, changing historical
experience and changing mix of the loan portfolio between the different types
of loans.
State and federal regulatory agencies, as an integral part of their
examination process, review Vail Banks' loans and its allowance for loan
losses. Management believes that Vail Banks' allowance for loan losses is
adequate to cover anticipated losses. There can be no assurance, however, that
management will not need to increase the allowance for loan losses or that
regulators, when reviewing Vail Banks' loan portfolio in the future, will not
require Vail Banks to increase such allowance, either of which could adversely
affect Vail Banks' earnings. Further, there can be no assurance that Vail
Banks' actual loan losses will not exceed its allowance for loan losses.
46
<PAGE>
The following table sets forth an allocation of the allowance for loan
losses by loan category as of the dates indicated. Portions of the allowance
have been allocated to specific categories based on the analysis of the loan
loss history of particular loan categories; however, the majority of the
allowance is utilized as a single unallocated allowance available for all loan
types. The allocation table should not be interpreted as an indication of the
specific amounts, by loan category, to be charged to the allowance.
ALLOWANCE FOR LOAN LOSS ALLOCATION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
LOANS IN LOANS IN LOANS IN
CATEGORY AS CATEGORY AS CATEGORY AS
A PERCENTAGE A PERCENTAGE A PERCENTAGE
AMOUNT OF OF TOTAL AMOUNT OF OF TOTAL AMOUNT OF OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ------------ --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allocated:
Commercial, financial
and agricultural..... $ 116 48.77% $ 31 50.22% $ 12 43.87%
Real estate--
construction......... 102 17.65 124 16.24 337 22.34
Real estate--
mortgage............. 1 20.04 24 20.41 40 29.79
Installment........... 18 13.54 66 13.12 11 4.00
Unallocated:............ 1,098 1,119 423
------ ------ ------ ------ ---- ------
Total allowance for
loan losses.......... $1,335 100.00% $1,364 100.00% $823 100.00%
====== ====== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
LOANS IN LOANS IN LOANS IN
CATEGORY AS CATEGORY AS CATEGORY AS
A PERCENTAGE A PERCENTAGE A PERCENTAGE
AMOUNT OF OF TOTAL AMOUNT OF OF TOTAL AMOUNT OF OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ------------ --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allocated:
Commercial, financial
and agricultural..... $ 0 43.20% $100 46.72% $ 65 43.11%
Real estate--
construction......... 175 24.81 0 25.61 0 24.32
Real estate--
mortgage............. 42 27.30 14 24.51 42 29.28
Installment........... 50 4.69 0 3.16 3 3.29
Unallocated:............ 353 247 243
---- ------ ---- ------ ---- ------
Total allowance for
loan losses.......... $620 100.00% $361 100.00% $353 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investments. Vail Banks' investment policy is designed primarily to ensure
liquidity and to meet pledging requirements and secondarily to provide
acceptable investment income. Investments are managed centrally to maximize
compliance and effectiveness of overall investment activities. Management's
focus is on maintaining a high quality investment portfolio oriented toward
U.S. Treasury and U.S. government agency securities. None of the securities in
the investment portfolio is classified as "high-risk" as defined by the
Federal Financial Institutions Examinations Council. The determination of the
amount and maturity of securities purchased is a function of liquidity and
income projections based on the existing, and expected, balance sheet and
interest rate forecasts.
47
<PAGE>
Vail Banks accounts for securities according to Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. At the date of purchase, Vail Banks is required to classify
debt and equity securities into one of three categories: held to maturity,
trading or available for sale. At each reporting date, the appropriateness of
each classification is reassessed. Investments in debt securities are
classified as held to maturity and measured at amortized cost in the financial
statements only if management has the positive intent and ability to hold
those securities to maturity. Securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading and
measured at fair value in the statements with unrealized gains and losses
included in earnings. Investments not classified as either held to maturity or
trading are classified as available for sale and measured at fair value in the
financial statements with unrealized gains and losses reported, net of tax, in
a separate component of shareholders' equity until realized. The following
table sets forth information regarding the investment composition of Vail
Banks as of the dates indicated.
INVESTMENT COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------------------
1998 1997 1996 1995
------------ ------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ----- ------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
SECURITIES
Estimated market value
U. S. Treasury.......... $1,363 15.8% $ 1,865 19.4% $ 0 0.0% $ 0 0.0%
U.S. government
agencies............... 3,247 37.8 3,843 40.0 3,496 83.1 6,981 94.2
State and municipal..... 2,720 31.6 2,978 31.0 0 0.0 0 0.0
Federal Home Loan Bank
stock.................. 703 8.2 500 5.2 433 10.3 227 3.1
Federal Reserve stock... 517 6.0 371 3.9 280 6.7 199 2.7
Other equity
investments............ 50 0.6 50 0.5 0 0.0 0 0.0
------ ----- ------- ----- ------- ----- ------- -----
Total available for
sale.................. $8,600 100.0% $ 9,607 100.0% $ 4,209 100.0% $ 7,407 100.0%
====== ===== ======= ===== ======= ===== ======= =====
HELD TO MATURITY
SECURITIES
Amortized cost
U. S. Treasury.......... $5,973 75.2% $ 7,960 78.6% $11,921 81.5% $10,248 69.8%
U.S. government
agencies............... 0 0.0 0 0.0 0 0.0 1,127 7.7
State and municipal..... 85 1.1 85 0.8 220 1.5 455 3.1
Mortgage-backed
securities............. 1,888 23.8 2,080 20.5 2,493 17.0 2,857 19.5
------ ----- ------- ----- ------- ----- ------- -----
Total held to
maturity.............. $7,946 100.0% $10,125 100.0% $14,634 100.0% $14,687 100.0%
====== ===== ======= ===== ======= ===== ======= =====
</TABLE>
Investment Maturities and Yield. The following table sets forth the
estimated market value and approximate yield of the securities in the
investment portfolio by type and maturity at June 30, 1998.
48
<PAGE>
INVESTMENT MATURITIES
JUNE 30, 1998
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN WITHIN
WITHIN ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL
---------------- -------------- ---------------- ---------------- ------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ------- ------- ------ ------- ------- -------- ------- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
SECURITIES
U.S. Treasury........... $ 752 5.93% $ 611 6.47% $ 0 0.00% $ 0 0.00% $1,363 6.17%
U.S. government
agencies............... 2,997 5.35 249 5.49 0 0.00 0 0.00 3,247 5.36
State and municipal..... 1,109 4.91 1,611 4.95 0 0.00 0 0.00 2,720 4.94
Equity securities(1).... 0 0.00 0 0.00 0 0.00 1,270 -- 1,270 --
-------- ------- -------- ------
Total available for
sale.................. $ 4,858 $ 2,471 $ 0 $ 1,270 $8,600
======== ======= ====== ======== ======
Weighted average yield.. 5.34% 5.38% 0.00% 0.00% 5.35%
HELD TO MATURITY
SECURITIES
U.S. Treasury........... $ 1,986 5.00% $ 3,986 5.25% $ 0 0.00% $ 0 0.00% $5,973 5.17%
State and municipal..... 35 5.50 50 5.60 0 0.00 0 0.00 85 5.56
Mortgage-backed
securities............. 0 0.00 0 0.00 0 0.00 1,888 6.85 1,888 6.85
-------- ------- ------ -------- ------
Total held to
maturity.............. $ 2,021 $ 4,036 $ 0 $ 1,888 $7,946
======== ======= ====== ======== ======
Weighted average yield.. 5.01% 5.25% 0.00% 6.85% 5.57%
</TABLE>
- --------
(1) Equity securities do not have stated maturity dates.
Deposits. Vail Banks' primary source of funds has historically been customer
deposits, which have experienced significant growth from year to year. Deposit
products are concentrated in business and personal checking accounts,
including interest-bearing and noninterest-bearing accounts. Generally,
deposits are short-term in nature with approximately 65% of deposits having a
committed term in excess of three months and approximately 20% having a
committed term of more than one year. Vail Banks' resort locations experience
a seasonality of deposits. The percentage decrease in deposits from the year's
high, typically in the first few months of the year, to the low, typically in
mid-year, has been 17.2%, 18.1% and 19.6% for 1997, 1996 and 1995,
respectively. Deposits in nonresort-oriented markets serve to reduce such
seasonality. Management expects the effect of the Independent Merger and the
Telluride Merger will further reduce such seasonality because each has
locations in nonresort areas.
Total deposits were $216.6 million as of June 30, 1998, an increase of $10.4
million, or 5.0%, from the December 31, 1997 amount. Deposits were $206.2
million as of December 31, 1997, an increase of $61.9 million, or 42.9%, over
the December 31, 1996 amount of $144.4 million. As of June 30, 1998,
noninterest-bearing deposits comprised 24.3% of total deposits.
The following table sets forth the distribution of Vail Banks' deposits by
type as of June 30, 1998, December 31, 1997, 1996 and 1995.
DEPOSIT COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------------------------
1998 1997 1996 1995
-------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand, noninterest-
bearing................ $ 52,604 24.3% $ 56,929 27.6% $ 43,747 30.3% $ 35,534 28.3%
Demand, interest-bear-
ing.................... 98,153 45.3 94,779 46.0 74,147 51.4 65,719 52.3
Savings................. 13,806 6.4 13,537 6.6 7,890 5.5 8,058 6.4
Time, $100,000 and
over................... 28,782 13.3 18,961 9.2 7,442 5.2 3,783 3.0
Other time.............. 23,228 10.7 22,009 10.7 11,124 7.7 12,525 10.0
-------- ----- -------- ----- -------- ----- -------- -----
Total................. $216,573 100.0% $206,215 100.0% $144,350 100.0% $125,619 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
49
<PAGE>
The following table sets forth the amount and maturity of time deposits that
had balances equal to or greater than $100,000 at June 30, 1998.
TIME DEPOSITS EQUAL TO OR GREATER THAN $100,000
<TABLE>
<CAPTION>
REMAINING MATURITY JUNE 30, 1998
- ------------------ --------------
(IN THOUSANDS)
<S> <C>
Three months or less............................................. $ 5,239
Between three months and six months.............................. 3,953
Between six months and one year.................................. 16,189
Over one year.................................................... 3,401
-------
Total.......................................................... $28,782
=======
</TABLE>
CAPITAL RESOURCES
Shareholders' equity as of June 30, 1998 increased $6.1 million, or 46.9%,
to $19.2 million from $13.1 million as of June 30, 1997. This increase was due
to the cash paid in the Cedaredge Merger, purchase of bank facilities real
estate using preferred stock, the retention of current period earnings, and a
private offering of $3.0 million in Common Stock, for general corporate
purposes, which increased capital in excess of par. As part of the Cedaredge
Merger, Vail Banks assumed $1.6 million of the Mandatorily Convertible
Debentures. Vail Banks issued $2.96 million of preferred stock, plus $300,000
in cash, to purchase the remaining ownership interest (72%) in Vail Banks'
Vail office building. After netting the effects of the tax loss carryforward
and the "equivalent taxation" entry, the total increase in shareholders'
equity due to retention of earnings was $1.3 million at June 30, 1998, up
$693,000 from $561,000 as of June 30, 1997.
Shareholders' equity as of December 31, 1997 increased $8.4 million, or
89.5%, to $17.9 million from $9.4 million as of December 31, 1996. The primary
reason for this increase was also the aforementioned Cedaredge Merger and bank
facility acquisition. The majority, $274,000, of the remainder of the increase
in capital in excess of par is attributable to the tax savings created by the
use of the tax loss carryforwards. After netting the effects of the tax loss
carryforward and the "equivalent taxation" entry, the total increase in
shareholders' equity due to retention of earnings was $748,000 for the year
ended December 31, 1997, up $141,000 from $607,000 for the year ended 1996.
Shareholders' equity as of December 31, 1996 increased $308,000, or 3.4%, to
$9.4 million from $9.1 million as of December 31, 1995. This increase was
primarily due to the retention of current year earnings, net of the tax loss
carryforward benefit and the absence of dividend payments in 1997.
Vail Banks is subject to various regulatory capital requirements
administered by the various governmental banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on Vail Banks' financial condition. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Vail
Banks must meet specific guidelines that involve quantitative measures of
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Vail Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to average assets. See
"Supervision and Regulation" for explanations of these terms and requirements.
50
<PAGE>
Vail Banks currently maintains, and intends to continue to maintain, capital
and leverage (Tier 1 capital to average total assets) ratios sufficient to
continue to be rated as "well capitalized." The following table sets forth
Vail Banks' capital ratios and capital to assets ("leverage") ratios as of the
indicated dates.
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------- ------------------------------
1998 1997 1996
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital................ $ 14,413 8.67% $ 12,925 8.26% $ 9,098 8.59%
Tier 1 capital minimum
requirement.................. 6,651 4.00 6,260 4.00 4,236 4.00
-------- ----- -------- ----- -------- -----
Excess........................ $ 7,762 4.67% $ 6,665 4.26% $ 4,862 4.59%
======== ===== ======== ===== ======== =====
Total capital................. $ 17,348 10.43% $ 15,889 10.15% $ 9,924 9.37%
Total capital minimum
requirement.................. 13,302 8.00 12,521 8.00 8,471 8.00
-------- ----- -------- ----- -------- -----
Excess........................ $ 4,046 2.43% $ 3,368 2.15% $ 1,453 1.37%
======== ===== ======== ===== ======== =====
Total risk adjusted assets.... $166,276 $156,508 $105,890
======== ======== ========
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital................ $ 8,855 9.93% $ 6,914 17.22% $ 6,825 20.51%
Tier 1 capital minimum re-
quirement.................... 3,567 4.00 1,606 4.00 1,331 4.00
-------- ----- -------- ----- -------- -----
Excess........................ $ 5,288 5.93% $ 5,308 13.22% $ 5,494 16.51%
======== ===== ======== ===== ======== =====
Total capital................. $ 9,475 10.62% $ 7,275 18.12% $ 7,178 21.57%
Total capital minimum require-
ment......................... 7,135 8.00 3,212 8.00 2,662 8.00
-------- ----- -------- ----- -------- -----
Excess........................ $ 2,340 2.62% $ 4,063 10.12% $ 4,516 13.57%
======== ===== ======== ===== ======== =====
Total risk adjusted assets.... $ 89,183 $ 40,148 $ 33,281
======== ======== ========
</TABLE>
LEVERAGE RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------
1998 1997 1996
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital.................... $ 14,413 6.15% $ 12,925 7.33% $ 9,098 6.23%
Minimum requirement............... 7,028 3.00 5,292 3.00 4,383 3.00
-------- ---- -------- ---- -------- ----
Excess............................ $ 7,385 3.15% $ 7,633 4.33% $ 4,715 3.23%
======== ==== ======== ==== ======== ====
Average total assets.............. $234,260 $176,390 $146,099
======== ======== ========
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital.................... $ 8,855 7.22% $ 6,914 9.11% $ 6,825 9.70%
Minimum requirement............... 3,679 3.00 2,278 3.00 2,112 3.00
-------- ---- -------- ---- -------- ----
Excess............................ $ 5,176 4.22% $ 4,636 6.11% $ 4,713 6.70%
======== ==== ======== ==== ======== ====
Average total assets.............. $122,635 $ 75,929 $ 70,395
======== ======== ========
</TABLE>
51
<PAGE>
LIQUIDITY
Sources of Liquidity. Vail Banks manages its liquidity to provide the
ability to generate funds to support asset growth, meet deposit withdrawals
(both anticipated and unanticipated), fund customer's borrowing needs, satisfy
maturities of short-term borrowings and maintain reserve requirements. Vail
Banks' liquidity needs can be managed using assets or liabilities, or both. On
the asset side, Vail Banks maintains an investment portfolio containing U.S.
government securities and state and municipal securities. On the liabilities
side, liquidity needs are met through the discretionary acquisition of funds
on the basis of interest rate competition. These funds may be obtained from
customer deposits, credit available from third party lenders or capital
markets.
Customer deposits are the primary source of funds. Deposits grew $61.9, or
42.9%, to $206.2 million during the year ended December 31, 1997 and increased
by $10.4 million, or 5.0%, to $216.6 million during the six months ended June
30, 1998. Those funds are held in various forms with varying degrees of
liquidity. Vail Banks generally does not accept brokered deposits. Vail Banks'
securities portfolio, federal funds sold, and cash and due from banks serve as
the primary sources of liquidity, providing adequate funding for loans during
periods of high loan demand. During periods of decreased lending, funds
obtained from the maturing or sale of investments, loan payments, and new
deposits are invested in short-term earning assets, such as federal funds
sold, to serve as a source of funding for future loan growth. Management
believes that Vail Banks' available sources of funds, including short-term
borrowings, will provide adequate liquidity for its operations in the
foreseeable future.
Asset and Liability Management. The liquidity position of Vail Banks is
monitored by the Asset/Liability Committee of the Board of Directors of
WestStar. A principal function of asset/liability management is to coordinate
the levels of interest-sensitive assets and liabilities to minimize net
interest income fluctuations in times of fluctuating market interest rates.
Interest-sensitive assets and liabilities are those that are subject to
repricing in the near term, including both variable rate instruments and those
fixed rate instruments which are approaching maturity. Changes in net yield on
interest-sensitive assets occur when interest rates on those assets, such as
loans and investment securities, change in a different time period from that
of the interest rates on liabilities, such as deposits. Changes in net yield
on interest-sensitive assets result from changes in the mix and volumes of
earning assets and interest-bearing liabilities. These differences, or "gaps,"
provide an indication of the extent that net interest income may be affected
by future changes in interest rates.
A positive gap exists when interest-sensitive assets exceed interest-
sensitive liabilities and indicates that a greater volume of assets than
liabilities will reprice during a given time period. With a positive gap,
rising rate environments may enhance earnings, while a declining rate
environment may depress earnings. Conversely, a negative gap exists when
interest-sensitive liabilities exceed interest-sensitive assets. With a
negative gap, rising rate environments may depress earnings, while declining
rate environments may enhance earnings.
The following table sets forth the interest rate sensitivity of Vail Banks'
assets and liabilities as of June 30, 1998, and sets forth the repricing dates
of Vail Banks' interest-earning assets and interest-bearing liabilities as of
that date, as well as Vail Banks' interest rate sensitivity gap percentages
for the periods presented. The table is based on assumptions as to when assets
and liabilities will reprice in a changing interest rate environment, and
since such assumptions can be no more than estimates, certain assets and
liabilities indicated as maturing or otherwise repricing within a stated
period may, in fact, mature or reprice at different times and at different
volumes than those estimated. Also, the renewal or repricing of certain assets
and liabilities can be discretionary and subject to competitive and other
pressures. Therefore, the following table does not and cannot necessarily
indicate the actual future impact of general interest rate movements on Vail
Banks' net interest income.
52
<PAGE>
MATURITY AND REPRICING OF INTEREST EARNING ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------------------------
THREE OVER THREE OVER ONE
MONTHS MONTHS THROUGH YEAR THROUGH OVER
OR LESS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------- -------------- ------------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold.... $19,450 $ 0 $ 0 $ 0 $ 19,450
Investment
securities........... 3,317 3,613 6,458 3,158 16,546
Loans................. 87,143 25,174 38,804 11,139 162,260
------- -------- ------- ------- --------
Total interest-
earning assets..... 109,910 28,787 45,262 14,297 198,256
Interest-bearing
liabilities:
Deposits
Demand, interest-
bearing............ 39,261 39,261 19,631 0 98,153
Savings............. 5,522 5,522 2,761 0 13,806
Certificates of
deposit............ 12,323 30,021 9,662 4 52,010
Securities sold under
repurchase
agreements........... 1,083 0 0 0 1,083
Note payable.......... 0 1,100 0 0 1,100
Other liabilities..... 0 0 0 0 0
------- -------- ------- ------- --------
Total interest-
bearing
liabilities........ $58,190 $ 75,905 $32,054 $ 4 $166,152
------- -------- ------- ------- --------
Interest rate gap....... $51,720 $(47,118) $13,208 $14,293 $ 32,104
======= ======== ======= ======= ========
Cumulative interest rate
gap at June 30, 1998... $51,720 $ 4,603 $17,811 $32,104
======= ======== ======= =======
Cumulative interest rate
gap to total assets.... 21.54% 1.92% 7.42% 13.37%
======= ======== ======= =======
</TABLE>
EFFECTS OF INFLATION AND CHANGING PRICES
The banking industry is unique in that substantially all of the assets and
liabilities are of a monetary nature. As a result, interest rates have a more
profound effect on a bank's performance than does inflation. Although there is
not always a direct relationship between the movement in the prices of goods
and services and changes in interest rates, increases in inflation generally
lead to increases in interest rates. However, in short periods of time
interest rates may not move in the same direction or magnitude as inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
Comprehensive Income. Vail Banks adopted Financial Accounting Standards
Board ("SFAS") No. 130, Reporting Comprehensive Income, ("SFAS No. 130"),
effective January 1, 1998. SFAS No. 130 establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains, and
losses). Components of comprehensive income are net income and all other non-
owner changes in equity. The statement requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. Vail Banks has chosen to disclose comprehensive income in a separate
income statement. The only component of comprehensive income consists of
unrealized holding gains on securities with no related tax effects.
Earnings Per Share. SFAS 128, Earnings per Share ("SFAS No. 128"), replaces
primary and fully diluted earnings per share with basic and diluted earnings
per share. Under the new requirements, the dilutive effect of stock options is
excluded from the calculation of basic earnings per share. Diluted earnings
per share are calculated similarly to the fully diluted earnings per share.
SFAS No. 128 became effective for Vail Banks'
53
<PAGE>
1997 year-end financial statements. All prior period earnings per share data
presented have been restated to conform to the provisions of this statement.
Operating Segments. Vail Banks adopted Financial Accounting Standards Board
Statement No. 131, Disclosures About Segments of an Enterprise and Related
Information, ("SFAS No. 131") effective January 1, 1998. This statement
establishes standards for reporting information about segments in annual and
interim financial statements. SFAS No. 131 introduces a new model for segment
reporting called the "management approach". The management approach is based
on the way the chief operating decision-maker organizes segments within the
company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure and any other in which management disaggregates a
company. Based on the "management approach" model, Vail Banks has determined
that its business is comprised of a single operating segment and that SFAS No.
131 therefore has no impact on its financial statements.
54
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Vail Banks are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
E.B. Chester, 55 Chairman of the Board of Directors of Vail Banks and
Jr.(1)(2)(3)........... WestStar
Lisa M. Dillon(1)(3).... 45 President and Chief Executive Officer of Vail Banks
and WestStar, director
Joseph S. Dillon........ 40 Senior Executive Vice President and Chief Financial
Officer of Vail Banks
James C. Allen(3)....... 62 Director
Kay H. Chester.......... 51 Director
James G. Flaum.......... 53 Director
S. David Gorsuch(3)..... 59 Director
James M. Griffin........ 51 Director
Martin T. Hart(2)....... 62 Director
Robert L. Knous, 51 Director
Jr.(3).................
Kent Myers.............. 49 Director
Byron A. Rose(1)(2)..... 56 Director
E. William Wilto(2)..... 51 Director
</TABLE>
- --------
(1) Member of the Executive Committee
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee
Mr. Chester, who formed Vail Banks through a series of acquisitions, has
served as Chairman of the Board of Directors of Vail Banks since 1993 and the
Chairman of the Board of Directors of WestStar since 1989. Mr. Chester is also
currently the president of Vail Valley Jet Center, a business involved in
private and commercial aviation, and Manager of King Creek Ranch LLC, a
ranching business. From 1986 to 1997, Mr. Chester served as the Chief
Executive Officer of First Carolina Cable TV, LP, a cable television company,
and from 1987 to 1997 served as the Chief Executive Officer of the corporate
general partner of Outdoor East, LP, an outdoor advertising firm.
Ms. Dillon has served as the President and Chief Executive Officer and
director of Vail Banks since 1993. Ms. Dillon, who started her career with
WestStar in 1979, also has served as President and Chief Executive Officer of
WestStar since 1989.
Mr. Dillon has served as the Senior Executive Vice President and Chief
Financial Officer of Vail Banks since June 1998. Mr. Dillon is currently the
Chairman, President and Chief Executive Officer of Dillon Technologies, Inc.,
a business consulting firm, and an associate of Dillon Schramm Associates,
Ltd., also a business consulting firm. Mr. Dillon served as Chief Financial
Officer, Secretary and Treasurer at Oread, Inc., a pharmaceutical company,
where he was employed from 1996 to 1997, and was employed by Hoechst Marion
Roussel, also a pharmaceutical company, from 1988 to 1996, where he had
various management positions.
Mr. Allen has been a director of Vail Banks since 1997. Mr. Allen, a retired
industrialist and investor, was Chairman of the Board of Directors and Chief
Executive Officer of Falcon Manufacturing Inc., a building insulation
manufacturer, from 1962 to 1997.
Ms. Chester has been a director of Vail Banks since 1993 and a director of
WestStar since 1992. Ms. Chester has been active in investing since 1989.
55
<PAGE>
Mr. Flaum has been a director of Vail Banks and WestStar since 1996. Mr.
Flaum has been the President of Slifer, Smith & Frampton/Vail Associates Real
Estate, a real estate firm, since 1997. Mr. Flaum started his career with
Slifer, Smith & Frampton/Vail Associates Real Estate in 1987.
Mr. Gorsuch has been a director of Vail Banks since 1993 and has been a
director of WestStar since 1977. Mr. Gorsuch is the President of Gorsuch Ltd.,
a retail clothing and ski equipment business.
Mr. Griffin has been a director of Vail Banks since 1993. Mr. Griffin was
employed by the Estee Lauder Companies in 1979. Before leaving the company in
1996, he served as Executive Vice President and Chief Operating Officer of
Lauder Investments Inc., an investment company affiliated with the Estee
Lauder Companies. Mr. Griffin also served as Senior Vice President and Chief
Operating Officer of First Spring Corporation during 1996. Since 1996 he has
been an independent investor.
Mr. Hart has been a director of Vail Banks since 1997. Since 1969, Mr. Hart
has been an independent investor. Mr. Hart is also a director of T. Netix, PJ
America, MassMutual Corporate Investors, MassMutual Participation Investors,
Schuler Homes, Inc., Optical Securities Corp., and Pacific National Financial
Group.
Mr. Knous has been a director of Vail Banks and WestStar since 1997. Mr.
Knous is the Managing Partner of East West Partners of Summit County, a real
estate development company, where he has worked since 1993.
Mr. Myers has been a director of Vail Banks and WestStar since 1997. Mr.
Myers, an independent investor, served as Senior Vice President and Chief
Operating Officer of Vail Resorts, a resort management company, where he
worked from 1988 to 1997.
Mr. Rose has been a director of Vail Banks since 1993 and a director of
WestStar since 1989. Mr. Rose, who retired in 1987, served as a Managing
Director of Morgan Stanley & Co. from 1978 to 1987.
Mr. Wilto has been a director of Vail Banks since 1993 and a director of
WestStar since 1985. Mr. Wilto is a realtor and has owned RE/MAX Vail, Inc., a
real estate firm, since 1991.
Mr. and Mrs. Chester are husband and wife, and Mr. and Ms. Dillon are
brother and sister.
BOARD COMMITTEES
Vail Banks' Board of Directors has established three committees, an Audit
Committee, a Compensation Committee and an Executive Committee.
The Audit Committee presently consists of four directors, including three
independent directors, and is responsible for reviewing and monitoring Vail
Banks' financial reports and accounting practices. The Audit Committee is also
responsible for reviewing related party transactions and potential conflicts
of interest involving officers, directors, employees or affiliates of Vail
Banks.
The Compensation Committee presently consists of five directors, including
three independent directors, and is responsible for determining the
compensation of Vail Banks' executive officers. The Compensation Committee is
also authorized to administer Vail Banks' Stock Incentive Plan.
The Executive Committee presently consists of three directors, of which one
is an independent director, and is authorized to consider any matter that may
be brought before a meeting of the full Board of Directors, subject to
restrictions under Colorado law.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual
compensation for services in all capacities to Vail Banks for the year ended
December 31, 1997 with respect to Vail Banks' Chairman, President
56
<PAGE>
and Chief Executive Officer (the "Named Executive Officers"). No other Vail
Banks' executive officer earned more than $100,000 in salary and bonus during
such fiscal year:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ---------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION(2) COMPENSATION(3)
- ------------------ -------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
E.B. Chester, Jr............. $118,000 $30,000 $10,770 $2,018
Chairman
Lisa M. Dillon............... 116,000 30,000 10,770 2,043
President and Chief
Executive Officer
</TABLE>
- --------
(1) Reflects fair market value of stock awarded as bonus for the fiscal year.
(2) Reflects cash paid for the payment of taxes.
(3) Reflects 401(k) matching contributions.
No options were granted by Vail Banks to its executive officers during the
year ended December 31, 1997, and none was exercised.
EMPLOYMENT AGREEMENTS
Vail Banks has entered into employment agreements with Mr. Chester and Ms.
Dillon effective August , 1998. Each of the agreements provides for a term
ending August , 2001. Mr. Chester's agreement provides for a base salary of
$145,000 (annualized) from August 1, 1998 to December 31, 1998, $160,000 from
January 1, 1999 to December 31, 1999, $180,000 from January 1, 2000 to
December 31, 2000 and $200,000 beginning January 1, 2001. Ms. Dillon's
agreement provides for a base salary of $130,000 (annualized) from August 1,
1998 to December 31, 1998, $140,000 from January 1, 1999 to December 31, 1999,
$150,000 from January 1, 2000 to December 31, 2000 and $162,000 beginning on
January 1, 2001. Each agreement also allows for a bonus as determined by Vail
Banks' Board of Directors and benefits of the type generally provided to key
executives. While Vail Banks may terminate the agreements at any time during
the term, if Vail Banks terminates the agreements other than for good cause,
death, or disability, Vail Banks must pay a lump sum cash amount equal to 150%
of the amount of base salary that otherwise would have been payable for the
remainder of the term and any bonus to which Mr. Chester or Ms. Dillon would
otherwise be entitled for the fiscal year in which such termination occurs.
The agreements also contain customary proscriptions against misuse of Vail
Banks' confidential information, competition with Vail Banks and solicitation
of the employees of Vail Banks.
DIRECTORS COMPENSATION
Each member of the Board of Directors is paid a $2,500 annual retainer, $200
per board meeting at which such member is in attendance, and each member,
other than Mr. Chester and Ms. Dillon, receives $100 per committee meeting at
which such member is in attendance.
STOCK INCENTIVE PLAN
In April 1998, Vail Banks adopted its Stock Incentive Plan (the "Plan") to
provide selected employees, directors and other persons providing services to
Vail Banks or its subsidiaries an opportunity to purchase Common Stock of Vail
Banks. The Plan promotes the success and enhances the value of Vail Banks by
linking the personal interests of participants to those of Vail Banks'
shareholders, and by providing participants with an incentive for outstanding
performance. Awards under the Plan may be structured in a variety of ways,
including as "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended ("IRC"), non-qualified stock options
and restricted stock awards.
Incentive stock options ("ISOs") may be granted only to employees of Vail
Banks, including its subsidiaries. All other awards may be granted to any
person employed by or performing services for Vail Banks or its subsidiaries.
The Plan provides for the issuance of options and awards for up to 15% of the
issued and outstanding shares of Common Stock as of the date the option or
award is granted.
57
<PAGE>
ISOs are subject to certain limitations prescribed by the IRC, including the
requirement that such options be granted with an exercise price no less than
the fair market value of the Common Stock at the date of grant and that the
value of stock with respect to which ISOs are exercisable by a participant for
the first time in any year under the terms of the Plan (and any other
incentive stock option plans of Vail Banks and its subsidiaries) may not
exceed $100,000, based on the fair market value of the stock at the date of
grant. In addition, ISOs may not be granted to employees who own more than 10%
of the combined voting power of all classes of voting stock of Vail Banks,
unless the option price is at least 110% of the fair market value of the
Common Stock subject to the option and unless the option is exercisable for no
more than five years from the grant date.
The Compensation Committee or a subcommittee thereof of the Board of
Directors of Vail Banks has discretion, subject to ratification by the full
Board, to set the terms and conditions of options and other awards, including
the term, exercise price and vesting conditions, if any, to select the persons
who receive such grants and awards, and to interpret and administer the Plan.
As of the date of this Prospectus, options to purchase an aggregate of
319,000 shares of Common Stock have been granted under the Plan and were
outstanding, including options for 113,000 shares of Common Stock issued to
Mr. Chester and 87,000 shares of Common Stock issued to Ms. Dillon. Ms.
Dillon's options have an exercise price of $8.54 per share, determined by the
Board of Directors to be the fair market value on the date of the grant, and
Mr. Chester's options have an exercise price of 110% of $8.54 per share or
$9.39.
58
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock, as of the date of this Prospectus by (i) each
person known to Vail Banks to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock; (ii) each director of Vail Banks; (iii)
each Named Executive Officer; (iv) all directors and executive officers of
Vail Banks as a group; and (v) the Selling Shareholders, which will sell
140,000 shares of Common Stock in the Offering, of which 100,000 shares of
Common Stock will be sold by VBILP in order to repay indebtedness owed to E.B.
Chester, Jr. pursuant to the Promissory Note (as defined in "Certain
Transactions"). Unless otherwise indicated, each of the shareholders listed
below has sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) NUMBER OFFERING(2)
----------------------OF SHARES ----------------------
BENEFICIAL OWNER NUMBER PERCENT TO BE SOLD NUMBER PERCENT
---------------- ----------- -------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
E.B. Chester,
Jr.(3)(4).............. 1,374,261 39.83% 0 1,274,261 24.04%
Kay H. Chester(4)(5).... 1,374,261 39.83% 0 1,274,261 24.04%
Byron A. Rose(6)........ 266,826 7.73% 0 266,826 5.03%
VBILP(7)................ 181,543 5.26% 100,000 81,543 1.54%
James M. Griffin(8)..... 166,572 4.83% 40,000 126,572 2.39%
C. David Smith(9)....... 174,742 5.06% 0 174,742 3.30%
James C. Allen.......... 79,590 2.31% 0 79,590 1.50%
Martin T. Hart.......... 79,590 2.31% 0 79,590 1.50%
Lisa M. Dillon(10)...... 46,312 1.34% 0 46,312 *
Kent Myers(11).......... 15,920 * 0 15,920 *
Robert L. Knous, Jr. ... 8,960 * 0 8,960 *
James G. Flaum(12)...... 4,260 * 0 4,260 *
S. David Gorsuch........ 2,732 * 0 2,732 *
E. William Wilto........ 1,932 * 0 1,932 *
Joseph S. Dillon........ 1,000 * 0 1,000 *
All directors and
executive officers as a
group (13 persons)..... 2,047,955 59.35% 40,000(13) 1,907,955 36.00%
</TABLE>
- --------
* Denotes less than 1%
(1) Assumes 3,450,730 shares outstanding immediately prior to the Offering,
which includes 300,000, 342,580, 204,540 and 317,790 shares issuable upon
conversion of the Mandatorily Convertible Debentures, issuable upon
conversion of the Series A Preferred Stock, issued in the private
offering, and issuable upon consummation of the Independent Merger,
respectively.
(2) Percentage of shares beneficially owned after the Offering assumes
5,300,070 shares outstanding.
(3) Includes (i) 431,620 shares owned by Mr. Chester's wife, Kay H. Chester,
as to which he disclaims beneficial ownership; (ii) 181,543 shares
beneficially owned by VBILP, with respect to which shares Mr. Chester
holds a proxy to vote, 100,000 shares of which will be sold in this
Offering; and (iii) 27,406.40 shares of Series A Preferred Stock which,
upon the consummation of the Offering, will be converted into 274,060
shares of Common Stock.
(4) Mr. and Mrs. Chester's address is care of Vail Banks, Inc., 108 S.
Frontage Road West, Suite 101, Vail, Colorado 81657.
(5) Includes 942,641 shares beneficially owned by Mrs. Chester's husband,
E.B. Chester, Jr., as to which she disclaims beneficial ownership.
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<PAGE>
(6) Includes 6,851.60 shares of Series A Preferred Stock which, upon the
consummation of the Offering, will be converted into 68,516 shares of
Common Stock. Mr. Rose's address is care of Vail Banks, Inc., 108 S.
Frontage Road West, Suite 101, Vail, Colorado 81657.
(7) The address of VBILP is 108 South Frontage Road West, Vail, Colorado
81657. Mr. Chester holds a proxy to vote all shares owned by VBILP. Ms.
Dillon serves as general partner of VBILP and Mr. Flaum and certain
employees of WestStar serve as limited partners of VBILP.
(8) Mr. Griffin's address is care of Vail Banks, Inc., 108 S. Frontage Road
West, Suite 101, Vail, Colorado 81657.
(9) Mr. Smith's address is care of Vail Banks, Inc., 108 S. Frontage Road
West, Suite 101, Vail, Colorado 81657.
(10) Does not include shares owned by VBILP in which Ms. Dillon holds a 56.58%
interest.
(11) Includes 1,500 shares held by Mr. Myers as custodian for his daughter,
Allison Myers, and 1,500 shares held by Mr. Myers as custodian for his
son, Brad Myers.
(12) Includes 3,000 shares owned jointly with Mr. Flaum's wife, Ronna J.
Flaum. Does not include shares owned by VBILP in which Mr. Flaum holds a
6.61% interest.
(13) Excludes the 100,000 shares of Common Stock to be sold by VBILP, in which
certain employees and a director have an interest and over which Mr.
Chester has voting power.
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<PAGE>
CERTAIN TRANSACTIONS
On December 1, 1997, VNB Building Corp. ("VNB"), owned by E.B. Chester, Jr.,
Chairman of Vail Banks, and Byron A. Rose, a principal shareholder of Vail
Banks, merged into Vail Banks. As a result of the merger, Vail Banks acquired
the building and property of the main office of WestStar and a 53% interest in
the building and property of the Avon retail office. As consideration in the
merger, Vail Banks issued shares of its Series A Preferred Stock to Messrs.
Chester and Rose. Upon consummation of the Offering, Messrs. Chester's and
Rose's shares of Series A Preferred Stock will be converted into 274,060 and
68,516 shares of Common Stock, respectively, and dividends of $461,271 and
$115,317 will be paid to Messrs. Chester and Rose, respectively. During 1997
and 1996, Vail Banks made rental payments, excluding common area maintenance
and taxes, of $362,465 and $337,070 to limited partnerships of which VNB was
the general partner for the Vail and Avon bank facilities.
In July 1997, Lisa M. Dillon, President and Chief Executive Officer of Vail
Banks and WestStar, entered into an Agreement of Limited Partnership which
formed VBI Employee Limited Partnership (defined elsewhere in this Prospectus
as "VBILP") and was designated general partner, with James G. Flaum, a
director, and several other employees of WestStar as limited partners. VBILP
acquired from E.B. Chester, Jr. 181,543 shares of Common Stock in
consideration for VBILP's promissory note dated July 8, 1997 (the "Promissory
Note"). The Promissory Note, in the principal amount of $1.275 million, bears
interest at a floating rate equal to the U.S. Bank reference rate plus 0.125%,
currently equal to 8.625% per annum. Accrued interest on the Promissory Note
is payable by the employee general and limited partners of VBILP to Mr.
Chester quarterly, and the principal on the Promissory Note is due in a lump
sum on September 20, 1999. VBILP will sell 100,000 shares of Common Stock in
the Offering in order to fulfill its obligations to Mr. Chester pursuant to
the Promissory Note. VBILP has granted to Mr. Chester a proxy to vote Common
Stock owned by VBILP until the Promissory Note in favor of Mr. Chester is paid
in full.
Vail Banks has entered into an agreement with Dillon Schramm Associates Ltd.
("DSAL"), pursuant to which DSAL will render certain consulting services in
connection with the Offering, the Telluride Merger and certain other matters.
Joseph S. Dillon is an associate of DSAL. Through June 30, 1998, Vail Banks
had paid fees and expenses of $31,226.64 to DSAL. On June 25, 1998, Mr. Dillon
was elected by the Board of Directors as Senior Executive Vice President and
Chief Financial Officer of Vail Banks. Vail Banks will pay DSAL a fee of 1% of
the gross proceeds of the Offering plus 0.5% of the acquisition price of the
Telluride Merger if the Offering is completed prior to the closing of the
Telluride Merger, or 1.1% of the acquisition price of the Telluride Merger if
the Offering is not completed prior to the closing of the Telluride Merger, as
compensation for its services (the "IPO Fee"). The monthly fees paid to DSAL
through the date of consummation of the Offering will be credited against the
IPO Fee. After the IPO and the Telluride Merger are consummated, Mr. Dillon
will be compensated solely in accordance with his position as the Senior
Executive Vice President and Chief Financial Officer of Vail Banks.
In July 1998, pursuant to a private offering of 204,540 shares of Common
Stock at $10.00 per share, primarily to existing shareholders, Vail Banks sold
an aggregate of 81,780 shares of Common Stock to 12 executive officers and
directors of Vail Banks. The purpose of the offering was to raise capital to
maintain Vail Banks' capital ratios at the well capitalized level after the
Independent Merger.
Vail Banks and WestStar have had, and expect to have in the future, banking
transactions in the ordinary course of business with, directors and officers
of Vail Banks and WestStar and their associates, including corporations in
which such officers or directors are shareholders, directors and/or officers,
on the same terms (including interest rates and collateral) as then prevailing
at the time for comparable transactions with other persons. Such transactions
have not involved more than the normal risk of collectibility or presented
other unfavorable features.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, Vail Banks will have outstanding 5,300,070
shares of Common Stock (5,486,070) shares if the Underwriter's over-allotment
option is exercised in full). Of such shares, the 1,240,000 shares sold in the
Offering (1,426,000 shares if the Underwriter's over-allotment option is
exercised in full) will be freely tradable without restrictions or further
registration under the Securities Act, unless acquired by "affiliates" of Vail
Banks, as that term is defined in Rule 144 under the Securities Act ("Rule
144"), in which case these shares will be subject to the resale limitations of
Rule 144. In addition, Vail Banks has entered into an agreement with the
holders of the 749,340 shares (subject to adjustment pursuant to the Telluride
Merger Agreement) to be issued in the Telluride Merger to register those
shares in the Resale Registration immediately following the consummation of
the Offering and the Telluride Merger and currently intends to register the
resale of the remaining shares of Common Stock outstanding less than two years
prior to the Offering pursuant to the Resale Registration.
The outstanding shares of Common Stock not sold in the Offering were issued
and sold by Vail Banks in private transactions in reliance upon the exemption
from registration contained in Section 4(2) of the Securities Act and are
restricted securities under Rule 144. These shares may not be sold unless they
are registered under the Securities Act or are sold pursuant to an applicable
exemption from registration, including the exemption pursuant to Rule 144. In
general, under Rule 144 as currently in effect, beginning 90 days after the
Offering, a person who has beneficially owned any such shares for at least one
year, including "affiliates" of Vail Banks, would be entitled to sell in
broker's transactions or to market makers within any three-month period a
number of shares that does not exceed the greater of one percent of the then
outstanding shares of Common Stock (estimated to be 53,000 shares after
completion of this Offering, or 54,861 shares if the Underwriter's over-
allotment option is exercised in full) or the average weekly trading volume of
the Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale restrictions
and notice requirements and to the availability of current public information
concerning Vail Banks. A person (or persons whose shares are aggregated) who
is not an "affiliate" of Vail Banks at any time during the 90 days preceding a
sale, and who has beneficially owned such shares for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the
availability of current public information, volume limitations, manner of sale
provisions, or notice requirements. The above is a summary of Rule 144 and is
not intended to be a complete description thereof.
Vail Banks, its executive officers and directors, the related interests of
such directors and executive officers, and principal shareholders of Vail
Banks have agreed that they will enter into lock-up agreements generally
providing that they will not, directly or indirectly, offer, pledge, sell,
contract to sell, or otherwise dispose of or grant any options or other rights
with respect to, any shares of Common Stock or any securities that are
convertible into or exchangeable or exercisable for Common Stock owned by them
for a period of 120 days after the date of this Prospectus, without the prior
written consent of the Underwriter. See "Underwriting."
Prior to the Offering, there has been no market for the Common Stock and no
prediction can be made as to the effect, if any, that sales of Common Stock by
existing shareholders in reliance upon Rule 144 or otherwise will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Stock in the public market, or the perception that such
sales could occur, could adversely affect the prevailing market price. Such
sales may also make it more difficult for Vail Banks to sell equity securities
or equity-related securities in the future at a time and price that it deems
appropriate.
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<PAGE>
SUPERVISION AND REGULATION
The following discussion of statutes and regulations affecting bank holding
companies and banks is a summary thereof and is qualified in its entirety by
reference to such statutes and regulations.
GENERAL. Vail Banks is a registered one bank holding company, and upon the
Telluride Merger, will be a registered multi-bank holding company subject to
regulation by the Federal Reserve under the Bank Holding Company Act of 1956,
as amended (the "Act"). Vail Banks is required to file financial information
with the Federal Reserve periodically and is subject to periodic examination
by the Federal Reserve.
The Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before (i) it may acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank that it does not
already control; (ii) it or any of its subsidiaries, other than a bank, may
acquire all or substantially all of the assets of a bank; and (iii) it may
merge or consolidate with any other bank holding company. In addition, a bank
holding company is generally prohibited from engaging in, or acquiring, direct
or indirect control of the voting shares of any company engaged in non-banking
activities. This prohibition does not apply to activities found by the Federal
Reserve, by order or regulation, to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation or order to
be closely related to banking are: making or servicing loans and certain types
of leases; performing certain data processing services; acting as fiduciary or
investment or financial advisor; providing discount brokerage services;
underwriting bank eligible securities; underwriting debt and equity securities
on a limited basis through separately capitalized subsidiaries; and making
investments in corporations or projects designed primarily to promote
community welfare.
Vail Banks must also register with the CDB and file periodic information
with the CDB. As part of such registration, the CDB requires information with
respect to, among other matters, the financial condition, operations,
management and intercompany relationships of Vail Banks and its subsidiary.
The CDB may also require such other information as is necessary to keep itself
informed as to whether the provisions of Colorado law and the regulations and
orders issued thereunder by the CDB have been complied with, and the CDB may
examine Vail Banks and its subsidiary.
Vail Banks is an "affiliate" of WestStar under the Federal Reserve Act which
imposes certain restrictions on (i) loans by WestStar to Vail Banks; (ii)
investments in the stock or securities of Vail Banks by WestStar; (iii)
WestStar's taking the stock or securities of an "affiliate" as collateral for
loans by WestStar to a borrower; and (iv) the purchase of assets from Vail
Banks by WestStar. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
WestStar is a member of the Federal Reserve Bank of Kansas City and is
subject to the supervision of and is regularly examined by the Federal
Reserve. Furthermore, WestStar, as a state banking association organized under
Colorado law, is subject to the supervision of, and is regularly examined by
the CDB. Both the Federal Reserve and the CDB must grant prior approval of any
merger, consolidation or other corporation reorganization involving WestStar.
A bank can be held liable for any loss incurred by, or reasonably expected to
be incurred by, the FDIC in connection with the default of a commonly-
controlled institution.
PAYMENT OF DIVIDENDS. Vail Banks is a legal entity separate and distinct
from WestStar. Most of the revenues of Vail Banks result from dividends paid
to it by WestStar. There are statutory and regulatory requirements applicable
to the payment of dividends by WestStar, as well as by Vail Banks to its
shareholders.
WestStar is a state chartered bank regulated by the CDB and the Federal
Reserve. Under the regulations of the CDB and the Federal Reserve, approval of
the regulators will be required if the total of all dividends declared by such
state bank in any calendar year shall exceed the total of its net profits of
that year combined with its
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retained net profits of the preceding two years, less any required transfers
to a fund for the retirement of any preferred stock.
The payment of dividends by Vail Banks and WestStar may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about
to engage in an unsafe or unsound practice (which, depending upon the
financial condition of the bank, could include the payment of dividends), such
authority may require, after notice and hearing, that such bank cease and
desist from such practice. In addition to the formal statutes and regulations,
regulatory authorities consider the adequacy of a bank's total capital in
relation to its assets, deposits and such items. Capital adequacy
considerations could further limit the availability of dividends to WestStar.
At June 30, 1998, net assets available from WestStar to pay dividends without
prior approval from regulatory authorities totaled approximately $2.4 million.
MONETARY POLICY. The results of operations of WestStar are affected by
credit policies of monetary authorities, particularly the Federal Reserve. The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. government securities, changes in the discount rate
on bank borrowings and changes in reserve requirements against bank deposits.
In view of changing conditions in the national economy and in the money
markets, as well as the effect of actions by monetary and fiscal authorities,
including the Federal Reserve, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand or the business and
earnings of WestStar.
CAPITAL ADEQUACY. The Federal Reserve and the FDIC have implemented
substantially identical risk-based rules for assessing bank and bank holding
company capital adequacy. These regulations establish minimum capital
standards in relation to assets and off-balance sheet exposures as adjusted
for credit risk. Banks and bank holding companies are required to have (i) a
minimum level of total capital (as defined) to risk-weighted assets of 8%;
(ii) a minimum Tier 1 Capital (as defined) to risk-weighted assets of 4%; and
(iii) a minimum shareholders' equity to risk-weighted assets of 4%. In
addition, the Federal Reserve and the FDIC have established a minimum 3%
leverage ratio of Tier 1 Capital to total assets for the most highly-rated
banks and bank holding companies. "Tier 1 Capital" generally consists of
common equity not including unrecognized gains and losses on securities,
minority interests in equity accounts of consolidated subsidiaries and certain
perpetual preferred stock less certain intangibles. The Federal Reserve and
the FDIC will require a bank holding company and a bank, respectively, to
maintain a leverage ratio greater than 3% if either is experiencing or
anticipating significant growth or is operating with less than well-
diversified risks in the opinion of the Federal Reserve. The Federal Reserve
and the FDIC use the leverage ratio in tandem with the risk-based ratio to
assess the capital adequacy of banks and bank holding companies. The FDIC, and
the Federal Reserve have amended effective January 1, 1997 the capital
adequacy standards to provide for the consideration of interest rate risk in
the overall determination of a bank's capital ratio, requiring banks with
greater interest rate risk to maintain greater capital for the risk.
In addition, Section 38 to the Federal Deposit Insurance Act implemented the
prompt corrective action provisions that Congress enacted as a part of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991
Act"). The "prompt corrective action" provisions set forth five regulatory
zones in which all banks are placed largely based on their capital positions.
Regulators are permitted to take increasingly harsh action as a bank's
financial condition declines. Regulators are also empowered to place in
receivership or require the sale of a bank to another depository institution
when a bank's capital leverage ratio reaches 2%. Better capitalized
institutions are generally subject to less onerous regulation and supervision
than banks with lesser amounts of capital.
The FDIC and the Federal Reserve have adopted regulations implementing the
prompt corrective action provisions of the 1991 Act, which place financial
institutions in the following five categories based upon capitalization ratios
(i) a "well capitalized" institution has a total risk-based capital ratio of
at least 10%, a Tier 1 risk-based ratio of at least 6% and a leverage ratio of
at least 5%; (ii) an "adequately capitalized" institution has a total risk-
based capital ratio of at least 8%, a Tier 1 risk-based ratio of at least 4%
and a leverage ratio
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<PAGE>
of at least 4%; (iii) an "undercapitalized" institution has a total risk-based
capital ratio of under 8%, a Tier 1 risk-based ratio of under 4% or a leverage
ratio of under 4%; (iv) a "significantly undercapitalized" institution has a
total risk-based capital ratio of under 6%, a Tier 1 risk-based ratio of under
3% or a leverage ratio of under 3%; and (v) a "critically undercapitalized"
institution has a leverage ratio of 2% or less. Institutions in any of the
three undercapitalized categories would be prohibited from declaring dividends
or making capital distributions. The Federal Reserve regulations also
establish procedures for "downgrading" an institution to a lower capital
category based on supervisory factors other than capital. Under the Federal
Reserve's regulations, WestStar was a "well capitalized" institution at June
30, 1998.
Set forth below are pertinent capital ratios for WestStar as of June 30,
1998:
<TABLE>
<CAPTION>
MINIMUM CAPITAL REQUIRED FOR
REQUIREMENT WELL CAPITALIZED ACTUAL
--------------- ---------------- ------
<S> <C> <C> <C>
Tier 1 Capital to Risk Based
Assets............................. 4.00% 6.00% 10.05%
Total Capital to Risk Based Assets.. 8.00% 10.00% 10.86%
Leverage Ratio (Tier 1 Capital to
Average Total Assets).............. 3.00% 5.00% 7.13%
</TABLE>
On April 19, 1995, the four federal bank regulatory agencies adopted
revisions to the regulations promulgated pursuant to the Community
Reinvestment Act (the "CRA"), which are intended to set distinct assessment
standards for financial institutions. The revised regulation contains three
evaluation tests (i) a lending test, which will compare an institution's
market share of loans in low- and moderate-income areas to its market share of
loans in its entire service area and the percentage of a bank's outstanding
loans to low- and moderate-income areas or individuals; (ii) a services test,
which will evaluate the provisions of services that promote the availability
of credit to low- and moderate-income areas; and (iii) an investment test,
which will evaluate an institution's record of investments in organizations
designed to foster community development, small- and minority-owned businesses
and affordable housing lending, including state and local government housing
or revenue bonds. The regulations are designed to reduce some paperwork
requirements of the previous regulations and provide regulators, institutions
and community groups with a more objective and predictable manner with which
to evaluate the CRA performance of financial institutions. The rules became
effective on January 1, 1996, at which time evaluation under streamlined
procedures began for institutions with assets of less than $250 million that
are owned by a holding company with total assets of less than $1 billion.
Congress and various federal agencies (including, in addition to the bank
regulatory agencies, the Department of Housing and Urban Development, the
Federal Trade Commission and the Department of Justice) (collectively the
"Federal Agencies") responsible for implementing the nation's fair lending
laws have been increasingly concerned that prospective home buyers and other
borrowers are experiencing discrimination in their efforts to obtain loans. In
recent years, the Department of Justice has filed suit against financial
institutions, which it determined had discriminated, seeking fines and
restitution for borrowers who allegedly suffered from discriminatory
practices. Most, if not all, of these suits have been settled (some for
substantial sums) without a full adjudication on the merits.
On March 8, 1994 the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and specify the factors the agencies will
consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Credit Opportunity Act and the Fair Housing Act. In the policy
statement, three methods of proving lending discrimination were identified (i)
overt evidence of discrimination, when a lender blatantly discriminates on a
prohibited basis; (ii) evidence of disparate treatment, when a lender treats
applicants differently based on a prohibited factor even where there is no
showing that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person; and (iii) evidence of disparate impact, when
a lender applies a practice uniformly to all applicants, but the practice has
a discriminatory effect, even where such practices are neutral on their face
and are applied equally, unless the practice can be justified on the basis of
business necessity.
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On September 23, 1994, Reigle Community Development and Regulatory
Improvement Act of 1994 (the "Regulatory Improvement Act") was signed. The
Regulatory Improvement Act contains funding for community development projects
through banks and community development financial institutions and also
numerous regulatory relief provisions designed to eliminate certain
duplicative regulations and paperwork requirements.
FDIC INSURANCE AND FICO ASSESSMENTS FOR WESTSTAR. WestStar is subject to
FDIC deposit insurance assessments for the Bank Insurance Fund (the "BIF").
Currently the deposit insurance premium for healthy banks is zero but the
assessment for the riskiest banks can be as high as $.27 per $100 of deposits
which is determined based upon a sliding scale depending on their placement in
supervisory categories.
On September 29, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 was enacted (the "1996 Act"). The 1996 Act's chief
accomplishment was to provide for the recapitalization of the Savings
Association Insurance Fund ("SAIF") by levying a one-time special assessment
on SAIF deposits to bring it up to a statutory goal of a reserve ratio equal
to $.25 per $100 of insured deposits and to provide that beginning in 1997,
BIF assessments would be used to help pay off the $780 million in annual
interest payments on the $8 billion Financing Corporation ("FICO") bonds
issued in the late 1980s as part of the government rescue of the thrift
industry. The 1996 Act provides that BIF assessments for FICO bond payments
must be set at a rate equal to 20% of the SAIF rates for such assessments in
1997, 1998 and 1999. After 1999, all FDIC insured institutions will pay the
same assessment rates. For 1997, the assessment for the FICO bond payments
were $.0132 per $100 of deposits for BIF deposits and $.0648 per $100 of
deposits for SAIF deposits. The premiums for 1997 for deposit insurance
assessments ranged from $0 to $.27 per $100 of deposits with 94% of banks
paying nothing for deposit insurance and there have been no announced changes
for 1998. As a result, it is anticipated that in 1998, WestStar will pay no
premium for deposit insurance, and a FICO bond assessment of $23,500. The 1996
Act also provided for certain limited regulatory relief and modifications to
certain out-of-date regulations.
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Offering, the authorized capital stock of Vail
Banks will consist of 20,000,000 shares of Common Stock, $1.00 par value and
2,250,000 shares of Preferred Stock, $0.10 par value. Upon completion of the
Offering, and giving effect to the Telluride Merger and the Independent Merger
(assuming the issuance of 749,340 and 317,790 shares of Common Stock in such
mergers, respectively, which is subject to adjustment under those agreements),
5,300,070 shares of Common Stock will be issued and outstanding (assuming an
Offering price of $15.00 per share), and no shares of Preferred Stock will be
issued and outstanding.
The following summary of Vail Banks' capital stock does not purport to be
complete and is qualified in its entirety by reference to the Articles of
Incorporation, as amended and restated, and Bylaws, as amended and restated of
Vail Banks that are included as exhibits to the Registration Statement of
which this Prospectus forms a part, and the applicable provisions of the
Colorado Business Corporation Act.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on any issue
submitted to a vote of the shareholders and do not have cumulative voting
rights in the election of directors. Accordingly, the holders of a majority of
the outstanding shares of Common Stock voting in an election of directors can
elect all of the directors then standing for election, if they choose to do
so. Subject to any outstanding shares of Preferred Stock, all shares of Common
Stock are entitled to share equally in such dividends as the Board of
Directors of Vail Banks may, in its discretion, declare out of sources legally
available therefor. See "Dividend Policy." Upon dissolution, liquidation, or
winding up of Vail Banks, holders of Common Stock are entitled to receive on a
ratable basis, after payment or provision for payment of all debts and
liabilities of Vail Banks and any preferential amount due with respect to
outstanding shares of Preferred Stock, if any, all assets of Vail Banks
available for distribution, in cash or in kind. Holders of shares of Common
Stock do not have preemptive or other subscription rights, conversion or
redemption rights, or any rights to share in any sinking fund. All
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currently outstanding shares of Common Stock are, and the shares offered
hereby (when sold in the manner contemplated by this Prospectus) will be,
fully paid and nonassessable.
PREFERRED STOCK
Pursuant to Vail Banks' Articles of Incorporation, the Board of Directors,
from time to time, may authorize the issuance of shares of Preferred Stock in
one or more series, may establish the number of shares to be included in any
such series, and may fix the designations, powers, preferences, and rights
(including voting rights) of the shares of each such series and any
qualifications, limitations, or restrictions thereon. No shareholder
authorization is required for the issuance of shares of Preferred Stock unless
imposed by then applicable law. Shares of Preferred Stock may be issued for
any general corporate purposes, including mergers and acquisitions. The Board
of Directors could issue a series of Preferred Stock with rights more
favorable with regard to dividends and liquidation than the rights of holders
of Common Stock. Such a series of Preferred Stock also could be used for the
purpose of preventing a hostile takeover of Vail Banks that is considered to
be desirable by the holders of the Common Stock, could otherwise adversely
affect the voting power of the holders of Common Stock, and could serve to
perpetuate the directors' control of Vail Banks under certain circumstances.
No transaction is now contemplated that would result in the issuance of any
such shares of Preferred Stock.
CERTAIN PROVISIONS OF VAIL BANKS' ARTICLES OF INCORPORATION AND BYLAWS
Staggered Board of Directors; Removal; Filling Vacancies. The Articles of
Incorporation provide that the Board of Directors will consist of between 10
and 18 directors. The Board currently consists of 12 directors, 10 of whom are
not employees of Vail Banks, and it is currently contemplated that three
additional directors will be added as a result of the Independent Merger and
the Telluride Merger, at least two of which will be employees of Vail Banks.
Upon the consummation of the Offering, the Board of Directors will be divided
into three classes of directors serving staggered three-year terms. In
addition, directors may be removed by the shareholders only for cause. The
classification of directors and the limitation on removal only for cause has
the effect of making it more difficult for shareholders to change the
composition of the Board of Directors. Vail Banks believes, however, that the
longer time required to elect a majority of a classified Board of Directors
will help to ensure the continuity and stability of Vail Banks' management and
policies. The classification provisions could also have the effect of
discouraging a third party from accumulating large blocks of Vail Banks' stock
or attempting to obtain control of Vail Banks, even though such an attempt
might be beneficial to Vail Banks and its shareholders. Accordingly,
shareholders could be deprived of certain opportunities to sell their shares
of Common Stock at a higher market price than might otherwise be the case. See
"Risk Factors--Certain Anti-takeover Provisions." The shareholders will be
entitled to vote on the election or removal of directors, with each share
entitled to one vote.
The Bylaws provide that, unless the Board of Directors otherwise determines,
any vacancies will be filled by the affirmative vote of a majority of the
remaining directors, even if less than a quorum. A director may be removed
only with cause by the vote of the holders of a majority of the shares
entitled to vote for the election of directors at a meeting of the
shareholders called for the purpose of removing such director. A vacancy
resulting from an increase in the number of directors may be filled by action
of the Board of Directors.
INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
Vail Banks' Articles of Incorporation provide for indemnification of
directors to the full extent permitted by Colorado law and, to the extent
permitted by such law, eliminate or limit the personal liability of directors
to Vail Banks and its shareholders for monetary damages for certain breaches
of fiduciary duty and the duty of care. Such indemnification may be available
for liabilities arising in connection with this Offering. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
directors, officers or persons controlling Vail Banks pursuant to the
foregoing provisions, Vail Banks has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. Pursuant to its Articles of
Incorporation, Vail Banks may indemnify its officers,
67
<PAGE>
employees, agents and other persons to the fullest extent permitted by
Colorado law. Vail Banks has entered into indemnification agreements with its
directors and executive officers pursuant to which Vail Banks has agreed to
indemnify such persons in certain circumstances.
Vail Banks' Bylaws also provide that Vail Banks shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Vail Banks, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of Vail Banks' subsidiaries or, at
the request of Vail Banks, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
whether Vail Banks would have the power to indemnify such person against such
liability under Colorado law. Vail Banks intends to purchase and maintain
insurance on behalf of all of its directors and executive officers.
REGISTRATION RIGHTS
Vail Banks has granted best efforts registration rights to certain employee
shareholders. Such registration rights grant the holders thereof the right to
have Vail Banks use its best efforts to register the Common Stock in
connection with any registration statements (including the Registration
Statement of which this Prospectus is part) filed by the Company. All such
holders of the aforementioned shares of Common Stock have signed a waiver
which precludes utilization of the best efforts registration rights pursuant
to this Prospectus.
OTHER MATTERS
Vail Banks has applied for listing of the Common Stock on The Nasdaq Stock
Market upon notice of issuance, under the proposed symbol "VAIL."
The transfer agent and registrar for Vail Banks' Common Stock is American
Securities Transfer & Trust, Inc., Denver, Colorado.
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
Vail Banks, the Selling Shareholders and the Underwriter, the Underwriter has
agreed to purchase from Vail Banks 1,100,000 and from the Selling Shareholders
140,000 shares of Common Stock at the Offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligation of the Underwriter
is subject to certain conditions precedent and that the Underwriter will
purchase all such shares of the Common Stock if any of such shares are
purchased. The Underwriter is obligated to take and pay for all of the shares
of Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any are taken.
Vail Banks has been advised by the Underwriter that the Underwriter proposes
to offer such shares of Common Stock to the public at the Offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriter may
allow, and such dealers may re-allow, a concession not in excess of $ per
share to certain other dealers. After the Offering, the Offering price and
other selling terms may be changed by the Underwriter.
Pursuant to the Underwriting Agreement, Vail Banks has granted to the
Underwriter an option, exercisable not later than 30 days after the date of
this Prospectus, to purchase up to 186,000 additional shares of Common Stock
at the Offering price, less the underwriting discounts and commissions set
forth on the cover page of this Prospectus, solely to cover over-allotments.
To the extent that the Underwriter exercises such option, the Underwriter will
become obligated, subject to certain conditions, to purchase such shares, and
Vail Banks will be obligated, pursuant to the option, to sell such shares to
the Underwriter.
Vail Banks and each of its directors and executive officers, the related
interests of such directors and executive officers and holders of 5% or more
of the Common Stock and the Selling Shareholders have agreed not to sell or
otherwise dispose of any shares of Common Stock for a period of 120 days after
the date of this Prospectus without the prior written consent of the
Underwriter, except that Vail Banks may issue shares of Common Stock upon the
exercise of currently outstanding options. See "Risk Factors--Shares Eligible
for Future Sale" and "Shares Eligible for Future Sale."
Vail Banks and the Selling Shareholders have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
Until the distribution of the Common Stock is completed, rules of the
Commission (as defined herein) may limit the ability of the Underwriter and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriter is permitted to engage in certain
transactions that stabilize the price of Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriter creates a short position in the Common Stock in
connection with the Offering, i.e., if it sells a greater aggregate number of
shares of Common Stock than is set forth on the cover page of this Prospectus,
the Underwriter may reduce the short position by purchasing shares of Common
Stock in the open market. The Underwriter may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
The Underwriter may also impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases Common Stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the Common Stock, it may reclaim the amount of the selling concession
from the selling group members who sold those shares of Common Stock as part
of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a
69
<PAGE>
penalty bid might also have an effect on the price of a security to the extent
that it were to discourage resales of the security.
Neither Vail Banks nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither Vail Banks nor the Underwriter makes any representation that
the Underwriter will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the Offering price for the Common Stock has been determined by
negotiations between Vail Banks and the Underwriter. Among the factors
considered in such negotiations were prevailing market and general economic
conditions, the market capitalization, trading histories and stages of
development of other traded companies that Vail Banks and the Underwriter
believed to be comparable to Vail Banks, the results of operations of Vail
Banks in recent periods, the current financial position of the company,
estimates of the business potential of Vail Banks and the present state of
Vail Banks' development and the availability for sale in the market of a
significant number of shares of Common Stock. Additionally, consideration has
been given to the general status of the securities market, the market
conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering was made.
Application has been made for approval of the shares of Common Stock for
quotation on the Nasdaq National Market.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for Vail Banks by Kilpatrick Stockton
LLP, Atlanta, Georgia. Certain legal matters in connection with this Offering
will be passed upon for the Underwriter by Bracewell & Patterson, L.L.P.,
Houston, Texas.
EXPERTS
The audited financial statements of Vail Banks at December 31, 1995, 1996
and 1997 in this Prospectus and elsewhere in the Registration Statement have
been audited by Fortner, Bayens, Levkulich & Co., P.C., independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon giving said reports and upon the authority of
said firm as experts in accounting and auditing.
The audited financial statements of Cedaredge at November 30, 1997 in this
Prospectus and elsewhere in the Registration Statement have been audited by
Dalby, Wendland & Co., P.C., independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
giving said reports and upon the authority of said firm as experts in
accounting and auditing.
The audited financial statements of Independent at December 31, 1996 and
1997 in this Prospectus and elsewhere in the Registration Statement have been
audited by GRA, Thompson, White & Co., P.C., independent public accountants,
as indicated in their reports with respect thereto, and are included herein in
reliance upon giving said reports and upon the authority of said firm as
experts in accounting and auditing.
The audited financial statements of Telluride at December 31, 1996 and 1997
in this Prospectus and elsewhere in the Registration Statement have been
audited by Dalby, Wendland & Co., P.C., independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon giving said reports and upon the authority of said firm as
experts in accounting and auditing.
70
<PAGE>
ADDITIONAL INFORMATION
Vail Banks has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which is a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to Vail Banks and the
Common Stock, reference is made to the Registration Statement, including the
exhibits and schedules thereto. Statements contained in this Prospectus
concerning the contents of any contract or any other document are not
necessarily complete. With respect to each such contract or document filed as
an exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description of the matters involved, and each statement
shall be deemed qualified in its entirety by such reference to the copy of the
applicable document filed with the Commission. A copy of the Registration
Statement, including the exhibits thereto, may be inspected without charge at
the Public Reference section of the commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional
offices of the Commission: New York Regional Office, 7 World Trade Center,
13th Floor, New York, New York 10048; and Chicago Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement and the exhibits and schedules thereto can be obtained
from the Public Reference Section of the Commission upon payment of prescribed
fees. The Commission maintains an Internet web site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission. The address of that site is
http://www.sec.gov.
Prior to filing the Registration Statement of which this Prospectus is a
part, Vail Banks was not subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon effectiveness of the Registration Statement, Vail Banks will
become subject to the informational and periodic reporting requirements of the
Exchange Act, and in accordance therewith, will file periodic reports, proxy
statements, and other information with the Commission. Such periodic reports,
proxy statements, and other information will be available for inspection and
copying at the public reference facilities and other regional offices referred
to above. Vail Banks intends to register the securities offered by the
Registration Statement under the Exchange Act simultaneously with the
effectiveness of the Registration Statement and to furnish its shareholders
with annual reports containing audited financial statements and such other
reports as may be required from time to time by law or The Nasdaq Stock
Market.
71
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<S> <C>
VAIL BANKS, INC.
Independent Auditor's Report............................................. F-1
Consolidated Balance Sheets at June 30, 1998 (unaudited) and December 31,
1997 and 1996........................................................... F-2
Consolidated Statements of Income for the Six Months Ended June 30, 1998
and 1997 (unaudited) and the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-3
Consolidated Statements of Comprehensive Income for the Six Months Ended
June 30, 1998 and 1997 (unaudited) and the Years Ended December 31,
1997, 1996 and 1995..................................................... F-4
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and for the Six Months Ended June 30,
1998 (Unaudited)........................................................ F-5
Consolidated Statements of Cash Flows of the Six Months Ended June 30,
1998 and 1997 (unaudited) and the Years Ended December 31, 1997, 1996
and 1995................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
CEDAREDGE FINANCIAL SERVICES, INC.
Independent Auditor's Report............................................. F-31
Consolidated Statements of Financial Condition at November 30, 1997 and
December 31, 1996 (restated)............................................ F-32
Consolidated Statement of Income for the Period Ended November 30, 1997.. F-33
Consolidated Statement of Changes in Shareholders' Equity for the Period
Ended November 30, 1997................................................. F-34
Consolidated Statement of Cash Flows for the Period Ended November 30,
1997.................................................................... F-35
Notes to the Consolidated Statements of Financial Condition.............. F-36
INDEPENDENT BANKSHARES, INC.
Independent Auditor's Report............................................. F-48
Consolidated Balance Sheets at June 30, 1998 and 1997 (unaudited) and
December 31, 1997....................................................... F-49
Consolidated Statements of Income and Comprehensive Income for the Six
Months Ended June 30, 1998 and 1997 (unaudited) and the Years Ended
December 31, 1997 and 1996.............................................. F-50
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996 and 1997 and the Six Months Ended June 30, 1998
(unaudited)............................................................. F-51
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1998 and 1997 (unaudited) and the Years Ended December 31, 1997 and
1996.................................................................... F-52
Notes to Consolidated Financial Statements............................... F-53
TELLURIDE BANCORP, LTD.
Independent Auditor's Report............................................. F-61
Consolidated Statements of Financial Condition at June 30, 1998 and 1997
(unaudited), December 31, 1997 and 1996................................. F-62
Consolidated Statement of Income and Comprehensive Income for the Six
Months Ended June 30, 1998 and 1997 (unaudited) and the Years Ended
December 31, 1997 and 1996.............................................. F-63
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1996 and 1997 and the Six Months Ended June 30, 1998
(unaudited)............................................................. F-64
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1998 and 1997 (unaudited) and the Years Ended December 31, 1997 and
1996.................................................................... F-65
Notes to Consolidated Financial Statements............................... F-67
</TABLE>
72
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Vail Banks, Inc.
Vail, Colorado
We have audited the accompanying consolidated balance sheets of Vail Banks,
Inc. and Subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of Vail Banks'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vail
Banks, Inc., and Subsidiary at December 31, 1997 and 1996, and the results of
their operations and cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Fortner, Bayens, Levkulich & Co., P.C.
Denver, Colorado
February 20, 1998 (except for notes W and X, as to which the date is July 10,
1998)
F-1
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1998 1997 1996
----------- -------- ----------
(UNAUDITED) (RESTATED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks....................... $ 16,516 $ 16,680 $ 17,452
Federal funds sold............................ 19,450 17,063 5,035
Investment securities
Available for sale.......................... 8,600 9,607 4,209
Held to maturity............................ 7,946 10,125 14,634
Loans......................................... 162,311 154,913 106,786
Less allowance for loan losses................ (1,335) (1,364) (823)
-------- -------- --------
160,976 153,549 105,963
Bank premises and equipment................... 19,287 17,836 5,964
Investment in real estate partnership......... -- -- 685
Accrued interest receivable................... 1,335 1,377 1,029
Deferred income taxes......................... 403 403 370
Intangible assets............................. 3,764 3,883 1,680
Other assets.................................. 1,836 668 173
-------- -------- --------
$240,113 $231,191 $157,194
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing.............. $ 52,604 $ 56,929 $ 43,747
Demand, interest bearing.................. 98,153 94,779 74,147
Savings................................... 13,806 13,537 7,890
Time, $100,000 and over................... 28,782 18,961 7,442
Other time................................ 23,228 22,009 11,124
-------- -------- --------
216,573 206,215 144,350
Note payable................................ 1,100 1,200 1,400
Federal funds purchased and securities sold
under repurchase agreements................ 1,083 308 1,647
Accrued interest payable and other
liabilities................................ 1,555 5,034 368
-------- -------- --------
Total liabilities....................... 220,311 212,757 147,765
Minority interest............................. 573 566 --
Shareholders' equity
Series A preferred stock--50,000 shares
authorized, 34,258 shares issued and
outstanding in 1998 and 1997............... 2,960 2,960 --
Series B preferred stock--authorized 200,000
shares, no shares issued................... -- -- --
Mandatorily convertible debentures.......... 1,600 1,600 --
Common stock--$1 par value; 20,000,000
shares authorized, 2,285,820, 2,250,980 and
1,782,510 shares issued and outstanding at
June 30, 1998, December 31, 1997 and 1996,
respectively (note X)...................... 2,286 2,251 1,782
Capital in excess of par value.............. 11,369 10,778 7,871
Retained earnings........................... 989 253 (221)
Accumulated other comprehensive income...... 25 26 (3)
-------- -------- --------
19,229 17,868 9,429
-------- -------- --------
$240,113 $231,191 $157,194
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------- -----------------------------
1998 1997 1997 1996 1995
-------- -------- ------- ---------- ----------
(UNAUDITED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans..... $ 8,508 $ 5,651 $12,570 $9,993 $6,322
Interest on investment
securities
Taxable...................... 456 492 934 1,300 1,431
Tax exempt................... 68 6 22 19 27
Interest on federal funds sold
and deposits in banks......... 804 362 496 343 802
-------- -------- ------- ------ ------
Total interest income...... 9,836 6,511 14,022 11,655 8,582
Interest expense
Demand deposits.............. 1,911 1,399 2,752 2,476 1,774
Savings deposits............. 197 106 219 231 216
Time deposits................ 1,367 578 1,280 1,035 779
Note payable................. 55 63 123 144 163
Mandatorily convertible
debentures.................. 77 -- 13 -- --
Interest on federal funds
purchased and other borrowed
funds....................... 15 54 127 324 113
-------- -------- ------- ------ ------
Total interest expense..... 3,622 2,200 4,514 4,210 3,045
-------- -------- ------- ------ ------
Net interest income............ 6,214 4,311 9,508 7,445 5,537
Provision for loan losses...... -- -- 232 154 40
-------- -------- ------- ------ ------
Net interest income after
provision for loan
losses.................... 6,214 4,311 9,276 7,291 5,497
Other income
Service charges on deposit
accounts.................... 606 430 916 790 671
Other income................. 453 147 357 281 240
-------- -------- ------- ------ ------
1,059 577 1,273 1,071 911
Other expenses
Salaries and employee
benefits.................... 3,204 2,191 5,086 3,670 2,511
Occupancy expenses of
premises.................... 738 661 1,325 1,185 959
Furniture and equipment
expense..................... 575 357 852 492 343
Other operating expenses..... 1,476 1,105 2,524 1,987 1,669
-------- -------- ------- ------ ------
5,993 4,314 9,787 7,334 5,482
-------- -------- ------- ------ ------
INCOME BEFORE UNUSUAL
OPERATIONAL ITEMS AND INCOME
TAXES......................... 1,280 574 762 1,028 926
Unusual operational income
(loss) (note V)............... -- -- -- (406) (139)
-------- -------- ------- ------ ------
Income before income taxes..... 1,280 574 762 622 787
Income tax expense............. 445 218 288 257 266
-------- -------- ------- ------ ------
NET INCOME..................... 835 356 474 365 521
Income tax benefit of net
operating loss carryforwards.. 419 205 274 242 264
-------- -------- ------- ------ ------
TOTAL INCREASE IN SHAREHOLDERS'
EQUITY AFTER BENEFIT OF LOSS
CARRYFORWARDS................. $ 1,254 $ 561 $ 748 $ 607 $ 785
======== ======== ======= ====== ======
Net income applicable to common
equity........................ $ 835 $ 356 $ 474 $ 365 $ 521
======== ======== ======= ====== ======
Net income per common share
(note P)...................... $ 0.32 $ 0.18 $ 0.23 $ 0.21 $ 0.30
Diluted net income per common
share (note P)................ $ 0.30 $ 0.17 $ 0.21 $ 0.19 $ 0.27
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------ --------------------------
1998 1997 1997 1996 1995
-------- -------- ---- ---------- ----------
(UNAUDITED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Net income........................ $ 835 $ 356 $474 $365 $521
Other comprehensive income
Unrealized gains (losses) on
investment securities available
for sale....................... (1) 1 29 14 (73)
-------- -------- ---- ---- ----
Comprehensive income.............. $ 834 $ 357 $503 $379 $448
======== ======== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
SERIES A MANDATORILY CAPITAL OTHER
PREFERRED CONVERTIBLE COMMON IN EXCESS OF RETAINED COMPREHENSIVE
STOCK DEBENTURES STOCK PAR VALUE EARNINGS INCOME TOTAL
--------- ----------- ------ ------------ -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... $ -- $ -- $1,320 $ 3,953 $(107) $ 56 $ 5,222
Issuance of 11,380
shares of common stock
for services........... -- -- 11 34 -- -- 45
Sale of 434,280 shares
of common stock........ -- -- 435 3,307 -- -- 3,742
Dividends paid--$.34 per
share.................. -- -- -- -- (600) -- (600)
Comprehensive income
Net income............ -- -- -- -- 521 -- 521
Other comprehensive
income............... -- -- -- -- -- (73) (73)
Income tax benefit
credited to capital
surplus................ -- -- -- 264 -- -- 264
------ ------ ------ ------- ----- ---- -------
Balance at December 31,
1995................... -- -- 1,766 7,558 (186) (17) 9,121
Issuance of 16,460
shares of common stock
for services........... -- -- 16 71 -- -- 87
Dividends paid and
accrued--$.22 per
share.................. -- -- -- -- (400) -- (400)
Comprehensive income
Net income............ -- -- -- -- 365 -- 365
Other comprehensive
income............... 14 14
Income tax benefit
credited to capital
surplus................ -- -- -- 242 -- -- 242
------ ------ ------ ------- ----- ---- -------
Balance at December 31,
1996................... -- -- 1,782 7,871 (221) (3) 9,429
Issuance of 13,580
shares of common stock
for services........... -- -- 14 62 -- -- 76
Sale of 454,890 shares
of common stock........ -- -- 455 2,571 -- -- 3,026
Debentures assumed in
acquisition of
Cedaredge Financial
Services, Inc.......... -- 1,600 -- -- -- -- 1,600
Issuance of 34,258
shares of preferred
stock.................. 2,960 -- -- -- -- -- 2,960
Comprehensive income
Net income............ -- -- -- -- 474 -- 474
Other comprehensive
income............... 29 29
Income tax benefit
credited to capital
surplus................ -- -- -- 274 -- -- 274
------ ------ ------ ------- ----- ---- -------
Balance at December 31,
1997................... 2,960 1,600 2,251 10,778 253 26 17,868
Issuance of 34,840
shares of common stock
for bonuses accrued as
of December 31, 1997... -- -- 35 172 -- -- 207
8% cash dividends paid
on preferred stock -- -- -- -- (99) -- (99)
Comprehensive income
Net income............ -- -- -- -- 835 -- 835
Other comprehensive
income............... (1) (1)
Income tax benefit
credited to capital
surplus................ -- -- -- 419 -- -- 419
------ ------ ------ ------- ----- ---- -------
Balance at June 30, 1998
(Unaudited)............ $2,960 $1,600 $2,286 $11,369 $ 989 $ 25 $19,229
====== ====== ====== ======= ===== ==== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------- -----------------------------------
1998 1997 1997 1996 1995
------- -------- -------- ---------- ----------
(UNAUDITED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net income............. $ 835 $ 356 $ 474 $ 365 $ 521
Adjustments to
reconcile net income
to net cash provided
from operating
activities
Amortization of
intangible assets..... 87 66 126 120 70
Depreciation........... 619 361 885 497 354
Provision for loan
losses................ -- -- 232 154 40
Net (discount
accretion) premium
amortization on
investment
securities............ (9) (25) (82) (102) 264
Stock dividends
received.............. (21) (15) (34) (24) --
Equity in operations of
partnership........... -- -- (18) (6) 63
Income tax benefit of
net operating loss
carryforwards......... 419 205 274 242 264
Common stock issued for
services.............. 207 76 76 87 45
Changes in deferrals
and accruals, net of
acquisitions accounted
for under the purchase
method of accounting
Accrued interest
receivable........... 42 7 77 (221) 203
Other assets, net..... (976) (59) 20 (31) (60)
Accrued interest
payable and other
liabilities.......... (3,479) (52) 4,210 61 (26)
------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities............. (2,276) 920 6,240 1,142 1,738
Cash flows from
investing activities
Net (increase) decrease
in federal funds
sold.................. (2,387) 3,486 (10,403) 5,340 (343)
Purchase of investments
held to maturity...... -- -- -- (9,810) (4,201)
Purchase of investments
available for sale.... (327) (43) (174) (263) (208)
Proceeds from
maturities of
investments held to
maturity.............. 1,539 4,111 450 3,500 14,830
Proceeds from
maturities of
investments available
for sale.............. 2,003 -- 4,610 9,964 --
Net (increase) decrease
in loans.............. (7,427) (5,182) (13,943) (28,386) (28,127)
Purchases of property
and equipment......... (2,070) (564) (2,215) (2,065) (1,505)
Proceeds from the sale
of property and
equipment............. -- -- -- 355 11
Proceeds from sale of
real estate acquired
through foreclosure... -- -- -- 464 59
Acquisition costs and
other intangible
assets................ (43) -- (764) -- --
Acquisition of
companies under the
purchase method of
accounting, net of
cash and due from
banks acquired........ -- -- (1,353) -- (404)
------- -------- -------- -------- --------
Net cash used in
investing activities... (8,712) 1,808 (23,792) (20,901) (19,888)
Cash flows from
financing activities
Net increase (decrease)
in deposits........... 10,358 (12,989) 19,858 18,786 25,821
Net increase (decrease)
in securities sold
under repurchase
agreements............ 775 77 (1,339) 1,308 338
Issuance of common
stock for cash........ -- 3,026 3,026 -- 3,742
Deferred stock offering
costs................. (110) -- -- -- --
Dividends paid on
common stock.......... -- -- -- (400) (672)
Dividends paid on
preferred stock....... (99) -- -- -- --
Payments on notes
payable............... (100) (100) (4,765) (200) (200)
------- -------- -------- -------- --------
Net cash provided by
financing activities... 10,824 (9,986) 16,780 19,494 29,029
------- -------- -------- -------- --------
Net increase (decrease)
in cash and due from
banks.................. (164) (7,258) (772) (265) 10,879
Cash and due from banks
at beginning of
period................. 16,680 17,452 17,452 17,717 6,838
------- -------- -------- -------- --------
Cash and due from banks
at end of period....... $16,516 $ 10,194 $ 16,680 $ 17,452 $ 17,717
======= ======== ======== ======== ========
Supplemental disclosures
of cash flow
information
Cash paid during the
period for:
Interest expense....... $ 3,381 $ 2,191 $ 4,360 $ 4,412 $ 3,024
Income taxes........... 12 8 8 18 5
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Organization and Basis of Presentation
Vail Banks, Inc. ("VBI") owns 100% of the outstanding common stock of
WestStar Bank ("the Bank"). The entities are collectively referred to as "the
Company". The accompanying consolidated financial statements include the
consolidated totals of the accounts of VBI and the Bank. Intercompany accounts
and transactions have been eliminated in consolidation.
Basis of Financial Statement Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Significant estimates and
assumptions are disclosed in the accompanying notes.
Investment Securities
The designation of a security as held to maturity or available for sale is
made at the time of acquisition. The held to maturity classification includes
debt securities that the Company has the positive intent and ability to hold
to maturity which are carried at amortized cost. The available for sale
classification includes debt and equity securities that are carried at fair
value. Unrealized gains and losses on securities available for sale are
included as a separate component of shareholders' equity. Gains or losses on
sales of securities are recognized by the specific identification method.
Loans
The Company provides a full range of banking and mortgage services to
individual and corporate customers principally in the Eagle, Summit and Delta
County areas, as well as, in the Denver area. The Company has a diversified
loan portfolio, and a substantial portion of its loans is underwritten based
on the value of real estate in these communities. The value of real estate in
these areas is dependent on factors not directly associated with borrowers and
these communities.
The accrual of interest on loans is discontinued when management believes
that interest or principal may not be collectible or recoverable. When placing
a loan in nonaccrual status, interest accrued to date is generally reversed
unless the net realizable value of the underlying collateral is sufficient to
cover principal and accrued interest. When such a reversal is made, interest
accrued during prior years is charged to the allowance for loan losses. All
other interest reversed on nonaccrual loans is charged against current year
interest income.
Loan fees and commitment fees are recognized as income when received since a
major portion of these represent recoveries of direct origination costs.
Provision and Allowance for Possible Loan Losses
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses.
In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties and
assesses estimated future cash flows from borrowers' operations and the
liquidation of loan collateral.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, changes in
economic conditions may necessitate revisions in future years. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additional losses based on the facts
surrounding any given loan at the time of their examination.
F-7
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
Provision and Allowance for Possible Loan Losses (Continued)
The Company provides for possible loan losses by a charge to current year
income based on the character of the loan portfolio, current economic
conditions, and such other factors as, in management's best judgment, deserve
current recognition in estimating loan losses. In addition, recoveries
realized on loans previously charged off are credited to the allowance for
possible loan losses.
Premises and Equipment
Premises and equipment are stated at cost. Depreciation and amortization is
provided for in amounts, principally on the straight-line method, sufficient
to relate the cost of depreciable assets to operations over their estimated
service lives.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of non-taxable income such as interest on state
and municipal securities) and deferred taxes on temporary differences between
the amount of taxable income and pretax financial income and between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. A deferred tax asset is included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes. The Bank files
consolidated tax returns with VBI.
Investment in Real Estate Partnership
The Company has accounted for its investment in Vail 108 Limited on the
equity method. Under this method, the investment is stated at initial cost and
adjusted for the Company's share of undistributed earnings from the date of
acquisition.
Intangible Assets
Included in intangible assets is the cost in excess of fair value of the net
assets acquired in purchase transactions. Amortization is computed on the
straight-line method over 25 years. Capitalized costs and accumulated
amortization for costs in excess of fair value of net assets acquired as of
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Capitalized costs............................................ $4,320 $1,869
Accumulated amortization..................................... (316) (189)
------ ------
$4,004 $1,680
====== ======
</TABLE>
Statement of Cash Flows
For purposes of the Statement of Cash Flows, the Company has defined cash
equivalents as those amounts included in the balance sheet caption "Cash and
Due from Banks."
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recorded. The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123).
F-8
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
Per Share Calculations
Basic earnings per share is calculated by dividing net income (less
preferred stock dividends) by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is calculated by
adjusting income and outstanding shares, assuming conversion of all
potentially dilutive securities, using the treasury stock method.
NOTE B--ACCOUNTING CHANGES
Comprehensive Income
The Company adopted Financial Accounting Standards Board No. 130, Reporting
Comprehensive Income (SFAS No. 130), effective January 1, 1998. SFAS No. 130
establishes standards for reporting comprehensive income and its components
(revenues, expenses, gains, and losses). Components of comprehensive income
are net income and all other non-owner changes in equity. The statement
requires that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
The Company has chosen to disclose comprehensive income in a separate income
statement.
The only component of comprehensive income consists of unrealized holding
gains on securities with no related tax effects.
Earnings Per Share
SFAS 128, Earnings per Share, replaces primary and fully diluted earnings
per share with basic and diluted earnings per share. Under the new
requirements, the dilutive effect of stock options is excluded from the
calculation of basic earnings per share. Diluted earnings per share are
calculated similarly to the fully diluted earnings per share. SFAS 128 became
effective for the Company's 1997 year-end financial statements. All prior
period earnings per share data presented have been restated to conform to the
provisions of this statement.
Operating Segments
The Company adopted Financial Accounting Standards Board Statement No. 131,
Disclosures About Segments of an Enterprise and Related Information, (SFAS No.
131) effective January 1, 1998. This statement establishes standards for
reporting information about segments in annual and interim financial
statements. SFAS No. 131 introduces a new model for segment reporting called
the "management approach". The management approach is based on the way the
chief operating decision-maker organizes segments within the company for
making operating decisions and assessing performance. Reportable segments are
based on products and services, geography, legal structure, management
structure and any other in which management disaggregates a company. Based on
the "management approach" model, the Company has determined that its business
is comprised of a single operating segment and that SFAS No. 131 therefore has
no impact on its financial statements.
F-9
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--INVESTMENT SECURITIES
At December 31, the Company had securities with the following amortized cost
and estimated fair market values (in thousands):
<TABLE>
<CAPTION>
1997
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury.................. $ 1,864 $ 1 $ -- $ 1,865
U.S. government agencies....... 3,843 -- -- 3,843
State and municipal............ 2,953 25 -- 2,978
Federal Home Loan Bank and
Federal Reserve Bank stock.... 921 -- -- 921
------- ---- ----- -------
$ 9,581 $ 26 $ -- $ 9,607
======= ==== ===== =======
Securities held to maturity
U.S. Treasury securities....... $ 7,960 $-- $ (22) $ 7,938
State and municipal............ 85 1 -- 86
Mortgage backed securities..... 2,080 24 -- 2,104
------- ---- ----- -------
$10,125 $ 25 $ (22) $10,128
======= ==== ===== =======
<CAPTION>
1996
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. government agencies....... $ 3,499 $ 1 $ (4) $ 3,496
Federal Home Loan Bank and
Federal Reserve Bank stock.... 713 -- -- 713
------- ---- ----- -------
$ 4,212 $ 1 $ (4) $ 4,209
======= ==== ===== =======
Securities held to maturity
U.S. Treasury securities....... $11,921 $ 21 $ (98) $11,844
State and municipal............ 220 4 -- 224
Mortgage backed securities..... 2,493 1 (30) 2,464
------- ---- ----- -------
$14,634 $ 26 $(128) $14,532
======= ==== ===== =======
</TABLE>
The carrying value and estimated market value of debt securities at December
31, 1997, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------- -----------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- --------- --------- -------
<S> <C> <C> <C> <C>
Due in one year or less............ $ 5,460 $ 5,356 $ 2,035 $ 2,038
Due after one year through five
years............................. 3,200 3,330 6,010 5,986
Mortgage backed securities......... -- -- 2,080 2,104
--------- --------- ------- -------
$ 8,660 $ 8,686 $10,125 $10,128
========= ========= ======= =======
</TABLE>
F-10
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--INVESTMENT SECURITIES--(CONTINUED)
The Company realized no gains or losses on the sales of investment
securities during 1997, 1996, or 1995.
Securities included in the accompanying balance sheet at December 31, 1997
and 1996 with a carrying value of $14,084,000 and $12,413,000, respectively,
are pledged as collateral for public deposits and for other purposes as
permitted or required by law.
Securities sold under repurchase agreements of $309,000 and $339,000 as of
December 31, 1997 and 1996, respectively, were fully collateralized by related
securities.
NOTE D--LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans at December 31, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Commercial, financial and agricultural.................... $ 77,801 $ 46,850
Real estate, construction................................. 26,056 24,312
Real estate, mortgage..................................... 30,725 31,355
Installment............................................... 20,331 4,269
-------- --------
$154,913 $106,786
======== ========
</TABLE>
Transactions in the allowance for loan losses for 1997, 1996 and 1995 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- ----
<S> <C> <C> <C>
Balance at beginning of year............................... $ 823 $ 620 $361
Provision for loan losses.................................. 232 154 40
Recoveries on loans previously charged off................. 27 171 77
Loans charged off.......................................... (58) (122) (38)
Allowance of banks assumed through acquisitions............ 340 -- 180
------ ----- ----
Balance at end of year..................................... $1,364 $ 823 $620
====== ===== ====
</TABLE>
At December 31, 1997 and 1996, the principal balance of loans with payments
delinquent more than sixty days amounted to approximately $227,000 and
$118,000, respectively.
Nonaccrual loans at December 31, 1997 and 1996 amounted to approximately
$136,000 and $353,000, respectively.
F-11
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE E--PREMISES AND EQUIPMENT
At December 31, premises and equipment, less accumulated depreciation,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997
-----------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------- ------------ --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.............. $ 5,872 $2,845 $ 3,027
Leasehold improvements......................... 3,242 843 2,399
Buildings...................................... 9,962 712 9,250
Land........................................... 3,160 -- 3,160
------- ------ -------
$22,236 $4,400 $17,836
======= ====== =======
<CAPTION>
1996
-----------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------- ------------ --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.............. $ 4,849 $2,478 $ 2,371
Leasehold improvements......................... 2,393 735 1,658
Buildings...................................... 1,917 510 1,407
Land........................................... 528 -- 528
------- ------ -------
$ 9,687 $3,723 $ 5,964
======= ====== =======
</TABLE>
NOTE F--DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as
follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. $31,621
1999................................................................. 7,988
2000................................................................. 1,361
-------
$40,970
=======
</TABLE>
NOTE G--FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Federal funds purchased and securities sold under agreements to repurchase,
which are classified as borrowings, generally mature within one to four days
from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount
of cash received in connection with the transaction. The Company monitors the
fair value of the underlying securities on a daily basis. Information
concerning securities sold under agreements to repurchase is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Average balance during the year...................... $1,519,000 $ 817,000
Average interest rate during the year................ 5.22% 4.15%
Maximum month-end balance during the year............ $1,559,000 $1,183,000
</TABLE>
F-12
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--INVESTMENT IN REAL ESTATE PARTNERSHIP
Through November 1997, the Company had a limited partnership interest of
approximately 28% in Vail 108 Limited (Vail 108) which it acquired for a cash
contribution to the partnership of $750,000. VNB Building Corp. (VNB)
contributed net rental property assets to the partnership in exchange for an
interest of approximately 72% (including a 1% general partnership interest).
The owners of VNB are also shareholders and directors of the Company.
The Company's cash contribution and the appraised value of net rental
property assets were the basis for determining the relative ownership of Vail
108. Information relative to the Company's investment in Vail 108 based on the
historical cost of the assets contributed to the partnership as of December
31, 1996 (in thousands) follows:
<TABLE>
<S> <C>
Equity in net assets................................................... $750
Equity in loss of subsidiary........................................... (65)
----
$685
====
</TABLE>
Amortization of the excess of cost over net book value of assets acquired
was based on depreciation of the excess of the appraised value of the rental
building over its historical cost basis. The principal components of the
building had a remaining life of approximately 25 years as of the date of
formation of the partnership.
The Company leased space for its main facility from Vail 108.
Vail 108 acquired a limited partnership interest of approximately 53% in
Avon 56 Limited (Avon 56) for a cash contribution of $750,000. VNB acquired a
1% general partnership interest for a cash contribution of $14,141. The
partnership was formed to construct, own, and operate a commercial rental
property in Avon, Colorado. The Company leases space for a branch facility
from Avon 56.
As discussed in note N, as of December 1, 1997, VNB was merged into the
Company and was liquidated. Assets of VNB included the remaining 72% interest
in Vail 108. As of the date of the merger, Vail 108 was dissolved.
NOTE I--RELATED PARTY TRANSACTIONS
At December 31, the Company had net loans receivable from directors,
officers and principal shareholders (more than ten percent ownership through
attribution) of the Company and their related business interests as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Directors and principal shareholders of parent company stock..... $398 $183
Officers......................................................... 423 135
---- ----
$821 $318
==== ====
</TABLE>
Other related party transactions are described in notes H and N.
F-13
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE J--LEASE COMMITMENTS
The Company leases facilities and equipment under leases that expire through
the year 2010. A number of the leases have renewal options. Approximate future
minimum annual rental commitments under the leases as of December 31, 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
FACILITIES EQUIPMENT TOTAL
---------- --------- ------
<S> <C> <C> <C>
1998............................................. $ 870 $ 37 $ 907
1999............................................. 827 37 864
2000............................................. 728 30 758
2001............................................. 687 20 707
2002............................................. 648 -- 648
Thereafter....................................... 3,479 -- 3,479
------ ---- ------
$7,239 $124 $7,363
====== ==== ======
</TABLE>
Total rental expense for 1997, 1996 and 1995 was $988,000, $790,000 and
$643,000, respectively.
NOTE K--INCOME TAXES
The Company has net operating loss carryforwards totaling approximately
$5,300,000, the components of which expire in the years 2004 through 2007. The
Company accrued alternative minimum tax expense of $14,000, $15,000 and $2,000
in 1997, 1996, and 1995, respectively. This tax may be carried forward as a
credit against taxes on income in the future years.
Deferred income taxes relate to temporary differences in tax bases for
financial reporting and income tax purposes. Components of deferred income
taxes as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards.......................... $1,894 $ 2,264
Other..................................................... 10 --
------ -------
1,904 2,264
Valuation allowance......................................... (989) (1,202)
------ -------
Total deferred tax assets............................... 915 1,062
Deferred tax liabilities
Allowance for loan losses................................. 307 502
Basis of bank premises.................................... 185 184
Other..................................................... 20 6
------ -------
Total deferred tax liabilities.......................... 512 692
------ -------
Net deferred tax asset...................................... $ 403 $ 370
====== =======
</TABLE>
The deferred tax assets reflect a portion of the benefit of loss
carryforwards to the extent that they offset estimated future income during
the following one-year period. Realization is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Management believes that the recorded deferred tax asset will be realized.
Cherry Creek National Bank--17th Street (CCNB) was merged into the Company
effective January 1, 1993. CCNB had effected a quasi reorganization under
which its assets and liabilities were adjusted to estimated fair
F-14
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE K--INCOME TAXES--(CONTINUED)
values and the deficit in its undivided profit account was charged to the
capital surplus account. The Company's net operating loss carryforwards are
attributable to the past operations of CCNB.
The Company has recognized tax benefits of loss carryforwards of $274,000,
$242,000 and $264,000 as an addition to capital surplus in 1997, 1996 and
1995, respectively. Also presented herein on the Statement of Income is the
effect of such loss carryforward as it combines with net income to increase
total shareholders' equity.
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters
of credit.
Those instruments involve, to a varying degree, elements of credit risk in
excess of the amount recognized in the statement of financial position. The
contract amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments. These
commitments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------
1998 1997 1996
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Commitments to extend credit................ $33,941 $30,620 $30,847
Letters of credit........................... 1,829 1,086 822
------- ------- -------
$35,770 $31,706 $31,669
======= ======= =======
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Bank upon extension of credit is based on
management's credit evaluation. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment and income
producing commercial properties.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
F-15
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE M--DIVIDENDS
The approval of the Bank's primary regulator is required for the Bank to pay
dividends in any calendar year which exceed the Bank's net profit for that
year combined with its retained profits for the preceding two years.
Permissible dividends may be further limited, however, by the minimum capital
constraints imposed on all banks by state and/or federal regulatory
authorities.
NOTE N--ACQUISITIONS
Cedaredge Financial Services, Inc.
Effective December 1, 1997, the Company purchased all of the outstanding
stock of Cedaredge Financial Services, Inc. ("Cedaredge") and its wholly-owned
subsidiary, Western Community Bank. These entities were merged into the
Company. The Company paid cash of $3,250,000 and assumed Cedaredge's
mandatorily convertible debentures totaling approximately $1,600,000 (see note
M).
The acquisition has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has generally been allocated
to the assets acquired and the liabilities assumed based on the estimated fair
value at the date of acquisition. The excess of purchase price over the net
assets acquired has been recorded as an intangible asset, which is amortized
over 25 years. The estimated fair values of assets and liabilities acquired
are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Cash and due from banks....................................... $ 2,197
Federal funds sold............................................ 1,625
Investment securities......................................... 5,629
Loans......................................................... 34,217
Less allowance for loan losses................................ (342)
--------
33,875
Bank premises and equipment................................... 1,579
Other assets.................................................. 580
Goodwill...................................................... 1,831
Deposits...................................................... (42,008)
Other liabilities............................................. (458)
Mandatorily convertible debentures............................ (1,600)
--------
Cash paid..................................................... $ 3,250
========
</TABLE>
F-16
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE N--ACQUISITIONS--(CONTINUED)
The Company has entered into consulting and non-compete agreements with two
of Cedaredge's executives. Under the agreements, a total of $110,000 is
payable annually to these individuals for five years. Payments commenced in
1997. For financial reporting purposes, the Company has included the
discounted present value of this obligation ($470,000) as a component of the
purchase price. This obligation is included in accrued interest payable and
other liabilities on the accompanying consolidated balance sheet. Future
maturities of the remaining obligation are as follows:
<TABLE>
<CAPTION>
YEAR ENDING PRINCIPAL
DECEMBER 31, MATURITIES INTEREST TOTAL
------------ ---------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
1998............................................. $ 79 $31 $110
1999............................................. 86 24 110
2000............................................. 93 17 110
2001............................................. 102 8 110
---- --- ----
$360 $80 $440
==== === ====
</TABLE>
VNB Building Corp.
In 1994, the Company purchased a 28% interest in Vail 108 Limited ("Vail
108"), the only asset owned at the time by VNB Building Corp. ("VNB") for
$750,000, which valued Vail 108, and therefore VNB, at approximately
$2,679,000.
As of December 1, 1997, the Company increased its ownership in Vail 108 from
28% to 100%, through a merger with VNB. The owners of VNB are also
shareholders and directors of the Company.
The Company paid cash to the sellers of $300,000 and issued 34,258 shares of
Series A Preferred stock (convertible into 342,580 shares on a post-stock
split basis) with a value of $2,960,000. The purchase price was determined
based on the fair market value of the net assets acquired. The number of
shares of preferred stock issued was determined based on the same ratio of
sales price to book value as the shares of common stock which were sold for
cash earlier in 1997.
Vail 108 owned rental property in which the Company's main facility is
located. Vail 108 also owned a 53% partnership interest in Avon 56 Limited
("Avon 56"). Avon 56 owns rental property in which a branch banking facility
is located. The Company has recorded the fair market value of the assets
acquired and liabilities assumed and has recognized the minority interest of
other investors in Avon 56. These are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Property and equipment, net of previously recorded invest-
ment in Vail 108.......................................... $ 8,288
Other assets and liabilities, net.......................... 102
Real estate mortgages...................................... (4,565)
Minority interest.......................................... (565)
Series A Preferred stock................................... (2,960)
-------
Cash paid................................................ $ 300
=======
</TABLE>
The fair value of the real estate exceeds the net book value of these assets
by approximately $1,588,000. In December 1997, the Company repaid the
mortgages on the real estate.
F-17
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE N--ACQUISITIONS--(CONTINUED)
Pro Forma Results of Operations
The operating results of the Cedaredge and VNB acquisitions are included in
the Company's consolidated results of operations from the dates of
acquisition. The following unaudited pro forma summary presents the
consolidated results of operations as if the acquisition had occurred at the
beginning of 1996, after giving effect to certain adjustments, including
depreciation, amortization of intangible assets, debt repayment, dividends on
preferred stock and income taxes. These pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of what
would have occurred had the acquisition been made as of those dates or of
results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Interest income........................................... $17,390 $14,728
Interest expense.......................................... 6,093 5,867
------- -------
Net interest income....................................... 11,297 8,861
Provision for loan losses................................. 311 383
------- -------
Net interest income after provision for possible loan
losses................................................... 10,986 8,478
Other income.............................................. 2,748 2,792
Other expenses............................................ 12,526 9,832
------- -------
INCOME BEFORE UNUSUAL OPERATIONAL ITEMS AND INCOME TAXES.. 1,208 1,438
Unusual operational income (loss)......................... -- (406)
------- -------
Income before income taxes................................ 1,208 1,032
Income tax expense........................................ 471 431
------- -------
NET INCOME................................................ 737 601
Income tax benefit of net operating loss carryforwards.... 457 416
------- -------
TOTAL INCREASE IN SHAREHOLDERS' EQUITY AFTER BENEFIT OF
LOSS CARRYFORWARDS....................................... $ 1,194 $ 1,017
======= =======
</TABLE>
Snow Bank, N.A.
Effective June 1, 1995, the Company purchased all of the outstanding stock
of Snow Bancorp, Inc. for $3,597,190. Snow Bancorp, Inc. was then liquidated.
The remaining asset, 91.2% of the common stock of The Snow Bank, N.A. (Snow
Bank), was contributed to the Bank. Simultaneously, the Bank purchased 8.8% of
Snow Bank common stock from other shareholders for $348,000. The Snow Bank was
merged into the Bank and became a branch facility.
F-18
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE N--ACQUISITIONS--(CONTINUED)
The acquisition has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has generally been allocated
to the assets acquired and the liabilities assumed based on the estimated fair
value at the date of acquisition. The excess of purchase price over the net
assets acquired has been recorded as goodwill, which is amortized over 25
years. The estimated fair values of assets and liabilities acquired are
summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Cash and due from banks....................................... $ 3,541
Investment securities......................................... 4,555
Loans......................................................... 18,393
Less allowance for loan losses................................ (182)
--------
18,211
Bank premises and equipment................................... 1,918
Other assets.................................................. 279
Goodwill...................................................... 1,795
Deposits...................................................... (24,715)
Other liabilities............................................. (1,639)
--------
Cash paid................................................... $ 3,945
========
</TABLE>
The operating results of this acquisition are included in the Company's
consolidated results of operations from the date of acquisition. The following
unaudited pro forma summary presents the consolidated results of operations as
if the acquisition had occurred at the beginning of 1995, after giving effect
to certain adjustments, including depreciation, amortization of goodwill and
income taxes. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisition been made as of those dates or of results which may occur
in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
<S> <C>
Interest income............................................. $9,436
Interest expense............................................ 3,312
------
Net interest income......................................... 6,124
Provision for loan losses................................... (40)
------
Net interest income after provision for possible loan
losses..................................................... 6,084
Other income................................................ 1,087
Other expenses.............................................. 6,195
------
INCOME BEFORE UNUSUAL OPERATIONAL ITEMS AND INCOME TAXES.. 976
Unusual operational income (loss)........................... (139)
------
Income before income taxes.................................. 837
Income tax expense.......................................... 266
------
NET INCOME................................................ 571
Income tax benefit of net operating loss carryforwards...... 264
------
TOTAL INCREASE IN SHAREHOLDERS' EQUITY AFTER BENEFIT OF
LOSS CARRYFORWARDS....................................... $ 835
======
</TABLE>
F-19
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE O--EQUITY ACCOUNTS
Significant matters related to certain equity accounts are as follows:
Preferred Stock
Series A Preferred Stock has a par value equal to 135% of the book value of
a share of common stock at the time of its issuance. Dividends on the stock
are payable quarterly at the rate of 8% in either cash or in shares of Series
B Preferred Stock at the option of the Board of Directors.
Each share of preferred stock, both Series A and B, will be mandatorily
converted into one share of common stock upon the occurrence of certain events
including an initial public offering of common stock or a sale to or merger
with another company. Holders of mandatorily convertible preferred stock,
which has been outstanding for less than three years, are entitled to receive,
as a minimum, an amount equal to three full years of dividends, less dividend
payments actually paid during such three-year period. At the option of the
Board of Directors, the payment may be made in cash or shares of Series B
Preferred Stock, each share of which will have a par value equal to 75% of the
book value of a share of common stock at the time of issuance.
Each share of preferred stock has one vote in any matter voted on by the
holders of common stock and, for the purposes of any such vote, the total
shares outstanding are the sum of the outstanding common and preferred shares.
Preferred stock has preference over common stock in liquidation.
Mandatorily Convertible Debentures
In connection with its acquisition of Cedaredge Financial Services, Inc.
("CFS"), the Company assumed mandatorily convertible debentures totaling
approximately $1,600,000. Under an agreement entered into at the time of the
merger, which amended the existing debenture agreement, the debentures are
subject to mandatory conversion to 300,000 shares of the Company's common
stock on a post-stock split basis. The conversion date is defined as the
earliest of the following occurrences:
. ten years,
. any public offering of common stock,
. a sale of all or substantially all of the assets or stock of the Company,
. a sale of all or substantially all of the shares of the Company owned by
the Company's Chairman, his wife, or his lineal descendants, or
. any merger, consolidation, or other reorganization which results in the
shareholders of the Company owning less than fifty percent of the
outstanding stock of the surviving entity.
F-20
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE P--EARNINGS PER SHARE
The components of earnings per share were:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
-------------------- -----------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Earnings per share
Net income............. $ 835 $ 356 $ 474 $ 365 $ 521
Preferred dividends.... (99) -- -- -- --
--------- --------- --------- --------- ---------
Net income to common
shareholders......... $ 736 $ 356 $ 474 $ 365 $ 521
========= ========= ========= ========= =========
Average shares
outstanding........... 2,285,628 1,947,370 2,100,423 1,778,373 1,763,021
========= ========= ========= ========= =========
Earnings per share..... $ 0.32 $ 0.18 $ 0.23 $ 0.21 $ 0.30
========= ========= ========= ========= =========
Diluted earnings per
share
Net income............. $ 835 $ 356 $ 474 $ 365 $ 521
Interest expense on
convertible
securities............ 77 -- -- -- --
--------- --------- --------- --------- ---------
Net income to common
shareholders......... $ 912 $ 356 $ 474 $ 365 $ 521
========= ========= ========= ========= =========
Average shares
outstanding........... 2,285,628 1,947,370 2,100,423 1,778,373 1,763,021
Conversion of preferred
stock................. 342,580 -- 28,230 -- --
Other convertible
securities............ 300,000 -- -- -- --
Stock options computed
under the treasury
stock method.......... 137,446 137,446 137,446 137,446 137,446
--------- --------- --------- --------- ---------
Dilutive common shares
outstanding.......... 3,065,654 2,084,816 2,266,099 1,915,819 1,900,467
========= ========= ========= ========= =========
Diluted earnings per
share.................. $ 0.30 $ 0.17 $ 0.21 $ 0.19 $ 0.27
========= ========= ========= ========= =========
</TABLE>
Share amounts have been adjusted to reflect a planned ten for one common
stock split.
Stock options were granted in April 1998 to acquire a total of 319,000
shares of common stock. Options for 206,000 shares have an exercise price of
$8.537 per share, and options for 113,000 shares have an exercise price of
$9.391 per share. Common shares outstanding for the computation of diluted
earnings per share during each of the periods include shares to be acquired
under stock options, computed under the treasury stock method, assuming
repurchase at $15 per share (the public offering price).
NOTE Q--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments. The Company
operates as a going concern and except for its investment portfolio, no active
market exists for its financial instruments. Much of the information used to
determine fair value is highly subjective and judgmental in nature and,
therefore, the results may not be precise. The subjective factors include,
among other things, estimates of cash flows, risk characteristics, credit
quality and interest rates, all of which are subject to change. Since the fair
value is estimated as of the balance sheet date, the amounts
F-21
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE Q--FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
which will actually be realized or paid upon settlement or maturity of the
various financial instruments could be significantly different.
Cash and Cash Equivalents
For these short-term instruments, the carrying amount approximates fair
value.
Investments
For securities held as investments, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. The carrying
amount of accrued interest receivable approximates its fair value.
Loans
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
For variable rate loans, the carrying amount is a reasonable estimate of fair
value. For loans where collection of principal is in doubt, an allowance for
losses has been estimated. Loans with similar characteristics were aggregated
for purposes of the calculations. The carrying amount of accrued interest
approximates its fair value.
Deposits
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the reporting
date (i.e. their carrying amount). The fair value of fixed maturity time
deposits is estimated using a discounted cash flow calculation that applies
the rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
Short-term Borrowings
For short-term borrowings, the carrying amount is a reasonable estimate of
fair value.
Long-term Borrowings
The fair value of long-term borrowings is estimated by discounting the
future cash flows using the current rate at which a similar loan could be
financed.
Commitments to Extend Credit, Standby Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present credit worthiness of the counterparts. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit and lines of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparts at the reporting date.
F-22
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE Q--FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Financial instruments for which the carrying amount differs from estimated
fair value as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets
Investment securities held to
maturity............................ $ 10,125 $ 10,128 $ 14,634 $ 14,533
Loans, less allowance for loan
losses.............................. 153,549 153,730 105,963 106,102
Financial liabilities
Deposits with stated maturities...... 40,970 40,979 18,566 18,566
</TABLE>
There is no material difference between the notional amount and the
estimated fair value of loan commitments and letters of credit. In addition,
fees collected from these arrangements are considered immaterial.
NOTE R--STOCK AGREEMENTS
Shareholders' Agreement
The Company and certain of its shareholders have entered into Shareholder
Agreements containing terms and conditions affecting the ownership of shares
covered by such Agreements. Agreements with non-employee shareholders provide
that employees may acquire shares not to exceed five percent of the
outstanding shares of the Company provided such employee shareholders own such
shares subject to an Employee Shareholder Agreement. Such Employee Shareholder
Agreements provide the Company the option to reacquire such stock should such
employee cease employment with the Company. Such Employee Shareholder
Agreements include restrictions related to sales, assignment or pledging of
shares owned thereunder.
In 1997, 1996, and 1995, shares of common stock totaling 13,580, 16,460, and
11,380, respectively, were issued for services on a post-stock split basis.
The services were valued at the book value of the stock issued; $76,000,
$87,000, and $45,000, respectively. These amounts were charged to current year
income. Additionally, as of December 31, 1997, the Company accrued $208,000
for stock bonuses. A total of 34,840 shares of common stock were issued in
1998 on a post-stock split basis as payment for these awards. The agreement
expires in 2004.
Stock Incentive Plan
In January 1998, the Company adopted a Stock Incentive Plan. The Plan
permits the grant of incentive stock options, nonqualified stock options,
restricted stock awards, and performance share awards to certain employees,
directors and others that perform services for the Company. The Compensation
Committee of the Board of Directors will determine which individuals are
eligible to receive awards, subject to Board ratification.
The number of shares available for grant of awards under the Plan, if any,
will be determined by the Company's shareholders. If granted, outstanding
options will be counted against the authorized pool of shares, regardless of
their vested status.
The option price for each grant of a stock option will not be less than the
fair market value on the date the option is granted. The committee may
determine the restrictions and conditions under which options may be
exercised. Options must be exercised within ten years of the date granted,
except that options issued to owners of 10% or more of the outstanding Common
Stock must be exercised within five years of the date granted.
The Plan provides for the grant of restricted stock awards subject to
restrictions, which the committee may determine. The restrictions would
typically require continued employment in order to vest in the restricted
stock. Vesting may also be based upon attainment of certain performance
measures.
F-23
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE R--STOCK AGREEMENTS--(CONTINUED)
Options Granted (Unaudited)
On April 21, 1998, the Board of Directors, subject to shareholder approval,
granted 319,000 options (after giving effect to the ten for one stock split).
Options for 206,000 shares have an exercise price of $8.537 per share, the
estimated fair market value of the Company's common stock on the dated
granted. Options for 113,000 shares have an exercise price of $9.391 per share
(110% of the estimated fair market value of the Company's common stock). The
options vest at 25% per year over a four-year period commencing January 1,
1998.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions for the six
months ended June 30, 1998:
<TABLE>
<S> <C>
Risk-free interest rate................................................ 5.43%
Dividend yield......................................................... 0.00%
Average expected life in years......................................... 4
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's unaudited pro forma net earnings and earnings per share for the six
months ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
------------- ------------
(THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net income................................... $ 835 $ 725
Net income per common share.................. 0.32 0.27
Diluted net income per common share.......... 0.30 0.26
</TABLE>
NOTE S--NOTE PAYABLE TO BANK
The note bears interest at one percent above the prime rate. Principal
payments of $50,000 plus interest are due quarterly. The note matures in
December 1998. The note is collateralized by all of the common stock of
WestStar Bank.
F-24
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE T--REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997,
that the Company meets all capital adequacy requirements to which it is
subject.
The most recent notification from the Federal Reserve categorized the
Company as "well capitalized" under the regulatory framework. To be
categorized as "well capitalized" the Company must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage capital ratios as set forth
in the table.
<TABLE>
<CAPTION>
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ----- -------- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital (to risk
weighted assets)......... $15,889 10.2% $*12,521 *8.0% $*15,651 *10.0%
Tier 1 capital (to risk
weighted assets)......... 12,925 8.3 * 6,260 *4.0 * 9,390 * 6.0
Tier 1 capital (to average
assets).................. 12,925 7.3 * 7,056 *4.0 * 8,820 * 5.0
As of December 31, 1996
Total capital (to risk
weighted assets)......... $ 9,924 9.4% $* 8,471 *8.0% $*10,589 *10.0%
Tier 1 capital (to risk
weighted assets)......... 9,098 8.6 * 4,236 *4.0 * 6,353 * 6.0
Tier 1 capital (to average
assets).................. 9,098 6.2 * 5,844 *4.0 * 7,305 * 5.0
</TABLE>
* = Denotes Greater than or Equal to.
Unaudited capital ratios for the Company as of June 30, 1998 are as follows:
<TABLE>
<S> <C>
Total capital to risk-weighted assets.................................. 10.4%
Tier 1 capital to risk-weighted assets................................. 8.7
Tier 1 capital to average assets....................................... 6.2
</TABLE>
The Federal Reserve Board requires banks to maintain reserve balances
composed of cash on hand and balances maintained at the Federal Reserve Bank.
These reserve balances are based primarily on deposit levels and totaled
approximately $3,407,000 at December 31, 1997.
F-25
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE U--PARENT COMPANY FINANCIAL INFORMATION
Condensed parent company only financial information follows:
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------
1998 1997 1996
----------- ------- ----------
(UNAUDITED) (RESTATED)
<S> <C> <C> <C>
Assets
Cash........................................ $ -- $ 127 $ 34
Investment in subsidiary.................... 19,867 18,917 10,775
Deferred stock offering costs............... 110 -- --
Other assets................................ 432 366 50
------- ------- -------
$20,409 $19,410 $10,859
======= ======= =======
Liabilities
Note payable................................ $ 1,100 $ 1,200 $ 1,400
Other liabilities........................... 80 342 30
------- ------- -------
1,180 1,542 1,430
Shareholders' equity.......................... 19,229 17,868 9,429
------- ------- -------
$20,409 $19,410 $10,859
======= ======= =======
</TABLE>
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------------------
1998 1997 1997 1996 1995
--------- ------------ ----- -----
(UNAUDITED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Revenue
Equity in earnings of subsidiary...... $ 1,059 $ 606 $996 $ 713 $ 831
Interest income....................... -- -- -- -- 98
--------- ------- ---- ----- -----
1,059 606 996 713 929
Expenses
Interest.............................. 132 63 136 144 163
Salaries, benefits and other
compensation......................... 155 225 404 263 206
Other expenses........................ 50 88 250 120 171
--------- ------- ---- ----- -----
337 376 790 527 540
--------- ------- ---- ----- -----
Income before income taxes.............. 722 230 206 186 389
Income tax benefit...................... 113 126 268 179 132
--------- ------- ---- ----- -----
NET INCOME.......................... $ 835 $ 356 $474 $ 365 $ 521
========= ======= ==== ===== =====
</TABLE>
F-26
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE U--PARENT COMPANY FINANCIAL INFORMATION--(CONTINUED)
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------ -----------------------
1998 1997 1997 1996 1995
-------- --------- ------- ----- -------
(UNAUDITED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income.................. $ 835 $ 356 $ 474 $ 365 $ 521
Adjustments to reconcile net
income to net cash provided
from operation activities
Equity in earnings of
subsidiary, less than
(in excess of) dividends
received................... (419) (396) (786) 290 301
Income tax benefit.......... (113) (126) (268) (179) (132)
Depreciation and
amortization............... 12 4 10 13 16
Common stock issued for
services................... 207 76 76 87 45
Change in other assets and
accrued liabilities........ (255) (18) (19) 5 (7)
------- --------- ------- ----- -------
Net cash provided by (used
in)
operating activities..... 267 (104) (513) 581 744
Investing activities
Purchases of property and
equipment.................. -- (3) (47) (5) (30)
Capital investment in
subsidiary................. -- (1,900) (1,900) -- (3,638)
Acquisition costs and other
intangible assets.......... (85) (26) (260) -- --
Investment in joint
venture.................... -- -- (13) -- --
------- --------- ------- ----- -------
Net cash used in investing
activities............... (85) (1,929) (2,220) (5) (3,668)
Financing activities
Payments on note payable.... (100) (100) (200) (200) (200)
Issuance of common stock for
cash....................... -- 3,026 3,026 -- 3,742
Deferred stock offering
costs...................... (110) -- -- -- --
Dividends paid.............. (99) -- -- (400) (672)
------- --------- ------- ----- -------
Net cash provided by (used
in)
financing activities..... (309) 2,926 2,826 (600) 2,870
------- --------- ------- ----- -------
Net increase (decrease) in
cash......................... (127) 893 93 (24) (54)
Cash--beginning of period..... 127 34 34 58 112
------- --------- ------- ----- -------
Cash--end of period........... $ -- $ 927 $ 127 $ 34 $ 58
======= ========= ======= ===== =======
</TABLE>
F-27
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE V--UNUSUAL OPERATIONAL LOSSES
The Bank detected operational losses which occurred in 1996 and 1995
totaling $406,000 and $139,000, respectively. These losses related primarily
to reconciling items for due from bank and other accounts that were not
cleared in the normal course of business and could not be cleared. Of the 1996
operational losses, $123,000 was identified in 1997. The 1996 and 1995
financial statements have been restated to give effect to these additional
losses as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------------------
1996 1995
------------------- -------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Total interest income.............. $11,655 $11,655 $ 8,582 $ 8,582
Total interest expense............. (4,210) (4,210) (3,045) (3,045)
------- ------- ------- -------
Net interest income................ 7,445 7,445 5,537 5,537
Provision for loan losses.......... (154) (154) (40) (40)
------- ------- ------- -------
Net interest income after
provision for loan losses....... 7,291 7,291 5,497 5,497
Other income....................... 1,071 1,071 911 911
Other expenses..................... (7,334) (7,334) (5,482) (5,482)
------- ------- ------- -------
INCOME BEFORE UNUSUAL OPERATIONAL
ITEMS AND INCOME TAXES............ 1,028 1,028 926 926
Unusual operational income (loss).. (283) (406) -- (139)
------- ------- ------- -------
Income before income taxes......... 745 622 926 787
Income tax expense................. (299) (257) (313) (266)
------- ------- ------- -------
NET INCOME......................... 446 365 613 521
Income tax benefit of net operating
loss carryforwards................ 284 242 312 264
------- ------- ------- -------
TOTAL INCREASE IN SHAREHOLDERS'
EQUITY AFTER BENEFIT OF LOSS
CARRYFORWARDS..................... $ 730 $ 607 $ 925 $ 785
======= ======= ======= =======
Net income per common share........ $ 2.51 $ 2.05 $ 3.47 $ 2.95
Diluted net income per common
share............................. 2.51 2.05 3.47 2.95
</TABLE>
NOTE W--PROPOSED ACQUISITIONS (UNAUDITED)
Independent Bankshares, Inc.
In March 1998, the Company entered into an agreement with Independent
Bankshares, Inc. ("Independent") and its subsidiary Glenwood Independent Bank,
a wholly-owned subsidiary of Independent, to merge the entities into the
Company.
The estimated purchase price is the greater of 300% of Independent's equity
or $7,500,000 plus other adjustments. Consideration paid by the Company will
consist of cash for half of the purchase price and the issuance of common
stock of the Company's common stock (valued for the exchange at 175% of the
Company's book value) for the remainder of the purchase price. For purposes of
the acquisition, the value of the stock issued by the Company will be at the
price per share of the private offering.
The merger will be accounted for under the purchase method of accounting and
accordingly, the assets and liabilities of Independent will be recorded at
their fair values, with the remaining purchase price allocated to intangible
assets.
F-28
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE W--PROPOSED ACQUISITIONS (UNAUDITED)--(CONTINUED)
The merger is subject to regulatory approval. The Company estimates that the
transaction will close in July 1998.
Telluride Bancorp, Ltd.
In April 1998, the Company entered into an agreement to acquire Telluride
Bancorp, Ltd. ("Telluride"), a bank holding company with two wholly-owned
subsidiaries, Bank of Telluride and Western Colorado Bank.
The purchase price will be the lesser of 300% of Telluride's equity or
$33,000,000. An amount equaling 45% of the purchase price will be paid in cash
and the remainder with the issuance of the Company's common stock (valued for
the exchange at 250% of the Company's book value). For purposes of the
acquisition, the value of the stock issued by the Company will be at the
initial public offering price.
The merger will be accounted for under the purchase method of accounting
and, accordingly, the assets and liabilities of Telluride will be recorded at
their fair values, with the remaining purchase price allocated to intangible
assets.
The merger is subject to regulatory approval. The Company estimates that the
transaction will close in September 1998.
Financial Information
The following are balance sheets of Independent and Telluride as of June 30,
1998 and December 31, 1997 and statements of income for the six months ended
June 30, 1998 and year ended December 31, 1997:
CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
INDEPENDENT TELLURIDE
------------------------ ------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1997 1998 1997
----------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks.. $ 2,288 $ 2,595 $ 6,230 $ 5,963
Federal funds sold....... 1,250 600 4,060 240
Investment securities.... 7,647 6,997 23,321 17,491
Loans, net............... 17,049 17,431 76,534 70,974
Property and equipment,
net..................... 993 1,005 8,583 7,772
Other assets............. 361 334 1,993 1,901
------- ------- -------- --------
$29,588 $28,962 $120,721 $104,341
======= ======= ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities
Deposits............... $26,658 $26,114 $108,795 $ 93,747
Other liabilities...... 386 544 1,993 1,180
------- ------- -------- --------
Total liabilities.... 27,044 26,658 110,788 94,927
Shareholders' equity..... 2,544 2,304 9,933 9,414
------- ------- -------- --------
$29,588 $28,962 $120,721 $104,341
======= ======= ======== ========
</TABLE>
F-29
<PAGE>
VAIL BANKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE W--PROPOSED ACQUISITIONS (UNAUDITED)--(CONTINUED)
CONDENSED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
INDEPENDENT TELLURIDE
------------------------ ------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1997 1998 1997
----------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income.......... $1,183 $2,274 $4,604 $8,639
Interest expense......... 489 882 1,766 3,287
------ ------ ------ ------
Net interest income.... 694 1,392 2,838 5,352
Provision for loan
losses.................. 5 -- 75 164
------ ------ ------ ------
Net interest income
after provision for
loan losses........... 689 1,392 2,763 5,188
Other income............. 251 437 465 897
Other expenses........... 578 1,146 2,472 4,871
------ ------ ------ ------
Income before income
taxes................. 362 683 756 1,214
Income tax expense....... 121 171 242 360
------ ------ ------ ------
Net income............. $ 241 $ 512 $ 514 $ 854
====== ====== ====== ======
</TABLE>
NOTE X--SUBSEQUENT EVENTS
Private Placement
The Company has offered shares of common stock for sale under a private
placement. Subscriptions have been received for a total of 20,454 shares at a
price of $100 per share. The closing of the stock sale is anticipated to take
place in late July 1998.
Stock Split
As part of its strategy in completing an initial public offering of common
stock, the Company plans to increase the number of authorized shares of its
common stock to 20,000,000 shares and affect a ten-for-one stock split. In
July 1998, the Board of Directors approved the stock split, subject to the
increase in the number of authorized shares which requires shareholder
approval. Because certain holders of more than a majority of the Company's
common stock have advised the Company that they will vote in favor of the
proposal to increase the authorized number of shares, approval is reasonably
assured. Accordingly, references in the accompanying financial statements to
numbers of shares of common stock, convertible securities, and per share
amounts have been retroactively restated to reflect the stock split.
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cedaredge Financial Services, Inc.
We have audited the accompanying consolidated statements of financial
condition of Cedaredge Financial Services, Inc. and its subsidiary as of
November 30, 1997 and December 31, 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
eleven months ended November 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our report dated September 22, 1997, we expressed an opinion that the
Company's December 31, 1996 statement of financial condition did not fairly
present its financial position in conformity with generally accepted
accounting principles because the Company understated its estimate of future
loan losses by $149,103. As described in Note 16, the Company has changed its
method of accounting for these estimates and has restated its December 31,
1996 statement of financial condition to conform with generally accepted
accounting principles. Accordingly, our present opinion on the Company's
statement of financial condition as of December 31, 1996, as presented herein,
is different from that expressed in our previous report.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cedaredge
Financial Services, Inc. and its subsidiary as of December 31, 1996 and
November 30, 1997, and the consolidated results of their operations and cash
flows for the eleven months ended November 30, 1997 in conformity with
generally accepted accounting principles.
/s/ Dalby, Wendland & Co., P.C.
December 30, 1997
F-31
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
12/31/96
11/30/97 AS RESTATED
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks.................................. $ 2,197,207 $ 2,747,882
Federal funds sold....................................... 1,625,000 --
Securities held to maturity.............................. 5,594,435 5,553,580
Equity securities available for sale..................... 60,905 45,762
Loans receivable net of allowance for loan losses and
deferred loan fees...................................... 33,874,920 31,802,919
Accrued interest receivable.............................. 425,893 312,781
Property, equipment and leasehold improvements net of
accumulated depreciation................................ 1,465,701 1,633,478
Prepaid income taxes..................................... 48,397 3,968
Intangible assets net of amortization.................... 82,538 94,667
Repossessions and other real estate owned and in process
of foreclosure.......................................... 19,606 331,961
Deferred tax asset....................................... 39,000 44,000
Other assets............................................. 40,060 91,219
----------- -----------
TOTAL ASSETS......................................... $45,473,662 $42,662,217
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Demand deposits--noninterest bearing................... 8,776,049 7,649,445
Demand deposits--interest bearing...................... 10,831,614 8,003,776
Savings................................................ 6,465,744 6,860,603
Certificates of deposits............................... 15,934,315 15,828,799
----------- -----------
TOTAL DEPOSITS....................................... 42,007,722 38,342,623
OTHER LIABILITIES
Federal funds purchased................................ -- 1,070,000
Accrued interest payable............................... 254,760 249,618
Deferred insurance commissions......................... 137,500 134,005
Other liabilities...................................... 113,686 118,129
----------- -----------
TOTAL LIABILITIES.................................... 42,513,668 39,914,375
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, no par value, 100,000 shares authorized,
29,340 shares issued and outstanding.................. 293,400 293,400
Mandatorily convertible debentures..................... 1,600,099 1,600,099
Paid in capital........................................ 374,727 374,727
Retained earnings...................................... 672,394 469,221
Net unrealized gains on securities available for sale
net of applicable deferred taxes of $11,500 and
$5,300, respectively.................................. 19,374 10,395
----------- -----------
TOTAL SHAREHOLDERS' EQUITY........................... 2,959,994 2,747,842
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $45,473,662 $42,662,217
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
PERIOD ENDED NOVEMBER 30, 1997
<TABLE>
<S> <C>
INTEREST INCOME
Loans receivable................................................... $3,060,280
Securities held to maturity........................................ 276,316
Federal funds sold................................................. 31,577
----------
TOTAL INTEREST INCOME........................................... 3,368,173
----------
INTEREST EXPENSE
Deposits........................................................... 1,247,643
Debentures......................................................... 138,167
Federal funds purchased............................................ 6,627
----------
TOTAL INTEREST EXPENSE.......................................... 1,392,437
----------
NET INTEREST INCOME........................................... 1,975,736
PROVISION FOR LOAN LOSSES........................................... 78,669
----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............... 1,897,067
----------
NONINTEREST INCOME
Service charges and fees........................................... 620,921
Rental income...................................................... 1,640
Gain on sale of assets............................................. 36,795
Loss on disposition of assets...................................... (85,569)
Other income....................................................... 37
----------
TOTAL OTHER INCOME.............................................. 573,824
----------
NONINTEREST EXPENSES
Salaries and employee benefits..................................... 1,164,567
General and administrative......................................... 683,283
Occupancy.......................................................... 358,035
Amortization of intangibles........................................ 12,129
----------
TOTAL OTHER EXPENSES............................................ 2,218,014
----------
INCOME BEFORE INCOME TAXES....................................... 252,877
PROVISION FOR INCOME TAXES.......................................... 49,704
----------
NET INCOME.................................................... $ 203,173
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-33
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
PERIOD ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS
COMMON STOCK MANDATORY ADDITIONAL ON SECURITIES
--------------- CONVERTIBLE PAID IN RETAINED AVAILABLE
SHARES AMOUNT DEBENTURES CAPITAL EARNINGS FOR SALE TOTAL
------ -------- ----------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE--December 31,
1996................... 29,430 $293,400 $1,600,099 $374,727 $ 569,324 $10,395 $2,847,945
Adjustment to restate
prior period.......... -- -- -- -- (100,103) -- (100,103)
------ -------- ---------- -------- --------- ------- ----------
Restated balances
December 31, 1996..... 29,430 293,400 1,600,099 374,727 469,221 10,395 2,747,842
Net income............. -- -- -- -- 203,173 -- 203,173
Net change in
unrealized gains and
losses on available
for sale securities,
net of taxes of
$6,200................ -- -- -- -- -- 8,979 8,979
------ -------- ---------- -------- --------- ------- ----------
BALANCE--November 30,
1997................... 29,430 $293,400 $1,600,009 $374,727 $ 672,394 $19,374 $2,959,994
====== ======== ========== ======== ========= ======= ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-34
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD ENDED NOVEMBER 30, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................... $ 203,173
-----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses....................................... 78,669
Provision for depreciation...................................... 152,469
Provision for deferred tax...................................... (1,200)
Amortization of premium and discount on investments............. 4,524
Amortization of core deposits................................... 12,129
Gain on sale of assets.......................................... (35,359)
Gain on sale of OREO............................................ (1,436)
Loss on disposition of assets................................... 85,569
Change in assets and liabilities:
Decrease in other assets....................................... 51,159
Increase in accrued interest receivable........................ (113,112)
Increase in prepaid taxes...................................... (44,429)
Increase in interest payable................................... 5,142
Increase in deferred income.................................... 3,495
Decrease in other liabilities.................................. (4,443)
-----------
Total adjustments.............................................. 193,177
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 396,350
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of held to maturity securities.......................... (1,005,379)
Proceeds from maturities of available for sale securities........ 36
Proceeds from maturities of held to maturity securities.......... 960,000
Purchase of property and equipment............................... (103,273)
Proceeds from sale of assets..................................... 404,174
Net change in loans made to customers............................ (2,172,682)
-----------
NET CASH USED BY INVESTING ACTIVITIES......................... (1,917,124)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits............................................. 3,665,099
Redemption of federal funds purchased............................ (1,070,000)
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 2,595,099
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 1,074,325
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 2,747,882
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 3,822,207
===========
Cash and cash equivalents are classified in the balance sheet as
follows:
Cash and due from banks......................................... $ 2,197,207
Federal funds sold.............................................. 1,625,000
-----------
Total cash and cash equivalents................................ $ 3,822,207
===========
SUPPLEMENTAL INFORMATION:
Interest paid on deposits........................................ $ 1,230,927
Interest paid on debentures...................................... 149,741
Income taxes paid................................................ 96,000
</TABLE>
The accompanying notes are an integral part of this statement.
F-35
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Cedaredge Financial Services, Inc. (the Company) was incorporated in the
State of Colorado on November 19, 1982. The Company became a bank holding
company in June of 1983, when it acquired 100% of the outstanding stock of the
First National Bank of Cedaredge. In 1993 the Company's subsidiary changed its
name to Western Community Bank (the Bank). The Bank has offices in Cedaredge,
Basalt, Delta and Montrose, Colorado. The Bank is state chartered and a member
of the Federal Deposit Insurance Corporation (FDIC).
A summary of significant accounting policies applied in preparation of the
Company's financial statements is as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Cedaredge
Financial Services, Inc. and its subsidiary, Western Community Bank.
Significant intercompany accounts and transactions have been eliminated.
Cash
The Company's subsidiary has deposit accounts with the Federal Reserve Bank
and other correspondent institutions. At times some of those deposits are in
excess of the portion insured by the FDIC. Uninsured deposits were
approximately $1,100,000 at November 30, 1997 and $1,589,000 at December 31,
1996.
Investment Securities
Trading Securities: Securities that are held for short-term resale are
classified as trading account securities and recorded at their fair values.
Realized and unrealized gains and losses on trading account securities are
included in other income.
Securities Held to Maturity: Government, Federal agency, and corporate debt
securities that management has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income using methods
approximating the interest method over the period to maturity.
Securities Available for Sale: Available for sale securities consist of
investment securities not classified as trading securities nor as held to
maturity securities. Unrealized holding gains and losses, net of tax, on
available for sale securities are reported as a net amount in a separate
component of shareholders' equity until realized. Gains and losses on the sale
of available for sale securities are determined using the specific-
identification method. The amortization of premiums and the accretion of
discounts are recognized in interest income using methods approximating the
interest method over the period to maturity.
Declines in the fair value of individually held to maturity and available
for sale securities below their cost that are other than temporary, result in
write-downs of the individual securities to their fair value. The related
write-downs are included in earnings as realized losses.
As of November 30, 1997 and December 31, 1996 all securities, other than
equity securities, held by the Company or its subsidiary were classified as
held to maturity. During the years ended November 30, 1997 and December 31,
1996, no securities were classified as trading securities.
F-36
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(CONTINUED)
Loans Receivable
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts.
Loan origination and commitment fees are deferred and amortized as a yield
adjustment over the lives of the related loans using straight-line methods.
Amortization of deferred loan fees is discontinued when a loan is placed on
nonaccrual status.
Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received on
such loans are applied as a reduction of the loan principal balance. Interest
income on other impaired loans is recognized only to the extent of interest
payments received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature
of the portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, economic conditions and other risks inherent in the
portfolio. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. The allowance
is increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation, with one exception. The building occupied by the
subsidiary's Delta branch is recorded at fair market value. Costs include the
net amount of interest costs associated with significant capital additions.
Gains and losses on dispositions are reflected in current operations.
Expenditures which materially add to the useful lives of property and
equipment are capitalized. All other maintenance and repair costs are charged
to current operations.
Depreciation for financial accounting purposes is computed using straight-
line or accelerated methods over the estimated useful life of each asset.
Estimated useful lives range from 3 to 40 years.
For income tax purposes, accelerated methods of depreciation are generally
used; deferred income taxes are provided for the difference between
depreciation expense for financial accounting purposes and for income tax
purposes.
Other Real Estate Owned and Repossessed Assets
Real estate and other assets acquired by actual or in-substance foreclosure
are carried at cost or fair value, whichever is lower. Fair value is based on
independent appraisals and other relevant factors. At the time of acquisition,
any excess of cost over fair value is charged to the allowance for loan
losses. Subsequent declines in fair value are charged to current income and
credited to the carrying value of the properties. Operating expenses are
charged to other noninterest expense.
Gains on sales of other real estate are recognized at the time of sale or
deferred for recognition in future periods, as appropriate, based on the
nature of the transaction. Losses on such sales are recognized at the time of
the sale.
F-37
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(CONTINUED)
Core Deposits and Branch Acquisition Costs
In 1993, the Bank acquired assets and liabilities of the institution which
became the Montrose Branch of Western Community Bank. $82,284 of the purchase
price was allocated to the core deposit base acquired, while $57,478 was
allocated to branch acquisition costs. These costs are being amortized over an
estimated useful life of 10 years.
Income Taxes
For income tax purposes, the Company files a consolidated income tax return
with its subsidiary. An agreement between the Company and its subsidiary
provides that any current tax liability of its subsidiary, computed on a
separate entity basis, will be paid by the subsidiary to the Company. Tax
refunds attributable to the operations of the subsidiary will be refunded to
the subsidiary to the extent it can offset income of the Consolidated Group.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credit carryforwards that may be used to reduce future tax liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Effect of New Accounting Standards
On January 1, 1996, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of (FAS 121). The statement
prescribes the accounting for the impairment of long-lived assets and goodwill
related to those assets. The new rules specify when assets should be reviewed
for impairment, how to determine whether an asset or group of assets is
impaired, how to measure an impairment loss, and what financial statement
disclosures are necessary. Also prescribed is the accounting for long-lived
assets and identifiable intangibles of which a company plans to dispose, other
than those that are a part of a discontinued operation. Any impairment of a
long-lived asset resulting from management's review is to be recognized as a
component of noninterest expense. The adoption of FAS 121 did not have a
material effect on the Company's consolidated financial statements.
In June 1996, the FASB issued Statement No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (FAS
125). The standard provides that, following a transfer of financial assets, an
entity is to recognize the financial and servicing assets it controls and the
liabilities it has incurred, derecognize financial assets when control has
been surrendered, and derecognize liabilities when extinguished. The Statement
is effective for transactions occurring after December 31, 1996. The FASB also
subsequently issued FAS No. 127 that delayed until January 1, 1998, the
effective date of certain provisions of FAS 125. Transactions subject to the
later effective date include securities lending, repurchase agreements, dollar
rolls, and similar secured financing arrangements. Application of the new
rules is not expected to have a material impact on the Company's consolidated
financial statements.
F-38
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 2--DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair value of securities at November 30,
1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to Maturity Securities:
U.S. Treasury securities..... $1,948,686 $15,923 $ (1,468) $1,963,141
Obligations of U.S. govern-
ment agencies............... 346,908 -- (3,928) 342,980
Obligations of state and
political subdivisions...... 3,298,841 15,988 (10,094) 3,304,735
---------- ------- -------- ----------
$5,594,435 $31,911 $(15,490) $5,610,856
---------- ------- -------- ----------
Available for Sale Securities:
Equity securities............ $ 30,031 $30,874 $ -- $ 60,905
========== ======= ======== ==========
</TABLE>
The amortized cost and estimated fair value of securities at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Held to Maturity Securities:
U.S. Treasury securities...... $2,198,384 $ 8,688 $(12,982) $2,194,090
Obligations of U.S. government
agencies..................... 100,000 -- (3,000) 97,000
Obligations of state and po-
litical subdivisions......... 3,255,196 21,232 (23,816) 3,252,612
---------- ------- -------- ----------
$5,553,580 $29,920 $(39,798) $5,543,702
---------- ------- -------- ----------
Available for Sale Securities:
Equity securities............. $ 30,067 $15,695 $ -- $ 45,762
========== ======= ======== ==========
</TABLE>
Equity securities include 200 shares of Delta Federal Savings owned by the
Company and 737 shares of common stock in Bankers Bank of the West Bancorp,
Inc. (BBWB) owned by Western Community Bank. The stock of BBWB is not publicly
traded and its market value is not readily available. Currently, if Western
Community Bank chose to sell its stock back to BBWB, it would be entitled to
receive current book value for each of its shares as valued by BBWB. The fair
market value of these equity securities is reported at the book value of BBWB
stock at September 30, 1997 and December 31, 1996.
The Company's policy prohibits its subsidiary bank from owning investment
derivatives.
The Company had pledged, as collateral for public funds on deposit,
securities in the principal amount of $2,910,000 as of November 30, 1997 and
$1,946,000 as of December 31, 1996.
The amortized cost and estimated market value of securities (other than
equity securities), by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AT NOVEMBER 30, 1997 AT DECEMBER 31, 1996
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to Maturity Securities:
Due in one year or less...... $1,634,908 $1,632,907 $1,412,844 $1,410,855
Due after one year through
five years.................. 3,959,527 3,977,949 4,140,736 4,132,847
---------- ---------- ---------- ----------
$5,594,435 $5,610,856 $5,553,580 $5,543,702
========== ========== ========== ==========
</TABLE>
F-39
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 3--LOANS RECEIVABLE
Loans consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Real estate loans.................................. $12,593,770 $11,735,791
Agriculture loans.................................. 2,516,135 1,509,474
Commercial loans................................... 6,797,464 5,319,191
Individual loans................................... 11,390,544 11,912,818
Mortgage loans warehoused.......................... 643,687 1,386,201
Ready reserve and overdrafts....................... 373,776 331,801
----------- -----------
34,315,376 32,195,276
Less:
Allowance for loan losses........................ 340,002 300,000
Deferred loan fees............................... 100,454 92,357
----------- -----------
$33,874,920 $31,802,919
=========== ===========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
1997
------------
<S> <C>
Balance at the beginning of the year......................... $300,000
Provision for possible loan losses charged to operations..... 78,669
Loan charge-offs............................................. (42,061)
Loan recoveries.............................................. 3,394
--------
Balance at the end of the year............................... $340,002
========
</TABLE>
Non-accrual loans were approximately $12,100 at November 30, 1997 and
$83,900 at December 31, 1996.
NOTE 4--BANK PROPERTY AND EQUIPMENT
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Bank buildings and improvements.................... $1,078,244 $1,064,102
Furniture, fixtures and equipment................ 888,132 1,096,277
Vehicles......................................... 32,000 32,000
---------- ----------
1,998,376 2,192,379
Less accumulated depreciation...................... (850,191) (895,101)
---------- ----------
1,148,185 1,297,278
Land............................................... 317,516 336,200
---------- ----------
$1,465,701 $1,633,478
========== ==========
</TABLE>
In 1996 the Company's shareholders sold to the Company a building occupied
by its subsidiary Bank in Delta at a cost of $400,000 which was approximately
$170,300 below the property's fair market value (FMV). The building was
recorded at its FMV of $595,000 with the difference between purchase price and
FMV, less
F-40
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 4--BANK PROPERTY AND EQUIPMENT--(CONTINUED)
the deferred tax effect, recognized as a contribution to capital by the
shareholders. The Company sold the building to its subsidiary Bank for
$400,000. The excess of the building's FMV over the purchase price was
recorded by the Bank as a contribution to capital.
The space not occupied by the Bank is leased under two operating leases with
terms of five years expiring in 1999 and contain provisions for one renewal
option of five years and annual adjustments to the base rent reflecting
increases in the consumer price index.
The following is a schedule of the minimum future rental revenues payable to
the Company under the terms of these leases prior to any deductions for
operating expenses:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1997.............................................................. $ 1,238
1998.............................................................. 14,860
1999.............................................................. 12,383
-------
Total minimum future rentals...................................... $28,481
=======
</TABLE>
NOTE 5--OPERATING LEASE COMMITMENTS
Cedaredge Branch
The Bank's Cedaredge branch leases a vehicle from Eagle Motors, Inc. The
lease has a term of four years and requires total payments of $19,152, payable
in monthly installments of $399. The lease expires March, 1999.
Basalt Branch
The Bank's Basalt branch is located inside the City Market grocery store at
140 Basalt Center Circle. The Bank leases space within the City Market grocery
store under a four-year operating lease with total payments of $54,240,
payable in monthly installments of $1,130. The lease expires June 30, 1999.
Insurance and maintenance costs on the Bank's personal property are the
responsibility of the Bank. Insurance and maintenance on the building as well
as lighting, heating and air conditioning for the space are the responsibility
of the lessor. All other utilities used by the Bank are its responsibility.
This branch also leases ATM space in the City Market grocery store. The
lease has a term of three years and requires total rent payments of $9,000,
payable in monthly installments of $250. The lease expires December 31, 1997
and may be renewed for an additional two years. The lessee is responsible for
utilities, maintenance, insurance, personal property taxes and communication
and servicing costs for the ATM.
Delta Branch
The Bank's Delta branch leases ATM space in the City Market grocery store
located at 122 Gunnison River Drive. The lease has a term of three years and
requires total rent payments of $13,600, payable in monthly installments of
$350. The lease expires December 31, 1997 and may be renewed for an additional
two years. The lessee is responsible for utilities, maintenance, insurance,
personal property taxes and communication and servicing costs for the ATM.
F-41
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 5--OPERATING LEASE COMMITMENTS--(CONTINUED)
Montrose Branch
The Bank's Montrose branch leases space within the City Market grocery store
located at 16362 Highway 550 under a five-year operating lease which may be
renewed for three additional terms of five years each. Under the terms of the
lease, the Bank pays a monthly licensing fee of $2,000 plus a nickel for each
ATM transaction. The first 4,000 ATM transactions are excluded from the
calculation. The initial lease expires August, 2001. Insurance and maintenance
costs on the Bank's personal property are the responsibility of the Bank.
Insurance and maintenance on the building as well as lighting, heating and air
conditioning for the space are the responsibility of the lessor. All other
utilities used by the Bank are its responsibility.
This branch also leases ATM space in the Wal-Mart store located at 2201 S.
Townsend. The lease has a term of three years and requires total base rent
payments of $9,000, payable in monthly installments of $250. In addition to
the base monthly rent, the branch is required to pay a dime for each ATM
transaction in excess of the first 3,000 transactions per month. The lease
expires June, 1998.
Future minimum rental payments under existing leases as of November 30, 1997
are as follows:
<TABLE>
<CAPTION>
MONTROSE MONTROSE
BASALT BASALT DELTA SPACE & WAL-MART
VEHICLE SPACE ATM ATM ATM ATM
------- ------- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1997--December only........... $ 399 $ 1,130 $250 $350 $ 2,000 $ 250
1998.......................... 4,788 13,560 -- -- 24,000 1,500
1999.......................... 798 6,780 -- -- 24,000 --
2000.......................... -- -- -- -- 24,000 --
2001.......................... -- -- -- -- 15,867 --
------ ------- ---- ---- ------- ------
Total....................... $5,985 $21,470 $250 $350 $89,867 $1,750
====== ======= ==== ==== ======= ======
</TABLE>
NOTE 6--MANDATORY CONVERTIBLE DEBENTURES
During 1993 and 1994 the Company issued Mandatory Convertible Debentures
which convert to common stock in the year 2003. The debentures bear interest
equal to the prime rate of Bankers Bank of the West plus one percent payable
semi-annually until converted to common stock.
In the year 2003 the debentures will convert to 75,122 shares of common
stock. This represents a conversion factor of $21.30 per share.
The debentures outstanding are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Burton O. George Revocable Trust................... $ 792,126 $ 792,126
Joannco Partnership................................ 272,107 272,107
Joe N. Basore...................................... 196,045 196,045
Joe N. Basore/Ann W. Basore........................ 127,928 127,928
Ann W. Basore...................................... 117,627 117,627
J. Neff Basore, Jr................................. 78,418 78,418
Charles Richards................................... 15,848 15,848
---------- ----------
$1,600,099 $1,600,099
========== ==========
</TABLE>
F-42
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 7--RELATED PARTY TRANSACTIONS
Banking transactions between the Company's subsidiary bank and its
directors, executive officers and their related interests are considered to be
between related parties. It is the Company's policy that the terms of such
transactions be made on substantially the same basis, including interest rate
and collateral, as those extended at the time to unrelated bank customers. The
amount of loans outstanding to related parties was approximately $136,000 at
November 30, 1997 and $333,000 at December 31, 1996. The amount of deposits
for related parties was approximately $134,300 at November 30, 1997 and
$32,000 at December 31, 1996.
NOTE 8--INCOME TAXES
The provision for income taxes consists of the following components as of
November 30, 1997:
<TABLE>
<S> <C>
Current income tax expense:
Federal........................................................ $48,262
State.......................................................... 2,642
--------
Total Current Income Tax Expense............................. 50,904
Deferred federal and state income tax expense.................... (1,200)
--------
Total Income Tax Expense..................................... $49,704
========
The provision for income tax expense differs from the amount computed by
applying the statutory federal income tax rate of 34% to income before income
taxes due to the following at November 30, 1997:
Income tax expense at the statutory rate....................... $ 86,000
Interest disallowed under Section 291.......................... 7,000
Tax-exempt interest............................................ (48,000)
Other items.................................................... 4,704
--------
Income Tax Expense........................................... $ 49,704
========
</TABLE>
F-43
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 8--INCOME TAXES--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effect of these
temporary differences as of November 30, 1997 and December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Fixed assets................................... $111,500 $119,100
Unrealized gain on securities available for
sale.......................................... 11,500 5,300
Prepaid state tax.............................. 4,500 --
-------- --------
127,500 124,400
-------- --------
Deferred tax assets:
Allowance for loan losses...................... 105,000 $ 83,300
Accrued items not recognized for tax purposes.. 49,400 65,300
Core deposits and branch acquisition costs..... 6,300 11,200
Federal net operating loss carryforwards....... 15,800 18,400
Colorado net operating loss carryforwards...... 3,200 3,500
Colorado business tax credit carryforwards..... 300 2,700
Repossessions.................................. -- 6,700
Other.......................................... 5,800 1,900
-------- --------
185,800 193,000
Deferred tax asset valuation allowance......... (19,300) (24,600)
-------- --------
Deferred tax asset............................. 166,500 168,400
-------- --------
Net deferred tax asset....................... $ 39,000 $ 44,000
======== ========
</TABLE>
As of November 30, 1997, the Company and its subsidiary have net operating
loss (NOL) carryforwards of approximately $46,500 federal and $673,000 state.
Limitations exist on the utilization of these net operating loss carryforwards
under IRS Code Section 382. As a result of these limitations and future
expiration of these carryforwards, the Company and its subsidiary will realize
no more than approximately $65,000 of the state NOL benefit. The federal and
state NOL and business tax credit carryforwards begin to expire as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
Federal NOL carryforwards............................................. 2004
Colorado NOL carryforwards............................................ 2000
Colorado business tax credit carryforwards............................ 1998
</TABLE>
The valuation allowance as of November 30, 1997 and December 31, 1996
relates to the deferred tax assets for federal and Colorado net operating loss
carryforwards and Colorado general business tax credit carry forwards which
may be applied against future tax liabilities, if any. A portion of these
assets have been reserved because of the uncertainty as to whether the Company
will benefit from these carryforwards before they expire. The valuation
allowance was decreased in 1997 as a result of various decreases in the tax
credit carryforwards and net operating loss carryforwards in the current
period.
F-44
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 9--TIME DEPOSITS
Time deposits consist of certificates of deposit, with the following
maturities as of November 30, 1997:
<TABLE>
<CAPTION>
CD'S
CD'S UNDER $100,000
$100,000 AND OVER TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
Maturing within:
0 to 3 months........................... $ 2,814,700 $1,684,800 $ 4,499,500
4 to 12 months.......................... 4,272,000 2,976,000 7,248,000
1 to 5 years............................ 3,468,100 718,400 4,186,500
----------- ---------- -----------
Total................................. $10,554,800 $5,379,200 $15,934,000
=========== ========== ===========
</TABLE>
NOTE 10--REGULATORY MATTERS
The Company's subsidiary is subject to various regulatory capital
requirements administered by its primary federal regulator, the Federal
Deposit Insurance Corporation (FDIC). Failure to meet the minimum regulatory
capital requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a direct
material affect on the subsidiary's financial statements. Under the regulatory
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the subsidiary must meet specific capital guidelines involving
quantitative measures of the subsidiary's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The subsidiary's capital amounts and classification under the prompt
corrective action guidelines are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the subsidiary to maintain minimum amounts and ratios of total risk-
based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of November 30, 1997, that the subsidiary meets all
the capital adequacy requirements to which it is subject.
WESTERN COMMUNITY BANK
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------- ----------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ----------- ----- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of November 30, 1997:
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... $3,144,756 9.5% *$2,652,134 *8.0% *$ 3,315,168 *10.0%
Tier I Capital
(to Risk-Weighted
Assets)............... $2,804,754 8.5% *$1,326,067 *4.0% *$ 1,989,101 *6.0%
Tier I Capital
(to Adjusted Total
Assets)............... $2,804,754 6.4% *$1,740,646 *4.0% *$ 2,175,807 *5.0%
As of December 31, 1996
as restated:
Total Risk-Based
Capital
(to Risk-Weighted
Assets)............... $2,850,623 9.4% *$2,415,203 *8.0% *$ 3,019,003 *10.0%
Tier I Capital
(to Risk-Weighted
Assets)............... $2,550,623 8.4% *$1,207,601 *4.0% *$ 1,811,402 *6.0%
Tier I Capital
(to Adjusted Total
Assets)............... $2,550,623 6.1% *$1,662,373 *4.0% *$ 2,077,967 *5.0%
</TABLE>
* = Denotes Greater than or Equal to.
F-45
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 11--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contract amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments. The Company uses
the same credit policies in making commitments and conditional obligations as
it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of one year or less or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained as considered necessary by the Company upon
extension of credit is based on management's credit evaluation of the counter-
party. Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements. Most standby
letters of credit are issued for one year or less. The credit risk involved in
issuing letters of credit is essentially the same as extending loans to
customers. Collateral requirements vary, but in general follow the
requirements for other loan facilities.
A summary of the Company's commitments consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Standby letters of credit.......................... $ 11,040 $ 180,000
Commitments to extend credit:
Loans............................................ 1,305,438 1,435,469
Ready reserve.................................... 492,296 439,351
---------- ----------
Total.......................................... $1,808,774 $2,054,820
========== ==========
</TABLE>
NOTE 12--CONTINGENT LIABILITIES
In the normal course of business, the Company's subsidiary is involved in
various legal actions arising from their lending and collection activities. In
the opinion of management, the outcome of these legal actions will not
significantly affect the financial position of the Company.
NOTE 13--EMPLOYEE BENEFIT PLANS
Retirement Plan
The Company adopted in January, 1994, a paired profit sharing plan that
provides benefits for employees who have had at least one year of service. In
a defined contribution plan, benefits depend solely on amounts contributed to
the plan plus investment earnings. Eligible employees who elect to participate
may contribute up to 15% of their salaries to the plan on a pre-tax basis. The
employer will contribute by matching one fourth of the first 8% of each
employee's contribution and may also make discretionary contributions which
would be
F-46
<PAGE>
CEDAREDGE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(CONTINUED)
NOTE 13--EMPLOYEE BENEFIT PLANS--(CONTINUED)
allocated to each participant based on the fraction of the individual's annual
pay to the total annual pay of all participants. For the period ended November
30, 1997 and the year ended December 31, 1996, the Company's contribution on
behalf of its employees to the plan was approximately $9,000 and $8,570,
respectively.
NOTE 14--CONCENTRATION OF CREDIT RISK
The majority of the Company's loan portfolio and collateral for those loans
is concentrated in Delta, Montrose, and Eagle Counties in Western Colorado.
The risks of lending, therefore, reflect local economic conditions.
NOTE 15--MERGER
Effective November 30, 1997, Vail Banks, Inc. purchased all of the
outstanding stock of the Company. Immediately after the acquisition, the
Company and its subsidiary were merged into Vail Banks, Inc. Under the terms
of the purchase agreement, Vail Banks, Inc. paid $ 3,250,000 for all of the
Company's outstanding shares and assumed its liability for $1,600,099 of
mandatory convertible debentures the Company had previously issued.
NOTE 16--CHANGE IN ACCOUNTING METHOD
In the period ending November 30, 1997, the Company changed its approach of
recognizing future loan losses to a generally accepted accounting method. As a
result of this adoption, its statement of financial condition as of December
31, 1996 has been restated to reflect this change. The following balances as
of December 31, 1996 were affected by this restatement:
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
REPORTED ADJUSTMENT RESTATED
------------- ---------- -----------
<S> <C> <C> <C>
Loans receivable, net................. $31,952,022 $(149,103) $31,802,919
Loan loss reserve..................... 150,897 149,103 300,000
Deferred tax asset.................... (5,000) 49,000 44,000
Undivided profits..................... 569,324 (100,103) 469,221
Total assets.......................... 42,767,320 (105,103) 42,662,217
Total equity.......................... 2,847,945 (100,103) 2,747,842
</TABLE>
F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Independent Bankshares, Inc.
Glenwood Springs, Colorado
We have audited the accompanying consolidated balance sheet of Independent
Bankshares, Inc. and Subsidiary as of December 31, 1997, and the related
consolidated statements of income and comprehensive income, shareholders'
equity and cash flows for the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Independent Bankshares, Inc. and Subsidiary as of December 31, 1997, and the
results of their operations and cash flows for the years ended December 31,
1997 and 1996 in conformity with generally accepted accounting principles.
/s/ Gra, Thompson, White & Co., P.C.
Englewood, Colorado
May 21, 1998
F-48
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1998 1997 1997
----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks.................. $ 2,088,727 $ 2,150,921 $ 2,198,367
Federal funds sold....................... 1,250,000 1,200,000 600,000
Interest bearing deposit accounts........ 199,000 397,000 397,000
Available for sale securities............ 4,904,162 2,985,562 4,209,833
Held to maturity securities.............. 2,717,037 2,671,719 2,760,938
Restricted equity securities............. 26,000 26,000 26,000
Net loans................................ 17,048,569 15,914,922 17,431,164
Premises and equipment, net.............. 993,079 1,009,465 1,004,492
Accrued interest receivable and other
assets.................................. 361,480 343,168 333,903
----------- ----------- -----------
$29,588,054 $26,698,757 $28,961,697
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits............................... $26,658,149 $24,045,982 $26,114,272
Notes payable.......................... 258,014 458,014 433,014
Accrued interest payable and other
liabilities........................... 127,507 137,266 110,782
----------- ----------- -----------
Total liabilities.................... 27,043,670 24,641,222 26,658,068
----------- ----------- -----------
Shareholders' equity
Common stock, $2 par value; 1,000,000
shares authorized, 10,000 shares
issued and outstanding................ 20,000 20,000 20,000
Additional paid-in capital............. 1,066,102 1,066,102 1,066,102
Retained earnings...................... 1,455,535 973,948 1,214,201
Accumulated other comprehensive
income................................ 2,747 (2,515) 3,326
----------- ----------- -----------
Total shareholders' equity........... 2,544,384 2,057,535 2,303,629
----------- ----------- -----------
$29,588,054 $26,698,757 $28,961,697
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-49
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ----------------------
1998 1997 1997 1996
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income
Loans........................ $ 952,580 $ 849,684 $1,850,249 $1,556,033
Investments.................. 198,865 170,820 370,220 307,785
Federal funds sold........... 31,801 24,819 53,680 69,769
---------- ---------- ---------- ----------
1,183,246 1,045,323 2,274,149 1,933,587
---------- ---------- ---------- ----------
Interest expense
Deposits..................... 482,307 378,232 835,787 684,181
Other borrowings............. 7,080 22,237 45,825 47,751
---------- ---------- ---------- ----------
489,387 400,469 881,612 731,932
---------- ---------- ---------- ----------
Net interest income........ 693,859 644,854 1,392,537 1,201,655
Provision for loan losses...... 5,000 40,000 0 40,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan
losses.................... 688,859 604,854 1,392,537 1,161,655
---------- ---------- ---------- ----------
Other income
Service charges on deposit
accounts.................... 45,947 48,579 97,203 83,780
Overdraft and other fees..... 85,440 94,648 185,976 154,829
Other........................ 120,026 81,403 153,775 94,606
---------- ---------- ---------- ----------
251,413 224,630 436,954 333,215
---------- ---------- ---------- ----------
Other expenses
Salaries and employee
benefits.................... 287,906 257,474 539,384 461,661
Occupancy.................... 77,498 50,797 119,086 71,487
Office....................... 34,474 46,615 95,909 72,042
Equipment.................... 26,408 35,130 77,429 60,129
Other........................ 151,762 140,484 314,539 208,368
---------- ---------- ---------- ----------
578,048 530,500 1,146,347 873,687
---------- ---------- ---------- ----------
Income before income
taxes..................... 362,224 298,984 683,144 621,183
Income tax expense............. 120,890 86,831 170,738 232,101
---------- ---------- ---------- ----------
Net income................. 241,334 212,153 512,406 389,082
Other comprehensive income, net
of tax
Unrealized loss on available
for sale securities......... (579) (13,909) (8,068) (35,044)
---------- ---------- ---------- ----------
Comprehensive income....... $ 240,755 $ 198,244 $ 504,338 $ 354,038
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-50
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1995................... $20,000 $1,066,102 $ 540,222 $ 46,438 $1,672,762
Net income............ -- -- 389,082 -- 389,082
Dividends............. -- -- (110,009) -- (110,009)
Other comprehensive
income............... -- -- -- (35,044) (35,044)
------- ---------- ---------- -------- ----------
BALANCE AT DECEMBER 31,
1996................... 20,000 1,066,102 819,295 11,394 1,916,791
Net income............ -- -- 512,406 -- 512,406
Dividends............. -- -- (117,500) -- (117,500)
Other comprehensive
income............... -- -- -- (8,068) (8,068)
------- ---------- ---------- -------- ----------
BALANCE AT DECEMBER 31,
1997................... 20,000 1,066,102 1,214,201 3,326 2,303,629
Net income
(unaudited).......... -- -- 241,334 -- 241,334
Other comprehensive
income............... -- -- -- (579) (579)
------- ---------- ---------- -------- ----------
BALANCE AT JUNE 30, 1998
(UNAUDITED)............ $20,000 $1,066,102 $1,455,535 $ 2,747 $2,544,384
======= ========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-51
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income................ $ 241,334 $ 212,153 $ 512,406 $ 389,082
Adjustments to reconcile
net earnings to net cash
provided by operating
activities:
Provision for loan
losses.................. 5,000 40,000 0 40,000
Net amortization of
premiums and (accretion)
of discounts............ 247 (1,102) 474 8,945
Depreciation and
amortization expense.... 33,681 31,573 90,686 57,769
Change in:
Accrued interest
receivable and other
assets................. (32,144) 15,339 17,439 (39,020)
Accrued interest payable
and other liabilities.. 16,725 (33,566) (55,854) (5,280)
----------- ----------- ----------- -----------
Net cash provided by
operating activities.. 264,843 264,397 565,151 451,496
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Net (increase) decrease in
federal funds sold....... (650,000) 100,000 700,000 1,850,000
Purchases of securities
available for sale....... (1,500,000) (1,200,000) (3,200,000) (3,059,222)
Proceeds from maturities
of securities available
for sale................. 804,793 1,606,152 2,390,731 1,699,956
Purchase of securities
held to maturity......... 0 (606,063) (762,628) (403,573)
Proceeds from maturities
of securities held to
maturity................. 0 225,000 250,000 306,126
Proceeds from paydowns of
securities held to
maturity................. 43,654 30,218 70,988 74,576
Proceeds from maturities
of interest bearing
deposits................. 198,000 0 0 199,015
Loans originated, net of
principal collections,
charge-offs and
recoveries............... 377,595 (884,824) (2,361,066) (3,810,046)
Net additions to premises
and equipment............ (17,402) (101,487) (155,627) (258,038)
----------- ----------- ----------- -----------
Net cash used in
investing activities.. (743,360) (831,004) (3,067,602) (3,401,206)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase in deposits.. 543,877 1,423,410 3,491,700 3,116,873
Dividends................. 0 (57,500) (117,500) (110,009)
Principal payment on notes
payable.................. (175,000) 0 (25,000) (66,986)
----------- ----------- ----------- -----------
Net cash provided by
financing activities.. 368,877 1,365,910 3,349,200 2,939,878
----------- ----------- ----------- -----------
Increase (decrease) in
cash and cash equiva-
lents.................... (109,640) 799,303 846,749 (9,832)
Cash and cash equiva-
lents--beginning of peri-
od....................... 2,198,367 1,351,618 1,351,618 1,361,450
----------- ----------- ----------- -----------
Cash and cash equiva-
lents--end of period..... $ 2,088,727 $ 2,150,921 $ 2,198,367 $ 1,351,618
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during period
for interest............. $ 487,916 $ 392,355 $ 822,832 $ 731,491
=========== =========== =========== ===========
Cash paid during period
for income taxes......... $ 88,553 $ 118,633 $ 229,033 $ 276,553
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-52
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization and Operations
Independent Bankshares, Inc. (Company) is a one bank holding company
providing bank and bank-related services through its subsidiary, Glenwood
Independent Bank (Bank). The Company was incorporated in the State of Colorado
on December 8, 1993 and is subject to regulation by the Federal Reserve Bank.
The Bank operates under a state bank charter and provides full banking
services through it's three locations in Glenwood Springs and New Castle,
Colorado. As a state bank, the Bank is subject to regulation of the Federal
Deposit Insurance Corporation and the Colorado Division of Banking. The area
served by Glenwood Independent Bank is the region surrounding Glenwood
Springs, Colorado.
b. Principals of Consolidation
The consolidated financial statements include the accounts of Independent
Bankshares, Inc. and its wholly owned subsidiary, Glenwood Independent Bank.
All significant intercompany transactions have been eliminated.
c. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
d. Investment Securities
Glenwood Independent Bank adopted Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities which requires that investments be classified in three
categories and accounted for as follows: held to maturity securities reported
at amortized cost, trading securities reported at fair value, with unrealized
gains and losses included in earnings, and available for sale securities
reported at fair value, with unrealized gains and losses shown as a separate
component of shareholders' equity.
Restricted equity securities are reported at the lower of cost or estimated
fair value.
Gains and losses on sales of securities are determined on a specific
identification method.
Premiums and discounts are recognized as interest income using the interest
method over the expected period to maturity.
e. Loans
Loans are stated at outstanding principal balances. Interest income on loans
is accrued and credited to operations based on the principal amount
outstanding. The accrual of interest is reduced or discontinued if
collectibility is considered doubtful, and all previously accrued but unpaid
interest is reversed at that time. Payments received on impaired loans are
recorded as a reduction to the recorded investment in such loans until the
recorded investment is recovered. Payments received subsequent to the recovery
of the recorded investment are recorded as income until the full amount of
contractual payments have been made.
F-53
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield on the related loans.
f. Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collectibility of the principal is
unlikely. The allowance is an amount management believes will be adequate to
absorb probable losses on existing loans that may become uncollectible, based
on evaluations of the collectibility of loans and prior loan loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans, and current economic conditions and trends that may
affect the borrowers' ability to pay.
g. Premises and Equipment
Premises and equipment are stated at cost, less accumulated amortization and
depreciation. Depreciation and amortization are computed using the straight-
line method based on the estimated useful lives of the related assets.
h. Income Taxes
Income taxes are accounted for under the asset and liability method. Income
tax expense is reported as the total of current income taxes payable and the
net change in deferred income taxes provided for temporary differences.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the values used for income tax purposes. Deferred income taxes
are recorded at the statutory Federal and state tax rates in effect at the
time that the temporary differences are expected to reverse.
The parent and subsidiary file a consolidated Federal income tax return. The
parent is reimbursed from the subsidiary for any current income tax benefits
derived.
i. Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers cash on
hand and amounts due from banks to be cash and cash equivalents.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE AT DECEMBER
31, 1997
U.S. Treasury and agency secu-
rities........................ $4,204,792 $ 5,084 $ (43) $4,209,833
---------- ------- -------- ----------
Totals....................... $4,204,792 $ 5,084 $ (43) $4,209,833
========== ======= ======== ==========
HELD TO MATURITY AT DECEMBER
31, 1997
U.S. Treasury and agency secu-
rities........................ $1,739,780 $ 5,801 $(45,017) $1,700,564
Obligations of states and po-
litical subdivisions.......... 1,021,158 19,070 -- 1,040,228
---------- ------- -------- ----------
Totals....................... $2,760,938 $24,871 $(45,017) $2,740,792
========== ======= ======== ==========
</TABLE>
F-54
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENT SECURITIES (CONTINUED)
The carrying value and estimated fair value of investments in restricted
equity securities at December 31, 1997 amounted to $26,000.
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less........ $2,799,342 $2,802,005 $ 444,967 $ 444,266
Due after one year through five
years......................... 1,405,450 1,407,878 1,024,562 1,019,430
Due after five years through
ten years..................... -- -- 804,173 791,987
Due after ten years............ -- -- 487,236 485,109
---------- ---------- ---------- ----------
$4,204,792 $4,209,833 $2,760,938 $2,740,792
========== ========== ========== ==========
</TABLE>
At December 31, 1997, investment securities with a carrying value of
$1,802,066 were pledged to secure public deposits and for other purposes.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Commercial real estate........................................ $ 5,432,632
Residential real estate....................................... 5,645,250
Commercial.................................................... 1,999,270
Consumer...................................................... 4,046,988
Credit Card................................................... 520,078
-----------
$17,644,218
Allowance for loan losses..................................... (213,054)
-----------
$17,431,164
===========
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balance, beginning of year............................. $256,282 $223,034
Provision for loan losses.............................. -- 40,000
Charge-offs, net of recoveries......................... (43,228) (6,752)
-------- --------
$213,054 $256,282
======== ========
</TABLE>
F-55
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Land........................................................... $ 170,000
Building....................................................... 300,000
Leasehold improvements......................................... 372,859
Furniture, fixtures and equipment.............................. 566,915
Automobile..................................................... 29,925
----------
1,439,699
Accumulated depreciation and amortization...................... (435,207)
----------
$1,004,492
==========
</TABLE>
5. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Demand
Noninterest-bearing.......................................... $ 4,679,190
Interest-bearing
NOW.......................................................... 2,153,400
Money market................................................. 4,503,993
-----------
11,336,583
Savings........................................................ 2,605,883
Time........................................................... 12,171,806
-----------
$26,114,272
===========
</TABLE>
Time deposits include certificates of deposit of $100,000 and over totalling
approximately $4,834,000 at December 31, 1997.
Remaining maturities of time deposits at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Less than one year............................................. $ 8,123,572
One to two years............................................... 2,402,090
Two to three years............................................. 940,875
Three to four years............................................ 265,812
Four to five years............................................. 389,391
Five years and over............................................ 50,066
-----------
$12,171,806
===========
</TABLE>
6. NOTES PAYABLE
On April 15, 1994, Independent Bankshares, Inc. borrowed $250,000 from a
correspondent Bank. The note payable had a maturity date of July 2004 and had
an interest rate of Prime (8.5% as of December 31, 1997). The note required
annual principal payments of $25,000 and quarterly interest payments. The note
was secured by
F-56
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES PAYABLE (CONTINUED)
common stock of the Bank. As of December 31, 1997, the balance of this note
was $175,000, however, the note was paid in full in January, 1998.
In addition, the Bank is obligated under a capital lease which requires a
payment of approximately $258,000 at the termination of the lease. The lease
terminates 11 months after the death of the lessor or November 1, 2032,
whichever occurs first. Monthly interest of $2,500 is required under this
obligation. Approximately $470,000 is recorded as Land and Building as a
result of the capital lease.
7. AVAILABLE LINE OF CREDIT
The Bank has established a Federal funds line of credit with Bankers' Bank
of the West in the amount of $1,100,000 which expires on July 31, 1998. The
line is to be used to purchase Federal funds and was granted on an unsecured
basis. As of December 31, 1997, the line was undrawn.
8. INCOME TAXES
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1997 CURRENT DEFERRED TOTAL
---- -------- -------- --------
<S> <C> <C> <C>
Federal........................................ $190,402 $(40,514) $149,888
State.......................................... 15,431 5,419 20,850
-------- -------- --------
$205,833 $(35,095) $170,738
======== ======== ========
<CAPTION>
1996 CURRENT DEFERRED TOTAL
---- -------- -------- --------
<S> <C> <C> <C>
Federal........................................ $199,882 $ 9,519 $209,401
State.......................................... 20,631 2,069 22,700
-------- -------- --------
$220,513 $ 11,588 $232,101
======== ======== ========
</TABLE>
The sources of deferred tax assets and liabilities are summarized as
follows:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Deferred tax assets:
Allowance for loan losses....................................... $55,731
Other........................................................... 17,595
-------
Total deferred tax assets..................................... 73,326
-------
Deferred tax liabilities:
Premises and equipment.......................................... (2,418)
Unrealized gain on securities available for sale................ (1,880)
-------
Total deferred tax liabilities................................ (4,298)
-------
Net deferred tax assets....................................... $69,028
=======
</TABLE>
F-57
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES (CONTINUED)
A reconciliation of expected Federal tax expense to actual tax expense is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
AMOUNT % AMOUNT %
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Expected Federal income tax expense........ $232,269 34.0 $211,202 34.0
State tax, net of Federal income tax
benefit................................... 13,761 2.0 14,982 2.4
Municipal interest......................... (13,751) (2.0) (10,684) (1.7)
Other, net................................. (61,541) (9.0) 16,601 2.7
-------- ---- -------- ----
$170,738 25.0 $232,101 37.4
======== ==== ======== ====
</TABLE>
9. EMPLOYEE BENEFITS
The Bank has established a pre-tax savings plan under Section 401(k) of the
Internal Revenue Code. Under the plan, eligible employees are able to
contribute up to 10% of their compensation (some limitations apply to highly
compensated employees). Total matching expense for 1997 and 1996 was
approximately $7,000 and $5,300, respectively.
10. OPERATING LEASES
The Bank's two branch locations, Glenwood Springs and New Castle, are leased
from a supermarket chain under operating leases. Both leases have five year
terms with automatic renewals of three additional five year terms. The
operating lease for the Glenwood Branch is cancelable in 1999, while the New
Castle lease is cancelable in 2000.
The lease for the Glenwood branch requires minimum rental payments through
the year 2001, and the lease for the New Castle branch requires minimum rental
payments through the year 2002. Total rent expense for December 31, 1997 and
1996, was approximately $37,000 and $16,000, respectively. Future minimum
rental payments under these operating leases are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 48,000
1999.............................................................. 48,000
2000.............................................................. 48,000
2001.............................................................. 32,000
2002.............................................................. 12,000
--------
$188,000
========
</TABLE>
Included in rent is a $.05 transaction fee for every ATM transaction,
excluding the first 4,000 transactions each month.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Financial instruments which represent off-balance sheet credit risk consist
of open commitments to extend credit. Open commitments to extend credit
amounted to $4,782,956 at December 31, 1997. Such agreements require the Bank
to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses. Since many of the commitments are expected to
expire without being fully drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case
F-58
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
basis. The amount of collateral obtained (if deemed necessary by the Bank upon
extension of credit) is based on management's credit evaluation of the
customer. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
12. CONCENTRATION OF CREDIT RISK
The Bank grants residential and commercial real estate loans to customers in
the Bank's market area. Although the Bank has a diversified loan portfolio, a
substantial portion of the Bank's debtors' ability to honor their contracts is
dependent upon the real estate economic sector. The concentrations of credit
by type of loan are set forth in Note 3.
13. RELATED PARTY TRANSACTIONS
The Bank makes loans to officers, directors, principal shareholders and
their affiliates in the normal course of business under substantially the same
terms as it does to others. At December 31, 1997, direct loans to such parties
aggregated $252,000. During 1997, new loans to related parties amounted to
$214,000 and repayments totaled $116,000.
Related parties maintained deposit account balances of approximately
$819,000 at December 31, 1997.
14. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Banks financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined) of 8% and 4%,
respectively, and of Tier I capital to average assets (as defined) of 4%. As
of December 31, 1997, the Bank meets all capital adequacy requirements to
which it is subject. The Bank's total capital to risk-weighted assets was
15.06%, Tier I capital to risk-weighted assets was 13.88% and the Tier I
capital ratio was 8.80%.
The most recent notification from the Federal Deposit Insurance Corporation
(FDIC) categorized the Bank as well-capitalized under the regulatory framework
for prompt corrective action. To be categorized as well-capitalized the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I capital
ratios of 10%, 6% and 5%, respectively. There are no conditions or events
since that notification that management believes have changed the
institution's category.
15. RESTRICTIONS ON DIVIDENDS
State banking regulations include various restrictions which limit the
extent to which dividends may be declared by the Bank. The approval of the
Colorado Banking Board is required for the Bank to declare dividends in any
calendar year which exceed the Bank's net income for that year combined with
its retained earnings for the preceding two years.
F-59
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SUBSEQUENT EVENT
On March 10, 1998, subsequent to our audit date, the shareholders of
Independent Bankshares, Inc. and Vail Banks, Inc. entered into a merger
agreement. The merger is pending regulatory approval which is expected by July,
1998.
F-60
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Telluride Bancorp, Ltd.
We have audited the accompanying consolidated statements of financial
condition of Telluride Bancorp, Ltd. and its subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income and
comprehensive income, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Telluride
Bancorp, Ltd. and its subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Dalby, Wendland & Co., P.C.
February 27, 1998
F-61
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEE ACCOUNTANTS' REPORT
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from
banks.................. $ 6,208,638 $ 8,232,978 $ 5,962,697 $ 5,669,250
Federal funds sold...... 4,060,000 -- 240,000 --
Interest bearing bal-
ances.................. 21,008 -- -- --
Securities available for
sale................... 23,321,457 19,924,744 17,490,951 22,248,272
Loans receivable, net of
allowance for loan
losses and deferred
loan fees.............. 76,534,114 63,852,832 70,973,516 63,628,947
Accrued interest receiv-
able................... 951,556 799,327 812,706 790,070
Property, equipment and
leasehold improvements,
net.................... 8,582,546 7,610,372 7,771,797 7,626,687
Prepaid income taxes.... 12,060 201,435 146,288 200,855
Intangible asset for
core deposits acquired,
net of accumulated am-
ortization............. 36,165 46,305 41,235 51,375
Other real estate owned
and in process of
foreclosure............ 244,588 292,014 306,358 165,000
Restricted investment
securities............. 422,300 278,500 396,200 274,100
Other assets............ 326,501 210,123 199,224 366,763
------------ ------------ ------------ ------------
TOTAL ASSETS........ $120,720,933 $101,448,630 $104,340,972 $101,021,319
============ ============ ============ ============
LIABILITIES AND STOCK-
HOLDERS' EQUITY
DEPOSITS
Demand--non-interest
bearing............... $ 21,417,201 $ 17,605,424 $ 20,155,136 $ 18,327,321
Demand--interest bear-
ing................... 31,763,044 26,909,461 27,080,384 25,160,320
Savings................ 27,773,325 20,608,978 20,911,270 23,683,915
Time................... 27,841,406 23,513,596 25,600,641 19,668,846
------------ ------------ ------------ ------------
TOTAL DEPOSITS...... 108,794,976 88,637,459 93,747,431 86,840,402
OTHER LIABILITIES
Federal funds pur-
chased................ -- 295,000 -- 2,225,000
Accrued interest pay-
able.................. 377,889 330,865 327,889 240,762
Notes payable.......... 1,210,972 2,715,756 395,972 2,715,756
Deferred income tax li-
ability............... 244,733 142,832 218,408 153,142
Other liabilities...... 158,994 366,106 237,719 363,575
------------ ------------ ------------ ------------
TOTAL LIABILITIES... 110,787,564 92,488,018 94,927,419 92,538,637
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par
value, 100,000 shares
authorized, 17,356
shares issued and out-
standing.............. 17,356 17,356 17,356 17,356
Additional paid-in cap-
ital.................. 1,799,367 1,799,367 1,799,367 1,799,367
Retained earnings...... 8,044,184 7,152,365 7,530,410 6,676,602
Accumulated other com-
prehensive income..... 72,462 (8,476) 66,420 (10,643)
------------ ------------ ------------ ------------
TOTAL STOCKHOLDERS'
EQUITY............. 9,933,369 8,960,612 9,413,553 8,482,682
------------ ------------ ------------ ------------
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY............. $120,720,933 $101,448,630 $104,340,972 $101,021,319
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-62
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
SEE ACCOUNTANTS' REPORT
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
----------------------- -------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable........... $3,926,012 $3,546,233 $7,271,774 $6,688,249
Securities available for
sale...................... 541,948 660,743 1,229,819 1,495,839
Federal funds sold......... 136,051 31,426 136,710 149,028
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME.... 4,604,011 4,238,402 8,638,303 8,333,116
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits................... 1,737,473 1,446,556 3,031,301 3,009,889
Notes payable.............. 18,810 126,698 246,651 270,122
Federal funds purchased.... 9,841 9,704 9,076 32,590
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE... 1,766,124 1,582,958 3,287,028 3,312,601
---------- ---------- ---------- ----------
NET INTEREST INCOME...... 2,837,887 2,655,444 5,351,275 5,020,515
PROVISION FOR LOAN LOSSES.... 75,000 32,500 163,750 161,350
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN
LOSSES.................. 2,762,887 2,622,944 5,187,525 4,859,165
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges and fees... 385,938 400,725 808,574 631,714
Rental income.............. 40,341 31,409 59,314 63,240
Gain (Loss) on sale of
assets.................... 15,731 4,500 (9,091) 44,772
Other income............... 23,656 8,539 38,412 18,483
---------- ---------- ---------- ----------
TOTAL OTHER INCOME....... 465,666 445,173 897,209 758,209
---------- ---------- ---------- ----------
NONINTEREST EXPENSES
Salaries and employee
benefits.................. 1,371,463 1,355,072 2,732,283 2,534,320
General and
administrative............ 583,598 543,583 1,189,501 1,401,651
Occupancy.................. 512,136 452,932 918,301 919,764
Reduction in carrying value
of assets................. -- 13,797 20,396 --
Amortization of core
deposits.................. 5,070 5,070 10,140 10,140
---------- ---------- ---------- ----------
TOTAL OTHER EXPENSES..... 2,472,267 2,370,454 4,870,621 4,865,875
---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES................... 756,286 697,663 1,214,113 751,499
PROVISION FOR INCOME TAXES... 242,512 221,900 360,305 175,292
---------- ---------- ---------- ----------
NET INCOME............... 513,774 475,763 853,808 576,207
OTHER COMPREHENSIVE INCOME,
net of tax:
Unrealized holding gains
(losses) on available for
sale securities arising
during the period......... 6,042 2,167 77,063 (150,551)
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME..... $ 519,816 $ 477,930 $ 930,871 $ 425,656
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-63
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SEE ACCOUNTANTS' REPORT (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------- PAID IN RETAINED COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL EARNINGS INCOME STOCK TOTAL
------ ------- ---------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE--January 1,
1996................... 18,539 $18,539 $1,934,320 $6,100,395 $ 139,908 $(136,136) $8,057,026
Comprehensive Income:
Net income.............. -- -- -- 576,207 -- -- 576,207
Other comprehensive
income................. -- -- -- -- (150,551) -- (150,551)
Treasury stock retired.. (1,183) (1,183) (134,953) -- -- 136,136 --
------ ------- ---------- ---------- --------- --------- ----------
BALANCE--December 31,
1996................... 17,356 17,356 1,799,367 6,676,602 (10,643) -- 8,482,682
Comprehensive Income:
Net income.............. -- -- -- 475,763 -- -- 475,763
Other comprehensive
income................. -- -- -- -- 2,167 -- 2,167
------ ------- ---------- ---------- --------- --------- ----------
BALANCE--June 30, 1997.. 17,356 17,356 1,799,367 7,152,365 (8,476) -- 8,960,612
Comprehensive Income:
Net income.............. -- -- -- 378,045 -- -- 378,045
Other comprehensive
income................. -- -- -- -- 74,896 -- 74,896
------ ------- ---------- ---------- --------- --------- ----------
BALANCE--December 31,
1997................... 17,356 17,356 1,799,367 7,530,410 66,420 -- 9,413,553
Comprehensive Income:
Net income.............. -- -- -- 513,774 -- -- 513,774
Other comprehensive
income................. -- -- -- -- 6,042 -- 6,042
------ ------- ---------- ---------- --------- --------- ----------
BALANCE--June 30, 1998.. 17,356 $17,356 $1,799,367 $8,044,184 $ 72,462 $ -- $9,933,369
====== ======= ========== ========== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-64
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEE ACCOUNTANTS' REPORT
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
------------------------- --------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
------------ ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income................ $ 513,774 $ 475,763 $ 853,808 $ 576,207
------------ --------- ----------- -----------
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Provision for loan
losses.................. 75,000 32,500 163,750 161,350
Provision for
depreciation............ 224,202 189,045 398,965 403,500
Provision for deferred
tax..................... 33,283 (11,600) 19,421 (24,597)
Amortization of premium
and discount on
investments............. 4,302 (2,568) (548) (23,084)
Amortization of core
deposits................ 5,070 5,070 10,140 10,140
Reduction in the carrying
value of other
property................ -- 13,797 20,396 --
Stock dividends
received................ (14,500) (4,400) (14,300) (16,800)
Loss (Gain) on sale of
assets.................. (15,731) (4,500) 9,091 (44,772)
Change in assets and
liabilities:
Decrease (Increase) in
other assets........... (112,353) 139,843 146,713 (39,479)
Decrease (Increase) in
accrued interest
receivable............. (138,850) (9,257) (22,636) 113,374
Decrease (Increase) in
prepaid taxes.......... 134,228 (580) 54,567 (33,533)
Increase in interest
payable................ 50,000 90,103 87,127 14,678
Increase (Decrease) in
other liabilities...... (78,725) 2,531 (125,856) 61,882
------------ --------- ----------- -----------
Total adjustments...... 165,926 439,984 746,830 582,659
------------ --------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES.. 679,700 915,747 1,600,638 1,158,866
------------ --------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of available for
sale securities.......... (9,267,187) (755,137) (3,726,543) (9,928,359)
Purchase of Federal Home
Loan Bank stock.......... (11,600) -- (107,800) --
Proceeds from maturities
of available for sale
securities............... 3,431,463 3,084,690 8,607,320 6,942,058
Purchase of property and
equipment................ (1,034,951) (180,600) (551,945) (228,758)
Proceeds from sale of
assets................... 237,577 212,052 460,854 805,378
Net (increase) decrease in
loans made to customers.. (5,810,598) (580,081) (8,111,322) 414,201
------------ --------- ----------- -----------
NET CASH USED BY
INVESTING ACTIVITIES.. (12,455,296) 1,780,924 (3,429,436) (1,995,480)
------------ --------- ----------- -----------
</TABLE>
F-65
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
----------------------- --------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase (Decrease) in
deposits............... $15,047,545 $ 1,797,057 $ 6,907,029 $(1,063,113)
Net change in federal
funds purchased........ -- (1,930,000) (2,225,000) 1,725,000
Note advances........... 815,000 -- -- --
Principal payments on
note payable........... -- -- (2,319,784) (892,828)
----------- ----------- ----------- -----------
NET CASH PROVIDED
(USED) BY FINANCING
ACTIVITIES.......... 15,862,545 (132,943) 2,362,245 (230,941)
----------- ----------- ----------- -----------
NET INCREASE
(DECREASE) IN CASH
AND CASH
EQUIVALENTS......... 4,086,949 2,563,728 533,447 (1,067,555)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR.... 6,202,697 5,669,250 5,669,250 6,736,805
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR.......... $10,289,646 $ 8,232,978 $ 6,202,697 $ 5,669,250
=========== =========== =========== ===========
Cash and cash equivalents
are classified in the
balance sheet as
follows:
Cash and due from
banks.................. $ 6,208,638 $ 8,232,978 $ 5,962,697 $ 5,669,250
Interest bearing
balances............... 21,008 -- -- --
Federal funds sold...... 4,060,000 -- 240,000 --
----------- ----------- ----------- -----------
Total cash and cash
equivalents........... $10,289,646 $ 8,232,978 $ 6,202,697 $ 5,669,250
=========== =========== =========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid on
deposits............... $ 1,687,473 $ 1,356,791 $ 2,908,326 $ 2,989,467
Interest paid on
outstanding debt....... 28,852 126,360 282,499 238,206
Income taxes paid....... 75,000 234,000 394,000 395,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEE ACCOUNTANTS' REPORT
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization History
Telluride Bancorp, Ltd. (the Company) was incorporated in the State of
Colorado in December 1987 and became a bank holding company in October 1988,
when it acquired controlling interest of the Bank of Telluride. In August
1991, the Company acquired San Miguel Investment Company and San Miguel Basin
State Bank. In 1992 San Miguel Basin State Bank changed its name to The Bank
of Norwood and in 1995 the Bank's name was changed to Western Colorado Bank.
On December 31, 1995, San Miguel Investment Company, a wholly- owned
subsidiary of the Company, was merged into the Company. Its only asset at the
date of the merger was its 94.17% ownership of Western Colorado Bank. The
Company's subsidiary banks are members of the Federal Deposit Insurance
Corporation (FDIC) and are subject to its regulations and the banking
regulations of the State of Colorado.
The Company's subsidiaries have bank facilities in Telluride, Norwood and
Montrose, Colorado.
A summary of significant accounting policies applied in preparation of the
Company's financial statements is as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Telluride
Bancorp, Ltd. and its wholly owned subsidiaries, the Bank of Telluride and
Western Colorado Bank. Significant intercompany accounts and transactions have
been eliminated.
Cash and Cash Equivalents
For purposes of presentation in the consolidated statement of cash flow,
cash and cash equivalents are defined as those amounts included in the balance
sheet captions "cash and due from banks," "interest bearing balances" and
"federal funds sold."
The Company's subsidiaries have deposit accounts with the Federal Reserve
Bank and other correspondent institutions. At times some of those deposits are
in excess of the portion insured by the FDIC. Uninsured deposits (approximate
amounts) were as follows:
<TABLE>
<S> <C>
June 30, 1998 (unaudited)..................................... $2,517,731
June 30, 1997 (unaudited)..................................... $2,088,000
December 31, 1997............................................. $1,314,000
December 31, 1996............................................. $1,951,000
</TABLE>
Investment Securities
Trading Securities: Securities that are held for short-term resale are
classified as trading account securities and recorded at their fair values.
Realized and unrealized gains and losses on trading account securities are
included in other income.
Securities Held to Maturity: Government, Federal agency, and corporate debt
securities that management has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income using methods
approximating the interest method over the period to maturity. Mortgage-backed
securities represent participating interests in pools of long-
F-67
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal
balances, adjusted for unamortized premiums and unearned discounts. Premiums
and discounts are amortized using methods approximating the interest method
over the remaining period to contractual maturity, adjusted for anticipated
prepayments.
Securities Available for Sale: Available for sale securities consist of
investment securities not classified as trading securities nor as held to
maturity securities. Unrealized holding gains and losses, net of tax, on
available for sale securities are reported as a net amount in a separate
component of stockholders' equity until realized. Gains and losses on the sale
of available for sale securities are determined using the specific-
identification method. The amortization of premiums and the accretion of
discounts are recognized in interest income using methods approximating the
interest method over the period of maturity.
Declines in the fair value of individually held to maturity and available
for sale securities below their cost that are other than temporary, result in
write-downs of the individual securities to their fair value. The related
write-downs are included in earnings as realized losses.
During the first half of 1998, and the years 1997 and 1996 all securities
held by the Company were classified as available for sale.
Loans Receivable
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts.
Unearned discounts on loans purchased are recognized as income over the term
of the loans using a method that approximates the interest method.
Loan origination and commitment fees are deferred and amortized as a yield
adjustment over the lives of the related loans using the interest and
straight-line methods. Amortization of deferred loan fees is discontinued when
a loan is placed on nonaccrual status.
Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received on
such loans are applied as a reduction of the loan principal balance. Interest
income on other impaired loans is recognized only to the extent of interest
payments received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature
of the portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, economic conditions and other risks inherent in the
portfolio. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. The allowance
is increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Costs include the net amount of interest costs
associated with significant capital additions. Profit and losses on
dispositions are reflected in current operations.
F-68
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Expenditures which materially add to the useful lives of property and
equipment are capitalized. All other maintenance and repair costs are charged
to current operations.
Depreciation for financial accounting purposes is computed using straight-
line or accelerated methods over the estimated useful life of each asset.
Estimated useful lives range from 3 to 50 years.
For income tax purposes, accelerated methods of depreciation are generally
used; deferred income taxes are provided for the difference between
depreciation expense for financial accounting purposes and for income tax
purposes.
Other Real Estate Owned and Repossessed Assets
Real estate and other assets acquired in actual or in-substance foreclosure
are carried at cost or fair value, whichever is lower. Fair value is based on
independent appraisals and other relevant factors. At the time of acquisition,
any excess of cost over fair value is charged to the allowance for loan
losses. Subsequent declines in fair value are charged to the current income
provision and credited to the carrying value of the properties. Operating
expenses are charged to other noninterest expense.
Gains on sales of other real estate are recognized at the time of sale or
deferred for recognition in future periods, as appropriate, based on the
nature of the transaction. Losses on such sales are recognized at the time of
the sale.
Core Deposits Acquired
As a result of the Company acquiring a controlling interest in Western
Colorado Bank, $105,595 of the purchase price was allocated to the core
deposit base acquired. These costs are being amortized over an estimated
useful life of 10 years.
Account Reclassifications
Certain 1996 balances have been reclassified for comparative purposes.
Income Taxes
For income tax purposes, the Company files a consolidated income tax return
with its subsidiaries. Agreements between the Company and its subsidiaries
provide that any current tax liability of its subsidiaries, computed on a
separate entity basis, will be paid by the subsidiaries to the Company. Tax
refunds attributable to the operations of the subsidiaries will be refunded to
the subsidiaries to the extent they can offset income of the Consolidated
Group.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes also are recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
F-69
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Effect of New Accounting Standards
On January 1, 1998, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 130, Reporting Comprehensive Income (FAS 130). The
statement prescribes the standards for reporting of comprehensive income and
its components. Comprehensive income is defined as the change in equity of a
business enterprise during the period from transactions and other events and
circumstances from non owner sources. The components of comprehensive income
consists of net income and other comprehensive income.
The pronouncement requires the Company to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid in capital in the equity section of a statement
of financial condition.
The Company has chosen to report comprehensive income in the consolidated
statement of income and comprehensive income.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
NOTE 2--SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities at June 30, 1998
(unaudited) are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale
Securities:
U.S. Treasury securities... $ 6,029,432 $ 15,338 $ (1,645) $ 6,043,125
Obligations of U.S.
government agencies....... 11,305,674 5,740 (9,083) 11,302,331
Obligations of state and
political subdivisions.... 4,532,443 93,679 (929) 4,625,193
Mortgaged-back securities.. 1,310,391 2,327 (410) 1,312,308
Equity securities.......... 38,500 -- -- 38,500
----------- -------- -------- -----------
Totals................... $23,216,440 $117,084 $(12,067) $23,321,457
=========== ======== ======== ===========
</TABLE>
F-70
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 2--SECURITIES AVAILABLE FOR SALE (CONTINUED)
The amortized cost and estimated fair value of securities at June 30, 1997
(unaudited) are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale
Securities:
U.S. Treasury securities.. $ 7,236,738 $ 17,308 $ (6,999) $ 7,247,047
Obligations of U.S.
government agencies...... 7,131,550 6,659 (80,247) 7,057,962
Obligations of state and
political subdivisions... 3,816,615 58,917 (2,054) 3,873,478
Mortgaged-back
securities............... 1,714,859 2,875 (9,977) 1,707,757
Equity securities......... 38,500 -- -- 38,500
----------- -------- --------- -----------
Totals.................. $19,938,262 $ 85,759 $ (99,277) $19,924,744
=========== ======== ========= ===========
The amortized cost and estimated fair value of securities at December 31,
1997 are as follows:
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale
Securities:
U.S. Treasury securities.. $ 5,264,106 $ 17,994 $ (3,271) $ 5,278,829
Obligations of U.S.
government agencies...... 6,679,840 9,525 (14,936) 6,674,429
Obligations of state and
political subdivisions... 3,850,362 96,250 -- 3,946,612
Mortgaged-back
securities............... 1,552,208 2,216 (1,843) 1,552,581
Equity securities......... 38,500 -- -- 38,500
----------- -------- --------- -----------
Totals.................. $17,385,016 $125,985 $ (20,050) $17,490,951
=========== ======== ========= ===========
The amortized cost and estimated fair value of securities at December 31,
1996 are as follows:
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale
Securities:
U.S. Treasury securities.. $ 9,478,035 $ 50,247 $ (8,452) $ 9,519,830
Obligations of U.S.
government agencies...... 7,128,931 9,753 (92,718) 7,045,966
Obligations of state and
political subdivisions... 3,694,768 47,503 (7,029) 3,735,242
Mortgaged-back
securities............... 1,925,010 1,260 (17,536) 1,908,734
Equity securities......... 38,500 -- -- 38,500
----------- -------- --------- -----------
Totals.................. $22,265,244 $108,763 $(125,735) $22,248,272
=========== ======== ========= ===========
</TABLE>
The Company's subsidiaries have designated all securities as available for
sale. Interest income for all securities has been combined for reporting
purposes.
The Company's policy prohibits its subsidiary banks from owning investment
derivatives.
F-71
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 2--SECURITIES AVAILABLE FOR SALE (CONTINUED)
The Company had pledged as collateral for public funds on deposit securities
in the principal amounts as follows:
<TABLE>
<S> <C>
June 30, 1998 (unaudited)..................................... $20,249,000
June 30, 1997 (unaudited)..................................... $18,014,000
December 31, 1997............................................. $12,670,000
December 31, 1996............................................. $14,654,000
</TABLE>
The amortized cost and estimated market value of securities (other than
equity securities) at June 30, 1998 (unaudited), by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
Available for Sale Securities:
Due in one year or less........................... $ 8,988,463 $ 8,995,529
Due after one year through five years............. 10,206,820 10,234,309
Due after five years through ten years............ 1,527,816 1,580,135
Due after ten years............................... 1,144,448 1,160,676
----------- -----------
21,867,547 21,970,649
Mortgaged-backed securities......................... 1,310,391 1,312,308
----------- -----------
$23,177,938 $23,282,957
=========== ===========
</TABLE>
NOTE 3--LOANS RECEIVABLE
Loans consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Real estate and
construction loans..... $56,242,893 $47,287,994 $54,297,552 $49,773,693
Commercial loans........ 15,931,078 13,537,305 13,442,077 12,413,783
Installment and consumer
loans.................. 4,174,479 3,078,782 3,183,785 1,466,611
Overdrafts, credit cards
and other loans........ 1,193,873 964,513 1,049,184 987,858
----------- ----------- ----------- -----------
77,542,323 64,868,594 71,972,598 64,641,945
Less:
Allowance for loan
losses............... (856,293) (821,764) (843,279) (835,042)
Deferred loan fees.... (151,916) (193,998) (155,803) (177,956)
----------- ----------- ----------- -----------
$76,534,114 $63,852,832 $70,973,516 $63,628,947
=========== =========== =========== ===========
</TABLE>
F-72
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 3--LOANS RECEIVABLE (CONTINUED)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Balance at the beginning
of the year............. $843,279 $835,042 $ 835,042 $ 765,860
Provision for possible
loan losses charged to
operations.............. 75,000 32,500 163,750 161,350
Loan charge-offs......... (72,154) (72,684) (206,269) (160,738)
Loan recoveries.......... 10,168 26,906 50,756 68,570
-------- -------- --------- ---------
Balance at the end of the
year.................... $856,293 $821,764 $ 843,279 $ 835,042
======== ======== ========= =========
</TABLE>
The Company had pledged as collateral for public funds on deposit, mortgage
loans as follows:
<TABLE>
<S> <C>
June 30, 1998 (unaudited)...................................... $1,183,000
June 30, 1997 (unaudited)...................................... $2,943,000
December 31, 1997.............................................. $1,916,000
December 31, 1996.............................................. $4,176,000
</TABLE>
Non-accrual loans were as follows:
<TABLE>
<S> <C>
June 30, 1998 (unaudited)...................................... $ 27,200
June 30, 1997 (unaudited)...................................... $ 499,600
December 31, 1997.............................................. $ 443,260
December 31, 1996.............................................. $1,017,000
</TABLE>
NOTE 4--BANK PROPERTY AND EQUIPMENT
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Bank buildings and
improvements........... $ 5,397,029 $ 5,548,411 $ 5,391,894 $ 5,420,712
Furniture, fixtures and
equipment.............. 2,118,465 1,780,586 1,864,836 1,754,469
Vehicles................ 155,012 172,557 155,012 189,541
----------- ----------- ----------- -----------
7,670,506 7,501,554 7,411,742 7,364,722
Less accumulated
depreciation........... (1,862,512) (1,467,803) (1,638,596) (1,307,695)
----------- ----------- ----------- -----------
5,807,994 6,033,751 5,773,146 6,057,027
Construction in
progress............... 1,204,892 6,961 428,991 --
Land.................... 1,569,660 1,569,660 1,569,660 1,569,660
----------- ----------- ----------- -----------
$ 8,582,546 $ 7,610,372 $ 7,771,797 $ 7,626,687
=========== =========== =========== ===========
</TABLE>
F-73
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 4--BANK PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense was as follows:
<TABLE>
<S> <C>
Period Ended June 30, 1998 (unaudited)........................... $224,202
Period Ended June 30, 1997 (unaudited)........................... $189,045
Year Ended December 31, 1997..................................... $398,965
Year Ended December 31, 1996..................................... $403,500
</TABLE>
Telluride Facility
In April of 1995, the Company completed construction of its new facility
located at 238 East Colorado in Telluride, Colorado. The facility is four
stories with approximately 15,000 square feet of office space, 5,500 square
feet of underground parking and a penthouse on the top floor with 4,400 square
feet. Approximately 3,000 square feet of the office space is rented to
unrelated tenants with the remaining space on the bottom three floors occupied
by the Company's subsidiary, the Bank of Telluride.
The space not occupied by the Bank is leased with terms from three to four
years and generally contain provisions for three renewal options of three
years each and annual adjustments to the base rent reflecting increases in the
consumer price index.
The following is a schedule of the minimum future rental revenues payable to
the Company under the terms of these leases prior to any deductions for
property management fees and operating expenses:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1998 (6 months)................................................... $16,440
1999.............................................................. 3,750
-------
Total minimum future rentals.................................... $20,190
=======
</TABLE>
In March of 1996, the Company sold the penthouse on the top floor of the
Telluride facility to an unrelated party for $830,000. The net proceeds from
the sale, approximately $783,000, were applied against the Company's
outstanding long-term debt. The gain realized on the sale of the unit was
approximately $41,000.
Total capitalized interest related to the new facility was $212,147 prior to
opening of the facility in 1995.
In December 1997, the Company sold its ownership interest in the Telluride
facility to its subsidiary, Bank of Telluride, for $3,000,000. The purchase
price was determined based on an appraisal of the units in the building that
were sold. The Company, on a separate entity basis, reported a gain on the
sale of $968,537 and a deferred tax expense of $361,000. The net effect of the
transaction was to increase the Company's net income by $607,537. These
amounts, gain on sale, deferred tax expense and increase to net income, have
been eliminated in determining consolidated net income.
Proceeds from the sale were used to pay off an outstanding note with a
principal balance of $2,209,784 and provide funds for future capital
contributions to the Company's subsidiary, Western Colorado Bank.
Montrose Facilities
The Company's subsidiary, Western Colorado Bank, has three branch locations,
one in Norwood, Colorado and two in Montrose, Colorado. The Montrose
facilities are located at 1500 East Oak Grove Road and inside the City Market
grocery store at 128 South Townsend Avenue.
F-74
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 4--BANK PROPERTY AND EQUIPMENT (CONTINUED)
The branch located at East Oak Grove Road is currently housed in a temporary
modular facility which is leased on a month-to-month basis. The lease requires
the Bank to pay $2,740 per month plus any property tax assessment. Property
insurance and any maintenance costs are the responsibility of the lessor.
Western Colorado Bank entered into an agreement in October 1997 for the
construction of its new bank facility. Under the terms of the contract and
amendments, the construction costs should not exceed $1,382,000. The Bank
estimates that the total project costs, including building construction, site
work, and equipment and furnishings additions, will be approximately
$1,900,000. It is management's intent to internally finance approximately
$600,000 of the total project with the balance being borrowed by the Company.
Capitalized interest related to the new facility was as follows:
<TABLE>
<S> <C>
June 30, 1998 (unaudited).......................................... $21,801
</TABLE>
The Bank leases space within the City Market grocery store under a five-year
operating lease which may be renewed for three additional terms of five years
each. Under the terms of the lease, the Bank pays a monthly licensing fee of
$2,000 a month plus a nickel for each ATM transaction. The first 4,000 ATM
transactions are excluded from the calculation.
The future minimum lease payments for the branch located in the City Market
store are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1998 (6 months)................................................... $12,000
1999.............................................................. 24,000
2000.............................................................. 22,000
-------
Total future minimum lease payments............................. $58,000
=======
</TABLE>
Vehicle Lease
During 1997, the Company's subsidiary, Western Colorado Bank, leased a 1998
Ford Explorer. The Bank leases the vehicle under a two-year lease requiring
monthly lease payments of $643. At the termination of the lease, the Bank has
the option to purchase the vehicle for approximately $19,000. The future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1998 (6 months).................................................... $3,858
1999............................................................... 5,787
------
Total future minimum lease payments.............................. $9,645
======
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
Banking transactions between the Company's subsidiary banks and their
directors, executive officers and their related interests are considered to be
between related parties. It is the Company's policy that the terms of such
transactions be made on substantially the same basis, including interest rate
and collateral, as those extended at the time to unrelated bank customers. The
amounts of loans outstanding to related parties were as follows:
F-75
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 5--RELATED PARTY TRANSACTIONS (CONTINUED)
<TABLE>
<S> <C>
June 30, 1998 (unaudited)........................................ $206,000
June 30, 1997 (unaudited)........................................ $127,000
December 31, 1997................................................ $132,000
December 31, 1996................................................ $277,000
</TABLE>
NOTE 6--NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Note payable to Bankers Bank
of the West, bearing
interest at 1% above
national prime rate (9.5%
at
June 30, 1998). The note
matures on August 29, 2001,
with interest payable
quarterly and a $60,000
principal reduction due
August 29 of each year
until the note matures. The
note is secured by the
capital stock of the Bank
of Telluride............... $ 219,995 $ 279,995 $219,995 $ 279,995
Note payable to Bankers Bank
of the West, bearing
interest at 1% above
national prime rate (9.5%
at
June 30, 1998). The note
matures on August 29, 2001,
with interest payable
quarterly and a $50,000
principal reduction due
August 29 of each year
until the note matures. The
note is secured by the
capital stock of the Bank
of Telluride............... 175,977 225,977 175,977 225,977
Note payable to Bankers Bank
of the West, bearing
interest at 1% above
national prime rate (9.5%
at
June 30, 1998). The note
was paid in full December,
1997. The note was secured
by the capital stock of the
Bank of Telluride and
Western Colorado Bank...... -- 2,209,784 -- 2,209,784
Note payable to Bankers Bank
of the West, bearing
interest at 1/2% above
national prime rate (9.0%
at June 30, 1998). The note
matures on January 1, 1999,
with interest payable
quarterly until the note
matures. The note is
secured by the capital
stock of the Bank of
Telluride and Western
Colorado Bank. The Company
can borrow up to $1.5
million.................... 815,000 -- -- --
---------- ---------- -------- ----------
Total..................... $1,210,972 $2,715,756 $395,972 $2,715,756
========== ========== ======== ==========
</TABLE>
F-76
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 6--NOTES PAYABLE (CONTINUED)
Principal maturities as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998 (6 months)................................................. $ 110,000
1999............................................................ 925,000
2000............................................................ 110,000
2001............................................................ 65,972
----------
TOTAL......................................................... $1,210,972
==========
</TABLE>
NOTE 7--RESTRICTED INVESTMENT SECURITIES
The Company's subsidiaries have lines of credit for short-term purposes with
the Federal Home Loan Bank. No advances were outstanding for any of the
periods presented. Mortgage loans were eligible as collateral for advances at
June 30, 1998. To establish the lines of credit, the Company's subsidiaries
were required to purchase stock in the Federal Home Loan Bank. The shares are
carried at cost plus the amount of stock dividends received. The number of
shares owned are as follows:
<TABLE>
<S> <C>
June 30, 1998 (unaudited)............................................ 4,223
June 30, 1997 (unaudited)............................................ 2,785
December 31, 1997.................................................... 3,962
December 31, 1996.................................................... 2,741
</TABLE>
NOTE 8--INCOME TAX
The provision for income taxes consists of the following components as of:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current income tax
expense:
Federal................ $209,229 $233,500 $323,314 $199,889
State.................. -- -- 17,570 --
-------- -------- -------- --------
Total Current Income
Tax Expense......... 209,229 233,500 340,884 199,889
Deferred federal and
state income tax
expense................. 33,283 (11,600) 19,421 (24,597)
-------- -------- -------- --------
Total Income Tax
Expense............. $242,512 $221,900 $360,305 $175,292
======== ======== ======== ========
</TABLE>
The provision for income tax expense differs from the amount computed by
applying the statutory federal income tax rate of 34% to income before income
taxes due to the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Income tax expense at
the statutory rate..... $257,000 $237,200 $413,000 $255,500
Tax-exempt interest..... (34,000) (38,300) (66,000) (72,000)
Other items............. 19,512 23,000 13,305 (8,208)
-------- -------- -------- --------
Income Tax Expense.... $242,512 $221,900 $360,305 $175,292
======== ======== ======== ========
</TABLE>
F-77
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 8--INCOME TAX (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effect of these
temporary differences are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Fixed assets........... $537,000 $521,000 $537,000 $522,000
Market adjustment for
available for sale
securities............ 32,555 -- 39,513 --
Accrued items not
recognized for tax
purposes.............. -- 1,000 -- 9,000
Stock dividends on
investments not
taxed................. 17,000 6,000 11,600 6,000
-------- -------- -------- --------
Gross deferred tax
liabilities......... 586,555 528,000 588,113 537,000
-------- -------- -------- --------
Deferred tax assets:
Allowance for loan
losses................ 290,000 281,000 300,000 287,500
Market adjustment for
available for sale
securities............ -- 5,042 -- 6,300
Other real estate
owned................. -- 19,000 12,000 13,900
Core deposits
acquired.............. 8,000 7,000 7,000 6,200
Deferred compensation
and severance pay
accrued............... 8,000 41,000 15,000 38,000
Net operating loss
carryforward--State... 46,000 52,000 52,000 52,000
General business tax
credit carryforward... 24,000 23,000 24,000 23,000
Other.................. 3,822 1,126 3,705 4,958
-------- -------- -------- --------
379,822 429,168 413,705 431,858
Deferred tax asset
valuation allowance... (38,000) (44,000) (44,000) (48,000)
-------- -------- -------- --------
Net deferred tax
asset................. 341,822 385,168 369,705 383,858
-------- -------- -------- --------
Net deferred tax
liability........... $244,733 $142,832 $218,408 $153,142
======== ======== ======== ========
</TABLE>
The valuation allowance for all dates presented relates to the deferred tax
assets for Colorado net operating loss carryforwards and general business tax
credit carryforwards which may be applied against future state tax
liabilities, if any. A portion of these assets have been reserved because of
the uncertainty as to whether the Company will benefit from these
carryforwards before they expire. The valuation allowance was decreased in
1997 and 1998 as a result of the Company benefiting from certain state
operating loss carryforwards being applied against current tax.
The Company has Colorado net operating loss (NOL) carryforwards of
approximately $800,000 which begin to expire in the year 2000. The amount of
the NOL which may be utilized in future years is limited because a portion of
the carryforward was acquired as a result of a corporate acquisition.
F-78
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 9--TIME DEPOSITS
Time deposits consist of certificates of deposit with the following
maturities as of June 30, 1998 (unaudited):
<TABLE>
<CAPTION>
CD'S CD'S
UNDER $ 100,000
$ 100,000 AND OVER TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Maturing within:
0 to 3 months.......................... $ 3,842,206 $ 2,619,890 $ 6,462,096
4 to 12 months......................... 10,450,514 7,582,197 18,032,711
1 to 5 years........................... 2,730,293 550,000 3,280,293
Over 5 years........................... 66,306 -- 66,306
----------- ----------- -----------
Total................................ $17,089,319 $10,752,087 $27,841,406
=========== =========== ===========
</TABLE>
NOTE 10--REGULATORY MATTERS
The Company's two subsidiaries are subject to various regulatory capital
requirements administered by its primary federal regulator, the Federal
Deposit Insurance Corporation (FDIC). Failure to meet the minimum regulatory
capital requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a direct
material affect on the subsidiaries' financial statements. Under the
regulatory capital adequacy guidelines and the regulatory framework for prompt
corrective action, the subsidiaries must meet specific capital guidelines
involving quantitative measures of the subsidiaries' assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The subsidiaries' capital amounts and classification under the
prompt corrective action guidelines are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the subsidiaries to maintain minimum amounts and ratios of total risk-
based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of June 30, 1998, that both subsidiaries meet all the
capital adequacy requirements to which they are subject.
As of June 30, 1998, in the most current communications with the FDIC, both
subsidiaries were categorized as well capitalized under the regulatory
framework for prompt corrective action. To remain categorized as well
capitalized, the subsidiaries will have to maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as disclosed in the table on the
following page. There are no conditions or events since the most recent
communication that management believes have changed the subsidiaries prompt
corrective action category.
F-79
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 10--REGULATORY MATTERS (CONTINUED)
BANK OF TELLURIDE
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
----------------- ----------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ ----------- ----- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
(unaudited):
Total Risk-Based
Capital
(to Risk-Weighted
Assets).............. $7,634,193 *15.0% *$4,062,494 *8.0% *$ 5,078,118 *10.0%
Tier I Capital
(to Risk-Weighted
Assets).............. $7,095,564 *14.0% *$2,031,247 *4.0% *$ 3,046,871 *6.0%
Tier I Capital
(to Adjusted Total
Assets).............. $7,095,564 *9.9% *$2,873,715 *4.0% *$ 3,592,144 *5.0%
As of June 30, 1997
(unaudited):
Total Risk-Based
Capital
(to Risk-Weighted
Assets).............. $7,175,307 *17.4% *$3,298,082 *8.0% *$ 4,122,603 *10.0%
Tier I Capital
(to Risk-Weighted
Assets).............. $6,659,286 *16.2% *$1,649,041 *4.0% *$ 2,473,562 *6.0%
Tier I Capital
(to Adjusted Total
Assets).............. $6,659,286 *10.3% *$2,575,680 *4.0% *$ 3,219,600 *5.0%
As of December 31, 1997:
Total Risk-Based
Capital
(to Risk-Weighted
Assets).............. $7,395,636 *14.9% *$3,957,644 *8.0% *$ 4,947,055 *10.0%
Tier I Capital
(to Risk-Weighted
Assets).............. $6,787,178 *13.7% *$1,978,822 *4.0% *$ 2,968,233 *6.0%
Tier I Capital
(to Adjusted Total
Assets).............. $6,787,178 *10.4% *$2,615,400 *4.0% *$ 3,269,250 *5.0%
As of December 31, 1996:
Total Risk-Based
Capital
(to Risk-Weighted
Assets).............. $7,012,435 *16.0% *$3,512,170 *8.0% *$ 4,390,213 *10.0%
Tier I Capital
(to Risk-Weighted
Assets).............. $6,462,922 *14.7% *$1,756,085 *4.0% *$ 2,634,128 *6.0%
Tier I Capital
(to Adjusted Total
Assets).............. $6,462,922 *9.2% *$2,801,000 *4.0% *$ 3,501,250 *5.0%
</TABLE>
* = Denotes Greater than or Equal to.
F-80
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 10--REGULATORY MATTERS (CONTINUED)
WESTERN COLORADO BANK
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
----------------- ----------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ ----------- ----- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
(unaudited):
Total Risk-Based
Capital
(to Risk-Weighted
Assets).............. $3,898,143 *10.6% *$2,952,887 *8.0% *$ 3,691,109 *10.0%
Tier I Capital
(to Risk-Weighted
Assets).............. $3,580,479 *9.7% *$1,476,444 *4.0% *$ 2,214,665 *6.0%
Tier I Capital
(to Adjusted Total
Assets).............. $3,580,479 *8.3% *$1,719,607 *4.0% *$ 2,149,508 *5.0%
As of June 30, 1997
(unaudited):
Total Risk-Based
Capital
(to Risk-Weighted
Assets).............. $2,669,627 *10.5% *$2,033,119 *8.0% *$ 2,541,339 *10.0%
Tier I Capital
(to Risk-Weighted
Assets).............. $2,419,533 *9.5% *$1,016,560 *4.0% *$ 1,524,840 *6.0%
Tier I Capital
(to Adjusted Total
Assets).............. $2,419,533 *6.7% *$1,443,828 *4.0% *$ 1,804,785 *5.0%
As of December 31, 1997:
Total Risk-Based
Capital
(to Risk-Weighted
Assets).............. $3,001,131 *10.3% *$2,334,049 *8.0% *$ 2,917,561 *10.0%
Tier I Capital
(to Risk-Weighted
Assets).............. $2,693,139 *9.2% *$1,167,024 *4.0% *$ 1,750,536 *6.0%
Tier I Capital
(to Adjusted Total
Assets).............. $2,693,139 *6.8% *$1,584,631 *4.0% *$ 1,980,788 *5.0%
As of December 31, 1996:
Total Risk-Based
Capital
(to Risk-Weighted
Assets).............. $2,467,978 *11.5% *$1,718,011 *8.0% *$ 2,147,514 *10.0%
Tier I Capital
(to Risk-Weighted
Assets).............. $2,241,394 *10.4% *$ 859,006 *4.0% *$ 1,288,509 *6.0%
Tier I Capital
(to Adjusted Total
Assets).............. $2,241,394 *6.7% *$1,346,825 *4.0% *$ 1,683,531 *5.0%
</TABLE>
* = Denotes Greater than or Equal to.
F-81
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 11--OTHER COMPREHENSIVE INCOME
Other comprehensive income recognized by the Company consists of unrealized
holding gains and losses on available for sale securities. The amounts
recognized for each period are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
----------------------- -------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Unrealized holding gains
and (losses) arising
during the period before
tax...................... $ (916) $ 3,457 $122,907 $(232,809)
Income tax (expense)
benefit.................. 6,958 (1,290) (45,844) 82,258
------ ------- -------- ---------
Other comprehensive income
net of tax............... $6,042 $ 2,167 $ 77,063 $(150,551)
====== ======= ======== =========
</TABLE>
During the period ended June 30, 1998, the Company changed its calculation
of deferred taxes for unrealized holding gains and losses on available for
sale securities by reducing the effective tax rate recognized from 37.3% to
31%.
During the periods reported, the Company did not sell any securities. As a
result, no holding gains or losses were realized as current income.
NOTE 12--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contract amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments. The Company uses
the same credit policies in making commitments and conditional obligations as
it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of one year or less or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained as considered necessary by the Company upon
extension of credit is based on management's credit evaluation of the counter-
party. Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements. Most standby
letters of credit are issued for one year or less. The credit risk involved in
issuing letters of credit is essentially the same as extending loans to
customers. Collateral requirements vary, but in general follow the
requirements for other loan facilities.
F-82
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 12--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
A summary of the Company's commitments consists of the following at:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Standby letters of
credit.................. $ 1,659,719 $ 3,027,530 $ 1,307,952 $ 3,181,846
Commitments to extend
credit:
Loans.................. 14,853,191 6,992,138 10,033,818 5,698,693
Credit cards........... 1,627,850 983,116 996,360 901,170
Ready reserve.......... 656,456 506,108 557,758 566,833
----------- ----------- ----------- -----------
Total................ $18,797,216 $11,508,892 $12,895,888 $10,348,542
=========== =========== =========== ===========
</TABLE>
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments are presented below. Certain assets, the most significant being
premises and equipment, do not meet the definition of a financial instrument
and are excluded from this disclosure. Similarly, core deposits base and other
customer relationship intangibles are not considered financial instruments and
are not discussed below. Fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated future
business. Accordingly, this fair value information is not intended to, and
does not, represent the Company's underlying value. Many of the assets and
liabilities subject to the disclosure requirements are not actively traded,
requiring fair values to be estimated by management. These estimates
necessarily involve the use of judgment about a wide variety of factors,
including but not limited to, relevancy of market prices of comparable
instruments, expected future cash flows, and appropriate discount rates.
The terms and short-term nature of certain assets and liabilities result in
their carrying value approximating fair value. These include cash and due from
banks and federal funds purchased and sold. Loan commitments and letters of
credit generally have short-term, variable rate features and contain clauses
which limit the Company's exposure to changes in customer credit quality.
Accordingly, their carrying values, which are immaterial at the respective
balance sheet dates, are reasonable estimates of fair value. The following
methods and assumptions were used by the Company to estimate the fair value of
the remaining classes of financial instruments:
Fair values of securities available for sale are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans are estimated using a discounted cash flow analysis,
based on interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
By definition, fair values of deposits with no stated maturities, such as
demand deposits, savings and NOW accounts and money market deposit accounts
are equal to the amounts payable on demand at the reporting date. The fair
values of all other fixed rate deposits are based on discounted cash flows
using rates currently offered for deposits of similar remaining maturities.
The fair values of the Company's variable rate long-term debt approximates
fair value.
F-83
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's significant financial instruments
were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
----------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks................ $ 6,209 $ 6,209 $ 8,233 $ 8,233
Interest bearing balances.............. 21 21 -- --
Federal funds sold..................... 4,060 4,060 -- --
Securities available for sale.......... 23,321 23,321 19,925 19,925
Loans receivable....................... 76,534 76,683 68,853 64,162
Financial Liabilities:
Deposits............................... 108,795 108,754 88,637 88,678
Notes payable.......................... 1,211 1,211 2,716 2,716
Federal funds purchased................ -- -- 295 295
</TABLE>
The amounts reported for fair value as of June 30, 1998 and 1997 for loans
receivable and deposits were extrapolated based on amounts calculated as of
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------ ------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks............. $ 5,963 $ 5,963 $ 5,669 $ 5,669
Federal funds sold.................. 240 240 -- --
Securities available for sale....... 17,887 17,887 22,522 22,522
Loans receivable.................... 70,974 71,203 63,629 64,017
Financial Liabilities:
Deposits............................ 93,747 93,747 86,840 86,923
Notes payable....................... 396 396 2,716 2,716
Federal funds purchased............. -- -- 2,225 2,225
</TABLE>
NOTE 14--CONTINGENT LIABILITIES
In the normal course of business, the Company's subsidiaries are involved in
various legal actions arising from their lending and collection activities. In
the opinion of management, the outcome of these legal actions will not
significantly affect the financial position of the Company.
As a result of constructing the new bank facility in Telluride, the town
required the Company's subsidiary, the Bank of Telluride, to issue letters of
credit equaling $218,500 in the town's name. The letters of credit will be
canceled upon the Bank's completion of the relocation and restoration of a
historic miner's cottage, repairs to Colorado Avenue and future underground
and alley improvements. Management believes the approximate cost of completing
these projects will not exceed $125,000.
F-84
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 15--EMPLOYEE BENEFIT PLANS
Retirement Plan
The Company adopted in 1990, a contributory profit sharing plan that
provides benefits for employees who have had at least one year of service. In
a defined contribution plan, benefits depend solely on amounts contributed to
the plan plus investment earnings. Eligible employees who elect to participate
may contribute up to 10% of their salaries to the plan on a pre-tax basis. The
employer will contribute by matching half of the first 4% of each employee's
contribution and may also make discretionary contributions which would be
allocated to each participant based on the fraction of the individual's annual
pay to the total annual pay of all participants. The Company's contribution on
behalf of its employees to the plan was as follows:
<TABLE>
<S> <C>
June 30, 1998 (unaudited)......................................... $49,253
June 30, 1997 (unaudited)......................................... $39,791
December 31, 1997................................................. $79,174
December 31, 1996................................................. $43,500
</TABLE>
The discretionary contribution for 1998 had not been approved as of June 30,
1998.
Deferred Compensation
The Company maintains a Non-Qualified Deferred Compensation plan for the
purpose of attracting and retaining key employees. Under the provisions of the
plan, key employees are granted stock appreciation units which are recognized
as compensation by the employee upon the employee's termination or as a result
of a "change in control" of the Company. The amount of the compensation is
calculated based on the number of units granted times the appreciation of each
unit. The appreciation of each unit reflects the change in fair market value
of the Company's common stock from the date each unit was granted to the date
of termination or change of control. If there has not been a change of control
or the stock is not publicly traded, fair market value of the units is defined
by the plan as book value of the Company's common stock calculated as if all
units outstanding are outstanding shares of common stock on the date the book
value is calculated. In the case of a change of control, the fair market value
of each unit is calculated by dividing the sum of the total consideration as a
result of the change of control transaction payable to holders of common
stock, plus the aggregate unit grant price for all units outstanding, divided
by the total number of shares of common stock outstanding on the effective
date of the change of control, plus the total number of stock appreciated
units outstanding. If in the future the Company's stock was publicly traded,
fair market value would be determined under the plan as the price at which the
last sale of common stock occurred. If the consideration to be paid to common
shareholders is other than cash, participants will receive their proportion of
the same type of consideration. The Company had accrued as deferred
compensation the following amounts:
<TABLE>
<S> <C>
June 30, 1998 (unaudited)......................................... $21,300
June 30, 1997 (unaudited)......................................... $85,460
December 31, 1997................................................. $15,300
December 31, 1996................................................. $76,500
</TABLE>
The amounts paid under the terms of the plan are recognized as expense by
the Company unless the payments result from a change of control. In the case
of a change of control, the amount paid to participants is included in the
total consideration paid under the terms of the change of control.
F-85
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 16--NON-QUALIFIED STOCK OPTIONS
In December 1995, the Company's board of directors approved a non-qualified
stock option plan for outside directors of its subsidiary banks. During 1996,
options to purchase 1,200 shares (300 shares to 4 different directors) of the
Company's common stock were awarded under the plan. In accordance with the
provisions of SFAS No. 123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plan and, accordingly, no
compensation costs have been recognized for the stock option plan. If the
Company had elected to recognize compensation cost based on the fair value of
the options awarded at their grant date as prescribed by SFAS No. 123, net
income would have been reduced to the proforma amounts indicated below (in
thousands):
<TABLE>
<CAPTION>
PROFORMA NET INCOME
NET AS
INCOME REPORTED
-------- ----------
<S> <C> <C>
For the six months ended June 30, 1998 (unaudited)... $514 $514
For the six months ended June 30, 1997 (unaudited)... 472 472
For the year ended December 31, 1997................. 854 854
For the year ended December 31, 1996................. 418 576
</TABLE>
The fair value of each option awarded is estimated on the date it was
granted using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<S> <C>
Expected dividend yield............................................ 0.0%
Risk-free interest rate............................................ 5.4%
Option price....................................................... $435
Estimated fair value per share..................................... $544
Life of the option................................................. 5 years
</TABLE>
As of June 30, 1998, none of the options awarded have been exercised. If the
options had been exercised and the additional 1,200 shares issued,
stockholders' equity would have increased by approximately $522,000.
F-86
<PAGE>
TELLURIDE BANCORP, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEE ACCOUNTANTS' REPORT
NOTE 17--RESTATEMENT OF BALANCES PREVIOUSLY REPORTED
During 1998, the Company's subsidiary, the Bank of Telluride, detected that
certain ATM expenses amounting to $48,316 had been incurred by the Bank prior
to 1997, but never recognized as expense. The Company's 1996 financial
statements have been restated in this report to correct for this error. A
summary of the account balances that were required to be restated is as
follows:
<TABLE>
<CAPTION>
AS
PREVIOUSLY CORRECTION
REPORTED OF ERROR AS RESTATED
------------ ---------- ------------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION
Prepaid income tax................ $ 184,428 $ 16,427 $ 200,855
Total assets...................... 101,004,892 16,427 101,021,319
Other liabilities................. 315,259 48,316 363,575
Retained earnings................. 6,708,491 (31,889) 6,676,602
Total stockholders' equity........ 8,514,571 (31,889) 8,482,682
Total liabilities and
stockholders' equity............. 101,004,892 16,427 101,021,319
CONSOLIDATED STATEMENT OF INCOME
General and administrative
expenses......................... 1,353,335 48,316 1,401,651
Provision for income tax.......... 191,719 (16,427) 175,292
Net income........................ 608,096 (31,889) 576,207
CONSOLIDATED STATEMENT OF CASH FLOWS
Net income........................ 608,096 (31,889) 576,207
Decrease (Increase) in prepaid
taxes............................ (17,106) (16,427) (33,533)
Increase in other liabilities..... 13,566 48,316 61,882
</TABLE>
NOTE 18--CONCENTRATION OF CREDIT RISK
The majority of the Company's loan portfolio and collateral for those loans
is concentrated in Montrose and San Miguel Counties in Western Colorado.
However, obligors and counterparties are diversified nationally. Because of
this, the risks of lending reflect both national and local economic
conditions.
NOTE 19 -- PROPOSED MERGER
In April 1998, the Company entered into a merger and plan of reorganization
agreement whereby it will be merged with and into Vail Banks, Inc.
Under the terms of the agreement, the purchase price for 100% of the
outstanding shares of the Company will be the lesser of 300% of its
stockholders' equity immediately prior to the sale, or $33,000,000. At the
completion of the transaction, the Company's shareholders will receive in
exchange for their shares, cash equal to 45% of the purchase price allocated
to their ownership percentage, with the remainder of their percentage of the
purchase price being paid in stock of Vail Banks, Inc.
The merger is subject to regulatory approval and the approval of the
Company's shareholders. The Company estimates that the transaction will close
in September 1998.
F-87
<PAGE>
[INSIDE BACK COVER]
[COLOR PICTURE OF AVON, COLORADO BANK LOBBY]
<PAGE>
[COLOR PICTURE OF OLD WEST-LOOKING BUILDING]
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK COVERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Vail Banks' Articles of Incorporation provides for indemnification of
directors to the full extent permitted by Colorado law and, to the extent
permitted by such law, eliminate or limit the personal liability of directors
to Vail Banks and its shareholders for monetary damages for certain breaches
of fiduciary duty and the duty of care. Such indemnification may be available
for liabilities arising in connection with this Offering. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
directors, officers or persons controlling Vail Banks pursuant to the
foregoing provisions, Vail Banks has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. Pursuant to its Articles of
Incorporation, Vail Banks may indemnify its officers, employees, agents and
other persons to the fullest extent permitted by Colorado law.
Vail Banks' Bylaws also provide that Vail Banks shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Vail Banks, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of Vail Banks' subsidiaries or, at
the request of Vail Banks, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
whether Vail Banks would have the power to indemnify such person against such
liability under Colorado law. Vail Banks intends to purchase and maintain
insurance on behalf of all of its directors and executive officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by Vail
Banks in connection with the issuance and distribution of the shares of Common
Stock.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $ 6,731
NASD Filing Fees and Blue Sky Fees and Expenses.................... 15,000
Nasdaq National Market Filing Fees................................. 63,725
Consulting Fees.................................................... 185,000
Printing and Engraving Expenses.................................... 125,000
Legal Fees and Expenses............................................ 200,000
Accounting Fees and Expenses....................................... 70,000
Transfer Agent Fees and Expenses................................... 2,500
Miscellaneous...................................................... 32,044
--------
Total............................................................ $700,000
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Vail Banks has issued the following securities since July 31, 1995 in
transactions exempt under Section 4(2) of the Securities Act.
<TABLE>
<CAPTION>
SECURITY NO. SHARES AGGREGATE CONSIDERATION DATE OF ISSUANCE
-------- ---------- ----------------------- ----------------
<S> <C> <C> <C>
Common Stock 204,540 $2.0 million July 24, 1998
Common Stock 454,890 $3.0 million April 30, 1997
Series A Preferred 34,258 Consideration for merger of VNB December 1, 1997
Building Corp.
Mandatorily N/A $1.6 million; assumed in December 1, 1997
Convertible acquisition of Cedaredge
Debentures
</TABLE>
II-1
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement between the Underwriter and the
Registrant*
2.1 Merger Agreement and Plan of Reorganization by and between Vail
Banks, Inc. and Telluride Bancorp, Ltd., dated April 16, 1998
2.2 Merger Agreement and Plan of Reorganization by and between Vail
Banks, Inc., WestStar Bank, Independent Bankshares, Inc., and
Glenwood Independent Bank, dated March 10, 1998
3.1 Amended and Restated Articles of Incorporation of the Registrant*
3.2 Amended and Restated Bylaws of the Registrant*
4.1 Form of Common Stock Certificate of the Registrant*
5.1 Opinion of Kilpatrick Stockton LLP*
10.1 Stock Purchase Agreement by and between Vail Banks, Inc., WestStar
Bank, Cedaredge Financial Services, Inc., WestStar Community
Bank, and certain Company Shareholders, dated July 3, 1997
10.2 Loan Agreement by and between Barnett Bank of Southwest Florida
and Bank of Colorado Holding Company, dated December 10, 1993
10.3 Stock Incentive Plan, as amended
10.4 Agreement with the Wallach Company, dated April 17, 1997
10.5 Consulting Agreement between Vail Banks, Inc. and Dillon Schramm
Associates, LTD, dated April 21, 1998
10.6 Employment Agreement between Vail Banks, Inc. and E.B. Chester,
Jr., dated , 1998*
10.7 Employment Agreement between Vail Banks, Inc. and Lisa M. Dillon,
dated , 1998*
21.1 Subsidiaries of the Registrant
23.1 Consent of Fortner, Bayens, Levkulich & Co., P.C.
23.2 Consent of Dalby, Wendland & Co., P.C.
23.3 Consent of GRA, Thompson, White & Co., P.C.
23.4 Consent of Kilpatrick Stockton LLP, included in opinion filed as
Exhibit 5.1*
24.1 Power of Attorney (on signature page)
27.1 Financial data schedule
</TABLE>
- --------
*To be filed by amendment.
(b) Financial Statement Schedules
None required
ITEM 28. UNDERTAKINGS
Vail Banks hereby undertakes to provide the Underwriter at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriter to permit prompt
delivery to each purchaser.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Vail Banks
pursuant to the foregoing provisions, or otherwise, Vail Banks has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Vail Banks
of expenses incurred or paid by a director, officer or controlling person of
Vail Banks in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, Vail Banks will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question as to whether such
indemnification by it is against public policy as expressed in the Securities
Act, and will be governed by the final adjudication of such issue.
The undersigned Vail Banks hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE
CITY OF VAIL, STATE OF COLORADO, ON THE 31ST DAY OF JULY, 1998.
VAIL BANKS, INC.
/s/ E.B. Chester, Jr.
By: _________________________________
E.B. CHESTER, JR.,
CHAIRMAN
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
E.B. Chester and Lisa M. Dillon and either of them, his or her true and lawful
attorneys-in-fact with full power of substitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign a Registration Statement pursuant to Rule 462(b) under
the Securities Act of 1933 and to cause the same to be filed, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting to said attorneys-in-fact
and agent, full power and authority to do and perform each and every act and
thing whatsoever requisite or desirable to be done in and about the premises,
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things that said
attorneys-in-fact and agents, or their substitutes or substitute, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 31st
day of July, 1998, in the capacities indicated.
SIGNATURE POSITION
/s/ E.B. Chester, Jr. Chairman
- -------------------------------------
E.B. CHESTER, JR.
/s/ Lisa M. Dillon President and Chief
- ------------------------------------- Executive Officer;
LISA M. DILLON director (principal
executive officer)
/s/ Joseph S. Dillon Senior Executive
- ------------------------------------- Vice President and
JOSEPH S. DILLON Chief Financial
Officer (principal
financial and
accounting officer)
II-4
<PAGE>
/s/ Kay H. Chester Director
- -------------------------------------
KAY H. CHESTER
/s/ James G. Flaum Director
- -------------------------------------
JAMES G. FLAUM
/s/ S. David Gorsuch Director
- -------------------------------------
S. DAVID GORSUCH
/s/ James M. Griffin Director
- -------------------------------------
JAMES M. GRIFFIN
/s/ Byron A. Rose Director
- -------------------------------------
BYRON A. ROSE
/s/ E. William Wilto Director
- -------------------------------------
E. WILLIAM WILTO
/s/ James C. Allen Director
- -------------------------------------
JAMES C. ALLEN
/s/ Martin T. Hart Director
- -------------------------------------
MARTIN T. HART
/s/ Robert L. Knous, Jr. Director
- -------------------------------------
ROBERT L. KNOUS, JR.
/s/ Kent Myers Director
- -------------------------------------
KENT MYERS
II-5
<PAGE>
EXHIBIT 2.1
-----------
- --------------------------------------------------------------------------------
VAIL BANKS, INC.
AND
TELLURIDE BANCORP, LTD.
====================================
MERGER AGREEMENT
and
PLAN OF REORGANIZATION
====================================
APRIL 16, 1998
- --------------------------------------------------------------------------------
<PAGE>
MERGER AGREEMENT AND PLAN OF REORGANIZATION
-------------------------------------------
THIS MERGER AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is
made and entered into this 16th day of April, 1998 by and between VAIL BANKS,
INC., a Colorado corporation (hereinafter "Vail Banks"), [and unless the context
otherwise requires, the term "Vail Banks" shall include both Vail Banks and its
wholly-owned subsidiary, WestStar Bank, a Colorado bank (hereinafter
"WestStar")], and TELLURIDE BANCORP, LTD., a Colorado corporation (hereinafter
the "Company"), [and unless the context otherwise requires, the term the
"Company" shall include its wholly-owned subsidiaries, Bank of Telluride, a
Colorado bank (hereinafter "Bank of Telluride"), and Western Colorado Bank, a
Colorado bank (hereinafter "Western Colorado"). Telluride Bancorp, Ltd., and
Bank of Telluride and Western Colorado Bank shall sometimes hereinafter be
referred to collectively as the "Banks"].
W I T N E S S E T H:
-------------------
WHEREAS, in order to effect the Merger (as defined below) the Boards
of Directors of the parties hereto deem it advisable and in the best interests
of each such corporation and their respective shareholders that Vail Banks
acquire one hundred percent (100%) of the ownership of the Company pursuant to
the merger of the Company with and into Vail Banks for cash and shares of Vail
Banks Common Stock and that Vail Banks shall be the surviving corporation of the
Merger upon the terms and conditions hereinafter set forth and as set forth in
the Agreement and Plan of Merger attached hereto as Exhibit A; and
WHEREAS, WestStar is a wholly-owned subsidiary of Vail Banks and Bank
of Telluride and Western Colorado are wholly-owned subsidiaries of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual and
reciprocal representations, warranties, promises and covenants herein contained,
the parties hereto agree as follows:
ARTICLE I
---------
TERMS OF THE BUSINESS ARRANGEMENT
---------------------------------
1.1 MERGER. Pursuant to the terms and conditions provided herein, on
------
the Closing Date (hereinafter defined) the Company shall be merged with and into
Vail Banks in accordance with and in the manner set forth in the Holding Company
Merger Agreement.
1.2 CONSIDERATION. For purposes of determining the amount of cash
-------------
and the number of shares of Vail Banks Common Stock that will be delivered to
the owners of Company Common Stock (the "Company Shareholders") at the Closing:
<PAGE>
(a) The value of the Company shall be assumed to be the lesser of (i)
three hundred percent (300%) of the Company's Shareholder Equity (as that term
is defined in paragraph (c) below) immediately prior to the Closing, or (ii)
$33,000,000 (the "Company's Assumed Value").
(b) The value of one share of Vail Banks Common Stock shall be equal
to Vail Banks' Shareholder Equity (as that term is defined in paragraph (c)
below) immediately prior to Closing divided by the total number of shares of
Vail Banks Common Stock outstanding immediately prior to Closing multiplied by
two hundred fifty percent (250%) (the "Vail Banks Assumed Per Share Value");
provided, however, that for purposes of determining the Vail Banks Assumed Per
Share Value, every share of stock of Vail Banks which is not Vail Banks Common
Stock, every debt instrument issued by Vail Banks which provides for the
conversion into Vail Banks Common Stock, and every option or right to purchase
stock of Vail Banks shall be treated as though such conversion occurred the day
immediately prior to Closing.
(c) For purposes of this Section 1.2, Shareholder Equity shall be the
value of the shareholder equity of the Company or Vail Banks, as the case may
be, as shown on unaudited, consolidated financial statements dated the day
immediately preceding Closing (or, in the case of the Company, dated the last
day of the month immediately preceding the month in which the Closing occurs)
and prepared in accordance with the standards set forth in Section 4.2.6;
provided, however, that Vail Banks' Shareholder Equity shall be determined after
giving effect to either any initial public offering of Vail Banks Common Stock
undertaken by Vail Banks (an "IPO") or any other capital raising transaction
which is required or allowed under the Regulatory Approvals (as defined in
Article III) (the "Equity Funding Transactions") and shall be reduced by the
amount of the fee paid or to be paid to the Wallach Company as described in
Section 3.2 below.
(d) Except as may be modified pursuant to paragraph (f) below, the
number of shares of Vail Banks Common Stock to be delivered at the Closing shall
be that number of shares equal to fifty-five percent (55%) of the Company's
Assumed Value divided by the Vail Banks Assumed Per Share Value.
(e) The amount of cash to be delivered to the Company Shareholders at
Closing shall be forty-five percent (45%) of the Company's Assumed Value (the
"Cash Portion"). For all purposes of this Agreement the Cash Portion shall
include all cash paid to those Company Shareholders who exercise their right to
dissent from the Merger (the "Dissenting Shareholders").
(f) Notwithstanding the preceding paragraph (d), in the event that the
product of (1) the number of shares to be delivered to the Company Shareholders
pursuant to paragraph (d) and (2) the Equity Funding Value (as defined in
paragraph (h) below) (the "Stock Portion") would be less than forty-five percent
(45%) of the sum of the Cash Portion and the Stock Portion, then Vail Banks
shall deliver to the Company Shareholders that number of shares of Vail Banks
Common Stock ("Additional Common Stock") which will cause the sum of (1) the
Stock Portion
2
<PAGE>
and (2) the Additional Common Stock multiplied by the Equity Funding Value (the
"Adjusted Stock Portion") to equal forty-five percent (45%) of (A) the Adjusted
Stock Portion plus (B) the Cash Portion; provided, however, if the offering
price of the Vail Banks Common Stock in any Equity Funding Transaction is less
than the equivalent of $135 per share based on the current capital structure of
Vail Banks (i.e. without giving effect to any stock splits accomplished in
connection with any Equity Funding Transaction), then Vail Banks shall have the
right to terminate this Agreement as provided in Section 11.1(k) hereof.
(g) The Company Shareholders shall be entitled to elect to receive
shares of Vail Banks Common Stock, cash or a combination thereof, in the amounts
specified by such Company Shareholders in accordance with the provisions of this
paragraph. On a date approximately 15 days prior to the date of the meeting of
Company Shareholders, referred to in Section 3.1.1 hereof, to be held for the
purpose of ratifying and authorizing the Company's entry into this Agreement
(the "Company Shareholder Meeting"), a form of election shall be mailed to each
Company Shareholder (the date of such form of election being referred to herein
as the "Mailing Date"). Each Company Shareholder shall indicate thereon his or
her preference as to the proportion of Vail Banks Common Stock and/or cash which
he or she desires to receive in exchange for his or her Company Common Stock and
shall return the form to the secretary of the Company prior to the adjournment
of the Company Shareholder Meeting (the "Election Date"). If the form of
election of any Company Shareholder is not returned prior to the Election Date,
such Company Shareholder will be deemed to have elected to receive (1) an amount
of cash equal to the Cash Portion multiplied by the Company Shareholder's
percentage ownership in the Company immediately prior to the Merger and (2) that
number of shares of Vail Banks Common Stock equal to the Stock Portion or
Adjusted Stock Portion, as the case may be, multiplied by the Company
Shareholder's percentage ownership in the Company immediately prior to the
Merger. If Company Shareholders elect to receive in the aggregate an amount of
cash in excess of the Cash Portion, then the amount of cash to be paid to any
Company Shareholder shall be adjusted to equal the amount which bears the same
ratio to the total amount of cash elected to be received by such Company
Shareholder as the Cash Portion, bears to the total amount of cash elected to be
received by all Company Shareholders. Conversely, if Company Shareholders elect
to receive in the aggregate a number of shares of Vail Banks Common Stock in
excess of the Stock Portion or the Adjusted Stock Portion, as the case may be,
then the number of shares of Vail Banks Common Stock to be delivered to any
Company Shareholder shall be adjusted to equal the number of shares of Vail
Banks Common Stock which bears the same ratio to the total number of shares of
Vail Banks Common Stock elected to be received by such Company Shareholder as
the Stock Portion or Adjusted Stock Portion, as the case may be, bears to the
total number of shares of Vail Banks Common Stock elected to be received by all
Company Shareholders.
(h) For purposes of this Section 1.2, "Equity Funding Value" shall
mean the price paid for one share of Vail Banks Common Stock in any Equity
Funding Transaction.
Upon the terms and conditions of this Agreement and the Holding Company Merger
Agreement, Vail Banks shall make available on or before the Effective Date of
the Merger (as defined in the
3
<PAGE>
Holding Company Merger Agreement) for delivery to (or to the order of) the
Company Shareholders sufficient funds to provide for cash payments to the
Company Shareholders as provided in this Agreement.
An example of the determination of the consideration to be delivered to the
Company Shareholders pursuant to this Section 1.2 is attached hereto as Exhibit
H.
1.3 POSSIBLE INITIAL PUBLIC OFFERING OF VAIL BANKS COMMON STOCK.
-----------------------------------------------------------
The Board of Directors of Vail Banks may determine to cause Vail Banks to
consummate an initial public offering of Vail Banks Common Stock immediately
before or contemporaneously with the Closing. In such event, Vail Banks shall
use its commercially reasonable best efforts to consummate such offering, and
the Company shall cooperate with the officers, directors, representatives,
agents, attorneys and accountants of Vail Banks and use its commercially
reasonable best efforts to furnish to Vail Banks all information concerning the
Company and the Banks as Vail Banks or its representatives may request in
connection with such offering.
1.4 DELIVERY OF CONSIDERATION. (a) Contemporaneously with the
-------------------------
Closing, Vail Banks shall deliver to the holders of certificates formerly
evidencing ownership of Company Common Stock, immediately upon receipt from the
Company Shareholders of such certificates, duly executed and in proper form for
transfer, the Consideration to which they are entitled pursuant to the
provisions of this Article.
(b) The portion of the Consideration that is to be paid to the Company
Shareholders in Vail Banks Common Stock shall be issued by Vail Banks in
reliance on Section 4(2) of the Securities Act of 1933, as amended, and the
regulations promulgated pursuant thereto. At Closing, Vail Banks will enter
into a Registration Rights Agreement in the form of Exhibit F attached hereto
with each Company Shareholder receiving Vail Banks Common Stock hereunder.
(c) In the event that the IPO Closing Date does not occur prior to or
contemporaneously with the Closing Date, the Company shall cause each Company
Shareholder who receives Vail Banks Common Stock hereunder, severally and not
jointly with any other person, (i) to acknowledge that the shares of Vail Banks
Common Stock to be delivered to that Company Shareholder pursuant to Section 1.2
have not been registered under the Securities Act, and therefore may not be
resold by that Company Shareholder without being in compliance with the
Securities Act or an exemption thereof prior to the registration of such stock,
(ii) convenant that none of the shares of Vail Banks Common Stock issued to that
Company Shareholder pursuant to Section 1.2 will be offered, sold, assigned,
transferred or otherwise disposed of except upon full compliance with all the
applicable provisions of the Securities Act and the rules and regulations of the
Securities and Exchange Commission and applicable state securities laws and
regulations, and (iii) to execute and be bound by the provisions of that
Shareholders' Agreement between Vail Banks and each owner of the capital stock
of Vail Banks, dated February 26, 1997, as thereafter or hereafter amended (the
"Vail Banks Shareholders' Agreement") (attached hereto as Exhibit G). In
addition, the certificates evidencing the shares of Vail Banks Common Stock
delivered to each
4
<PAGE>
Company Shareholder will bear a legend substantially in the form set forth below
and containing such other information as Vail Banks may deem necessary or
appropriate:
EXCEPT PURSUANT TO THE TERMS OF THE AGREEMENT AND HOLDING COMPANY MERGER
AGREEMENT DATED ______________, 1998 AMONG THE ISSUER AND THE HOLDER OF
THIS CERTIFICATE AND THE OTHER PARTIES THERETO, THE SHARES REPRESENTED BY
THIS CERTIFICATE MAY NOT BE VOLUNTARILY SOLD, ASSIGNED, EXCHANGED,
TRANSFERRED OR OTHERWISE DISPOSED OF AND THE ISSUER SHALL NOT BE REQUIRED
TO GIVE EFFECT TO ANY ATTEMPTED VOLUNTARY SALE, ASSIGNMENT, EXCHANGE,
TRANSFER, OR OTHER DISPOSITION OF ANY OF THOSE SHARES, DURING THE SIX
MONTH PERIOD ENDING ON ___________, 199__ (THE "RESTRICTED PERIOD"). ON
THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES
TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE
TRANSFER AGENT) AFTER THE EXPIRATION OF THE RESTRICTED PERIOD.
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR ANY STATE SECURITIES
LAWS, HAVE BEEN ISSUED PURSUANT TO AND UNDER ONE OR MORE EXEMPTIONS
THERETO, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, OR
DISPOSED OF UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS, UNLESS THE ISSUER HAS RECEIVED AN
OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
TRANSFER OF ANY OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AND ENTITLED TO THE BENEFITS OF THAT CERTAIN SHAREHOLDERS'
AGREEMENT, DATED AS OF FEBRUARY 26, 1997, BY AND AMONG VAIL BANKS, INC.
AND ITS SHAREHOLDERS, A COPY OF WHICH MAY BE INSPECTED AT THE PRINCIPAL
OFFICE OF VAIL BANKS, INC.
1.5 DUE DILIGENCE. Vail Banks and the Company shall have forty-five
-------------
(45) days from the date of this Agreement in which to conduct reasonable due
diligence activities with respect to the other party and its wholly-owned
subsidiaries. Immediately upon the expiration of the thirtieth (30th) day of
such forty-five (45) day period the Company shall provide the Company Disclosure
Memorandum described in Section 4.1 below to Vail Banks and Vail Banks shall
provide the Vail Banks Disclosure Memorandum described in Section 6.1 below to
the Company.
5
<PAGE>
1.6 VAIL BANKS BOARD OF DIRECTORS POSITION. Immediately following
--------------------------------------
the Closing, Vail Banks shall (i) use its best efforts to nominate and elect
Garner F. Hill, II ("Hill") and one additional person who is either a member of
the Management (as that term is defined in Section 4.2.5) of the Company or a
Company Shareholder to serve as members of the Board of Directors of WestStar
for a term ending two (2) years following the date of Closing; and (ii) use its
best efforts to cause the shareholders of Vail Banks to nominate and elect such
persons to serve as members of the Board of Directors of Vail Banks for a term
ending two (2) years following the date of Closing.
1.7 RESTRICTIONS ON TRANSFER OF VAIL BANKS COMMON STOCK. In the
---------------------------------------------------
event that an IPO is completed by Vail Banks immediately before or
contemporaneously with the Closing, the Company agrees to use its best efforts
to cause each Company Shareholder, to the extent and for the period required by
the underwriters in connection with the IPO, to agree not to sell, assign,
exchange, transfer, or otherwise dispose of (A) any shares of Vail Banks Common
Stock received by any Company Shareholder in the Merger or (B) any interest in
(including any option to buy or sell unless such option is not exercisable until
after expiration of the Restricted Period) any of those shares of Vail Banks
Common Stock, in whole or in part.
ARTICLE II
----------
CLOSING
-------
The transactions contemplated herein shall be consummated (the
"Closing") at such place as mutually agreed to by the parties hereto. In the
- --------
event that Vail Banks is actively working toward consummating an IPO at the time
at which all approvals from any and all governmental authorities having
jurisdiction over the transactions contemplated by this Agreement and the
Holding Company Merger Agreement and the expiration of any waiting or similar
period required by applicable law (the "Regulatory Approvals"), are received and
complied with, the Closing shall occur on the date on which the IPO transaction
closes (the "IPO Closing Date"). In the event that the IPO Closing Date has
occurred at the time of receipt of all Regulatory Approvals, the Closing shall
occur on or before the thirtieth (30th) day following the receipt of all
Regulatory Approvals. In the event that Vail Banks is not actively working
toward consummating an IPO at the time at which the Regulatory Approvals are
received, the Closing shall occur on or before the later of (i) December 31,
1998 or (ii) the tenth (10th) business day following the last day of the month
following the month in which all Regulatory Approvals are received (but in no
event shall the Closing occur before July 1, 1998), or at such other time and
place as may be mutually satisfactory to the parties hereto (the "Closing
Date"). The parties acknowledge that the Closing is not conditioned upon the
successful completion of an IPO.
6
<PAGE>
ARTICLE III
-----------
OTHER AGREEMENTS
----------------
3.1 SHAREHOLDER CONSENT
-------------------
3.1.1 THE COMPANY. Two-thirds of the shareholders of the
-----------
Company Common Stock will vote on or before the thirtieth (30th) day following
the date of this Agreement to ratify and authorize the Company's entry into this
Agreement and the Holding Company Merger Agreement.
3.1.2 VAIL BANKS. Two-thirds of the shareholders of Vail
----------
Banks Common Stock and Vail Banks Series A Preferred Stock (the "Vail Banks
Preferred Stock") will vote on or before the thirtieth (30th) day following the
date of this Agreement to ratify and authorize Vail Banks' entry into this
Agreement.
3.2 BROKERS; FINDERS' FEES; COMMISSIONS. Each party hereto
-----------------------------------
represents and warrants to the other that no broker or finder has acted on its
behalf in connection with this Agreement or the transactions contemplated
hereby. Notwithstanding the preceding sentence, Vail Banks has entered into an
agreement with The Wallach Company pursuant to which Vail Banks will pay to The
Wallach Company a percentage fee based upon the value of assets purchased by
Vail Banks pursuant to this Agreement. Each party agrees to indemnify the other
and hold and save the other harmless from any claim or demand for commissions or
other compensation by any broker, finder or similar agent (other than The
Wallach Company) claiming to have been employed by or on behalf of such party.
3.3 ACCESS, INFORMATION AND DOCUMENTS. During the forty-five
---------------------------------
(45) days following the date of this Agreement the Company shall permit, and
shall cause the Banks, to permit, Vail Banks and its authorized representatives
full access, except as prohibited by law, during normal business hours to all of
the Company's and the Banks' properties, books, contracts, commitments and
records and the Company shall furnish, and shall cause the Banks to furnish,
Vail Banks and its authorized representatives such information concerning the
Company's and the Banks' affairs as Vail Banks may reasonably request. The
Company shall require, and shall cause the Banks to require, its personnel to
assist Vail Banks in making any such investigation of the Company or the Banks
and shall cause the counsel, accountants, employees and other representatives of
the Company and the Banks to be available to Vail Banks for such purposes.
During such investigation, Vail Banks and its authorized representatives shall
have the right to make copies of such records, files, tax returns and other
materials as they may deem advisable and shall advise the Company or the Banks
of those items of which copies are made. No investigation made heretofore or
hereafter by Vail Banks shall affect the representations and warranties of the
Company hereunder; provided, however, that in the event any investigation made
by Vail Banks after the provision by the Company to Vail Banks of the Company
Disclosure Memorandum which affects the representations and warranties of the
Company hereunder, the Company may amend the Company Disclosure Memorandum in
order to make any such representation or warranty true,
7
<PAGE>
correct and complete. Vail Banks and WestStar agree to allow the Company access
to information and documentation on the same terms as set forth above.
3.4 CONFIDENTIALITY. Prior to consummation of the Holding
---------------
Company Merger, the parties to this Agreement will provide each other with
information which may be deemed by the party providing the information to be
confidential or proprietary. Each party agrees that it will hold confidential
and protect all information provided to it by the other party to this Agreement
and use such information only in connection with the consummation of the
Mergers, except that the obligations contained in this Section 3.4 shall not in
any way restrict the rights of any party or person to use information that (i)
was known to such party prior to the disclosure by the other party; (ii) is or
becomes generally available to the public other than by breach of this
Agreement; or (iii) otherwise becomes lawfully available to a party to this
Agreement on a non-confidential basis from a third party who is not under an
obligation of confidence to the other party to this Agreement. If this Agreement
is terminated prior to consummation of the Holding Company Merger, each party
agrees to return all documents and other material, and any copies thereof,
whether or not confidential, provided to it by or on behalf of the other party
to this Agreement. Each party shall insure that its officers, directors,
investment advisors, attorneys and other representatives who are given access to
such information are bound by and will use the information only in accordance
with the foregoing restrictions. The provisions of this Section 3.4 shall
survive any termination of this Agreement.
3.5 FULL COOPERATION. The parties shall cooperate fully with
----------------
each other and with their respective agents, representatives, counsel and
accountants in connection with any acts or actions required to be taken as part
of their respective obligations under this Agreement, including cooperation in
the filing of all applications and other requests for consents and approvals
with respect to the transactions contemplated hereby and by the Holding Company
Merger Agreement.
3.6 EXPENSES. All of the expenses incurred by Vail Banks in
--------
connection with the authorization, preparation, execution and performance of
this Agreement, including, without limitation, all fees and expenses of its
agents, representatives, counsel and accountants and the fees and expenses
related to filing regulatory applications with state and federal authorities in
connection with the transactions contemplated hereby, shall be paid by Vail
Banks. All expenses incurred by the Company in connection with the
authorization, preparation, execution and performance of this Agreement,
including, without limitation, all fees and expenses of agents, representatives,
counsel and accountants for the Company shall be paid by the Company and/or the
Company Shareholders.
3.7 APPROVALS AND CONSENTS. Each party hereto represents and
----------------------
warrants to and covenants with the others that it will, and will cause its
officers, directors, employees and agents to, use its and their best efforts to
obtain as soon as is reasonably practicable all approvals and consents of state
and federal departments or agencies required or deemed necessary for
consummation of the transactions contemplated by this Agreement. Provided,
however, that Vail
8
<PAGE>
Banks shall have primary responsibility for preparation, filing and prosecution
of all applications associated with such approvals and consents.
3.8 PUBLICITY. All press releases and other announcements
---------
respecting the subject matter of this Agreement or an initial public offering of
Vail Banks Common Stock to any person shall be made only at the direction of
Vail Banks following consultation with and notice to the Company.
3.9 PRESERVATION OF GOODWILL. Each party hereto shall use its
------------------------
reasonable best efforts to preserve its business organization and the business
organization of its subsidiaries, to keep available the services of its present
employees and of the present employees of its subsidiaries, and to preserve the
goodwill of customers and others having business relations with such party or
its subsidiaries.
3.10 AGREEMENT AS TO EFFORTS TO CONSUMMATE. Subject to the terms
-------------------------------------
and conditions of this Agreement, the parties agree to use all reasonable
efforts to take, or cause to be taken, all actions, and to do or cause to be
done all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective on a timely basis the transactions
contemplated by this Agreement and the Holding Company Merger Agreement.
3.11 DIVIDENDS. The Company may not prior to Closing declare
---------
dividends or other distributions on its Common Stock. The Banks may declare
dividends. Except with prior written consent of Vail Banks, neither the Company
nor the Banks may issue, sell, repurchase, acquire or redeem any of its Common
Stock.
3.12 EMPLOYMENT AGREEMENTS. Vail Banks shall have entered into an
---------------------
agreement with each person listed on Exhibit I hereto (an "Employee") which
shall provide that Vail Banks shall employ the Employee for a period of two (2)
years from the date of Closing and shall pay the Employee an annual salary
during such two (2) year period equal to the amount opposite the Employee's name
on Exhibit I. Furthermore, each agreement shall provide that Vail Banks will
not pay to the Employee the amount of the unpaid salary due under the agreement
in the event that Vail Banks terminates the Employee's employment for "Cause,"
which shall mean (i) Employee's refusal, negligence or willful misconduct in
connection with the performance of his duties, (ii) Employee's conviction (or
nolo contendere plea) in connection with a crime against WestStar or its
affiliates or involving a felony or moral turpitude (for purposes of this
Agreement "moral turpitude" shall mean any act or activity involving dishonesty,
immorality, theft or fraud), or (iii) the performance of any act or failure to
perform any act (other than in good faith) to the detriment of WestStar.
Disability because of illness or accident or any other physical or mental
disability shall not constitute a basis for discharge for Cause. Each agreement
shall also provide that Vail Banks shall not be obligated to pay any amount,
other than compensation already earned, to the Employee in the event that the
Employee terminates his or her employment by Vail Banks. In addition, all other
terms and conditions of each agreement must be satisfactory to Vail Banks.
9
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ARTICLE IV
----------
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
--------------------------------------------------------
To induce Vail Banks to enter into and perform this Agreement, the
Company represents, warrants, covenants and agrees as follows, which
representations, warranties, covenants and agreements are being made as of the
date hereof and shall be deemed to be made again as of the Closing:
4.1 COMPANY DISCLOSURE MEMORANDUM. The Company shall deliver
-----------------------------
to Vail Banks on or before the thirtieth (30th) day following the date of this
Agreement a memorandum (the "Company Disclosure Memorandum") containing certain
information regarding the Company and the Banks as indicated at various places
in this Agreement. All information set forth in the Company Disclosure
Memorandum or in documents incorporated by reference in the Company Disclosure
Memorandum is true, correct and complete, does not omit to state any fact
necessary in order to make the statements therein not misleading, and shall be
deemed for all purposes of this Agreement to constitute part of the
representations and warranties of the Company under this Article IV. The
information contained in the Company Disclosure Memorandum shall be deemed to be
part of and qualify only those representations and warranties contained in this
Article IV which make specific reference to the Company Disclosure Memorandum.
All information in each of the documents and other writings furnished to Vail
Banks pursuant to this Agreement or the Company Disclosure Memorandum is or will
be true, correct and complete in all material respects and does not and will not
omit to state any fact necessary in order to make the statements therein not
misleading. The Company shall promptly provide Vail Banks with written
notification of any event, occurrence or other information necessary to maintain
the Company Disclosure Memorandum and all other documents and writings furnished
to Vail Banks pursuant to this Agreement as true, correct and complete in all
material respects at all times prior to and including the Closing.
4.2 CORPORATE AND FINANCIAL.
-----------------------
4.2.1 AUTHORITY. (a) Subject to the approval of the
---------
Company Shareholders, certain lenders and various state and federal regulatory
authorities, the Company has full power and authority to make, execute and
perform this Agreement and the Holding Company Merger Agreement and to
consummate the transactions contemplated hereby and thereby, and no further
action is necessary on the part of the Company to authorize its consummation of
the transactions contemplated hereby and thereby. Other than such regulatory
approvals and approval from certain lenders, no further corporate action is
necessary on the part of the Company to consummate the transactions contemplated
hereby and by the Holding Company Merger Agreement. This Agreement constitutes
the valid and binding obligation of the Company, and the Holding Company Merger
Agreement constitutes the consent of the Company to the Holding Company Merger,
and each is enforceable in accordance with its terms, except as limited by the
10
<PAGE>
laws affecting creditors' rights generally and by the discretion of courts to
compel specific performance.
(b) Subject to the approval of the Company Shareholders
and various state and federal regulators, the execution, delivery and
performance of this Agreement and the other transactions contemplated or
required in connection herewith will not, with or without the giving of notice
or the passage of time, or both, (i) violate any provision of federal or state
law applicable to the Company or the Banks, the violation of which could be
expected to have an adverse effect on the business, operations, properties,
assets, financial condition or prospects of the Company or the Banks; (ii)
violate any provision of the articles of incorporation or charter, as the case
may be, or bylaws of the Company or the Banks; (iii) conflict with or result in
a breach of any provision of, or termination of, or constitute a default under
any instrument, license, agreement or commitment to which the Company or either
of the Banks is a party, which, singly or in the aggregate, could be expected to
have an adverse effect on the business, operations, properties, assets,
financial condition or prospects of the Company or the Banks; or (iv) constitute
a violation of any order, judgment or decree to which the Company or either of
the Banks is a party, or by which the Company or the Banks or any of their
respective assets or properties are bound.
4.2.2 CORPORATE STATUS.
----------------
(a) THE COMPANY. The Company is a corporation duly
-----------
organized, validly existing and in good standing under the laws of the state of
Colorado and has no direct or indirect subsidiaries other than the Banks. The
Company has all requisite corporate power and authority and is entitled to own
or lease its properties and assets and to carry on its business as and in the
places where such properties or assets are now owned, leased or operated and
such business is conducted. The Company is duly licensed, qualified or
domesticated as a foreign corporation in the jurisdictions listed in Section
4.2.2(a) of the Company Disclosure Memorandum, which are all jurisdictions where
the character of the property owned by it or the nature of the business
transacted by it make such license, qualification or domestication necessary.
(b) BANK OF TELLURIDE. Bank of Telluride is a bank
-----------------
duly organized, validly existing and in good standing under the laws of the
State of Colorado. Bank of Telluride has all requisite corporate power and
authority and is entitled to own and lease its properties and assets and to
carry on its business as and in the places where such properties or assets are
now owned, leased or operated and such business is conducted.
(c) WESTERN COLORADO. Western Colorado is a bank duly
----------------
organized, validly existing and in good standing under the laws of the State of
Colorado. Western Colorado has all requisite corporate power and authority and
is entitled to own and lease its properties and assets and to carry on its
business as and in the places where such properties or assets are now owned,
leased or operated and such business is conducted.
4.2.3 CAPITAL STRUCTURE.
-----------------
11
<PAGE>
(a) THE COMPANY. (i) The Company has an authorized
-----------
capital stock consisting solely of 100,000 shares, $1.00 par value, common
stock, of which 17,356 shares of common stock are issued and outstanding as of
the date hereof (a list of the Company Shareholders and the number of shares of
Company Common Stock owned by each is attached hereto as Exhibit B). All of the
outstanding capital stock of the Company is duly and validly issued, fully paid
and non-assessable and was offered, issued and sold in compliance with all
applicable federal and state securities laws. No person has any right of
rescission or claim for damages under federal or state securities laws with
respect to the issuance of any shares of capital stock of the Company previously
issued. None of the capital stock of the Company has been issued in violation of
any preemptive or other rights of its shareholders.
(ii) Except as set forth in Section 4.2.3(a)(ii)
of the Company Disclosure Memorandum, the Company does not have outstanding any
securities which are either by their terms or by contract convertible or
exchangeable into capital stock of the Company, or any other securities or debt
of the Company, or any preemptive or similar rights to subscribe for or to
purchase, or any options or warrants or agreements or understandings for the
purchase or the issuance (contingent or otherwise) of, or any calls, commitments
or claims of any character relating to, its capital stock or securities
convertible into its capital stock. The Company is not subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire, or to
register, any shares of its capital stock.
(iii) Except as set forth in Section 4.2.3(a)(iii)
of the Company Disclosure Memorandum, there is no agreement, arrangement or
understanding to which the Company is a party restricting or otherwise relating
to the transfer of any shares of capital stock of the Company.
(iv) All shares of Company Common Stock or other
capital stock, or any other securities or debt, of the Company, which have been
purchased or redeemed by the Company have been purchased or redeemed in
accordance with all applicable federal, state and local laws, rules, and
regulations, including, without limitation, all federal and state securities
laws and rules and regulations of any securities exchange or system on which
such stock, securities or debt are, or at such time were, traded, and no such
purchase or redemption has resulted or will with the giving of notice or lapse
of time, or both, result in a default or acceleration of the maturity of, or
otherwise modify, any agreement, note, mortgage, bond, security agreement, loan
agreement or other contract or commitment of the Company.
(b) BANK OF TELLURIDE. (i) Bank of Telluride has an
-----------------
authorized capital stock consisting solely of 100,000 shares, $1.00 par value,
common stock, of which 7,500 shares of common stock are issued and outstanding
as of the date hereof and of which the Company owns 7,500 shares, or 100% of the
issued and outstanding common stock. All of the outstanding capital stock of
Bank of Telluride is duly and validly issued, fully paid and non-assessable and
was offered, issued and sold in compliance with all applicable federal and state
securities laws. No person has any right of rescission or claim for damages
under federal or state
12
<PAGE>
securities laws with respect to the issuance of any shares of capital stock of
Bank of Telluride previously issued. None of the capital stock of Bank of
Telluride has been issued in violation of any preemptive or other rights of its
shareholders.
(ii) Bank of Telluride does not have outstanding
any securities which are either by their terms or by contract convertible or
exchangeable into capital stock of Bank of Telluride, or any other securities or
debt of Bank of Telluride, or any preemptive or similar rights to subscribe for
or to purchase, or any options or warrants or agreements or understandings for
the purchase or the issuance (contingent or otherwise) of, or any calls,
commitments or claims of any character relating to, its capital stock or
securities convertible into its capital stock. Bank of Telluride is not subject
to any obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire, or to register, any shares of its capital stock.
(iii) There is no agreement, arrangement or under-
standing to which either Bank of Telluride or the Company is a party restricting
or otherwise relating to the transfer of any shares of capital stock of Bank of
Telluride.
(iv) All shares of Bank of Telluride Common Stock
or other capital stock, or any other securities or debt, of Bank of Telluride,
which have been purchased or redeemed by Bank of Telluride have been purchased
or redeemed in accordance with all applicable federal, state and local laws,
rules, and regulations, including, without limitation, all federal and state
securities laws and rules and regulations of any securities exchange or system
on which such stock, securities or debt are, or at such time were, traded, and
no such purchase or redemption has resulted or will, with the giving of notice
or lapse of time, or both, result in a default or acceleration of the maturity
of, or otherwise modify, any agreement, note, mortgage, bond, security
agreement, loan agreement or other contract or commitment of Bank of Telluride.
(c) WESTERN COLORADO. (i) Western Colorado has an
----------------
authorized capital stock consisting solely of 50,000 shares, $1.00 par value,
common stock, of which 40,000 shares of common stock are issued and outstanding
as of the date hereof and of which the Company owns 40,000 shares, or 100% of
the issued and outstanding common stock. All of the outstanding capital stock of
Western Colorado is duly and validly issued, fully paid and non-assessable and
was offered, issued and sold in compliance with all applicable federal and state
securities laws. No person has any right of rescission or claim for damages
under federal or state securities laws with respect to the issuance of any
shares of capital stock of Western Colorado previously issued. None of the
capital stock of Western Colorado has been issued in violation of any preemptive
or other rights of its shareholders.
(ii) Western Colorado does not have outstanding
any securities which are either by their terms or by contract convertible or
exchangeable into capital stock of Western Colorado, or any other securities or
debt of Western Colorado, or any preemptive or similar rights to subscribe for
or to purchase, or any options or warrants or agreements or understandings for
the purchase or the issuance (contingent or otherwise) of, or any calls,
13
<PAGE>
commitments or claims of any character relating to, its capital stock or
securities convertible into its capital stock. Western Colorado is not subject
to any obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire, or to register, any shares of its capital stock.
(iii) There is no agreement, arrangement or under-
standing to which either Western Colorado or the Company is a party restricting
or otherwise relating to the transfer of any shares of capital stock of Western
Colorado.
(iv) All shares of Western Colorado Common Stock
or other capital stock, or any other securities or debt, of Western Colorado,
which have been purchased or redeemed by Western Colorado have been purchased or
redeemed in accordance with all applicable federal, state and local laws, rules,
and regulations, including, without limitation, all federal and state securities
laws and rules and regulations of any securities exchange or system on which
such stock, securities or debt are, or at such time were, traded, and no such
purchase or redemption has resulted or will, with the giving of notice or lapse
of time, or both, result in a default or acceleration of the maturity of, or
otherwise modify, any agreement, note, mortgage, bond, security agreement, loan
agreement or other contract or commitment of Western Colorado.
4.2.4 CORPORATE RECORDS. The stock records and minute
-----------------
books of the Company and the Banks, as applicable, whether previously or in the
future furnished or made available to Vail Banks by the Company and the Banks,
fully and accurately reflect all issuances, transfers and redemptions of the
common stock of the Company or the Banks, as applicable, correctly show the
record addresses and the number of shares of such stock issued and outstanding
on the date hereof held by the shareholders of the Company or the Banks,
correctly show all corporate action taken by the directors and shareholders of
the Company or the Banks (including actions taken by consent without a meeting),
and contain true and correct copies or originals of their respective articles of
incorporation or charter, as the case may be, and all amendments thereto,
bylaws, as amended and currently in force, and the minutes of all meetings or
consent actions of their respective directors and shareholders. No resolutions,
regulations or bylaws have been passed, enacted, consented to or adopted by the
respective directors or shareholders of the Company or the Banks except those
contained in the minute books. All corporate records of the Company and the
Banks have been maintained in accordance with all applicable statutory
requirements and are complete and accurate.
4.2.5 TAX RETURNS, TAXES. (a) The Company and the Banks
------------------
have duly filed or will file when due (i) all required federal and state tax
returns and reports, and (ii) all required returns and reports of other
governmental units having jurisdiction with respect to taxes imposed upon their
respective incomes, properties, revenues, franchises, operations or other assets
or taxes imposed which might create a lien or encumbrance on any of such assets
or affect adversely their respective businesses or operations. Such returns or
reports are, and when filed will be, true, complete and correct, and the Company
and the Banks have paid, or will pay with respect to returns or reports related
to their respective businesses not yet filed because not yet due, to the extent
such taxes or other governmental charges have become due, all taxes and other
governmental
14
<PAGE>
charges including all applicable interest and penalties, set forth in such
returns or reports related to their respective businesses. All federal, state
and local taxes and other governmental charges paid or payable by the Company or
the Banks have been paid, or have been accrued or reserved on their respective
books in accordance with generally accepted accounting principles applied on a
basis consistent with prior periods. Adequate reserves for the payment of taxes
have been established on the books of the Company and the Banks for all periods
through the date hereof, whether or not due and payable and whether or not
disputed. Until the Closing Date, the Company and the Banks shall continue to
reserve sufficient funds for the payment of expected tax liabilities in
accordance with generally accepted accounting principles applied on a basis
consistent with prior periods. Neither the Company nor either of the Banks has
received any notice of a tax deficiency or assessment of additional taxes of any
kind and, to the knowledge of officers of the Company or either of the Banks
(collectively "Management"), there is no threatened claim against either the
Company or either of the Banks, or any basis for any such claim, for payment of
any additional federal, state, local or foreign taxes for any period prior to
the date of this Agreement in excess of the accruals or reserves with respect to
any such claim shown in the Company 1997 Financial Statements (as defined below)
or disclosed in the notes with respect thereto. There are no waivers or
agreements by either the Company or either of the Banks for the extension of
time for the assessment of any taxes. The federal income tax returns of the
Company or either of the Banks have not been examined by the Internal Revenue
Service for any period since calendar year 1990.
(b) Except as set forth in Section 4.2.5(b) of the
Company Disclosure Memorandum, proper and accurate amounts have been withheld by
the Company and the Banks from their employees for all periods in full and
complete compliance with the tax withholding provisions of applicable federal,
state and local tax laws, and proper and accurate federal, state and local tax
returns have been filed by the Company and the Banks for all periods for which
returns were due with respect to withholding, social security and unemployment
taxes, and the amounts shown thereon to be due and payable have been paid in
full.
4.2.6 FINANCIAL STATEMENTS. The Company will deliver to
--------------------
Vail Banks contemporaneously with the delivery of the Company Disclosure
Memorandum true, correct and complete copies of (i) the audited, consolidated
financial statements of the Company and the Banks for the years ended December
31, 1995, 1996 and 1997, including balance sheets, statements of income,
statements of shareholders' equity, statements of cash flows and related notes
(the audited, consolidated financial statements for the year ended December 31,
1997 being referred to as the "Company 1997 Financial Statements") and (ii)
unaudited, consolidated financial statements of the Company and the Banks for
the period ended March 31, 1998, including a balance sheet, statement of income
and related notes. In addition, the Company will provide to Vail Banks monthly
interim unaudited, consolidated financial statements of the Company and the
Banks ending at the end of each month prior to Closing and after March 31,
1998. All of such financial statements, except for the interim statements which
have been prepared consistently with the audited financial statements of the
Company but without footnotes, etc., have been prepared in accordance with
generally accepted accounting principles consistently applied and truthfully
reflect the assets, liabilities and
15
<PAGE>
financial condition of the Company and the Banks as of the dates indicated
therein and the results of its operations for the respective periods then ended.
4.2.7 REGULATORY REPORTS. The Company will deliver to
------------------
Vail Banks contemporaneously with the delivery of the Company Disclosure
Memorandum for review and inspection all Forms FRY6 filed by the Company with
the Board of Governors of the Federal Reserve System (the "Federal Reserve") for
the three years ended December 31, 1997 and through the date of this Agreement,
together with all other reports filed by the Company or the Banks for the same
period with the Division of Banking of the Department of Regulatory Agencies of
the State of Colorado (the "Division of Banking"), and other applicable
regulatory agencies (collectively, the "Reports"). All of such Reports, as
amended, have been prepared in accordance with applicable rules and regulations
applied on a basis consistent with prior periods and contain in all material
respects all information required to be presented therein in accordance with
such rules and regulations.
4.2.8 ACCOUNTS. Section 4.2.8 of the Company Disclosure
--------
Memorandum contains a list of each and every bank and other institution in which
the Company or either of the Banks maintains an account or safety deposit box,
the account numbers and the names of all persons who are presently authorized to
draw thereon, have access thereto or give instructions regarding distribution of
funds or assets therein.
4.2.9 NOTES AND OBLIGATIONS. (a) Except as set forth in
---------------------
Section 4.2.9(a) of the Company Disclosure Memorandum or as provided for in the
loss reserve described in subsection (b) below, all notes receivable or other
obligations owned by the Company or either of the Banks or due to any one of
them shown in the Company 1997 Financial Statements and any such notes
receivable and obligations on the date hereof and on the Closing Date are, and
will be, genuine, legal, valid and collectible obligations of the respective
makers thereof and are not and will not be subject to any offset or
counterclaim. Except as set forth in Section 4.2.9(a) of the Company Disclosure
Memorandum or in subsection (b) below, all such notes and obligations are
evidenced by written agreements, true and correct copies of which will be made
available to Vail Banks for examination prior to the Closing Date. All such
notes and obligations were entered into by either the Company or either of the
Banks, as the case may be, in the ordinary course of business and in compliance
with all applicable laws and regulations.
(b) The Company has established a loss reserve in
its Company 1997 Financial Statements and as of the date of this Agreement and
will establish a loan loss reserve as of the Closing Date in accordance with
formulas and procedures consistent with past practice which is or will be
adequate to cover anticipated losses which might result from such items as the
insolvency or default of borrowers or obligors on such loans or obligations,
defects in the notes or evidences of obligation (including losses of original
notes or instruments), offsets or counterclaims properly chargeable to such
reserve, or the availability of legal or equitable defenses which might preclude
or limit the ability of the Company or the Banks, as the case may be, to enforce
the note or
16
<PAGE>
obligation, and the representations set forth in subsection (a) above are
qualified in their entirety by the aggregate of such loss reserve.
4.2.10 LIABILITIES. Neither the Company nor either of
-----------
the Banks has any debt, liability or obligation of any kind required to be shown
pursuant to generally accepted accounting principles on the consolidated balance
sheet of the Company, whether accrued, absolute, known or unknown, contingent or
otherwise, including, but not limited to, (a) liability or obligation on account
of any federal, state or local taxes or penalty, or interest or fines with
respect to such taxes, (b) liability arising from or by virtue of the
distribution, delivery or other transfer or disposition of goods, personal
property or services of any type, kind or variety, (c) unfunded liabilities with
respect to any pension, profit sharing or employee stock ownership plan, whether
operated by the Company or either of the Banks or any other entity covering
employees of the Company or the Banks, or (d) environmental liability, except
(i) those reflected in the Company 1997 Financial Statements, or (ii) as
disclosed in Section 4.2.10 of the Company Disclosure Memorandum. Except as set
forth in Section 4.2.10 of the Company Disclosure Memorandum, on the Closing
Date, the Company shall have no indebtedness of any nature whatsoever, and
neither of the Banks shall have any indebtedness resulting from the borrowing of
any funds, property or services; provided, however, that this section 4.2.10
shall not apply to the purchase of Federal Funds in the ordinary course of
business.
4.2.11 ABSENCE OF CHANGES. Except as specifically
------------------
provided for in this Agreement or specifically set forth in Section 4.2.11 of
the Company Disclosure Memorandum, since December 31, 1997:
(a) there have been no changes in the business,
assets, properties, liabilities, results of operations or financial condition of
the Company or the Banks, or in any of their respective relationships with
customers, employees, lessors or others, other than changes in the ordinary
course of business, none of which individually or in the aggregate has had or
which Management believes will have a material adverse effect on such
businesses, assets, liabilities, results of operations, financial conditions or
properties;
(b) there has been no material damage, destruction
or loss to the assets, properties or business of the Company or the Banks,
whether or not covered by insurance, which has had or which Management believes
may have an adverse effect thereon;
(c) the businesses of the Company and the Banks
have been operated in the ordinary course, and not otherwise;
(d) the properties and assets of the Company and
the Banks used in their respective businesses have been maintained in good
order, repair and condition, ordinary wear and tear excepted;
17
<PAGE>
(e) the respective books, accounts and records of
the Company and the Banks have been maintained in the usual, regular and
ordinary manner;
(f) there has been no increase greater than 5% in
the compensation or in the rate of compensation or commissions payable or to
become payable by the Company and/or the Banks to any of their directors or
executive officers, or to any of their employees earning $25,000 or more per
annum, or any general increase greater then 5% in the compensation or in the
rate of compensation payable or to become payable to employees of the Company
and/or either of the Banks earning less than $25,000 per annum ("general
increase" for the purpose hereof meaning any increase generally applicable to a
class or group of employees, but not including increases granted to individual
employees for merit, length of service, change in position or responsibility or
other reasons applicable to specific employees and not generally to a class or
group thereof), or any director, officer, or employee hired by the Company or
either of the Banks at a salary in excess of $25,000 per annum, or any increase
in any payment of or commitment to pay any bonus, profit sharing or other
extraordinary compensation to any of their employees;
(g) there have been no changes in the articles of
incorporation or charter, as the case may be, or bylaws of the Company or either
of the Banks;
(h) there has been no labor dispute, unfair labor
practice charge or employment discrimination charge, nor, to the knowledge of
Management, any organizational effort by any union, or institution or threatened
institution of any effort, complaint or other proceeding in connection
therewith, involving the Company or either of the Banks, or affecting their
respective operations;
(i) there has been no issuance, sale, repurchase,
acquisition or redemption by the Company or either of the Banks of any of their
respective capital stock, bonds, notes, debt or other securities or any
modification or amendment of the rights of the holders of any outstanding
capital stock, bonds, notes, debt or other securities thereof;
(j) except as set forth in Section 4.2.11(f) of
the Company Disclosure Memorandum, there has been no mortgage, lien or other
encumbrance or security interest (other than liens for current taxes not yet due
or purchase money security interests or pledges to secure public deposits or
federal funds purchased arising in the ordinary course of business) created on
or in (including without limitation, any deposit for security consisting of) any
asset or assets of the Company or either of the Banks or assumed by any one of
them with respect to any of their assets;
(k) except as disclosed in the Company 1997
Financial Statements, any interim financial statements or Section 4.2.11(1) of
the Company Disclosure Memorandum, there has been no indebtedness or other
liability or obligation (whether absolute, accrued, contingent or otherwise)
incurred by the Company or either of the Banks which would be
18
<PAGE>
required to be reflected on a balance sheet of the Company or either of the
Banks prepared as of the date hereof in accordance with generally accepted
accounting principles applied on a consistent basis, except as incurred in the
ordinary course of business;
(l) no obligation or liability of either the
Company or either of the Banks has been discharged or satisfied, other than in
the ordinary course of business;
(m) there have been no sales, transfers or other
dispositions of any asset or assets of either the Company or the Banks, other
than sales in the ordinary course of business; and
(n) there has been no amendment, termination or
waiver of any right of either the Company or the Banks under any contract or
agreement or governmental license, permit or permission which has had or may
have an adverse effect on either of their businesses or properties.
4.2.12 LITIGATION AND PROCEEDINGS. Except as set forth
--------------------------
in Section 4.2.12 of the Company Disclosure Memorandum, there are no actions,
decrees, suits, counterclaims, claims, proceedings or governmental actions or
investigations pending or, to the knowledge of Management, threatened against,
by or affecting either the Company or the Banks, or any officer, director,
employee or agent in such person's capacity as an officer, director, employee or
agent of either the Company or the Banks or relating to the business or affairs
of either the Company or the Banks, in any court or before any arbitrator or
governmental agency, and no judgment, award, order or decree of any nature has
been rendered against or with respect thereto by any agency, arbitrator, court,
commission or other authority, nor does either the Company or the Banks have any
unasserted contingent liabilities which might have an adverse effect on either
of their assets or on the operation of their respective businesses or which
might prevent or impede the consummation of the transactions contemplated by
this Agreement.
4.2.13 INVESTMENT INTENTIONS. (a) Each Company
---------------------
Shareholder who is to receive Vail Banks Common Stock in the Merger will agree
in writing prior to being issued such shares of Vail Banks Common Stock that he
or she (i) will be acquiring the shares of Vail Banks Common Stock to be issued
pursuant to Section 1.2 to the Company Shareholder solely for such Company
Shareholder's account, for investment purposes only and with no current
intention or plan to distribute, sell, or otherwise dispose of any of those
shares in connection with any distribution; (ii) is not a party to any agreement
or other arrangement for the disposition of any shares of Vail Banks Common
Stock other than this Merger Agreement; (iii) unless disclosed otherwise in
Section 4.2.13 of the Company Disclosure Memorandum, is an "accredited investor"
as defined in Securities Act Rule 501(a); (iv) (A) is able to bear the economic
risks of an investment in the Vail Banks Common Stock acquired pursuant to this
Agreement, (B) can afford to sustain a total loss of that investment, (C) has
such knowledge and experience in financial and business matters that the Company
Shareholder is capable of evaluating the merits and risks of the proposed
investment in the Vail Banks Common Stock, (D) has had an adequate opportunity
to
19
<PAGE>
ask questions and receive answers from the officers of Vail Banks concerning any
and all matters relating to the transactions contemplated hereby, including the
background and experience of the current and proposed officers and directors of
Vail Banks, the plans for the operations of the business of Vail Banks, the
business, operations, and financial condition of Vail Banks, and any plans of
Vail Banks for additional acquisitions, and (E) has asked all questions of the
nature described in preceding clause (D), and all those questions have been
answered to such Company Shareholder's satisfaction.
(b) To the best of the knowledge of the
management of the Company, there is no plan or intention by any Company
Shareholder who owns one percent (1%) or more of the Company Common Stock and to
the best of the knowledge of management of the Company, there is no plan or
intention on the part of the remaining shareholders of the Company to sell,
exchange, or otherwise dispose of a number of shares of Vail Banks Common Stock
received in the merger that would reduce the Company Shareholders' ownership of
Vail Banks Common Stock to a number of shares having a value, as of the date of
the Closing, of less than forty-five percent (45%) of the value of all of the
formerly outstanding stock of the Company as of the date of the Closing. For
purposes of this representation, shares of Company Common Stock exchanged for
cash or other property, surrendered by dissenters, or exchanged for cash in lieu
of fractional shares of Vail Banks Common Stock will be treated as outstanding
Company Common Stock on the date of the Closing. Moreover, shares of Company
Common Stock redeemed, or disposed of prior or subsequent to the Closing will be
considered in making this representation.
4.3 BUSINESS OPERATIONS.
-------------------
4.3.1 CUSTOMERS. Management has no knowledge of any
---------
presently existing facts which could reasonably be expected to result in the
loss of any material borrower or depositor of either of the Banks or in the
inability of either of the Banks to collect amounts due therefrom or to return
funds deposited thereby, except as set forth in Section 4.3.1 of the Company
Disclosure Memorandum.
4.3.2 PERMITS; COMPLIANCE WITH LAW. (a) The Company
----------------------------
and the Banks have all permits, licenses, approvals, authorizations and
registrations under all federal, state, local and foreign laws required for them
to carry on their respective businesses as presently conducted, and all of such
permits, licenses, approvals, authorizations and registrations are in full force
and effect, and no suspension or cancellation of any of them is pending or, to
the knowledge of Management, threatened.
(b) The Company and the Banks have complied with
all laws, regulations, and orders applicable to them or their businesses.
Section 4.3.2(b) of the Company Disclosure Memorandum contains a list of any
known violations of such laws, regulations, ordinances or rules by any present
officer, director, or employee of the Company or either of the Banks which
occurred since December 31, 1992, and which resulted in any order, proceeding,
judgment or decree which would be required to be disclosed pursuant to Item
401(d) of
20
<PAGE>
Regulation S-K promulgated by the Securities and Exchange Commission if the
Company or either of the Banks had been subject to the reporting requirements
under the Securities Act or the Exchange Act. No past violation of any such law,
regulation, ordinance or rule has occurred which could impair the right or
ability of the Company or the Banks to conduct their businesses.
(c) Except as set forth in Section 4.3.2(c) of the
Company Disclosure Memorandum, no notice or warning from any governmental
authority with respect to any failure or alleged failure of the Company or
either of the Banks to comply in any respect with any law, regulation or order
has been received, nor is any such notice or warning proposed or, to the
knowledge of Management, threatened.
4.3.3 ENVIRONMENTAL. (a) Except as set forth in
-------------
Section 4.3.3(a) of the Company Disclosure Memorandum, the Company and the
Banks:
(i) have not caused or permitted, and have
no knowledge of, the generation, manufacture, use, or handling or the release or
presence of any hazardous substances on, in, under or from any properties or
facilities currently owned or leased by the Company or either of the Banks or
adjacent to any properties so owned or leased; and
(ii) have complied with, and have kept all
records and made all filings required by, applicable federal, state and local
laws, regulations, orders, permits and licenses relating to the generation,
manufacture, use, handling, release or presence of any hazardous substance on,
in, under or from any properties or facilities currently owned or leased by the
Company or either of the Banks.
(b) Except as set forth in Section 4.3.3(b) of the
Company Disclosure Memorandum, neither the Company nor either of the Banks nor
any of their officers, directors, employees or agents, in the course of their
employment by the Company or either of the Banks, has directly or indirectly
given advice with respect to, or participated in any respect, directly or
indirectly, in, the management or operation of any entity or concern whose
business relates in any way to the generation, storage, handling, disposal,
transfer, production or processing of hazardous substances, nor has the Company
or either of the Banks foreclosed on any property on which there is a threatened
release of any hazardous substances or on which there has been such a release
and full remediation has not been completed, or any property on which contained
(non-released) hazardous substances or solid wastes are located.
(c) Except as set forth in Section 4.3.3(c) of the
Company Disclosure Memorandum, neither the Company nor either of the Banks, nor
any of their officers, directors, employees, and agents, are aware of, have been
told of, or have observed, the presence of any hazardous substance or solid
waste on, in, under, or around property on which the Company or either of the
Banks holds a legal or security interest, in violation of, or creating liability
under, federal, state or local environmental statutes, regulations, or
ordinances.
21
<PAGE>
4.3.4 INSURANCE. Section 4.3.4 of the Company
---------
Disclosure Memorandum contains a complete list and description (including the
expiration date, premium amount and coverage thereunder) of all policies of
insurance and bonds presently maintained by, or providing coverage for, the
Company and either of the Banks or any of their officers, directors and
employees, all of which are, and will be maintained through the Closing Date, in
full force and effect, together with a complete list of all pending claims under
any of such policies or bonds. All terms, obligations and provisions of each of
such policies and bonds have been complied with, all premiums due thereon have
been paid, and no notice of cancellation with respect thereto has been received.
Except as set forth in Section 4.3.4 of the Company Disclosure Memorandum,
Management believes that such policies and bonds provide adequate coverage to
insure the properties and businesses of the Company and the Banks and the
activities of their officers, directors and employees against such risks and in
such amounts as are prudent and customary. Neither the Company nor the Banks
will as of the Closing Date have any liability for premiums or for retrospective
premium adjustments for any period prior to the Closing Date. The Company and
the Banks have previously made available to Vail Banks a true, correct and
complete copy of each insurance policy and bond in effect since January 1, 1992
with respect to the business and affairs of the Company and the Banks.
4.4 PROPERTIES AND ASSETS.
---------------------
4.4.1 CONTRACTS AND COMMITMENTS. Section 4.4.1 of the
-------------------------
Company Disclosure Memorandum contains a list identifying and briefly describing
all written contracts, purchase orders, agreements, security deeds, guaranties
or commitments to which the Company or either of the Banks is a party, or by
which they may be bound, involving the payment or receipt, actual or contingent,
of more than $25,000 or having a term or requiring performance over a period of
more than ninety (90) days, other than agreements, contracts, security deeds,
guaranties or commitments made in the ordinary course of the Company's business
and other agreements pursuant to which the Company has received a security
interest. Except as set forth in Section 4.4.1 of the Company Disclosure
Memorandum, each such contract, agreement, guaranty and commitment of the
Company and the Banks is in full force and effect and is valid and enforceable
in accordance with its terms, and constitutes a legal and binding obligation of
the respective parties thereto and is not the subject of any notice of default,
termination, partial termination or of any ongoing, pending, completed or
threatened investigation, inquiry or other proceeding or action that will give
rise to any notice of default, termination or partial termination. The Company
and the Banks have complied with the provisions of such contracts, agreements,
guaranties and commitments. A true and complete copy of each such document has
been made available to Vail Banks for examination.
4.4.2 LICENSES; INTELLECTUAL PROPERTY. The Company and
-------------------------------
the Banks have all patents, trademarks, trade names, service marks, copyrights,
trade secrets and know-how reasonably necessary to conduct their businesses as
presently conducted and, except as described in Section 4.4.2 of the Company
Disclosure Memorandum, neither the Company nor either of the Banks is a party,
either as licensor or licensee, to any agreement for any patent, process,
22
<PAGE>
trademark, service mark, trade name, copyright, trade secret or other
confidential information, and there are no rights of third parties with respect
to any trademark, service mark, trade secrets, confidential information, trade
name, patent, patent application, copyright, invention, device or process owned
or used by the Company or the Banks or presently expected to be used by either
of them in the future. All patents, copyrights, trademarks, service marks, trade
names, and applications therefor or registrations thereof, owned or used by the
Company or the Banks, are listed in Section 4.4.2 of the Company Disclosure
Memorandum. The Company and the Banks have complied with all applicable Colorado
laws relating to the filing or registration of "fictitious names" or trade
names.
4.4.3 PERSONAL PROPERTY. The Company and the Banks each
-----------------
have good and marketable title to all of their respective personalty, tangible
and intangible, reflected in the Company 1997 Financial Statements (except as
since sold or otherwise disposed of by either of them in the ordinary course of
business), free and clear of all encumbrances, liens or charges of any kind or
character except (i) those referred to in the notes to the Company 1997
Financial Statements as securing specified liabilities (with respect to which no
default exists or, to the knowledge of Management, is claimed to exist), (ii)
those described in Section 4.4.3 of the Company Disclosure Memorandum and (iii)
liens for taxes not due and payable.
4.4.4 LEASES. (a) All leases pursuant to which either
------
the Company or either of the Banks is lessor or lessee (the "Leases") of any
real or personal property are valid and enforceable in accordance with their
terms; there is not, under any of such Leases any default or, to the knowledge
of Management, any claimed default by the Company or either of the Banks, as the
case may be, or event of default or event which with notice or lapse of time, or
both would constitute a default by the Company or either of the Banks, as the
case may be, and in respect of which adequate steps have not been taken to
prevent a default on either of their parts from occurring.
(b) Except as set forth in Section 4.4.4(b) of the
Company Disclosure Memorandum, there are no contractual obligations, agreements
in principle or present plans for either the Company or the Banks to enter into
new leases of real property or to renew or amend existing Leases prior to the
Closing Date.
(c) The copies of the Leases heretofore furnished
or made available by the Company and the Banks to Vail Banks are true, correct
and complete, and the Leases have not been modified in any respect other than
pursuant to amendments, copies of which have been concurrently delivered or made
available to Vail Banks, and are in full force and effect in accordance with
their terms.
(d) Except as set forth in Section 4.4.4(d) of the
Company Disclosure Memorandum, no rent has been paid in advance and no security
deposit has been paid, nor is any brokerage commission payable, by or to the
Company or the Banks with respect to any Lease.
23
<PAGE>
4.4.5 REAL PROPERTY. (a) Except as disclosed in
-------------
Section 4.4.5(a) of the Company Disclosure Memorandum, the Company and the Banks
have good and marketable title to the real property reflected in the Company
1997 Financial Statements (the "Realty"), and the titles to the Realty are
covered by title insurance policies providing coverage in the amount of the
original purchase price.
(b) Except as set forth in Section 4.4.5(b) of the
Company Disclosure Memorandum, the interests of the Company or the Banks in the
Realty and in and under each of the Leases are free and clear of any and all
liens and encumbrances except for liens for current taxes not yet due, and are
subject to no present claim, contest, dispute, action or, to the knowledge of
Management, threatened action at law or in equity.
(c) The present and past use and operations of,
and improvements upon, the Realty and all real properties leased by the Company
and the Banks (the "Leased Properties") are in compliance with all applicable
building, fire, zoning and other applicable laws, ordinances and regulations,
including the Americans with Disabilities Act, and with all deed restrictions of
record, no notice of any violation or alleged violation thereof has been
received, and to the knowledge of Management, there are no proposed changes
therein that would affect the Realty, the Leased Properties or their uses.
(d) Management is not aware of any proposed or
pending change in the zoning of, or of any proposed or pending condemnation
proceeding with respect to, any of the Realty or the Leased Properties which may
adversely affect the Realty or the Leased Properties or the current or currently
contemplated use thereof.
(e) The buildings and structures owned, leased or
used by the Company and the Banks are, taken as a whole, in good operating order
(except for ordinary wear and tear), usable in the ordinary course of business,
and are sufficient and adequate to carry on the businesses and affairs of the
Company and the Banks as presently conducted.
4.5 EMPLOYEES AND BENEFITS.
----------------------
4.5.1 COMPENSATION STRUCTURE. Section 4.5.1 of the
----------------------
Company Disclosure Memorandum contains a true and complete list of the names,
titles, responsibilities and compensation arrangements of each person whose
earned compensation (including without limitation all salary, wages, bonuses and
fringe benefits, other than those fringe benefits made available to all
employees on a non-discriminatory basis), regardless of whether actually payable
in such year, from the Company and either of the Banks for the current fiscal
year will equal or exceed $25,000. Section 4.5.1 of the Company Disclosure
Memorandum contains copies of all written agreements, correspondence (other than
outstanding offers of employment to prospective employees whose compensation
levels will not exceed $25,000 in cash), memoranda and other written materials
currently in effect which have been provided to such employees relating to their
compensation.
24
<PAGE>
4.5.2 DIRECTORS OR OFFICERS OF OTHER CORPORATIONS.
-------------------------------------------
Except as set forth in Section 4.5.2 of the Company Disclosure Memorandum, no
director, officer, or employee of the Company or either of the Banks serves, or
in the past five years has served, as a director or officer of any other
corporation (other than the Company or either of the Banks) on behalf of or as a
designee of the Company or any of its subsidiaries.
4.5.3 EMPLOYEE BENEFITS. (a) Except as set forth in
-----------------
Section 4.5.3(a) of the Company Disclosure Memorandum, neither the Company nor
either of the Banks has or maintains a pension plan, profit sharing plan, group
insurance plan, employee welfare benefit plan (as such term is defined in
Section 3(l) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), severance plan, bonus plan, stock option plan or deferred
compensation plan for any of its current or former employees.
(b) Each "employee benefit plan" as defined in
Section 3(3) of ERISA, maintained by or on behalf of the Company or either of
the Banks (including any plans which are "multiemployer plans" under Section
3(37)(A) of ERISA ("Multiemployer Plans") and any defined benefit plan (as
defined in Section 3(35) of ERISA) terminated by the Company or either of the
Banks within the five plan-years ending immediately before the Closing Date),
which covers or covered any employees of the Company, the Banks, or any
subsidiary or of any predecessors thereof (each a "Plan"), is listed in Section
4.5.3(b) of the Company Disclosure Memorandum, and copies of all the Plans and
Plan trusts (if applicable), Summary Plan Descriptions, Actuarial Reports and
valuations (if any), and Annual Reports (and attachments thereto) on Form 5500,
5500-C or 5500-R, as the case may be (if required pursuant to ERISA), for the
most recent three years with respect to the Plans, Internal Revenue Service
determination letters and any other related documents requested by Vail Banks or
its counsel have been, or prior to the Closing Date will be, provided to Vail
Banks.
(c) Except as set forth in Section 4.5.3(c) of the
Company Disclosure Memorandum, with respect to each Plan: no litigation or
administrative or other proceeding is pending or, to the knowledge of
Management, threatened; each Plan has been restated or amended so as to comply
with all applicable requirements of law, including all applicable requirements
of ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations promulgated thereunder by the Internal Revenue Service and the
United States Department of Labor. Neither the Plan nor any trustee,
administrator or fiduciary thereof has at any time been involved in any
transaction relating to the Plan which would constitute a breach of fiduciary
duty under ERISA or a "prohibited transaction" within the meaning of Section 406
of ERISA or Section 4975 of the Code, unless such transaction is specifically
permitted under Sections 407 or 408 of ERISA, Section 4975 of the Code or a
class or administrative exemption issued by the Department of Labor.
(d) Except as set forth in Section 4.5.3(d) of the
Company Disclosure Memorandum, each Plan has been administered in compliance in
all material respects with applicable law and the terms of the Plan.
25
<PAGE>
(e) Except as disclosed in Section 4.5.3(e) of the
Company Disclosure Memorandum and except for obligations under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), neither the
Company nor either of the Banks has any obligation to provide, or material
liability for, health care, life insurance or other benefits after termination
of active employment. As of the Closing Date, the Company and the Banks will
have provided adequate reserves, or insurance or qualified trust funds, for all
claims incurred through the Closing Date, including adequate reserves to provide
for any post-retirement health care, life insurance or other benefits with
respect to periods of employment prior to the Closing Date, based on an
actuarial valuation satisfactory to the actuaries of the Company and the Banks
representing a projection of claims expected to be incurred for such retirees
during their period of coverage under such Plan.
(f) To the knowledge of Management, no fact or
circumstance exists which could constitute grounds in the future for the Pension
Benefit Guaranty Corporation ("PBGC") (or any successor to the PBGC) to take any
action whatsoever under Section 4042 of ERISA in connection with any plan which
an Affiliate (as defined below) of the Company maintains within the meaning of
Section 4062 or 4064 of ERISA, and, in either case, PBGC has not previously
taken any such action which has, or reasonably might, result in any liability of
an Affiliate or the Company to the PBGC, which would have an adverse effect on
the business of the Company. The term "Affiliate" for purposes of this Section
means any trade or business (whether incorporated or unincorporated) which is a
member of a group described in Sections 414(b) or 414(c) of the Code of which
the Company is also a member.
(g) Only current and former employees of the
Company or the Banks participate in any Plan.
4.5.4 LABOR-RELATED MATTERS. Neither the Company nor
---------------------
either of the Banks is, and neither the Company nor either of the Banks has
been, a party to any collective bargaining agreement or agreement of any kind
with any union or labor organization or to any agreement with any of its
employees which is not terminable at will or upon ninety (90) days notice at the
election of, and without cost or penalty to, the Company or the Banks. Except
as set forth in Section 4.5.4 of the Company Disclosure Memorandum, neither the
Company nor either of the Banks has received at any time in the past five (5)
years, any demand for recognition from any union, and no attempt has been made,
or will have been made as of the Closing Date, to organize any of their
employees. The Company has complied with all obligations under the National
Labor Relations Act, as amended, the Age Discrimination in Employment Act, as
amended, and all other federal, state and local labor laws and regulations
applicable to employees. To the knowledge of Management, there are no unfair
labor practice charges pending or threatened against the Company or either of
the Banks, and there are, and in the past three (3) years there have been, no
charges, complaints, claims or proceedings, or slowdowns or strikes pending or
threatened against, or involving, as the case may be, the Company or either of
the Banks with respect to any alleged violation of any legal duty (including but
not limited to any wage and hour claims, employment
26
<PAGE>
discrimination claims or claims arising out of any employment relationship) by
the Company or either of the Banks as to any of their employees or as to any
person seeking employment therefrom, and no such violations exist.
4.5.5 RELATED-PARTY TRANSACTIONS. Except for (a) loans
--------------------------
and extensions of credit made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions by the Company or the Banks with other persons who are not
affiliated with the Company or the Banks, and which do not involve more than the
normal risk of repayment or present other unfavorable features, (b) deposits,
all of which are on terms and conditions identical to those made available to
all customers of the Banks at the time such deposits were entered into, and (c)
transactions specifically described in Section 4.5.5 of the Company Disclosure
Memorandum, there are no contracts with or commitments to present or former 5%
or greater shareholders, directors, officers, or employees of the Company or
either of the Banks involving the expenditure after December 31, 1997 of more
than $60,000 as to any one individual, including with respect to any business
directly or indirectly controlled by any such person, or $100,000 for all such
contracts or commitments in the aggregate for all such individuals (other than
contracts or commitments relating to services to be performed by any officer,
director or employee as a currently-employed employee of the Company or the
Banks).
4.6 OTHER MATTERS.
-------------
4.6.1 APPROVALS, CONSENTS AND FILINGS. Except for the
-------------------------------
approval of the Federal Reserve, the Federal Deposit Insurance Corporation (the
"FDIC"), the Division of Banking, the Company Shareholders, or as set forth in
Section 4.6.1 of the Company Disclosure Memorandum, neither the execution and
delivery of this Agreement or the Holding Company Merger Agreement by the
Company nor the consummation of the transactions contemplated hereby or thereby,
will (a) require any consent, approval, authorization or permit of, or filing
with or notification to, any governmental or regulatory authority, or (b)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or the Banks, or any of their respective assets.
4.6.2 DEFAULT. (a) Except for those consents
--------
described in or set forth pursuant to Section 4.6.1 above or as set forth in
Section 4.6.2(a) of the Company Disclosure Memorandum, neither the execution of
this Agreement or the Holding Company Merger Agreement nor the consummation of
the transactions contemplated herein or therein (i) constitutes a breach of or
default under any contract or commitment to which the Company or either of the
Banks is a party or by which the Company or either of the Banks or their
properties or assets are bound, (ii) does or will result in the creation or
imposition of any security interest, lien, encumbrance, charge, equity or
restriction of any nature whatsoever in favor of any third party upon any assets
of the Company or either of the Banks, or (iii) constitutes an event permitting
termination of any agreement or the acceleration of any indebtedness of the
Company or either of the Banks.
27
<PAGE>
(b) Except as set forth in Section 4.6.2(b) of the
Company Disclosure Memorandum, neither the Company nor either of the Banks is in
default under its articles of incorporation or charter, as the case may be, or
bylaws or under any term or provision of any security deed, mortgage, indenture
or security agreement or of any other contract or instrument to which the
Company or either of the Banks is a party or by which either of them or any of
their property is bound.
4.6.3 BANK OF TELLURIDE. The Company owns 100% of the
-----------------
equity interests of Bank of Telluride, and pursuant to the Holding Company
Merger, Vail Banks will acquire all of the Company's rights, title and interest
in and to such equity interests.
4.6.4 WESTERN COLORADO. The Company owns 100% of the
----------------
equity interests of Western Colorado, and pursuant to the Holding Company
Merger, Vail Banks will acquire all of the Company's rights, title and interest
in and to such equity interests.
4.6.5 REPRESENTATIONS AND WARRANTIES. No material
------------------------------
representation or warranty contained in this Article IV or in any written
statement delivered by or at the direction of the Company or either of the Banks
pursuant hereto or in connection with the transactions contemplated hereby
contains or shall contain any untrue statement, nor shall such representations
and warranties taken as a whole omit any statement necessary in order to make
any statement not misleading. Copies of all documents furnished to Vail Banks
in connection with this Agreement or pursuant hereto are true, correct and
complete.
ARTICLE V
---------
CONDUCT OF BUSINESS OF THE COMPANY
----------------------------------
OR THE BANKS PENDING CLOSING
----------------------------
During the period from the date of this Agreement and continuing until
the Closing Date, or the earlier termination of this Agreement pursuant to
Article IX hereof, the Company agrees (except as expressly contemplated by this
Agreement or to the extent that Vail Banks shall otherwise consent in advance in
writing) that:
(a) ORDINARY COURSE. Except in specific contemplation of the
---------------
transactions contemplated by this Agreement, the Company and the Banks shall
carry on their businesses in the usual, regular and ordinary course in the same
manner as heretofore conducted, without the creation of any indebtedness for
borrowed money (other than deposit and similar accounts and customary credit
arrangements between banks in the ordinary course of business), and, to the
extent consistent with such businesses, use their best efforts to preserve
intact their present business organizations, keep available the services of
their present officers and employees and preserve their relationships with
representatives, customers, suppliers, personnel and others having business
dealings with the Company and the Banks.
28
<PAGE>
(b) DIVIDENDS; CHANGES IN STOCK. Except upon the prior written
---------------------------
approval of Vail Banks, the Company shall not and or shall not propose to
declare or pay any dividends on, or make other distributions in respect of, any
of their capital stock, and neither the Company nor either of the Banks shall or
shall propose to (i) split, combine or reclassify any of their capital stock or
issue, authorize or propose the issuance of any other securities in respect of,
in lieu of or in substitution for shares of capital stock of the Company or
either of the Banks, or (ii) repurchase or otherwise acquire any shares of their
capital stock.
(c) ISSUANCE OF SECURITIES. The Company and the Banks shall not
----------------------
sell, issue, authorize or propose the sale or issuance of, or purchase or
propose the purchase of, any shares of their capital stock or any class of
securities convertible into, or rights, warrants or options to acquire, any such
shares or other convertible securities or enter into any agreement with respect
to the foregoing.
(d) GOVERNING DOCUMENTS; COMPLIANCE WITH LAW. The Company and the
----------------------------------------
Banks shall not amend their articles of incorporation or charter, as the case
may be, or bylaws; provided, however, that Western Colorado may amend its
charter to move its main banking location from Norwood, Colorado to Montrose,
Colorado and to make the existing main banking location in Norwood, Colorado a
branch location. The Company and the Banks shall each maintain their corporate
existence and powers and fully comply with all federal, state and local laws
with respect to their operations and the conduct of their businesses.
(e) NO ACQUISITIONS. The Company and the Banks shall not acquire by
---------------
merging or consolidating with, or by purchasing a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other entity or division thereof or otherwise acquire or agree to
acquire any assets which are material, individually or in the aggregate, to
them.
(f) NO DISPOSITIONS. The Company and the Banks shall not sell, lease
---------------
or otherwise dispose of any of their assets except for sales, leases and other
dispositions in the ordinary course of business consistent with prior practice.
(g) MAINTENANCE OF PROPERTIES. The Company and the Banks shall
-------------------------
maintain their properties and assets in satisfactory condition and repair for
the purposes intended, ordinary wear and tear and damage by fire or other
casualty excepted.
(h) BENEFIT PLANS, ETC. The Company and the Banks shall not enter
------------------
into or amend any bonus, incentive compensation, deferred compensation, profit
sharing, retirement, pension, group insurance, stock option, stock purchase or
other benefit plan or any union, employment or consulting agreement except as
required by law or regulations and shall not accelerate the exercisability of
any options, warrants or rights to purchase securities of the Company or either
of the Banks pursuant to any benefit plan.
29
<PAGE>
(i) BOOKS AND RECORDS. The books and records of the Company and the
-----------------
Banks shall be maintained in the usual, regular and ordinary course on a basis
consistent with prior years.
(j) INCREASE IN COMPENSATION. The Company and the Banks shall not
------------------------
grant to any officer, employee or agent any increase in compensation (other than
any increase referred to in Section 4.2.11(f) hereof) or in severance or
termination pay, or enter into any employment agreement, except as may be
required under employment, termination or other agreements in effect on the date
of this Agreement and which are described in the Company Disclosure Memorandum.
(k) PAYMENT OF DEBT. The Company and the Banks shall not pay any
---------------
claim or discharge or satisfy any lien or encumbrance or pay any obligation or
liability other than in the ordinary course of business or as required by the
terms of any written instrument evidencing or governing the same, a copy of
which has been heretofore made available to Vail Banks.
(l) OTHER ACTIONS. The Company and the Banks shall not take any
-------------
action that would or could reasonably be expected to result in any of the
representations and warranties of the Company and the Banks set forth in this
Agreement becoming untrue at any time on or prior to the Closing Date.
(m) MAINTENANCE OF INSURANCE. The Company and the Banks shall
------------------------
maintain and keep or cause to be maintained and kept in full force and effect
all of the insurance referred to in Section 4.3.4 hereof or other insurance
equivalent thereto.
(n) INVESTMENT PORTFOLIO. The Company and the Banks shall only invest
--------------------
funds of the Company or the Banks in securities of the government of the United
States, Repurchase Agreements secured by securities of the government of the
United States, federal funds, or deposits insured by the FDIC; provided,
however, that no such investment by the Company or the Banks shall have a stated
maturity of greater than five (5) years and the various stated maturities of the
Company's and the Banks' investments shall be consistent with the stated
maturities of the investments held in the ordinary course of the Company's and
the Banks' businesses.
(o) BANKING RELATIONSHIPS. Except for changes in the ordinary course
---------------------
of business, no change will be made in the banking and safe deposit arrangements
referred to in Section 4.2.8 hereof.
(p) ADVICE OF CHANGES. The Company and the Banks shall promptly
-----------------
advise Vail Banks orally and in writing of any change or event having, or which
Management of the Company and the Banks believes could have, a material adverse
effect on the assets, liabilities, business, operations or financial condition
of the Company or the Banks.
ARTICLE VI
----------
30
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REPRESENTATIONS AND WARRANTIES OF VAIL BANKS
--------------------------------------------
To induce the Company to enter into and perform this Agreement, Vail
Banks represents, warrants, covenants and agrees as follows, which
representations, warranties, covenants and agreements are being made as of the
date hereof and shall be deemed to be made again as of the Closing:
6.1 VAIL BANKS DISCLOSURE MEMORANDUM. Vail Banks shall
--------------------------------
deliver to the Company on or before the thirtieth (30th) day following the date
of this Agreement a memorandum (the "Vail Banks Disclosure Memorandum")
containing certain information regarding Vail Banks and WestStar as indicated at
various places in this Agreement. All information set forth in the Vail Banks
Disclosure Memorandum or in documents incorporated by reference in the Vail
Banks Disclosure Memorandum is true, correct and complete, does not omit to
state any fact necessary in order to make the statements therein not misleading,
and shall be deemed for all purposes of this Agreement to constitute part of the
representations and warranties of Vail Banks under this Article VI. The
information contained in the Vail Banks Disclosure Memorandum shall be deemed to
be part of and qualify only those representations and warranties contained in
this Article VI which make specific reference to the Vail Banks Disclosure
Memorandum. All information in each of the documents and other writings
furnished to the Company pursuant to this Agreement or the Vail Banks Disclosure
Memorandum is or will be true, correct and complete in all material respects and
does not and will not omit to state any fact necessary in order to make the
statements therein not misleading. Vail Banks shall promptly provide the
Company with written notification of any event, occurrence or other information
necessary to maintain the Vail Banks Disclosure Memorandum and all other
documents and writings furnished to the Company pursuant to this Agreement as
true, correct and complete in all material respects at all times prior to and
including the Closing.
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6.2 CORPORATE AND FINANCIAL.
-----------------------
6.2.1 AUTHORITY. (a) Subject to the approval of various
---------
state and federal regulatory authorities, Vail Banks has full power and
authority to make, execute and perform this Agreement and the Holding Company
Merger Agreement and to consummate the transactions contemplated hereby and
thereby, and no further action is necessary on the part of Vail Banks to
authorize its consummation of the transactions contemplated hereby and thereby.
Other than such regulatory approvals, no further corporate action is necessary
on the part of Vail Banks to consummate the transactions contemplated hereby and
by the Holding Company Merger Agreement. This Agreement constitutes the valid
and binding obligation of Vail Banks, and the Holding Company Merger Agreement
constitutes the consent of Vail Banks to the Holding Company Merger, and each is
enforceable in accordance with its terms, except as limited by the laws
affecting creditors' rights generally and by the discretion of courts to compel
specific performance.
(b) Subject to the approval of the various state and
federal regulators, the execution, delivery and performance of this Agreement
and the other transactions contemplated or required in connection herewith will
not, with or without the giving of notice or the passage of time, or both, (i)
violate any provision of federal or state law applicable to Vail Banks or
WestStar, the violation of which could be expected to have an adverse effect on
the business, operations, properties, assets, financial condition or prospects
of Vail Banks or WestStar; (ii) violate any provision of the articles of
incorporation or charter, as the case may be, or bylaws of Vail Banks or
WestStar; (iii) conflict with or result in a breach of any provision of, or
termination of, or constitute a default under any instrument, license, agreement
or commitment to which Vail Banks or WestStar is a party, which, singly or in
the aggregate, could be expected to have an adverse effect on the business,
operations, properties, assets, financial condition or prospects of Vail Banks
or WestStar; or (iv) constitute a violation of any order, judgment or decree to
which Vail Banks or WestStar is a party, or by which Vail Banks or WestStar or
any of their respective assets or properties are bound.
6.2.2 CORPORATE STATUS.
----------------
(a) VAIL BANKS. Vail Banks is a corporation duly
----------
organized, validly existing and in good standing under the laws of the state of
Colorado and has no direct or indirect subsidiaries other than WestStar and
Mortgage Associates Vail, Inc. Vail Banks has all requisite corporate power and
authority and is entitled to own or lease its properties and assets and to carry
on its business as and in the places where such properties or assets are now
owned, leased or operated and such business is conducted. Vail Banks is duly
licensed, qualified or domesticated as a foreign corporation in the
jurisdictions listed in Section 6.2.2(a) of the Vail Banks Disclosure
Memorandum, which are all jurisdictions where the character of the property
owned by it or the nature of the business transacted by it make such license,
qualification or domestication necessary.
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(b) WESTSTAR. WestStar is a bank duly organized,
--------
validly existing and in good standing under the laws of the State of Colorado.
WestStar has all requisite corporate power and authority and is entitled to own
and lease its properties and assets and to carry on its business as and in the
places where such properties or assets are now owned, leased or operated and
such business is conducted.
6.2.3 CAPITAL STRUCTURE.
-----------------
(a) VAIL BANKS. (v) Vail Banks has an authorized
----------
capital stock consisting of 2,000,000 shares, $1.00 par value, common stock, of
which 228,582 shares of common stock are issued and outstanding as of the date
hereof, 50,000 shares, with a par value equal to 135% of the book value of Vail
Banks at the time of issuance, Series A Preferred Stock, of which 34,258 shares
of Series A Preferred Stock are issued and outstanding as of the date hereof,
and 200,000 shares of Series B Preferred Stock, with a par value equal to 75% of
the book value of Vail Banks at the time of issuance, of which no shares of
Series B Preferred Stock are issued and outstanding as of the date hereof (a
list of Vail Banks Shareholders and the number of shares of the capital stock of
Vail Banks owned by each is attached hereto as Exhibit C). All of the
outstanding capital stock of Vail Banks is duly and validly issued, fully paid
and non-assessable and was offered, issued and sold in compliance with all
applicable federal and state securities laws. No person has any right of
rescission or claim for damages under federal or state securities laws with
respect to the issuance of any shares of capital stock of Vail Banks previously
issued. None of the capital stock of Vail Banks has been issued in violation of
any preemptive or other rights of its shareholders.
(vi) Except as set forth in Section 6.2.3 (a)(ii) of
the Vail Banks Disclosure Memorandum, Vail Banks does not have outstanding any
securities which are either by their terms or by contract convertible or
exchangeable into capital stock of Vail Banks, or any other securities or debt
of Vail Banks, or any preemptive or similar rights to subscribe for or to
purchase, or any options or warrants or agreements or understandings for the
purchase or the issuance (contingent or otherwise) of, or any calls, commitments
or claims of any character relating to, its capital stock or securities
convertible into its capital stock. Vail Banks is not subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire, or to
register, any shares of its capital stock.
(vii) Except as set forth in Section 6.2.3 (a)(iii)
of the Vail Banks Disclosure Memorandum, there is no agreement, arrangement or
understanding to which Vail Banks is a party restricting or otherwise relating
to the transfer of any shares of capital stock of Vail Banks.
(viii) All shares of Company Common Stock or other
capital stock, or any other securities or debt, of Vail Banks, which have been
purchased or redeemed by Vail Banks have been purchased or redeemed in
accordance with all applicable federal, state and local laws, rules, and
regulations, including, without limitation, all federal and state securities
laws and rules and regulations of any securities exchange or system on which
such
33
<PAGE>
stock, securities or debt are, or at such time were, traded, and no such
purchase or redemption has resulted or will with the giving of notice or lapse
of time, or both, result in a default or acceleration of the maturity of, or
otherwise modify, any agreement, note, mortgage, bond, security agreement, loan
agreement or other contract or commitment of Vail Banks.
(b) WESTSTAR. (i) WestStar has an authorized capital
--------
stock consisting solely of 130,693 shares, $6.00 par value, common stock, of
which 130,693 shares of common stock are issued and outstanding as of the date
hereof and of which Vail Banks owns 130,693 shares, or 100% of the issued and
outstanding common stock. All of the outstanding capital stock of WestStar is
duly and validly issued, fully paid and non-assessable and was offered, issued
and sold in compliance with all applicable federal and state securities laws. No
person has any right of rescission or claim for damages under federal or state
securities laws with respect to the issuance of any shares of capital stock of
WestStar previously issued. None of the capital stock of WestStar has been
issued in violation of any preemptive or other rights of its shareholders.
(ii) WestStar does not have outstanding any
securities which are either by their terms or by contract convertible or
exchangeable into capital stock of WestStar, or any other securities or debt of
WestStar, or any preemptive or similar rights to subscribe for or to purchase,
or any options or warrants or agreements or understandings for the purchase or
the issuance (contingent or otherwise) of, or any calls, commitments or claims
of any character relating to, its capital stock or securities convertible into
its capital stock. WestStar is not subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire, or to register, any
shares of its capital stock.
(iii) There is no agreement, arrangement or under-
standing to which either WestStar or Vail Banks is a party restricting or
otherwise relating to the transfer of any shares of capital stock of WestStar.
(iv) All shares of WestStar Common Stock or other
capital stock, or any other securities or debt, of WestStar, which have been
purchased or redeemed by WestStar have been purchased or redeemed in accordance
with all applicable federal, state and local laws, rules, and regulations,
including, without limitation, all federal and state securities laws and rules
and regulations of any securities exchange or system on which such stock,
securities or debt are, or at such time were, traded, and no such purchase or
redemption has resulted or will, with the giving of notice or lapse of time, or
both, result in a default or acceleration of the maturity of, or otherwise
modify, any agreement, note, mortgage, bond, security agreement, loan agreement
or other contract or commitment of WestStar.
6.2.4 CORPORATE RECORDS. The stock records and minute books
-----------------
of Vail Banks and WestStar, as applicable, whether previously or in the future
furnished or made available to the Company by Vail Banks and WestStar, fully and
accurately reflect all issuances, transfers and redemptions of the common stock
of Vail Banks or WestStar, as applicable, correctly show the record addresses
and the number of shares of such stock issued and outstanding on the date hereof
held by the shareholders of Vail Banks or WestStar, correctly show all corporate
action
34
<PAGE>
taken by the directors and shareholders of Vail Banks or WestStar (including
actions taken by consent without a meeting), and contain true and correct copies
or originals of their respective articles of incorporation or charter, as the
case may be, and all amendments thereto, bylaws, as amended and currently in
force, and the minutes of all meetings or consent actions of their respective
directors and shareholders. No resolutions, regulations or bylaws have been
passed, enacted, consented to or adopted by the respective directors or
shareholders of Vail Banks or WestStar except those contained in the minute
books. All corporate records of Vail Banks and WestStar have been maintained in
accordance with all applicable statutory requirements and are complete and
accurate.
6.2.5 TAX RETURNS, TAXES. (a) Vail Banks and WestStar
------------------
have duly filed or will file when due (i) all required federal and state tax
returns and reports, and (ii) all required returns and reports of other
governmental units having jurisdiction with respect to taxes imposed upon their
respective incomes, properties, revenues, franchises, operations or other assets
or taxes imposed which might create a lien or encumbrance on any of such assets
or affect adversely their respective businesses or operations. Such returns or
reports are, and when filed will be, true, complete and correct, and Vail Banks
and WestStar have paid, or will pay with respect to returns or reports related
to their respective businesses not yet filed because not yet due, to the extent
such taxes or other governmental charges have become due, all taxes and other
governmental charges including all applicable interest and penalties, set forth
in such returns or reports related to their respective businesses. All federal,
state and local taxes and other governmental charges paid or payable by Vail
Banks or WestStar have been paid, or have been accrued or reserved on their
respective books in accordance with generally accepted accounting principles
applied on a basis consistent with prior periods. Adequate reserves for the
payment of taxes have been established on the books of Vail Banks and WestStar
for all periods through the date hereof, whether or not due and payable and
whether or not disputed. Until the Closing Date, Vail Banks and WestStar shall
continue to reserve sufficient funds for the payment of expected tax liabilities
in accordance with generally accepted accounting principles applied on a basis
consistent with prior periods. Neither Vail Banks nor WestStar have received any
notice of a tax deficiency or assessment of additional taxes of any kind and, to
the knowledge of officers of Vail Banks or WestStar (collectively "Management"),
there is no threatened claim against either Vail Banks or WestStar, or any basis
for any such claim, for payment of any additional federal, state, local or
foreign taxes for any period prior to the date of this Agreement in excess of
the accruals or reserves with respect to any such claim shown in the Vail Banks
1997 Financial Statements (as defined below) or disclosed in the notes with
respect thereto. There are no waivers or agreements by either Vail Banks or
WestStar for the extension of time for the assessment of any taxes. The federal
income tax returns of Vail Banks or WestStar have not been examined by the
Internal Revenue Service for any period since December 31, 1993.
(b) Except as set forth in Section 6.2.5(b) of the Vail
Banks Disclosure Memorandum, proper and accurate amounts have been withheld by
Vail Banks and WestStar from their employees for all periods in full and
complete compliance with the tax withholding provisions of applicable federal,
state and local tax laws, and proper and accurate federal, state and local tax
returns have been filed by Vail Banks and WestStar for all periods for
35
<PAGE>
which returns were due with respect to withholding, social security and
unemployment taxes, and the amounts shown thereon to be due and payable have
been paid in full.
6.2.6 FINANCIAL STATEMENTS. Vail Banks has delivered to
--------------------
the Company true, correct and complete copies of (i) the audited, consolidated
financial statements of Vail Banks and WestStar for the years ended December 31,
1995, 1996 and 1997, including balance sheets, statements of income, statements
of shareholders' equity, statements of cash flows and related notes (the
audited, consolidated financial statements for the year ended December 31, 1997
being referred to as the "Vail Banks 1997 Financial Statements") and (ii)
unaudited, consolidated financial statements of Vail Banks and WestStar for the
period ended March 31, 1998, including a balance sheet, statement of income and
related notes. In addition, Vail Banks will provide to the Company monthly
interim unaudited, consolidated financial statements of Vail Banks and WestStar
ending at the end of each month prior to Closing and after March 31, 1998. All
of such financial statements, except for the interim statements which have been
prepared consistently with the audited financial statements of the Company but
without footnotes, etc., have been prepared in accordance with generally
accepted accounting principles consistently applied and truthfully reflect the
assets, liabilities and financial condition of Vail Banks and WestStar as of the
dates indicated therein and the results of its operations for the respective
periods then ended.
6.2.7 REGULATORY REPORTS. Vail Banks has delivered to
------------------
the Company for review and inspection as a part of the Vail Banks Disclosure
Memorandum all Forms FRY6 filed by Vail Banks with the Board of Governors of the
Federal Reserve System (the "Federal Reserve") for the three years ended
December 31, 1997 and through the date of this Agreement, together with all
other reports filed by Vail Banks or WestStar for the same period with the
Division of Banking of the Department of Regulatory Agencies of the State of
Colorado (the "Division of Banking"), and other applicable regulatory agencies
(collectively, the "Reports"). All of such Reports, as amended, have been
prepared in accordance with applicable rules and regulations applied on a basis
consistent with prior periods and contain in all material respects all
information required to be presented therein in accordance with such rules and
regulations.
6.2.8 ACCOUNTS. Section 6.2.8 of the Vail Banks
--------
Disclosure Memorandum contains a list of each and every bank and other
institution in which Vail Banks or WestStar maintains an account or safety
deposit box, the account numbers and the names of all persons who are presently
authorized to draw thereon, have access thereto or give instructions regarding
distribution of funds or assets therein.
6.2.9 NOTES AND OBLIGATIONS. (a) Except as set forth
---------------------
in Section 6.2.9(a) of the Vail Banks Disclosure Memorandum or as provided for
in the loss reserve described in subsection (b) below, all notes receivable or
other obligations owned by Vail Banks or WestStar or due to any one of them
shown in the Vail Banks 1997 Financial Statements and any such notes receivable
and obligations on the date hereof and on the Closing Date are, and will be,
genuine, legal, valid and collectible obligations of the respective makers
thereof and are not and will not be subject to any offset or counterclaim.
Except as set forth in Section 6.2.9(a) of the Vail Banks Disclosure Memorandum
or in subsection (b) below, all such notes and obligations are evidenced
36
<PAGE>
by written agreements, true and correct copies of which will be made available
to the Company for examination prior to the Closing Date. All such notes and
obligations were entered into by either Vail Banks or WestStar, as the case may
be, in the ordinary course of business and in compliance with all applicable
laws and regulations.
(b) Vail Banks has established a loss reserve in
its Vail Banks 1997 Financial Statements and as of the date of this Agreement
and will establish a loan loss reserve as of the Closing Date which is or will
be adequate to cover anticipated losses which might result from such items as
the insolvency or default of borrowers or obligors on such loans or obligations,
defects in the notes or evidences of obligation (including losses of original
notes or instruments), offsets or counterclaims properly chargeable to such
reserve, or the availability of legal or equitable defenses which might preclude
or limit the ability of Vail Banks or WestStar, as the case may be, to
enforce the note or obligation, and the representations set forth in subsection
(a) above are qualified in their entirety by the aggregate of such loss reserve.
6.2.10 LIABILITIES. Neither Vail Banks nor WestStar has
-----------
any debt, liability or obligation of any kind required to be shown pursuant to
generally accepted accounting principles on the consolidated balance sheet of
Vail Banks, whether accrued, absolute, known or unknown, contingent or
otherwise, including, but not limited to, (a) liability or obligation on account
of any federal, state or local taxes or penalty, or interest or fines with
respect to such taxes, (b) liability arising from or by virtue of the
distribution, delivery or other transfer or disposition of goods, personal
property or services of any type, kind or variety, (c) unfunded liabilities with
respect to any pension, profit sharing or employee stock ownership plan, whether
operated by Vail Banks or WestStar or any other entity covering employees of
Vail Banks or WestStar, or (d) environmental liability, except (i) those
reflected in the Vail Banks 1997 Financial Statements, and (ii) as disclosed in
Section 6.2.10 of the Vail Banks Disclosure Memorandum. On the Closing Date,
Vail Banks shall have no indebtedness of any nature whatsoever, and WestStar
shall have any indebtedness resulting from the borrowing of any funds, property
or services; provided, however, that this section 6.2.10 shall not apply to the
purchase of Federal Funds in the ordinary course of business.
6.2.11 ABSENCE OF CHANGES. Except as specifically
------------------
provided for in this Agreement or specifically set forth in Section 6.2.11 of
the Vail Banks Disclosure Memorandum, since December 31, 1997:
(a) there have been no changes in the business,
assets, properties, liabilities, results of operations or financial condition of
Vail Banks or WestStar, or in any of their respective relationships with
customers, employees, lessors or others, other than changes in the ordinary
course of business, none of which individually or in the aggregate has had or
which Management believes will have a material adverse effect on such
businesses, assets, liabilities, results of operations, financial conditions or
properties;
37
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(b) there has been no material damage, destruction
or loss to the assets, properties or business of Vail Banks or WestStar, whether
or not covered by insurance, which has had or which Management believes may have
an adverse effect thereon;
(c) the businesses of Vail Banks and WestStar have
been operated in the ordinary course, and not otherwise, except for the
activities undertaken with respect to the pending acquisition by Vail Banks of
Independent Bankshares, Inc.;
(d) the properties and assets of Vail Banks and
WestStar used in their respective businesses have been maintained in good order,
repair and condition, ordinary wear and tear excepted;
(e) the respective books, accounts and records of
Vail Banks and WestStar have been maintained in the usual, regular and ordinary
manner;
(f) there have been no changes in the articles of
incorporation or charter, as the case may be, or bylaws of Vail Banks or
WestStar;
(g) there has been no labor dispute, unfair labor
practice charge or employment discrimination charge, nor, to the knowledge of
Management, any organizational effort by any union, or institution or threatened
institution of any effort, complaint or other proceeding in connection
therewith, involving Vail Banks or WestStar, or affecting their respective
operations;
(h) there has been no mortgage, lien or other
encumbrance or security interest (other than liens for current taxes not yet due
or purchase money security interests or pledges to secure public deposits or
federal funds purchased arising in the ordinary course of business) created on
or in (including without limitation, any deposit for security consisting of) any
asset or assets of Vail Banks or WestStar or assumed by either of them with
respect to any of their assets;
(i) there has been no indebtedness or other
liability or obligation (whether absolute, accrued, contingent or otherwise)
incurred by Vail Banks or WestStar which would be required to be reflected on a
balance sheet of Vail Banks or WestStar prepared as of the date hereof in
accordance with generally accepted accounting principles applied on a consistent
basis, except as incurred in the ordinary course of business;
(j) no obligation or liability of either Vail
Banks or WestStar has been discharged or satisfied, other than in the ordinary
course of business;
(k) there have been no sales, transfers or other
dispositions of any asset or assets of either Vail Banks or WestStar, other than
sales in the ordinary course of business; and
38
<PAGE>
(l) there has been no amendment, termination or
waiver of any right of either Vail Banks or WestStar under any contract or
agreement or governmental license, permit or permission which has had or may
have an adverse effect on either of their businesses or properties.
6.2.12 LITIGATION AND PROCEEDINGS. Except as set forth
--------------------------
in Section 6.2.12 of the Vail Banks Disclosure Memorandum, there are no actions,
decrees, suits, counterclaims, claims, proceedings or governmental actions or
investigations pending or, to the knowledge of Management, threatened against,
by or affecting either Vail Banks or WestStar, or any officer, director,
employee or agent in such person's capacity as an officer, director, employee or
agent of either Vail Banks or WestStar or relating to the business or affairs of
either Vail Banks or WestStar, in any court or before any arbitrator or
governmental agency, and no judgment, award, order or decree of any nature has
been rendered against or with respect thereto by any agency, arbitrator, court,
commission or other authority, nor does either Vail Banks or WestStar have any
unasserted contingent liabilities which might have an adverse effect on either
of their assets or on the operation of their respective businesses or which
might prevent or impede the consummation of the transactions contemplated by
this Agreement.
6.3 BUSINESS OPERATIONS.
-------------------
6.3.1 CUSTOMERS. Management has no knowledge of any
---------
presently existing facts which could reasonably be expected to result in the
loss of any material borrower or depositor of WestStar or in the inability of
WestStar to collect amounts due therefrom or to return funds deposited thereby,
except as set forth in Section 6.3.1 of the Vail Banks Disclosure Memorandum.
6.3.2 PERMITS; COMPLIANCE WITH LAW. (a) Vail Banks and
----------------------------
WestStar have all permits, licenses, approvals, authorizations and registrations
under all federal, state, local and foreign laws required for them to carry on
their respective businesses as presently conducted, and all of such permits,
licenses, approvals, authorizations and registrations are in full force and
effect, and no suspension or cancellation of any of them is pending or, to the
knowledge of Management, threatened.
(b) Vail Banks and WestStar have complied with all
laws, regulations, and orders applicable to them or their businesses. Section
6.3.2(b) of the Vail Banks Disclosure Memorandum contains a list of any known
violations of such laws, regulations, ordinances or rules by any present
officer, director, or employee of Vail Banks or WestStar which occurred since
December 31, 1992, and which resulted in any order, proceeding, judgment or
decree which would be required to be disclosed pursuant to Item 401(d) of
Regulation S-K promulgated by the Securities and Exchange Commission if Vail
Banks or WestStar had been subject to the reporting requirements under the
Securities Act or the Exchange Act. No past violation of any such law,
regulation, ordinance or rule has occurred which could impair the right or
ability of Vail Banks or WestStar to conduct their businesses.
39
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(c) Except as set forth in Section 6.3.2(c) of the
Vail Banks Disclosure Memorandum, no notice or warning from any governmental
authority with respect to any failure or alleged failure of Vail Banks or
WestStar to comply in any respect with any law, regulation or order has been
received, nor is any such notice or warning proposed or, to the knowledge of
Management, threatened.
6.3.3 ENVIRONMENTAL. (a) Except as set forth in Section
-------------
6.3.3(a) of the Vail Banks Disclosure Memorandum, Vail Banks and WestStar:
(i) have not caused or permitted, and have
no knowledge of, the generation, manufacture, use, or handling or the release or
presence of any hazardous substances on, in, under or from any properties or
facilities currently owned or leased by Vail Banks or WestStar or adjacent to
any properties so owned or leased; and
(ii) have complied with, and have kept all
records and made all filings required by, applicable federal, state and local
laws, regulations, orders, permits and licenses relating to the generation,
manufacture, use, handling, release or presence of any hazardous substance on,
in, under or from any properties or facilities currently owned or leased by Vail
Banks or WestStar.
(b) Except as set forth in Section 6.3.3(b) of the
Vail Banks Disclosure Memorandum, neither Vail Banks nor WestStar nor any of
their officers, directors, employees or agents, in the course of their
employment by Vail Banks or WestStar, has directly or indirectly given advice
with respect to, or participated in any respect, directly or indirectly, in, the
management or operation of any entity or concern whose business relates in any
way to the generation, storage, handling, disposal, transfer, production or
processing of hazardous substances, nor has Vail Banks or WestStar foreclosed on
any property on which there is a threatened release of any hazardous substances
or on which there has been such a release and full remediation has not been
completed, or any property on which contained (non-released) hazardous
substances or solid wastes are located.
(c) Except as set forth in Section 6.3.3(c) of the
Vail Banks Disclosure Memorandum, neither Vail Banks nor WestStar, nor any of
their officers, directors, employees, and agents, are aware of, have been told
of, or have observed, the presence of any hazardous substance or solid waste on,
in, under, or around property on which Vail Banks or WestStar holds a legal or
security interest, in violation of, or creating liability under, federal, state
or local environmental statutes, regulations, or ordinances.
6.3.4 INSURANCE. Section 6.3.4 of the Vail Banks
---------
Disclosure Memorandum contains a complete list and description (including the
expiration date, premium amount and coverage thereunder) of all policies of
insurance and bonds presently maintained by, or providing coverage for, Vail
Banks and WestStar or any of their officers, directors and employees, all of
which are, and will be maintained through the Closing Date, in full force and
effect, together with a complete list of all pending claims under any of such
policies or bonds. All terms, obligations and provisions of each of such
policies and bonds have been complied with, all premiums due thereon have been
paid, and no notice of cancellation with respect thereto has been received.
Except as set forth in Section 6.3.4 of the Vail Banks Disclosure Memorandum,
Management believes that such policies and bonds provide adequate coverage to
insure the properties and businesses of Vail Banks and WestStar and the
activities of their officers, directors and employees against such risks and in
such amounts as are prudent and customary. Neither Vail Banks nor WestStar will
as of the Closing Date have any liability for premiums or for retrospective
premium adjustments for any period prior to the Closing Date. Vail Banks and
WestStar have
40
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previously made available to the Company a true, correct and complete copy of
each insurance policy and bond in effect since January 1, 1992 with respect to
the business and affairs of Vail Banks and WestStar.
6.4 PROPERTIES AND ASSETS.
---------------------
6.4.1 CONTRACTS AND COMMITMENTS. Section 6.4.1 of the
-------------------------
Vail Banks Disclosure Memorandum contains a list identifying and briefly
describing all written contracts, purchase orders, agreements, security deeds,
guaranties or commitments to which Vail Banks or WestStar is a party, or by
which they may be bound, involving the payment or receipt, actual or contingent,
of more than $25,000 or having a term or requiring performance over a period of
more than ninety (90) days, other than agreements, contracts, security deeds,
guaranties or commitments made in the ordinary course of Vail Banks' business
and other agreements pursuant to which Vail Banks has received a security
interest. Except as set forth in Section 6.4.1 of the Vail Banks Disclosure
Memorandum, each such contract, agreement, guaranty and commitment of Vail Banks
and WestStar is in full force and effect and is valid and enforceable in
accordance with its terms, and constitutes a legal and binding obligation of the
respective parties thereto and is not the subject of any notice of default,
termination, partial termination or of any ongoing, pending, completed or
threatened investigation, inquiry or other proceeding or action that will give
rise to any notice of default, termination or partial termination. Vail Banks
and WestStar have complied with the provisions of such contracts, agreements,
guaranties and commitments. A true and complete copy of each such document has
been made available to the Company for examination.
6.4.2 LICENSES; INTELLECTUAL PROPERTY. Vail Banks and
-------------------------------
WestStar have all patents, trademarks, trade names, service marks, copyrights,
trade secrets and know-how reasonably necessary to conduct their businesses as
presently conducted and, except as described in Section 6.4.2 of the Vail Banks
Disclosure Memorandum, neither Vail Banks nor WestStar is a party, either as
licensor or licensee, to any agreement for any patent, process, trademark,
service mark, trade name, copyright, trade secret or other confidential
information, and there are no rights of third parties with respect to any
trademark, service mark, trade secrets, confidential information, trade name,
patent, patent application, copyright, invention, device or process owned or
used by Vail Banks or WestStar or presently expected to be used by either of
them in the future. All patents, copyrights, trademarks, service marks, trade
names, and applications therefor or registrations thereof, owned or used by Vail
Banks or WestStar, are listed in Section 6.4.2 of the Vail Banks Disclosure
Memorandum. Vail Banks and WestStar have complied with all applicable laws
relating to the filing or registration of "fictitious names" or trade names.
6.4.3 PERSONAL PROPERTY. Vail Banks and WestStar each
-----------------
have good and marketable title to all of their respective personalty, tangible
and intangible, reflected in the Vail Banks 1997 Financial Statements (except as
since sold or otherwise disposed of by either of them in the ordinary course of
business), free and clear of all encumbrances, liens or charges of any kind or
character except (i) those referred to in the notes to the Vail Banks 1997
Financial Statements as securing specified liabilities (with respect to which no
default exists or, to the
41
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knowledge of Management, is claimed to exist), (ii) those described in Section
6.4.3 of the Vail Banks Disclosure Memorandum and (iii) liens for taxes not due
and payable.
6.4.4 LEASES. (a) All leases pursuant to which either
------
Vail Banks or WestStar is lessor or lessee (the "Leases") of any real or
personal property are valid and enforceable in accordance with their terms;
there is not, under any of such Leases any default or, to the knowledge of
Management, any claimed default by Vail Banks or WestStar, as the case may be,
or event of default or event which with notice or lapse of time, or both would
constitute a default by Vail Banks or WestStar, as the case may be, and in
respect of which adequate steps have not been taken to prevent a default on
either of their parts from occurring.
(b) Except as set forth in Section 6.4.4(b) of the
Vail Banks Disclosure Memorandum, there are no contractual obligations,
agreements in principle or present plans for either Vail Banks or WestStar to
enter into new leases of real property or to renew or amend existing Leases
prior to the Closing Date.
(c) The copies of the Leases heretofore furnished
or made available by Vail Banks and WestStar to the Company are true, correct
and complete, and the Leases have not been modified in any respect other than
pursuant to amendments, copies of which have been concurrently delivered or made
available to the Company, and are in full force and effect in accordance with
their terms.
(d) Except as set forth in Section 6.4.4(d) of the
Vail Banks Disclosure Memorandum, no rent has been paid in advance and no
security deposit has been paid, nor is any brokerage commission payable, by or
to Vail Banks or WestStar with respect to any Lease.
6.4.5 REAL PROPERTY. (a) Except as disclosed in
-------------
Section 6.4.5(a) of the Vail Banks Disclosure Memorandum, Vail Banks and
WestStar have good and marketable title to the real property reflected in the
Vail Banks 1997 Financial Statements (the "Realty"), and the titles to the
Realty are covered by title insurance policies providing coverage in the amount
of the original purchase price.
(b) Except as set forth in Section 6.4.5(b) of the
Vail Banks Disclosure Memorandum, the interests of Vail Banks or WestStar in the
Realty and in and under each of the Leases are free and clear of any and all
liens and encumbrances except for liens for current taxes not yet due, and are
subject to no present claim, contest, dispute, action or, to the knowledge of
Management, threatened action at law or in equity.
(c) The present and past use and operations of,
and improvements upon, the Realty and all real properties leased by Vail Banks
and WestStar (the "Leased Properties") are in compliance with all applicable
building, fire, zoning and other applicable laws, ordinances and regulations,
including the Americans with Disabilities Act, and
42
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with all deed restrictions of record, no notice of any violation or alleged
violation thereof has been received, and to the knowledge of Management, there
are no proposed changes therein that would affect the Realty, the Leased
Properties or their uses.
(d) Management is not aware of any proposed or
pending change in the zoning of, or of any proposed or pending condemnation
proceeding with respect to, any of the Realty or the Leased Properties which may
adversely affect the Realty or the Leased Properties or the current or currently
contemplated use thereof.
(e) The buildings and structures owned, leased or
used by Vail Banks and WestStar are, taken as a whole, in good operating order
(except for ordinary wear and tear), usable in the ordinary course of business,
and are sufficient and adequate to carry on the businesses and affairs of Vail
Banks and WestStar as presently conducted.
6.5 EMPLOYEES AND BENEFITS.
----------------------
6.5.1 COMPENSATION STRUCTURE. Section 6.5.1 of the Vail
----------------------
Banks Disclosure Memorandum contains a true and complete list of the names,
titles, responsibilities and compensation arrangements of each person whose
earned compensation (including without limitation all salary, wages, bonuses and
fringe benefits, other than those fringe benefits made available to all
employees on a non-discriminatory basis), regardless of whether actually payable
in such year, from Vail Banks and WestStar for the current fiscal year will
equal or exceed $25,000. Section 6.5.1 of the Vail Banks Disclosure Memorandum
contains copies of all written agreements, correspondence (other than
outstanding offers of employment to prospective employees whose compensation
levels will not exceed $25,000 in cash), memoranda and other written materials
currently in effect which have been provided to such employees relating to their
compensation.
6.5.2 DIRECTORS OR OFFICERS OF OTHER CORPORATIONS.
-------------------------------------------
Except as set forth in Section 6.5.2 of the Vail Banks Disclosure Memorandum, no
director, officer, or employee of Vail Banks or WestStar serves, or in the past
five years has served, as a director or officer of any other corporation (other
than Vail Banks or WestStar) on behalf of or as a designee of Vail Banks or any
of its subsidiaries.
6.5.3 EMPLOYEE BENEFITS. (a) Except as set forth in
-----------------
Section 6.5.3(a) of the Vail Banks Disclosure Memorandum, neither Vail Banks nor
WestStar has or maintains a pension plan, profit sharing plan, group insurance
plan, employee welfare benefit plan (as such term is defined in Section 3(l) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
severance plan, bonus plan, stock option plan or deferred compensation plan for
any of its current or former employees.
(b) Each "employee benefit plan" as defined in
Section 3(3) of ERISA, maintained by or on behalf of Vail Banks or WestStar
(including any plans which are "multiemployer plans" under Section 3(37)(A) of
ERISA ("Multiemployer Plans") and any defined
43
<PAGE>
benefit plan (as defined in Section 3(35) of ERISA) terminated by Vail Banks or
WestStar within the five plan-years ending immediately before the Closing Date),
which covers or covered any employees of Vail Banks, WestStar, or any subsidiary
or of any predecessors thereof (each a "Plan"), is listed in Section 6.5.3(b) of
the Vail Banks Disclosure Memorandum, and copies of all the Plans and Plan
trusts (if applicable), Summary Plan Descriptions, Actuarial Reports and
valuations (if any), and Annual Reports (and attachments thereto) on Form 5500,
5500-C or 5500-R, as the case may be (if required pursuant to ERISA), for the
most recent three years with respect to the Plans, Internal Revenue Service
determination letters and any other related documents requested by the Company
or its counsel have been, or prior to the Closing Date will be, provided to the
Company.
(c) Except as set forth in Section 6.5.3(c) of the
Vail Banks Disclosure Memorandum, with respect to each Plan: no litigation or
administrative or other proceeding is pending or, to the knowledge of
Management, threatened; each Plan has been restated or amended so as to comply
with all applicable requirements of law, including all applicable requirements
of ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations promulgated thereunder by the Internal Revenue Service and the
United States Department of Labor. Neither the Plan nor any trustee,
administrator or fiduciary thereof has at any time been involved in any
transaction relating to the Plan which would constitute a breach of fiduciary
duty under ERISA or a "prohibited transaction" within the meaning of Section 406
of ERISA or Section 4975 of the Code, unless such transaction is specifically
permitted under Sections 407 or 408 of ERISA, Section 4975 of the Code or a
class or administrative exemption issued by the Department of Labor.
(d) Except as set forth in Section 6.5.3(d) of the
Vail Banks Disclosure Memorandum, each Plan has been administered in compliance
in all material respects with applicable law and the terms of the Plan.
(e) Except as disclosed in Section 6.5.3(e) of the
Vail Banks Disclosure Memorandum and except for obligations under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"),
neither Vail Banks nor WestStar has any obligation to provide, or material
liability for, health care, life insurance or other benefits after termination
of active employment. As of the Closing Date, Vail Banks and WestStar will have
provided adequate reserves, or insurance or qualified trust funds, for all
claims incurred through the Closing Date, including adequate reserves to provide
for any post-retirement health care, life insurance or other benefits with
respect to periods of employment prior to the Closing Date, based on an
actuarial valuation satisfactory to the actuaries of Vail Banks and WestStar
representing a projection of claims expected to be incurred for such retirees
during their period of coverage under such Plan.
(f) To the knowledge of Management, no fact or
circumstance exists which could constitute grounds in the future for the Pension
Benefit Guaranty Corporation ("PBGC") (or any successor to the PBGC) to take any
action whatsoever under
44
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Section 4042 of ERISA in connection with any plan which an Affiliate (as defined
below) of Vail Banks maintains within the meaning of Section 4062 or 4064 of
ERISA, and, in either case, PBGC has not previously taken any such action which
has, or reasonably might, result in any liability of an Affiliate or Vail Banks
to the PBGC, which would have an adverse effect on the business of Vail Banks.
The term "Affiliate" for purposes of this Section means any trade or business
(whether incorporated or unincorporated) which is a member of a group described
in Sections 414(b) or 414(c) of the Code of which Vail Banks is also a member.
(g) Only current and former employees of Vail
Banks or WestStar participate in any Plan.
6.5.4 LABOR-RELATED MATTERS. Neither Vail Banks nor
---------------------
WestStar is, and neither Vail Banks nor WestStar has been, a party to any
collective bargaining agreement or agreement of any kind with any union or labor
organization or to any agreement with any of its employees which is not
terminable at will or upon ninety (90) days notice at the election of, and
without cost or penalty to, Vail Banks or WestStar. Except as set forth in
Section 6.5.4 of the Vail Banks Disclosure Memorandum, neither Vail Banks nor
WestStar has received at any time in the past five (5) years, any demand for
recognition from any union, and no attempt has been made, or will have been made
as of the Closing Date, to organize any of their employees. Vail Banks has
complied with all obligations under the National Labor Relations Act, as
amended, the Age Discrimination in Employment Act, as amended, and all other
federal, state and local labor laws and regulations applicable to employees. To
the knowledge of Management, there are no unfair labor practice charges pending
or threatened against Vail Banks or WestStar, and there are, and in the past
three (3) years there have been, no charges, complaints, claims or proceedings,
or slowdowns or strikes pending or threatened against, or involving, as the case
may be, Vail Banks or WestStar with respect to any alleged violation of any
legal duty (including but not limited to any wage and hour claims, employment
discrimination claims or claims arising out of any employment relationship) by
Vail Banks or WestStar as to any of their employees or as to any person seeking
employment therefrom, and no such violations exist.
6.5.5 RELATED-PARTY TRANSACTIONS. Except for (a)
--------------------------
loans and extensions of credit made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions by Vail Banks or WestStar with other persons who are not affiliated
with Vail Banks or WestStar, and which do not involve more than the normal risk
of repayment or present other unfavorable features, (b) deposits, all of which
are on terms and conditions identical to those made available to all customers
of WestStar at the time such deposits were entered into, and (c) transactions
specifically described in Section 6.5.5 of the Vail Banks Disclosure Memorandum,
there are no contracts with or commitments to present or former 5% or greater
shareholders, directors, officers, or employees of Vail Banks or WestStar
involving the expenditure after December 31, 1997 of more than $60,000 as to any
one individual, including with respect to any business directly or indirectly
controlled by any such person, or $100,000 for all such contracts or commitments
in the aggregate for all such individuals (other than contracts or
45
<PAGE>
commitments relating to services to be performed by any officer, director or
employee as a currently-employed employee of Vail Banks or WestStar).
6.6 OTHER MATTERS.
-------------
6.6.1 APPROVALS, CONSENTS AND FILINGS. Except for the
-------------------------------
approval of the Federal Reserve, the Federal Deposit Insurance Corporation (the
"FDIC"), the Division of Banking, the shareholders of Vail Banks, or as set
forth in Section 6.6.1 of the Vail Banks Disclosure Memorandum, neither the
execution and delivery of this Agreement or the Holding Company Merger Agreement
by Vail Banks nor the consummation of the transactions contemplated hereby or
thereby, will (a) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority, or (b)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Vail Banks or WestStar, or any of their respective assets.
6.6.2 DEFAULT. (a) Except for those consents described in
-------
or set forth pursuant to Section 6.6.1 above or as set forth in Section 6.6.2(a)
of the Vail Banks Disclosure Memorandum, neither the execution of this Agreement
or the Holding Company Merger Agreement nor the consummation of the transactions
contemplated herein or therein (i) constitutes a breach of or default under any
contract or commitment to which Vail Banks or WestStar is a party or by which
Vail Banks or WestStar or their properties or assets are bound, (ii) does or
will result in the creation or imposition of any security interest, lien,
encumbrance, charge, equity or restriction of any nature whatsoever in favor of
any third party upon any assets of Vail Banks or WestStar, or (iii) constitutes
an event permitting termination of any agreement or the acceleration of any
indebtedness of Vail Banks or WestStar.
(b) Except as set forth in Section 6.6.2(b) of the Vail
Banks Disclosure Memorandum, neither Vail Banks nor WestStar is in default under
its articles of incorporation or charter, as the case may be, or bylaws or under
any term or provision of any security deed, mortgage, indenture or security
agreement or of any other contract or instrument to which Vail Banks or WestStar
is a party or by which either of them or any of their property is bound.
6.6.3 WESTSTAR. Vail Banks owns 100% of the equity interests
--------
of WestStar.
6.6.4 REPRESENTATIONS AND WARRANTIES. No material
------------------------------
representation or warranty contained in this Article IV or in any written
statement delivered by or at the direction of Vail Banks or WestStar pursuant
hereto or in connection with the transactions contemplated hereby contains or
shall contain any untrue statement, nor shall such representations and
warranties taken as a whole omit any statement necessary in order to make any
statement not misleading. Copies of all documents furnished to the Company in
connection with this Agreement or pursuant hereto are true, correct and
complete.
46
<PAGE>
ARTICLE VII
-----------
CONDUCT OF THE BUSINESS OF VAIL BANKS
--------------------------------------
OR WESTSTAR PENDING CLOSING
---------------------------
During the period from the date of this Agreement and continuing until
the Closing Date, or the earlier termination of this Agreement pursuant to
Article IX hereof, Vail Banks agrees (except as expressly contemplated by this
Agreement or to the extent that the Company shall otherwise consent in advance
in writing) that:
7.1 ORDINARY COURSE. Except in specific contemplation of the
---------------
transactions contemplated by this Agreement and except for the pending
acquisition by Vail Banks of Independent Bankshares, Inc., Vail Banks and
WestStar shall carry on their businesses in the usual, regular and ordinary
course in the same manner as heretofore conducted, without the creation of any
indebtedness for borrowed money (other than deposit and similar accounts and
customary credit arrangements between banks in the ordinary course of business),
and, to the extent consistent with such businesses, use their best efforts to
preserve intact their present business organizations, keep available the
services of their present officers and employees and preserve their
relationships with representatives, customers, suppliers, personnel and others
having business dealings with Vail Banks and WestStar.
7.2 GOVERNING DOCUMENTS; COMPLIANCE WITH LAW. Vail Banks and
----------------------------------------
WestStar shall not amend their articles of incorporation or charter, as the case
may be, or bylaws; provided, however, that Vail Banks may amend its articles of
incorporation for the purpose of adjusting the payment schedule of the Series A
Preferred Stock or as may be required in order to consummate any Equity Funding
Transaction. Vail Banks and WestStar shall each maintain their corporate
existence and powers and fully comply with all federal, state and local laws
with respect to their operations and the conduct of their businesses.
7.3 MAINTENANCE OF PROPERTIES. Vail Banks and WestStar shall
-------------------------
maintain their properties and assets in satisfactory condition and repair for
the purposes intended, ordinary wear and tear and damage by fire or other
casualty excepted.
7.4 BOOKS AND RECORDS. The books and records of Vail Banks and
-----------------
WestStar shall be maintained in the usual, regular and ordinary course on a
basis consistent with prior years.
7.5 PAYMENT OF DEBT. Vail Banks and WestStar shall not pay any
---------------
claim or discharge or satisfy any lien or encumbrance or pay any obligation or
liability other than in the ordinary course of business or as required by the
terms of any written instrument evidencing or governing the same, a copy of
which has been heretofore made available to the Company.
47
<PAGE>
7.6 OTHER ACTIONS. Vail Banks and WestStar shall not take any
-------------
action that would or could reasonably be expected to result in any of the
representations and warranties of Vail Banks and WestStar set forth in this
Agreement becoming untrue at any time on or prior to the Closing Date.
7.7 MAINTENANCE OF INSURANCE. Vail Banks and WestStar shall
------------------------
maintain and keep or cause to be maintained and kept in full force and effect
all of the insurance referred to in Section 6.3.4 hereof or other insurance
equivalent thereto.
7.8 INVESTMENT PORTFOLIO. Vail Banks and WestStar shall only
--------------------
invest funds of Vail Banks or WestStar in securities of the government of the
United States, Repurchase Agreements secured by securities of the government of
the United States, federal funds, or deposits insured by the FDIC; provided,
further that no such investments by Vail Banks or WestStar shall have a stated
maturity of greater than five (5) years and the various stated maturities of the
Vail Banks' and the WestStar's investments shall be consistent with the stated
maturities of the investments held in the ordinary course of the Vail Banks' and
the WestStar's business.
7.9 ADVICE OF CHANGES. Vail Banks and WestStar shall promptly
-----------------
advise the Company orally and in writing of any change or event having, or which
Management of Vail Banks and WestStar believes could have, a material adverse
effect on the assets, liabilities, business, operations or financial condition
of Vail Banks or WestStar, including, but not limited to, the issuance by Vail
Banks of any Vail Banks Common Stock at a price in excess of 200% of the then
book value of Vail Banks Common Stock.
ARTICLE VIII
------------
CONDITIONS TO OBLIGATIONS OF
----------------------------
VAIL BANKS
----------
All of the obligations of Vail Banks under this Agreement are subject
to the fulfillment prior to or at the Closing Date of each of the following
conditions, any one or more of which may be waived by Vail Banks:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of the Company contained herein or in any certificate, schedule or
other document delivered pursuant to the provisions hereof, or in connection
herewith, shall be true in all material respects as of the date when made and,
except where otherwise expressly provided herein, shall be deemed to be made
again at and as of the Closing Date and shall be true in all material respects
at and as of such time, except (i) for those representations and warranties
confined to a specific date, which shall be true and correct as of such date, or
(ii) as a result of changes or events expressly permitted or contemplated
herein.
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<PAGE>
8.2 PERFORMANCE OF CONDITIONS AND AGREEMENTS. The Company
----------------------------------------
Shareholders and the Company shall have performed and complied in all material
respects with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to or on the Closing Date.
8.3 CERTIFICATES, RESOLUTIONS, OPINION. The Company shall
----------------------------------
have delivered, or cause the Banks to deliver, to Vail Banks:
(a) a certificate executed by the President or Chairman of the
Company, dated as of the Closing Date, and certifying in such detail
as Vail Banks may reasonably request to the fulfillment of the
conditions specified in Sections 8.1 and 8.2 hereof;
(b) certificates executed by the Secretary of State of the
State of Colorado dated not more than thirty (30) business days prior
to the Closing Date, of the valid existence of the Company and the
Banks, respectively, under the laws of Colorado;
(c) evidence that the Company and the Banks have filed all
corporate tax returns required by the laws of the State of Colorado,
and have paid all taxes shown thereon to be due; and
(d) an opinion from counsel of the Company acceptable to Vail
Banks and its counsel, dated the Closing Date, in the form attached as
Exhibit D.
8.4 ACCOUNTANTS' LETTER. Vail Banks shall have received a
------------------- -
letter from Dalby, Wendland & Co., P.C. dated the Closing Date, to the effect
that: At the request of the Company they have carried out procedures to a
specified date not more than five business days prior to the Closing Date, which
procedures did not constitute an examination in accordance with generally
accepted auditing standards, of the financial statements of the Company, as
follows: (a) read the unaudited balance sheets and statements of income of the
Company and the Banks from December 31, 1997 through the date of the most recent
monthly financial statements available in the ordinary course of business; (b)
read the minutes of the meetings of shareholders and Board of Directors of the
Company and the Banks from December 31, 1997 to said date not more than five
business days prior to the Closing Date; and (c) consulted with certain officers
and employees of the Company and the Banks responsible for financial and
accounting matters and, based on such procedures, nothing has come to their
attention which would cause them to believe that (i) such unaudited interim
balance sheets and statements of income are not fairly presented in conformity
with generally accepted accounting principles applied on a basis consistent with
that of the Company 1997 Financial Statements, (ii) as of said date not more
than five business days prior to the Closing Date the shareholders' equity,
long-term debt, reserve for possible loan losses and total assets of the
Company, in each case as compared with the amounts shown in the Company 1997
49
<PAGE>
Financial Statements, are not different except as set forth in such letter, or
(iii) for the period from December 31, 1997 to said date not more than five
business days prior to the Closing Date, the net interest income, total and per
share amounts of consolidated income (before extraordinary items) and net income
of the Company, as compared with the corresponding portion of the preceding 12-
month period, are not different except as set forth in such letter.
8.5 REGULATORY APPROVALS. Vail Banks shall have received from
--------------------
any and all governmental authorities, bodies or agencies having jurisdiction
over the transactions contemplated by this Agreement, including, but not limited
to, the Federal Reserve, FDIC and the Division of Banking, all such consents,
authorizations and approvals as are necessary for the consummation thereof and
all applicable waiting or similar periods required by law shall have expired.
8.6 CERTIFICATES. There shall have been filed with the
------------
Secretary of State of the State of Colorado articles of merger with respect to
the merger of the Company into Vail Banks in accordance with the provisions of
Colorado law.
8.7 EMPLOYMENT. Except as specified in Section 3.12, all
----------
written employment, termination, consulting or similar agreements entered into
by the Company or the Banks shall have been effectively terminated with no
remaining liabilities, duties or obligations on the part of the Company or the
Banks under said agreements.
8.8 CONSENTS TO THE HOLDING COMPANY MERGER. The Company shall
--------------------------------------
have delivered to Vail Banks all consents to the Holding Company Merger that are
required to be secured from any party to any agreement with the Company or the
Banks.
8.9 BOARD APPROVAL. The Board of Directors and shareholders
--------------
of Vail Banks shall have approved the transactions provided for herein, which
approval shall be given no later than thirty (30) days following the date of
this Agreement.
8.10 TERMINATION OF COMPANY SHAREHOLDERS' AGREEMENT. All of the
----------------------------------------------
parties to that Shareholders' Agreement, dated November 30, 1988, as thereafter
or hereafter amended, shall execute a written agreement, pursuant to Section
10.2.2 of such Shareholders' Agreement, to terminate such Shareholders'
Agreement.
ARTICLE IX
----------
CONDITIONS TO OBLIGATIONS OF THE COMPANY
----------------------------------------
All of the obligations of the Company under this Agreement are subject
to the fulfillment prior to or at the Closing Date of each of the following
conditions, any one or more of which may be waived by the Company:
50
<PAGE>
9.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of Vail Banks contained herein or in any certificate, schedule or
other document delivered pursuant to the provisions hereof, or in connection
herewith, shall be true in all material respects as of the date when made and
shall be deemed to be made again at and as of the Closing Date and shall be true
in all material respects at and as of such time.
9.2 PERFORMANCE OF AGREEMENTS. Vail Banks shall have performed
-------------------------
and complied in all material respects with all agreements and conditions
required by this Agreement to be performed or complied with by it prior to or at
the Closing Date.
9.3 CERTIFICATES, RESOLUTIONS, OPINIONS. Vail Banks shall
-----------------------------------
have delivered to the Company:
(a) a certificate executed by the President of Vail Banks,
dated the Closing Date, certifying in such detail as the Company may
reasonably request to the fulfillment of the conditions specified in
Sections 9.1 and 9.2 hereof;
(b) duly adopted resolutions of the Board of Directors of
Vail Banks, certified by the Secretary or an Assistant Secretary
thereof, dated the Closing Date, authorizing and approving (i) the
execution of this Agreement and the Holding Company Merger Agreement,
and the consummation of the transactions contemplated herein and
therein in accordance with their respective terms, and (ii) all other
necessary and proper corporate action to enable Vail Banks to comply
with the terms hereof;
(c) an opinion of Kilpatrick Stockton LLP, counsel for Vail
Banks, dated the Closing Date, in the form attached as Exhibit E.
(d) certificates executed by the Secretary of State of the
State of Colorado, dated not more than thirty (30) business days prior
to the Closing Date, of the valid existence of Vail Banks under the
laws of Colorado.
9.4 SHAREHOLDER APPROVAL. This Agreement and the Merger shall
--------------------
have been approved by the vote of the holders of at least two-thirds of the
Company Common Stock and the holders of at least two-thirds of the Vail Banks
Common Stock and Vail Banks Preferred Stock.
9.5 REGULATORY APPROVALS. Any and all governmental
--------------------
authorities, bodies or agencies having jurisdiction over the transactions
contemplated by this Agreement, including, but not limited to, the Federal
Reserve, the FDIC and the Division of Banking, shall have granted all such
consents, authorizations and approvals as are necessary for the consummation
thereof, and all applicable waiting or similar periods required by law shall
have expired.
51
<PAGE>
9.6 ACCOUNTANTS' LETTER. The Company shall have received a letter
-------------------
from Fortner, Baynes, Levkulich and Co., dated the Closing Date, to the effect
that: at the request of Vail Banks they have carried out procedures to a
specified date not more than five business days prior to the Closing Date, which
procedures did not constitute an examination in accordance with generally
accepted auditing standards, of the financial statements of Vail Banks, as
follows: (a) read the unaudited balance sheets and statements of income of Vail
Banks and WestStar from December 31, 1997 through the date of the most recent
monthly financial statements available in the ordinary course of business; (b)
read the minutes of the meetings of shareholders and Board of Directors of Vail
Banks and WestStar from December 31, 1997 to said date not more than five
business days prior to the Closing Date; and (c) consulted with certain officers
and employees of Vail Banks and WestStar responsible for financial and
accounting matters and, based on such procedures, nothing has come to their
attention which would cause them to believe that (i) such unaudited interim
balance sheets and statements of income are not fairly presented in conformity
with generally accepted accounting principles applied on a basis consistent with
that of the Vail Banks 1997 Financial Statements, (ii) as of said date not more
than five business days prior to the Closing Date the shareholders' equity,
long-term debt, reserve for possible loan losses and total assets of Vail Banks,
in each case as compared with the amount shown in the Vail Banks 1997 Financial
Statements, are not different except as set forth in such letter, or (iii) for
the period from December 31, 1997 to said date not more than five business days
prior to the Closing Date, the net interest income, total and per share amounts
of consolidated income (before extraordinary items) and net income of Vail
Banks, as compared with the corresponding portion of the preceding 12-month
period, are not different except as set forth in such letter.
9.7 ATTORNEY'S OPINION. The Company shall have received from
------------------
Kilpatrick Stockton LLP, counsel for Vail Banks, their opinion, in form and
substance reasonably satisfactory to the Company, to the effect that the merger
of the Company into Vail Banks and the issuance of shares of Vail Banks Common
Stock in connection therewith, as described herein, will constitute a tax-free
reorganization under Section 368(a)(1)(A) of the Internal Revenue Code of 1986,
as amended.
9.8 CERTIFICATES. There shall have been filed with the Secretary
------------
of State of the State of Colorado articles of merger with respect to the merger
of the Company into Vail Banks in accordance with the provisions of Colorado
law.
9.9 DELIVERY OF CONSIDERATION BY VAIL BANKS. Vail Banks shall
---------------------------------------
have delivered the Consideration pursuant to Section 1.4 hereof.
ARTICLE X
---------
WARRANTIES, NOTICES, ETC.
-------------------------
52
<PAGE>
10.1 WARRANTIES. All statements contained in any certificate
-----------
or other instrument delivered by or on behalf of the Company pursuant to Article
VII or Vail Banks pursuant to Article VIII hereto or in connection with the
transactions contemplated hereby shall be deemed representations and warranties
hereunder by the delivering party.
10.2 SURVIVAL OF REPRESENTATIONS. All representations, warranties,
---------------------------
covenants, and agreements made by either party hereto in or pursuant to this
Agreement or in any instrument, exhibit or certificate delivered pursuant hereto
shall be deemed to have been material and to have been relied upon by the party
to which made, but, except as set forth hereafter or specifically stated in this
Agreement, such representations, warranties, covenants, and agreements shall
expire and be of no further force and effect upon the consummation of the
Holding Company Merger; provided, however, that the following shall survive
consummation of the Holding Company Merger and the transactions contemplated
hereby:
(a) the opinions of counsel referred to in Sections 8.3(d),
9.3(c) and 9.7 of this Agreement;
(b) the opinion of accountants referred to in Sections 8.4
and 9.6 of this Agreement;
(c) any intentional misrepresentation of any material fact
made by any party hereto in or pursuant to this Agreement or in any
instrument, document or certificate delivered pursuant hereto, which
shall survive for a period of two (2) years from the consummation of
the Holding Company Merger; and
(d) the covenant with respect to the Confidentiality of
certain information contained in Section 3.4 of this Agreement.
10.3 NOTICE. All notices, requests, demands and other
------
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered or mailed, first class, certified
mail, postage prepaid to each of the parties hereto at the respective addresses
set forth below (or at such other address either party may have theretofore
notified the other party in writing):
(a) To the Company: Garner F. Hill, II
Alexander Capital Management Group
1009 18th Street
Suite 2810
Denver, Colorado 80202
With copies to: Rothberger, Johnson & Lyons LLP
1200 Seventeenth Street
Suite 3000
53
<PAGE>
Denver, Colorado 80202
Attn: Tennyson W. Grebenar, Esq.
54
<PAGE>
(b) To Vail Banks: Vail Banks, Inc.
108 S. Frontage Road, West
Suite 101
Vail, Colorado 81657
Attn.: E. B. Chester, Jr.
With copies to: Kilpatrick Stockton LLP
Suite 2800
1100 Peachtree Street
Atlanta, Georgia 30309-4530
Attn.: R. Alexander Bransford, Jr.
10.4 ENTIRE AGREEMENT. This Agreement and the Holding Company
----------------
Merger Agreement supersede all prior discussions and agreements by and between
Vail Banks and the Company with respect to the Holding Company Merger and the
other matters with respect thereto, and the Agreement and the Holding Company
Merger Agreement contain the sole and entire agreement between the parties
hereto with respect to the transactions contemplated herein.
10.5 WAIVER; AMENDMENT. Prior to or on the Closing Date, Vail
-----------------
Banks, acting through its Board of Directors, Chairman or President, shall have
the right to waive any default in the performance of any term of this Agreement
by the Company, to waive or extend the time for the fulfillment by the Company
of any and all of its obligations under this Agreement, and to waive any or all
of the conditions precedent to the obligations of Vail Banks under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any law or applicable governmental regulation. Prior to or on the
Closing Date, the Company, acting through its Board of Directors or Chairman,
shall have the right to waive any default in the performance of any term of this
Agreement by Vail Banks, to waive or extend the time for the fulfillment by Vail
Banks of any and all of its obligations under this Agreement, and to waive any
or all of the conditions precedent to the obligations of the Company under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any law or applicable governmental regulation. This Agreement may
be amended by a subsequent writing signed by the parties hereto upon the
approval of the Boards of Directors of each of the parties hereto; provided,
however, that the provisions of Sections 8.5 and 8.5 requiring regulatory
approval shall not be amended by the parties hereto without such approval.
10.6 OFFICERS' CERTIFICATES. Each certificate executed and
----------------------
delivered by an officer of a party pursuant to this Agreement shall be deemed to
have been executed and delivered by such officer in his or her capacity as an
officer of the party on whose behalf the certificate is executed and delivered,
and not in his or her personal capacity, and such officer shall have no personal
liability by reason of his or her execution or delivery of any such certificate
in the absence of fraud, deliberate misrepresentation, other intentional
tortuous conduct, or gross negligence on the part of that officer.
55
<PAGE>
ARTICLE XI
----------
TERMINATION
-----------
11.1 TERMINATION OF AGREEMENT. This Agreement may be terminated
------------------------
only for the following reasons:
(a) MATERIAL ADVERSE CHANGE OF THE COMPANY OR THE BANKS. By
---------------------------------------------------
either party, if, after the date hereof, a material adverse change in the
financial condition or business of the Company, either of the Banks, Vail Banks
or WestStar, as the case may be, shall have occurred or the Company, either of
the Banks, Vail Banks or WestStar, as the case may be, shall have suffered a
material loss or damage to any of its properties or assets, which change, loss
or damage materially affects or impairs the ability of any of the Company,
either of the Banks, Vail Banks or WestStar, as the case may be, to conduct its
business.
(b) NONCOMPLIANCE OF THE COMPANY. By Vail Banks, if the
----------------------------
terms, covenants or conditions of this Agreement to be complied with or
performed by the Company at or before the Closing shall not have been complied
with or performed in all material respects and such noncompliance or non-
performance shall not have been waived by Vail Banks.
(c) NONCOMPLIANCE OF VAIL BANKS. By the Company, if the
---------------------------
terms, covenants or conditions of this Agreement to be complied with or
performed by Vail Banks at or before the Closing shall not have been complied
with or performed in all material respects and such noncompliance or non-
performance shall not have been waived by the Company.
(d) COMPANY'S FAILURE TO DISCLOSE. By Vail Banks, if it
-----------------------------
learns of any fact or condition not disclosed in this Agreement, the Company
Disclosure Memorandum or the Company 1997 Financial Statements and which was
required to be disclosed by the Company pursuant to the provisions of this
Agreement at or prior to the date of execution hereof with respect to the
business, properties, assets or earnings of the Company or either of the Banks
which materially and adversely affects such business, properties, assets or
earnings or the ownership, value or continuance thereof.
(e) COMPANY'S ENVIRONMENTAL LIABILITY. By Vail Banks, if it
---------------------------------
learns of any potential liability of the Company arising from noncompliance with
any federal, state or local environmental law by the Company, or any potential
liability of the Company arising from any environmental condition of the
properties or assets of the Company, including any properties or assets in which
the Company holds a security interest.
(f) VAIL BANKS' FAILURE TO DISCLOSE. By the Company, if it
-------------------------------
learns of any fact or condition not disclosed in this Agreement, the Vail Banks
Disclosure Memorandum or the Vail Banks 1997 Financial Statements and which was
required to be disclosed by Vail Banks pursuant to the provisions of this
Agreement at or prior to the date of execution hereof with respect to the
business, properties, assets or earnings of Vail Banks or WestStar which
materially and
56
<PAGE>
adversely affects such business, properties, assets or earnings or the
ownership, value or continuance thereof.
(g) VAIL BANKS' ENVIRONMENTAL LIABILITY. By the Company, if
-----------------------------------
it learns of any potential liability of Vail Banks arising from noncompliance
with any federal, state or local environmental law by Vail Banks, or any
potential liability of Vail Banks arising from any environmental condition of
the properties or assets of Vail Banks, including any properties or assets in
which Vail Banks holds a security interest.
(h) ADVERSE PROCEEDINGS. By either party, if any action,
-------------------
suit or proceeding shall have been instituted or threatened against either party
to this Agreement to restrain or prohibit, or to obtain substantial damages in
respect of, this Agreement or the consummation of the transactions contemplated
herein, which, in the good faith opinion of such party, makes consummation of
the transactions herein contemplated inadvisable.
(i) TERMINATION DATE. By either party, if neither
----------------
receipt of Regulatory Approvals nor receipt of equity funding required under the
terms of the Regulatory Approvals have occurred on or before December 31, 1998.
(j) DISSENTERS. By either party, if the holders of more than
----------
five percent (5%) of the Company Common Stock elect to exercise their statutory
right to dissent from the Merger and demand payment in cash for the "Fair Value"
of their shares ("Dissenters' Rights"); provided, however, if more than five
percent (5%) but less than twenty percent (20%) of the holders of the Company
Common Stock elect to exercise their Dissenters' Rights, the Company shall have
the right to require Vail Banks to waive its right to terminate the Agreement
under this Section 11.1(j).
(k) EQUITY FUNDING TRANSACTION. By Vail Banks, if the
--------------------------
offering price of the Vail Banks Common Stock in any Equity Funding Transaction
is less than the equivalent of $135 per share based on the current capital
structure of Vail Banks (i.e. without giving effect to any stock splits
accomplished in connection with any Equity Funding Transaction).
11.2 DAMAGES. (a) If the Company terminates this Agreement for
-------
any reason whatsoever after the forty-five (45) day due diligence period and
during the twelve (12) month period following the forty-five (45) day due
diligence period enters into an agreement to consummate the sale or other
disposition of a majority of its Common Stock or substantially all of its assets
to any third party or to engage in the combination or reorganization of the
Company and/or the Banks with any third party, the Company shall pay to Vail
Banks the sum of $500,000.
(b) If Vail Banks fails to raise in any Equity Funding
Transaction an amount of cash sufficient to enable Vail Banks to deliver to the
Company Shareholders the Cash Portion required under Section 1.2 hereof, then
Vail Banks shall pay to the Company the sum of $500,000 as liquidated damages.
The terms of this Section 11.2(b) provide the exclusive remedy
57
<PAGE>
of the Company for any claim brought as a result of Vail Banks failure to raise
sufficient cash in any Equity Funding Transaction.
(c) Except as otherwise provided in this Article XI, in the
event of any wrongful termination of this Agreement by either party, the other
party shall have the right to seek all legal and equitable remedies for damages
resulting from such wrongful termination. The right of Vail Banks to receive
liquidated damages pursuant to Section 11.2(a) shall be in addition to, and not
in limitation of, the right of Vail Banks to seek all legal and equitable
remedies for damages resulting from a wrongful termination of this Agreement by
the Company.
ARTICLE XII
-----------
COUNTERPARTS, HEADINGS, ETC.
----------------------------
This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument. The headings herein set out are for
convenience of reference only and shall not be deemed a part of this Agreement.
ARTICLE XIII
------------
BINDING EFFECT
--------------
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that this Agreement may not be assigned by any party without the prior
written consent of the others.
ARTICLE XIV
-----------
GOVERNING LAW
-------------
The validity and effect of this Agreement and the rights and
obligations of the parties hereto shall be governed by and construed and
enforced in accordance with the laws of the State of Colorado.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized corporate officers and their corporate seals
to be affixed hereto all as of the day and year first above written.
[Signatures on following page]
58
<PAGE>
VAIL BANKS, INC.
By: /s/ E.B. Chester, Jr.
---------------------
Chairman
(CORPORATE SEAL)
Attest:
/s/ Sharon B. Davis
---------------
Secretary
TELLURIDE BANCORP, LTD.
By: /s/Garner F. Hill, II,
----------------------
Chairman
(CORPORATE SEAL)
Attest:
/s/ Robert Campbell
---------------
Secretary
59
<PAGE>
INDEX TO EXHIBIT
Index of Exhibits
-----------------
Exhibit A: Agreement and Plan of Merger by and between Telluride Bancorp, Inc.,
and Vail Banks, Inc.
Exhibit B: A List of Company Shareholders and Number of Shares Owned
Exhibit C: List of Vail Banks Shareholders and Number of Shares Owned
Exhibit D: Opinion of Company
Exhibit E: Opinion of Kilpatrick Stockton LLP, Counsel for Vail Banks
Exhibit F: Registration Rights Agreement
Exhibit G: Vail Banks Shareholders' Agreement
Exhibit H: Determination of the Consideration to be delivered to Company
Shareholders
Exhibit I: Employment Agreements
60
<PAGE>
EXHIBIT 2.2
-----------
================================================================================
VAIL BANKS, INC.
AND
INDEPENDENT BANKSHARES, INC.
MERGER AGREEMENT
AND
PLAN OF REORGANIZATION
March 10, 1998
----------
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I................................................................. 6
- ---------
1.1 Merger.............................................................. 6
1.2 Consideration....................................................... 6
1.3 Restrictions on Transfer of Vail Banks Common Stock................. 7
1.4 Due Diligence....................................................... 8
ARTICLE II CLOSING........................................................ 8
- ----------
ARTICLE III OTHER AGREEMENTS.............................................. 8
- -----------
3.1 Meetings of Shareholders............................................. 8
3.1.1 The Company...................................................... 8
3.1.2 Banks............................................................ 8
3.2 Brokers; Finders' Fees; Commissions.................................. 9
3.3 Access, Information and Documents.................................... 9
3.4 Confidentiality...................................................... 9
3.5 Full Cooperation..................................................... 10
3.6 Expenses............................................................. 10
3.7 Approvals and Consents............................................... 10
3.8 Publicity............................................................ 10
3.9 Preservation of Goodwill............................................. 10
3.10 Agreement as to Efforts to Consummate............................... 11
3.11 Dividends........................................................... 11
ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY....... 11
- ----------
4.1 Disclosure Memorandum................................................ 11
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4.2 Corporate and Financial............................................. 11
4.2.1 Authority....................................................... 11
4.2.2 Corporate Status................................................ 12
4.2.3 Capital Structure............................................... 13
4.2.4 Corporate Records............................................... 14
4.2.5 Tax Returns, Taxes.............................................. 15
4.2.6 Financial Statements............................................ 16
4.2.7 Regulatory Reports.............................................. 16
4.2.11 Accounts....................................................... 16
4.2.9 Notes and Obligations........................................... 16
4.2.10 Liabilities.................................................... 17
4.2.11 Absence of Changes............................................. 17
4.2.12 Litigation and Proceedings..................................... 19
4.1.13 Cash Items..................................................... 19
4.3 Business Operations................................................. 20
4.3.1 Customers....................................................... 20
4.3.2 Permits; Compliance with Law.................................... 20
4.3.3 Environmental................................................... 21
4.3.4 Insurance....................................................... 22
4.4 Properties and Assets............................................... 22
4.4.1 Contracts and Commitments....................................... 22
4.4.2 Licenses; Intellectual Property................................. 23
4.4.3 Personal Property............................................... 23
4.4.4 Leases.......................................................... 23
4.4.5 Real Property................................................... 24
4.5 Employees and Benefits.............................................. 24
4.5.1 Compensation Structure.......................................... 24
4.5.2 Directors or Officers of Other Corporations..................... 25
4.5.3 Employee Benefits............................................... 25
4.5.4 Labor-Related Matters........................................... 26
4.5.5 Related-Party Transactions...................................... 27
4.6 Other Matters....................................................... 27
4.6.1 Approvals, Consents and Filings................................. 27
4.6.2 Default......................................................... 28
4.6.3 Bank of Telluride............................................... 28
4.6.5 Representations and Warranties.................................. 28
ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY
- ---------
SHAREHOLDERS............................................................. 28
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE V CONDUCT OF BUSINESS OF THE COMPANY OR THE BANKS PENDING
- ---------
CLOSING.................................................................. 29
ARTICLE V REPRESENTATIONS AND WARRANTIES OF VAIL BANKS................... 32
- ---------
7.1 Good Standing Vail Banks........................................... 32
7.2 Authority.......................................................... 32
7.3 Default............................................................ 32
7.4 Applications....................................................... 32
7.5 Documents Received from Company and Glenwood....................... 32
7.6 Representations and Warranties..................................... 32
ARTICLE VII CONDITIONS TO OBLIGATIONS OF VAIL BANKS..................... 33
- -----------
7.1 Representations and Warranties...................................... 33
7.2 Performance of Conditions and Agreements............................ 33
7.3 Certificates, Resolutions, Opinion.................................. 33
7.4 Accountants' Letter Vail............................................ 33
7.5 Regulatory Approvals................................................ 34
7.6 Certificates........................................................ 34
7.7 Employment.......................................................... 34
7.8 Consents to the Holding Company Merger.............................. 34
7.9 Board Approval...................................................... 35
ARTICLE VIII CONDITIONS TO OBLIGATIONS OF THE COMPANY..................... 35
- ------------
8.1 Representations and Warranties....................................... 35
8.2 PERFORMANCE OF AGREEMENTS \F C \L..................................... 35
8.3 Certificates, Resolutions, Opinions.................................. 35
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
8.4 Shareholder Approval The............................................. 36
8.5 Regulatory Approvals Any............................................. 36
ARTICLE IX WARRANTIES, NOTICES, ETC....................................... 36
- ----------
9.1 Warranties........................................................... 36
9.2 Survival of Representations.......................................... 36
9.3 Notice............................................................... 37
9.4 Entire Agreement..................................................... 38
9.5 Waiver; Amendment.................................................... 38
ARTICLE X TERMINATION..................................................... 39
- ---------
10.1 Material Adverse Change of the Company or the Banks................. 39
10.2 Noncompliance of the Company........................................ 39
10.4 Noncompliance of Vail Banks......................................... 39
10.5 Failure to Disclose................................................. 39
10.6 Environmental Liability............................................. 39
10.7 Adverse Proceedings................................................. 40
10.8 Termination Date.................................................... 40
ARTICLE XI COUNTERPARTS, HEADINGS, ETC.................................... 40
- ----------
ARTICLE XII BINDING EFFECT................................................ 40
- -----------
ARTICLE XIII.............................................................. 40
- ------------
</TABLE>
iv
<PAGE>
MERGER AGREEMENT AND PLAN OF REORGANIZATION
-------------------------------------------
THIS MERGER AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is
made and entered into this 10th day of March, 1998 by and between VAIL BANKS,
INC., a Colorado corporation (hereinafter "Vail Banks"), WESTSTAR BANK, a
Colorado bank (hereinafter "WestStar") [and unless the context otherwise owned
requires, the term "Vail Banks" shall include both Vail Banks and its wholly-
owned subsidiary, WestStar], INDEPENDENT BANKSHARES, INC., a Colorado
corporation (hereinafter the "Company"), GLENWOOD INDEPENDENT BANK, a Colorado
bank (hereinafter "Glenwood") [and unless the context otherwise requires, the
term the "Company" shall include Independent Bankshares, Inc. and its wholly-
owned subsidiary Glenwood], and DON VANDERHOOF, EDDI VANDERHOOF, STEVE
VANDERHOOF, GLEN JOHNSON, ROBERT CUTTER, MARK GOULD, NICHOLAS MASSARO, JIM
NELSON AND JOHN MASUR, the shareholders of the Company (hereinafter the "Company
Shareholders").
W I T N E S S E T H:
-------------------
WHEREAS, in order to effect the Mergers the Boards of Directors of
the parties hereto deem it advisable and in the best interests of each such
corporation and their respective shareholders that Vail Banks acquire one
hundred percent (100%) of the ownership of the Company pursuant to the merger
of the Company with and into Vail Banks for cash and shares of Vail Banks
Common Stock and that Vail Banks shall be the surviving corporation of such
merger (the "Holding Company Merger"), upon the terms and conditions
hereinafter set forth and as set forth in the Agreement and Plan of Merger
attached hereto as Exhibit A (the "Holding Company Merger Agreement"); and
WHEREAS, WestStar is a wholly-owned subsidiary of Vail Banks and
Glenwood is a wholly-owned subsidiary of the Company; and
WHEREAS, it is contemplated that Glenwood will merge with and into
WestStar with WestStar being the Surviving Bank in the merger (the "Bank
Merger"), upon the terms and conditions herein set forth and as set forth in
the Agreement and Plan of Merger attached hereto as Exhibit B (the "Bank
Merger Agreement"), the closing of the Bank Merger occurring simultaneously
with the closing of the Holding Company Merger (the Holding Company Merger and
Bank Merger being sometimes hereinafter collectively referred to as the
"Mergers").
NOW, THEREFORE, in consideration of the premises and the mutual and
reciprocal representations, warranties, promises and covenants herein
contained, the parties hereto agree as follows:
1
<PAGE>
ARTICLE I
---------
TERMS OF THE BUSINESS ARRANGEMENT
---------------------------------
1.1 MERGER. Pursuant to the terms and conditions provided
------
herein, on the Closing Date (hereinafter defined) the Company shall be merged
with and into Vail Banks in accordance with and in the manner set forth in the
Holding Company Merger Agreement, and Glenwood shall be merged with and into
WestStar in accordance with the Bank Merger Agreement.
1.2 CONSIDERATION. For purposes of determining the amount of
-------------
cash and the number of shares of Vail Banks Common Stock that will be
delivered to the Company Shareholders:
(a) The value of the Company shall be assumed to be (i) three
hundred percent (300%) of the Company's Shareholder Equity (as that term is
defined in paragraph (c) below) immediately prior to the Closing, or (ii) if
the amount determined under Clause (i) above exceeds $7,500,000, then the
value shall be assumed to be the greater of (A) $7,500,000 plus one hundred
percent (100%) of the amount by which the Company's Shareholder Equity exceeds
$2,500,000 or (B) $7,500,000 plus three hundred percent (300%) of the product
of 8.9% multiplied by the amount by which the customer deposits of Glenwood
immediately prior to Closing exceed $28,150,000 (the "Company's Assumed
Value").
(b) The value of one share of Vail Banks Common Stock shall be equal
to Vail Banks' Shareholder Equity (as that term is defined in paragraph (c)
below) immediately prior to Closing divided by the total number of shares of
Vail Banks Common Stock outstanding immediately prior to Closing multiplied by
one hundred seventy-five percent (175%) (the "Vail Banks Assumed Per Share
Value"); provided, however, that for purposes of determining the Vail Banks
Assumed Per Share Value, every share of stock in Vail Banks which is not Vail
Banks Common Stock and every debt instrument issued by Vail Banks which
provides for the conversion into Vail Banks Common Stock shall be treated as
though such conversion occurred the day immediately prior to Closing.
(c) For purposes of this Section 1.2, Shareholder Equity shall be
the value of the shareholder equity of the Company or Vail Banks, as the case
may be, as shown on unaudited, consolidated financial statements dated the day
immediately preceding Closing and prepared in accordance with the standards
set forth in Section 4.2.6.; provided, however, that Shareholder Equity of the
Company shall be increased by the lesser of (i) an amount equal to any
adjustment resulting from the conversion to audited financial statements that
is attributable to accounting for any capital lease asset and note payable
related to such capital lease asset; and (ii) $50,000.
2
<PAGE>
(d) The number of shares of Vail Banks Common Stock to be delivered
at the Closing shall be that number of shares equal to fifty percent (50%) of
the Company's Assumed Value divided by the Vail Banks Assumed Per Share Value.
(e) The amount of cash to be delivered to the Company Shareholders
at Closing shall be fifty percent (50%) of the Company's Assumed Value (the
"Cash Portion").
Upon the terms and conditions of this Agreement and the Holding
Company Merger Agreement, Vail Banks shall make available on or before the
Effective Date of the Holding Company Merger (as defined in the Holding
Company Merger Agreement) for delivery to (or to the order of) the Company
Shareholders sufficient funds to provide for cash payments to the Company
Shareholders as provided in the Holding Company Merger Agreement.
1.3 RESTRICTIONS ON TRANSFER OF VAIL BANKS COMMON STOCK. The
---------------------------------------------------
Company shall cause each Company Shareholder, severally and not jointly with
any other person, (i) to acknowledge that the shares of Vail Banks Common
Stock to be delivered to that Company Shareholder pursuant to Section 1.2 have
not been, and will not be, registered under the Securities Act, and therefore
may not be resold by that Company Shareholder without being in compliance with
the Securities Act or an exemption thereof, and (ii) covenant that none of the
shares of Vail Banks Common Stock issued to that Company Shareholder pursuant
to Section 1.2 will be offered, sold, assigned, transferred or otherwise
disposed of except upon full compliance with all the applicable provisions of
the Securities Act and the rules and regulations of the Securities and
Exchange Commission and applicable state securities laws and regulations, and
(iii) to execute and be bound by the provisions of that Shareholders'
Agreement between Vail Banks and each owner of the capital stock of Vail
Banks, dated February 26, 1997, as thereafter or hereafter amended. All
certificates evidencing shares of Vail Banks Common Stock issued pursuant to
Section 1.2 will bear substantially the following legend:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS, HAVE BEEN
ISSUED PURSUANT TO AND UNDER ONE OR MORE EXEMPTIONS THERETO, AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, OR DISPOSED OF UNLESS AND UNTIL
REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS,
UNLESS THE ISSUER HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
TRANSFER OF ANY OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AND ENTITLED TO THE
3
<PAGE>
BENEFITS OF THAT CERTAIN SHAREHOLDERS' AGREEMENT, DATED AS OF FEBRUARY 26,
1997, BY AND AMONG VAIL BANKS, INC. AND ITS SHAREHOLDERS, A COPY OF WHICH
MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF VAIL BANKS, INC.
In addition, certificates evidencing shares of Vail Banks Common Stock issued
pursuant to Section 1.2 to each Company Shareholder will bear any legend
required by the securities or blue sky laws of the state in which that Company
Shareholder resides.
1.4 DUE DILIGENCE. Vail Banks and the Company shall have until May
-------------
1, 1998 to conduct reasonable due diligence activities with respect to the
other party and its wholly-owned subsidiaries. Immediately upon the
expiration of the thirty (30) day period beginning on the date of this
Agreement the Company shall provide to Vail Banks the Disclosure Memorandum
described in Section 4.1 below.
ARTICLE II
----------
CLOSING
-------
The transactions contemplated herein shall be consummated (the
"Closing") at such place as mutually agreed to by the parties hereto, on or
-------
before the thirtieth (30th) day, which day shall be by mutual agreement of the
parties (and if no mutual agreement can be reached then on the thirtieth
(30th) day, but in no event earlier than June 30, 1998), following receipt of,
and compliance with the terms of, all approvals from any and all governmental
authorities or regulatory bodies having jurisdiction over the transactions
contemplated by this Agreement and the expiration of any waiting or similar
period required by applicable law, or at such other time and place as may be
mutually satisfactory to the parties hereto (the "Closing Date").
ARTICLE III
-----------
OTHER AGREEMENTS
----------------
3.1 MEETINGS OF SHAREHOLDERS.
------------------------
3.1.1 THE COMPANY. The Company shall cause a majority of the
-----------
shareholders of the Company Common Stock to vote within thirty (30) days
following the date of this Agreement to ratify and authorize the Company's
entry into this Agreement and the Holding Company Merger Agreement.
3.1.2 GLENWOOD. Entry into this Agreement by the Company
--------
shall constitute consent of the Company as sole shareholder of Glenwood to the
Bank Merger.
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3.2 BROKERS; FINDERS' FEES; COMMISSIONS. Each party hereto
-----------------------------------
represents and warrants to the other that no broker or finder has acted on its
behalf in connection with this Agreement or the transactions contemplated
hereby. Notwithstanding the preceding sentence, Vail Banks has entered into
an agreement with The Wallach Company pursuant to which Vail Banks will pay to
The Wallach Company a percentage fee based upon the value of assets purchased
by Vail Banks pursuant to this Agreement. Each party agrees to indemnify the
other and hold and save the other harmless from any claim or demand for
commissions or other compensation by any broker, finder or similar agent
claiming to have been employed by or on behalf of such party.
3.3 ACCESS, INFORMATION AND DOCUMENTS. The Company shall permit,
---------------------------------
and shall cause Glenwood, to permit, Vail Banks and its authorized
representatives full access during normal business hours from and after the
date hereof and prior to the Closing Date to all of the Company's and
Glenwood's properties, books, contracts, commitments and records and the
Company shall furnish, and shall cause Glenwood to furnish, Vail Banks and its
authorized representatives such information concerning the Company's and
Glenwood's affairs as Vail Banks may reasonably request. The Company shall
require, and shall cause Glenwood to require, its personnel to assist Vail
Banks in making any such investigation of the Company or Glenwood and shall
cause the counsel, accountants, employees and other representatives of the
Company and Glenwood to be available to Vail Banks for such purposes. During
such investigation, Vail Banks and its authorized representatives shall have
the right to make copies of such records, files, tax returns and other
materials as they may deem advisable and shall advise the Company or Glenwood
of those items of which copies are made. No investigation made heretofore or
hereafter by Vail Banks shall affect the representations and warranties of the
Company hereunder. Vail Banks and WestStar agree to allow the Company access
to information and documentation on the same terms as set forth above.
3.4 CONFIDENTIALITY. Prior to consummation of the Holding Company
---------------
Merger, the parties to this Agreement will provide each other with information
which may be deemed by the party providing the information to be confidential
or proprietary. Each party agrees that it will hold confidential and protect
all information provided to it by the other party to this Agreement and use
such information only in connection with the of the Mergers, except that the
obligations contained in this Section 3.4 shall not in any way restrict the
rights of any party or person to use information that (i) was known to such
party prior to the disclosure by the other party; (ii) is or becomes generally
available to the public other than by breach of this Agreement; (iii)
otherwise becomes lawfully available to a party to this Agreement on a non-
confidential basis from a third party who is not under an obligation of
confidence to the other party to this Agreement or (iv) is required to be
disclosed pursuant to any state or federal law. If this Agreement is
terminated prior to consummation of the Holding Company Merger, each party
agrees to return all documents and other material, and any copies thereof,
whether or not confidential, provided to it by or on behalf of the other party
to this Agreement. Each party shall insure that its officers, directors,
investment advisors, attorneys and other representatives who are given access
to such information are bound by and will use the
5
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information only in accordance with the foregoing restrictions. The provisions
of this Section 3.4 shall survive any termination of this Agreement.
3.5 FULL COOPERATION. The parties shall cooperate fully with each
----------------
other and with their respective agents, representatives, counsel and
accountants in connection with any acts or actions required to be taken as
part of their respective obligations under this Agreement, including
cooperation in the filing of all applications and other requests for consents
and approvals with respect to the transactions contemplated hereby and by the
Holding Company Merger Agreement and the Bank Merger Agreement.
3.6 EXPENSES. All of the expenses incurred by Vail Banks in
--------
connection with the authorization, preparation, execution and performance of
this Agreement, including, without limitation, all fees and expenses of its
agents, representatives, counsel and accountants and the fees and expenses
related to filing regulatory applications with state and federal authorities
in connection with the transactions contemplated hereby, shall be paid by Vail
Banks. All expenses incurred by the Company in connection with the
authorization, preparation, execution and performance of this Agreement,
including, without limitation, all fees and expenses of agents,
representatives, counsel and accountants for the Company shall be paid by the
Company.
3.7 APPROVALS AND CONSENTS. Each party hereto represents and
----------------------
warrants to and covenants with the others that it will, and will cause its
officers, directors, employees and agents to, use its and their best efforts
to obtain as soon as is reasonably practicable all approvals and consents of
state and federal departments or agencies required or deemed necessary for
consummation of the transactions contemplated by this Agreement. Provided,
however, that Vail Banks shall have primary responsibility for preparation,
filing and prosecution of all applications associated with such approvals and
consents.
3.8 PUBLICITY. All press releases and other announcements
---------
respecting the subject matter of this Agreement to any person shall be made
jointly by Vail Banks and the Company; provided, however, that any press
release, publication or other announcement respecting any public offering of
Vail Banks Common Stock or complying with any requirement of the Securities
and Exchange Commission shall be made only at the discretion of Vail Banks.
3.9 PRESERVATION OF GOODWILL. Each party hereto shall use its
------------------------
reasonable best efforts to preserve its business organization and the business
organization of its subsidiaries, to keep available the services of its
present employees and of the present employees of its subsidiaries, and to
preserve the goodwill of customers and others having business relations with
such party or its subsidiaries.
6
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3.10 AGREEMENT AS TO EFFORTS TO CONSUMMATE. Subject to the terms
-------------------------------------
and conditions of this Agreement, the parties agree to use all reasonable
efforts to take, or cause to be taken, all actions, and to do or cause to be
done all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective on a timely basis the
transactions contemplated by this Agreement, the Holding Company Merger
Agreement and the Bank Merger Agreement.
3.11 DIVIDENDS. The Company and Glenwood may prior to Closing
---------
declare dividends or other distributions on its Common Stock. Except with
prior written consent of Vail Banks, neither the Company nor Glenwood may
issue, sell, repurchase, acquire or redeem any of its Common Stock.
ARTICLE IV
----------
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
--------------------------------------------------------
To induce Vail Banks to enter into and perform this Agreement, the
Company, represents, warrants, covenants and agrees as follows, which
representations, warranties, covenants and agreements are being made as of the
date hereof and shall be deemed to be made again as of the Closing:
4.1 DISCLOSURE MEMORANDUM. The Company shall deliver to Vail Banks
---------------------
on or before the expiration of the thirty (30) day period beginning on the
date of this Agreement a memorandum (the "Disclosure Memorandum") containing
certain information regarding the Company and Glenwood as indicated at various
places in this Agreement. All information set forth in the Disclosure
Memorandum or in documents incorporated by reference in the Disclosure
Memorandum is true, correct and complete, does not omit to state any fact
necessary in order to make the statements therein not misleading, and shall be
deemed for all purposes of this Agreement to constitute part of the
representations and warranties of the Company under this Article IV. The
information contained in the Disclosure Memorandum shall be deemed to be part
of and qualify only those representations and warranties contained in this
Article IV which make specific reference to the Disclosure Memorandum. All
information in each of the documents and other writings furnished to Vail
Banks pursuant to this Agreement or the Disclosure Memorandum is or will be
true, correct and complete in all material respects and does not and will not
omit to state any fact necessary in order to make the statements therein not
misleading. The Company shall promptly provide Vail Banks with written
notification of any event, occurrence or other information necessary to
maintain the Disclosure Memorandum and all other documents and writings
furnished to Vail Banks pursuant to this Agreement as true, correct and
complete in all material respects at all times prior to and including the
Closing.
4.2 CORPORATE AND FINANCIAL.
-----------------------
4.2.1 AUTHORITY. (a) Subject to the approval of various state
---------
and federal regulatory authorities, the Company has full power and authority
to make, execute and perform this Agreement and the Holding Company Merger
Agreement and to
7
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consummate the transactions contemplated hereby and thereby, and no further
action is necessary on the part of the Company to authorize its consummation
of the transactions contemplated hereby and thereby. Other than such
regulatory approvals, no further corporate action is necessary on the part of
the Company to consummate the transactions contemplated hereby and by the
Holding Company Merger Agreement. This Agreement constitutes the valid and
binding obligation of the Company, and the Holding Company Merger Agreement
constitutes the consent of the Company to the Holding Company Merger, and each
is enforceable in accordance with its terms, except as limited by the laws
affecting creditors' rights generally and by the discretion of courts to
compel specific performance.
(b) Subject to the approval of the various
state and federal regulators, the execution, delivery and performance of this
Agreement and the other transactions contemplated or required in connection
herewith will not, with or without the giving of notice or the passage of
time, or both, (i) violate any provision of federal or state law applicable to
the Company or Glenwood, the violation of which could be expected to have an
adverse effect on the business, operations, properties, assets, financial
condition or prospects of the Company or Glenwood; (ii) violate any provision
of the articles of incorporation or charter, as the case may be, or bylaws of
the Company or Glenwood; (iii) conflict with or result in a breach of any
provision of, or termination of, or constitute a default under any instrument,
license, agreement or commitment to which the Company or Glenwood is a party,
which, singly or in the aggregate, could be expected to have an adverse effect
on the business, operations, properties, assets, financial condition or
prospects of the Company or Glenwood; or (iv) constitute a violation of any
order, judgment or decree to which the Company or Glenwood is a party, or by
which the Company or Glenwood or any of their respective assets or properties
are bound.
4.2.2 CORPORATE STATUS.
----------------
(a) THE COMPANY. The Company is a corporation
-----------
duly organized, validly existing and in good standing under the laws of the
state of Colorado and has no direct or indirect subsidiaries other than
Glenwood. The Company has all requisite corporate power and authority and is
entitled to own or lease its properties and assets and to carry on its
business as and in the places where such properties or assets are now owned,
leased or operated and such business is conducted. The Company is duly
licensed, qualified or domesticated as a foreign corporation in the
jurisdictions listed in Section 4.2.2(a) of the Disclosure Memorandum, which
are all jurisdictions where the character of the property owned by it or the
nature of the business transacted by it make such license, qualification or
domestication necessary.
(b) GLENWOOD. Glenwood is a bank duly
--------
organized, validly existing and in good standing under the laws of the State
of Colorado. Glenwood has all requisite corporate power and authority and is
entitled to own and lease its properties and assets and to carry on its
business as and in the places where such properties or assets are now owned,
leased or operated and such business is conducted.
8
<PAGE>
4.2.3 CAPITAL STRUCTURE.
-----------------
(a) THE COMPANY. (i) The Company has an
-----------
authorized capital stock consisting solely of 1,000,000 shares, $2.00 par
value, common stock, of which 10,000 shares of common stock are issued and
outstanding as of the date hereof (a list of the Company Shareholders and the
number of shares of Company Common Stock owned by each is attached hereto as
Exhibit C). All of the outstanding capital stock of the Company is duly and
validly issued, fully paid and non-assessable and was offered, issued and sold
in compliance with all applicable federal and state securities laws. No person
has any right of rescission or claim for damages under federal or state
securities laws with respect to the issuance of any shares of capital stock of
the Company previously issued. None of the capital stock of the Company has
been issued in violation of any preemptive or other rights of its
shareholders.
(ii) The Company does not have outstanding
any securities which are either by their terms or by contract convertible or
exchangeable into capital stock of the Company, or any other securities or
debt of the Company, or any preemptive or similar rights to subscribe for or
to purchase, or any options or warrants or agreements or understandings for
the purchase or the issuance (contingent or otherwise) of, or any calls,
commitments or claims of any character relating to, its capital stock or
securities convertible into its capital stock. The Company is not subject to
any obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire, or to register, any shares of its capital stock.
(iii) There is no agreement, arrangement
or understanding to which the Company is a party restricting or otherwise
relating to the transfer of any shares of capital stock of the Company.
(iv) All shares of Company Common Stock or
other capital stock, or any other securities or debt, of the Company, which
have been purchased or redeemed by the Company have been purchased or redeemed
in accordance with all applicable federal, state and local laws, rules, and
regulations, including, without limitation, all federal and state securities
laws and rules and regulations of any securities exchange or system on which
such stock, securities or debt are, or at such time were, traded, and no such
purchase or redemption has resulted or will with the giving of notice or lapse
of time, or both, result in a default or acceleration of the maturity of, or
otherwise modify, any agreement, note, mortgage, bond, security agreement,
loan agreement or other contract or commitment of the Company.
(b) GLENWOOD. (i) Glenwood has an authorized
capital stock consisting solely of 10,000 shares, $100.00 par value, common
stock, of which 2,363 shares of common stock are issued and outstanding as of
the date hereof and of which the Company owns 2,363 shares, or 100% of the
issued and outstanding common stock. All of the outstanding capital stock of
Glenwood is duly and validly issued, fully
9
<PAGE>
paid and non-assessable and was offered, issued and sold in compliance with
all applicable federal and state securities laws. No person has any right of
rescission or claim for damages under federal or state securities laws with
respect to the issuance of any shares of capital stock of Glenwood previously
issued. None of the capital stock of Glenwood has been issued in violation of
any preemptive or other rights of its shareholders.
(ii) Glenwood does not have outstanding
any securities which are either by their terms or by contract convertible or
exchangeable into capital stock of Glenwood, or any other securities or debt
of Glenwood, or any preemptive or similar rights to subscribe for or to
purchase, or any options or warrants or agreements or understandings for the
purchase or the issuance (contingent or otherwise) of, or any calls,
commitments or claims of any character relating to, its capital stock or
securities convertible into its capital stock. Glenwood is not subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire, or to register, any shares of its capital stock.
(iii) There is no agreement, arrangement
or understanding to which either Glenwood or the Company is a party
restricting or otherwise relating to the transfer of any shares of capital
stock of Glenwood.
(iv) All shares of Glenwood Common Stock
or other capital stock, or any other securities or debt, of Glenwood, which
have been purchased or redeemed by Glenwood have been purchased or redeemed in
accordance with all applicable federal, state and local laws, rules, and
regulations, including, without limitation, all federal and state securities
laws and rules and regulations of any securities exchange or system on which
such stock, securities or debt are, or at such time were, traded, and no such
purchase or redemption has resulted or will, with the giving of notice or
lapse of time, or both, result in a default or acceleration of the maturity
of, or otherwise modify, any agreement, note, mortgage, bond, security
agreement, loan agreement or other contract or commitment of Glenwood.
4.2.4 CORPORATE RECORDS. The stock records and minute
-----------------
books of the Company and Glenwood, as applicable, whether previously or in the
future furnished or made available to Vail Banks by the Company and Glenwood,
fully and accurately reflect all issuances, transfers and redemptions of the
common stock of the Company or Glenwood, as applicable, correctly show the
record addresses and the number of shares of such stock issued and outstanding
on the date hereof held by the shareholders of the Company or Glenwood,
correctly show all corporate action taken by the directors and shareholders of
the Company or Glenwood (including actions taken by consent without a
meeting), and contain true and correct copies or originals of their respective
articles of incorporation or charter, as the case may be, and all amendments
thereto, bylaws, as amended and currently in force, and the minutes of all
meetings or consent actions of their respective directors and shareholders. No
resolutions, regulations or bylaws have been passed, enacted, consented to or
adopted by the respective directors or shareholders of the Company or Glenwood
except those contained in the minute books. All corporate records
10
<PAGE>
of the Company and Glenwood have been maintained in accordance with all
applicable statutory requirements and are complete and accurate.
4.2.5 TAX RETURNS, TAXES. (a) The Company and Glenwood have duly
------------------
filed or will file when due (i) all required federal and state tax returns and
reports, and (ii) all required returns and reports of other governmental units
having jurisdiction with respect to taxes imposed upon their respective
incomes, properties, revenues, franchises, operations or other assets or taxes
imposed which might create a lien or encumbrance on any of such assets or
affect adversely their respective businesses or operations. Such returns or
reports are, and when filed will be, true, complete and correct, and the
Company and Glenwood have paid, or will pay with respect to returns or reports
related to their respective businesses not yet filed because not yet due, to
the extent such taxes or other governmental charges have become due, all taxes
and other governmental charges including all applicable interest and
penalties, set forth in such returns or reports related to their respective
businesses. All federal, state and local taxes and other governmental charges
paid or payable by the Company or Glenwood have been paid, or have been
accrued or reserved on their respective books in accordance with generally
accepted accounting principles applied on a basis consistent with prior
periods. Adequate reserves for the payment of taxes have been established on
the books of the Company and Glenwood for all periods through the date hereof,
whether or not due and payable and whether or not disputed. Until the Closing
Date, the Company and Glenwood shall continue to reserve sufficient funds for
the payment of expected tax liabilities in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods.
Neither the Company nor Glenwood has received any notice of a tax deficiency
or assessment of additional taxes of any kind and, to the knowledge of
officers of the Company or Glenwood (collectively "Management"), there is no
threatened claim against either the Company or Glenwood, or any basis for any
such claim, for payment of any additional federal, state, local or foreign
taxes for any period prior to the date of this Agreement in excess of the
accruals or reserves with respect to any such claim shown in the 1997
Financial Statements (as defined below) or disclosed in the notes with respect
thereto. There are no waivers or agreements by either the Company or Glenwood
for the extension of time for the assessment of any taxes. The federal income
tax returns of the Company or Glenwood have not been examined by the Internal
Revenue Service for any period since 1970.
(b) Except as set forth in Section 4.2.5(b) of the
Disclosure Memorandum, proper and accurate amounts have been withheld by the
Company and Glenwood from their employees for all periods in full and complete
compliance with the tax withholding provisions of applicable federal, state
and local tax laws, and proper and accurate federal, state and local tax
returns have been filed by the Company and Glenwood for all periods for which
returns were due with respect to withholding, social security and unemployment
taxes, and the amounts shown thereon to be due and payable have been paid in
full.
11
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4.2.6 FINANCIAL STATEMENTS. The Company has delivered to Vail
--------------------
Banks true, correct and complete copies of (i) the unaudited, consolidated
financial statements of the Company and Glenwood for the year ended December
31, 1995, including balance sheets, statements of income, statements of
shareholders' equity, statements of cash flows and related notes, and the
unaudited, consolidated financial statements of the Company and Glenwood for
the years ended December 31, 1996 and 1997 (the unaudited, consolidated
financial statements for the year ended December 31, 1997 being referred to as
the "1997 Financial Statements") and (ii) unaudited, consolidated financial
statements of the Company and Glenwood for the period and January 31, 1998,
including a balance sheet, statement of income and related notes. In addition,
the Company will deliver to Vail Banks unaudited, consolidated financial
statements for (i) the period ended March 31, 1998 and (ii) each month ended
thereafter up to and including the month during which the Closing occurs;
provided, that any such financial statement deliverable to Vail Banks pursuant
to this sentence shall be delivered no later than 45 days after the end of the
applicable period. All of such financial statements have been or will be
prepared in accordance with generally accepted accounting principles
consistently applied and truthfully reflect the assets, liabilities and
financial condition of the Company and Glenwood as of the dates indicated
therein and the results of its operations for the respective periods then
ended.
4.2.7 REGULATORY REPORTS. The Company has delivered to Vail Banks
------------------
for review and inspection as a part of the Disclosure Memorandum all Forms
FRY6 filed by the Company with the Board of Governors of the Federal Reserve
System (the "Federal Reserve") for the three years ended December 31, 1997 and
through the date of this Agreement, together with all other reports filed by
the Company or Glenwood for the same period with the Division of Banking of
the Department of Regulatory Agencies of the State of Colorado (the "Division
of Banking"), and other applicable regulatory agencies (collectively, the
"Reports"). In addition, the Company will deliver to Vail Banks for review and
inspection all CALL reports for any period filed after the date of this
Agreement and shall deliver such reports to Vail Banks within 45 days of the
end of the applicable period. All of such Reports, as amended, have been or
will be prepared in accordance with applicable rules and regulations applied
on a basis consistent with prior periods and contain in all material respects
all information required to be presented therein in accordance with such rules
and regulations.
4.2.8 ACCOUNTS. Section 4.2.8 of the Disclosure Memorandum
--------
contains a list of each and every bank and other institution in which the
Company or Glenwood maintains an account or safety deposit box, the account
numbers and the names of all persons who are presently authorized to draw
thereon, have access thereto or give instructions regarding distribution of
funds or assets therein.
4.2.9 NOTES AND OBLIGATIONS. (a) Except as set forth in Section
---------------------
4.2.9(a) of the Disclosure Memorandum or as provided for in the loss reserve
described in subsection (b) below, all notes receivable or other obligations
owned by the Company or Glenwood or due to either of them shown in the 1997
Financial Statements and any such notes receivable and obligations on the date
hereof and on the Closing
12
<PAGE>
Date are, and will be, genuine, legal, valid and collectible obligations of
the respective makers thereof and are not and will not be subject to any
offset or counterclaim. Except as set forth in Section 4.2.9(a) of the
Disclosure Memorandum or in subsection (b) below, all such notes and
obligations are evidenced by written agreements, true and correct copies of
which will be made available to Vail Banks for examination prior to the
Closing Date. All such notes and obligations were entered into by either the
Company or Glenwood, as the case may be, in the ordinary course of business
and in compliance with all applicable laws and regulations.
(b) The Company has established a loss reserve in its 1997
Financial Statements and will continue to maintain appropriate loan loss
reserves which will be adequate to cover anticipated losses which might result
from such items as the insolvency or default of borrowers or obligors on such
loans or obligations, defects in the notes or evidences of obligation
(including losses of original notes or instruments), offsets or counterclaims
properly chargeable to such reserve, or the availability of legal or equitable
defenses which might preclude or limit the ability of the Company or Glenwood,
as the case may be, to enforce the note or obligation, and the representations
set forth in subsection (a) above are qualified in their entirety by the
aggregate of such loss reserve.
4.2.10 LIABILITIES. Neither the Company nor Glenwood has any
-----------
debt, liability or obligation of any kind required to be shown pursuant to
generally accepted accounting principles on the consolidated balance sheet of
the Company, whether accrued, absolute, known or unknown, contingent or
otherwise, including, but not limited to, (a) liability or obligation on
account of any federal, state or local taxes or penalty, or interest or fines
with respect to such taxes, (b) liability arising from or by virtue of the
distribution, delivery or other transfer or disposition of goods, personal
property or services of any type, kind or variety, (c) unfunded liabilities
with respect to any pension, profit sharing or employee stock ownership plan,
whether operated by the Company or Glenwood or any other entity covering
employees of the Company or Glenwood, or (d) environmental liability, except
(i) those reflected in the 1997 Financial Statements, and (ii) as disclosed in
Section 4.2.10 of the Disclosure Memorandum. On the Closing Date, the Company
shall have no indebtedness of any nature whatsoever, and Glenwood shall have
any indebtedness resulting from the borrowing of any funds, property or
services; provided, however, that this section 4.2.10 shall not apply to the
purchase of Federal Funds in the ordinary course of business.
4.2.11 ABSENCE OF CHANGES. Except as specifically provided for in
------------------
this Agreement or specifically set forth in Section 4.2.11 of the Disclosure
Memorandum, since December 31, 1997:
(a) there have been no changes in the business, assets,
properties, liabilities, results of operations or financial condition of the
Company or Glenwood, or in any of their respective relationships with
customers, employees, lessors or others, other than changes in the ordinary
course of business, none of which individually or in the aggregate has had or
which Management believes will have a material adverse effect
13
<PAGE>
on such businesses, assets, liabilities, results of operations, financial
conditions or properties;
(b) there has been no material damage, destruction or loss
to the assets, properties or business of the Company or Glenwood, whether or
not covered by insurance, which has had or which Management believes may have
an adverse effect thereon;
(c) the businesses of the Company and Glenwood have been
operated in the ordinary course, and not otherwise;
(d) the properties and assets of the Company and Glenwood
used in their respective businesses have been maintained in good order, repair
and condition, ordinary wear and tear excepted;
(e) the respective books, accounts and records of the
Company and Glenwood have been maintained in the usual, regular and ordinary
manner;
(f) except as disclosed to Vail Banks, there has been no
increase in the compensation or in the rate of compensation or commissions
payable by the Company and/or Glenwood to any of their directors or executive
officers, or to any of their employees, or any increase in any payment of or
commitment to pay any bonus, profit sharing or other extraordinary
compensation to any of their employees;
(g) there have been no changes in the articles of
incorporation or charter, as the case may be, or bylaws of the Company or
Glenwood;
(h) there has been no labor dispute, unfair labor practice
charge or employment discrimination charge, nor, to the knowledge of
Management, any organizational effort by any union, or institution or
threatened institution of any effort, complaint or other proceeding in
connection therewith, involving the Company or Glenwood, or affecting their
respective operations;
(i) there has been no issuance, sale, repurchase,
acquisition or redemption by the Company or Glenwood of any of their
respective capital stock, bonds, notes, debt or other securities or any
modification or amendment of the rights of the holders of any outstanding
capital stock, bonds, notes, debt or other securities thereof;
(j) there has been no mortgage, lien or other encumbrance
or security interest (other than liens for current taxes not yet due or
purchase money security interests or pledges to secure public deposits or
federal funds purchased arising in the ordinary course of business) created on
or in (including without limitation, any deposit for security consisting of)
any asset or assets of the Company or Glenwood or assumed by either of them
with respect to any of their assets;
14
<PAGE>
(k) there has been no indebtedness or other liability or
obligation (whether absolute, accrued, contingent or otherwise) incurred by
the Company or Glenwood which would be required to be reflected on a balance
sheet of the Company or Glenwood prepared as of the date hereof in accordance
with generally accepted accounting principles applied on a consistent basis,
except as incurred in the ordinary course of business;
(l) no obligation or liability of either the Company or
Glenwood has been discharged or satisfied, other than in the ordinary course
of business;
(m) there have been no sales, transfers or other
dispositions of any asset or assets of either the Company or Glenwood, other
than sales in the ordinary course of business; and
(n) there has been no amendment, termination or waiver of
any right of either the Company or Glenwood under any contract or agreement or
governmental license, permit or permission which has had or may have an
adverse effect on either of their businesses or properties.
4.2.12 LITIGATION AND PROCEEDINGS. Except as set forth in
--------------------------
Section 4.2.12 of the Disclosure Memorandum, there are no actions, decrees,
suits, counterclaims, claims, proceedings or governmental actions or
investigations pending or, to the knowledge of Management, threatened against,
by or affecting either the Company or Glenwood, or any officer, director,
employee or agent in such person's capacity as an officer, director, employee
or agent of either the Company or Glenwood or relating to the business or
affairs of either the Company or Glenwood, in any court or before any
arbitrator or governmental agency, and no judgment, award, order or decree of
any nature has been rendered against or with respect thereto by any agency,
arbitrator, court, commission or other authority, nor does either the Company
or Glenwood have any unasserted contingent liabilities which might have an
adverse effect on either of their assets or on the operation of their
respective businesses or which might prevent or impede the consummation of the
transactions contemplated by this Agreement.
4.2.13 CASH ITEMS. Except as set forth on Exhibit 4.1.13, there
----------
is no cash item on Glenwood's balance sheet which has remained unreconciled
for a period of thirty (30) days. All other cash items on Glenwood's balance
sheet occurred in the normal course of business and neither the Company nor
Glenwood anticipate that any such item cannot be reconciled in the normal
course of business or contains significant loss content.
4.2.14 INVESTMENT INTENTIONS. (a) Each Company Shareholder (i)
---------------------
will be acquiring the shares of Vail Banks Common Stock to be issued pursuant
to Section 1.2 to the Company Shareholder solely for such Company
Shareholder's account, for investment purposes only and with no current
intention or plan to distribute, sell, or otherwise dispose of any of those
shares in connection with any distribution; (ii) is not a
15
<PAGE>
party to any agreement or other arrangement for the disposition of any shares
of Vail Banks Common Stock other than this Merger Agreement; (iii) unless
disclosed otherwise in Section 4.2.13 of the Disclosure Memorandum, is an
"accredited investor" as defined in Securities Act Rule 501(a); (iv) (A) is
able to bear the economic risks of an investment in the Vail Banks Common
Stock acquired pursuant to this Agreement, (B) can afford to sustain a total
loss of that investment, (C) has such knowledge and experience in financial
and business matters that the Company Shareholder is capable of evaluating the
merits and risks of the proposed investment in the Vail Banks Common Stock,
(D) has had an adequate opportunity to ask questions and receive answers from
the officers of Vail Banks concerning any and all matters relating to the
transactions contemplated hereby, including the background and experience of
the current and proposed officers and directors of Vail Banks, the plans for
the operations of the business of Vail Banks, the business, operations, and
financial condition of Vail Banks, and any plans of Vail Banks for additional
acquisitions, and (E) has asked all questions of the nature described in
preceding clause (D), and all those questions have been answered to such
Company Shareholder's satisfaction.
(b) There is no plan or intention by any Company
Shareholder who owns one percent (1%) or more of the Company Common Stock and
to the best of the knowledge of management of the Company, there is no plan or
intention on the part of the remaining shareholders of the Company to sell,
exchange, or otherwise dispose of a number of shares of Vail Banks Common
Stock received in the merger that would reduce the Company Shareholders'
ownership of Vail Banks Common Stock to a number of shares having a value, as
of the date of the Closing, of less than forty-five percent (45%) of the value
of all of the formerly outstanding stock of the Company as of the date of the
Closing. For purposes of this representation, shares of Company Common Stock
exchanged for cash or other property, surrendered by dissenters, or exchanged
for cash in lieu of fractional shares of Vail Banks Common Stock will be
treated as outstanding Company Common Stock on the date of the Closing.
Moreover, shares of Company Common Stock redeemed, or disposed of prior or
subsequent to the Closing will be considered in making this representation.
4.3 BUSINESS OPERATIONS.
-------------------
4.3.1 CUSTOMERS. Management has no knowledge of any
---------
presently existing facts which could reasonably be expected to result in the
loss of any material borrower or depositor of Glenwood or in the inability of
Glenwood to collect amounts due therefrom or to return funds deposited
thereby, except as set forth in Section 4.3.1 of the Disclosure Memorandum.
4.3.2 PERMITS; COMPLIANCE WITH LAW. (a) The Company and
----------------------------
Glenwood have all permits, licenses, approvals, authorizations and
registrations under all federal, state, local and foreign laws required for
them to carry on their respective businesses as presently conducted, and all
of such permits, licenses, approvals, authorizations and registrations are in
full force and effect, and no suspension or cancellation of any of them is
pending or, to the knowledge of Management, threatened.
16
<PAGE>
(b) The Company and Glenwood have materially complied with
all laws, regulations, and orders applicable to them or their businesses.
Section 4.3.2(b) of the Disclosure Memorandum contains a list of any known
violations of such laws, regulations, ordinances or rules by any present
officer, director, or employee of the Company or Glenwood which occurred since
December 31, 1992, and which resulted in any order, proceeding, judgment or
decree which would be required to be disclosed pursuant to Item 401(d) of
Regulation S-K promulgated by the Securities and Exchange Commission if the
Company or Glenwood had been subject to the reporting requirements under the
Securities Act or the Exchange Act. No past violation of any such law,
regulation, ordinance or rule has occurred which could impair the right or
ability of the Company or Glenwood to conduct their businesses.
(c) Except as set forth in Section 4.3.2(c) of the
Disclosure Memorandum, no notice or warning from any governmental authority
with respect to any failure or alleged failure of the Company or Glenwood to
comply in any respect with any law, regulation or order has been received, nor
is any such notice or warning proposed or, to the knowledge of Management,
threatened.
4.3.3 ENVIRONMENTAL. (a) Except as set forth in Section 4.3.3(a)
-------------
of the Disclosure Memorandum, the Company and Glenwood:
(i) have not caused or permitted, and have no
knowledge of, the generation, manufacture, use, or handling or the release or
presence of any hazardous substances on, in, under or from any properties or
facilities currently owned or leased by the Company or Glenwood or adjacent to
any properties so owned or leased; and
(ii) have complied with, and have kept all records and
made all filings required by, applicable federal, state and local laws,
regulations, orders, permits and licenses relating to the generation,
manufacture, use, handling, release or presence of any hazardous substance on,
in, under or from any properties or facilities currently owned or leased by
the Company or Glenwood.
(b) Except as set forth in Section 4.3.3(b) of the
Disclosure Memorandum, neither the Company nor Glenwood nor any of their
officers, directors, employees or agents, in the course of their employment by
the Company or Glenwood, has directly or indirectly given advice with respect
to, or participated in any respect, directly or indirectly, in, the management
or operation of any entity or concern whose business relates in any way to the
generation, storage, handling, disposal, transfer, production or processing of
hazardous substances, nor has the Company or Glenwood foreclosed on any
property on which there is a threatened release of any hazardous substances or
on which there has been such a release and full remediation has not been
completed, or any property on which contained (non-released) hazardous
substances or solid wastes are located.
17
<PAGE>
(c) Except as set forth in Section 4.3.3(c) of the
Disclosure Memorandum, neither the Company nor Glenwood, nor any of their
officers, directors, employees, and agents, are aware of, have been told of,
or have observed, the presence of any hazardous substance or solid waste on,
in, under, or around property on which the Company or Glenwood holds a legal
or security interest, in violation of, or creating liability under, federal,
state or local environmental statutes, regulations, or ordinances.
4.3.4 INSURANCE. Section 4.3.4 of the Disclosure Memorandum
---------
contains a complete list and description (including the expiration date,
premium amount and coverage thereunder) of all policies of insurance and bonds
presently maintained by, or providing coverage for, the Company and Glenwood
or any of their officers, directors and employees, all of which are, and will
be maintained through the Closing Date, in full force and effect, together
with a complete list of all pending claims under any of such policies or
bonds. All terms, obligations and provisions of each of such policies and
bonds have been complied with, all premiums due thereon have been paid, and no
notice of cancellation with respect thereto has been received. Except as set
forth in Section 4.3.4 of the Disclosure Memorandum, Management believes that
such policies and bonds provide adequate coverage to insure the properties and
businesses of the Company and Glenwood and the activities of their officers,
directors and employees against such risks and in such amounts as are prudent
and customary. Neither the Company nor Glenwood will as of the Closing Date
have any liability for premiums or for retrospective premium adjustments for
any period prior to the Closing Date. The Company and Glenwood have previously
made available to Vail Banks a true, correct and complete copy of each
insurance policy and bond in effect since January 1, 1992 with respect to the
business and affairs of the Company and Glenwood.
4.4 PROPERTIES AND ASSETS.
---------------------
4.4.1 CONTRACTS AND COMMITMENTS. Section 4.4.1 of the
-------------------------
Disclosure Memorandum contains a list identifying and briefly describing all
written contracts, purchase orders, agreements, security deeds, guaranties or
commitments to which the Company or Glenwood is a party, or by which they may
be bound, involving the payment or receipt, actual or contingent, of more than
$25,000 or having a term or requiring performance over a period of more than
ninety (90) days. Except as set forth in Section 4.4.1 of the Disclosure
Memorandum, each such contract, agreement, guaranty and commitment of the
Company and Glenwood is in full force and effect and is valid and enforceable
in accordance with its terms, and constitutes a legal and binding obligation
of the respective parties thereto and is not the subject of any notice of
default, termination, partial termination or of any ongoing, pending,
completed or threatened investigation, inquiry or other proceeding or action
that will give rise to any notice of default, termination or partial
termination. The Company and Glenwood have complied with the provisions of
such contracts, agreements, guaranties and commitments. A true and complete
copy of each such document has been made available to Vail Banks for
examination.
18
<PAGE>
4.4.2 LICENSES; INTELLECTUAL PROPERTY. The Company and Glenwood
-------------------------------
have all patents, trademarks, trade names, service marks, copyrights, trade
secrets and know-how reasonably necessary to conduct their businesses as
presently conducted and, except as described in Section 4.4.2 of the
Disclosure Memorandum, neither the Company nor Glenwood is a party, either as
licensor or licensee, to any agreement for any patent, process, trademark,
service mark, trade name, copyright, trade secret or other confidential
information, and there are no rights of third parties with respect to any
trademark, service mark, trade secrets, confidential information, trade name,
patent, patent application, copyright, invention, device or process owned or
used by the Company or Glenwood or presently expected to be used by either of
them in the future. All patents, copyrights, trademarks, service marks, trade
names, and applications therefor or registrations thereof, owned or used by
the Company or Glenwood, are listed in Section 4.4.2 of the Disclosure
Memorandum. The Company and Glenwood have complied with all applicable laws
relating to the filing or registration of "fictitious names" or trade names.
4.4.3 PERSONAL PROPERTY. The Company and Glenwood each have good
-----------------
and marketable title to all of their respective personalty, tangible and
intangible, reflected in the 1997 Financial Statements (except as since sold
or otherwise disposed of by either of them in the ordinary course of
business), free and clear of all encumbrances, liens or charges of any kind or
character except (i) those referred to in the notes to the 1997 Financial
Statements as securing specified liabilities (with respect to which no default
exists or, to the knowledge of Management, is claimed to exist), (ii) those
described in Section 4.4.3 of the Disclosure Memorandum and (iii) liens for
taxes not due and payable.
4.4.4 LEASES. (a) All leases pursuant to which either the Company
------
or Glenwood is lessor or lessee (the "Leases") of any real or personal
property are valid and enforceable in accordance with their terms; there is
not, under any of such Leases any default or, to the knowledge of Management,
any claimed default by the Company or Glenwood, as the case may be, or event
of default or event which with notice or lapse of time, or both would
constitute a default by the Company or Glenwood, as the case may be, and in
respect of which adequate steps have not been taken to prevent a default on
either of their parts from occurring.
(b) Except as set forth in Section 4.4.4(b) of the
Disclosure Memorandum, there are no contractual obligations, agreements in
principle or present plans for either the Company or Glenwood to enter into
new leases of real property or to renew or amend existing Leases prior to the
Closing Date.
(c) The copies of the Leases heretofore furnished or made
available by the Company and Glenwood to Vail Banks are true, correct and
complete, and the Leases have not been modified in any respect other than
pursuant to amendments, copies of which have been concurrently delivered or
made available to Vail Banks, and are in full force and effect in accordance
with their terms.
19
<PAGE>
(d) Except as set forth in Section 4.4.4(d) of the
Disclosure Memorandum, no rent has been paid in advance and no security
deposit has been paid, nor is any brokerage commission payable, by or to the
Company or Glenwood with respect to any Lease.
4.4.5 REAL PROPERTY. (a) Except as disclosed in Section 4.4.5(a)
-------------
of the Disclosure Memorandum, the Company and Glenwood have good and
marketable title to the real property reflected in the 1997 Financial
Statements (the "Realty"), and the titles to the Realty are covered by title
insurance policies providing coverage in the amount of the original purchase
price.
(b) Except as set forth in Section 4.4.5(b) of the
Disclosure Memorandum, the interests of the Company or Glenwood in the Realty
and in and under each of the Leases are free and clear of any and all liens
and encumbrances except for liens for current taxes not yet due, and are
subject to no present claim, contest, dispute, action or, to the knowledge of
Management, threatened action at law or in equity.
(c) The present and past use and operations of, and
improvements upon, the Realty and all real properties leased by the Company
and Glenwood (the "Leased Properties") are in material compliance with all
applicable building, fire, zoning and other applicable laws, ordinances and
regulations, including the Americans with Disabilities Act, and with all deed
restrictions of record, no notice of any violation or alleged violation
thereof has been received, and to the knowledge of Management, there are no
proposed changes therein that would affect the Realty, the Leased Properties
or their uses.
(d) Management is not aware of any proposed or pending
change in the zoning of, or of any proposed or pending condemnation proceeding
with respect to, any of the Realty or the Leased Properties which may
adversely affect the Realty or the Leased Properties or the current or
currently contemplated use thereof.
(e) The buildings and structures owned, leased or used by
the Company and Glenwood are, taken as a whole, in good operating order
(except for ordinary wear and tear), usable in the ordinary course of
business, and are sufficient and adequate to carry on the businesses and
affairs of the Company and Glenwood as presently conducted.
4.5 EMPLOYEES AND BENEFITS.
----------------------
4.5.1 COMPENSATION STRUCTURE. Section 4.5.1 of the
----------------------
Disclosure Memorandum contains:
(a) a true and complete list of the names, titles,
responsibilities and compensation arrangements of each person whose earned
compensation (including without limitation all salary, wages, bonuses and
fringe
20
<PAGE>
benefits made available to all employees on a non-discriminatory basis),
regardless of whether actually payable in such year, from the Company and
Glenwood for the current fiscal year. For purposes of this Section 4.5.1(a),
compensation shall include any amounts which are or could be owed to any person
in payment of accrued vacation time, sick leave, or as a result of any other
incentive plan currently or previously in effect with respect to such person.
(b) copies of all written agreements, correspondence (other than
outstanding offers of employment to prospective employees whose compensation
levels will not exceed $25,000 in cash), memoranda and other written materials
currently in effect which have been provided to such employees relating to their
compensation.
4.5.2 DIRECTORS OR OFFICERS OF OTHER CORPORATIONS. Except as set
-------------------------------------------
forth in Section 4.5.2 of the Disclosure Memorandum, no director, officer, or
employee of the Company or Glenwood serves, or in the past five years has
served, as a director or officer of any other corporation (other than the
Company or Glenwood) on behalf of or as a designee of the Company or any of its
subsidiaries.
4.5.3 EMPLOYEE BENEFITS. (a) Except as set forth in Section
-----------------
4.5.3(a) of the Disclosure Memorandum, neither the Company nor Glenwood has or
maintains a pension plan, profit sharing plan, group insurance plan, employee
welfare benefit plan (as such term is defined in Section 3(l) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), severance plan,
bonus plan, stock option plan or deferred compensation plan for any of its
current or former employees.
(b) Each "employee benefit plan" as defined in Section
3(3) of ERISA, maintained by or on behalf of the Company or Glenwood (including
any plans which are "multiemployer plans" under Section 3(37)(A) of ERISA
("Multiemployer Plans") and any defined benefit plan (as defined in Section
3(35) of ERISA) terminated by the Company or Glenwood within the five plan-years
ending immediately before the Closing Date), which covers or covered any
employees of the Company, Glenwood, or any subsidiary or of any predecessors
thereof (each a "Plan"), is listed in Section 4.5.3(b) of the Disclosure
Memorandum, and copies of all the Plans and Plan trusts (if applicable), Summary
Plan Descriptions, Actuarial Reports and valuations (if any), and Annual Reports
(and attachments thereto) on Form 5500, 5500-C or 5500-R, as the case may be (if
required pursuant to ERISA), for the most recent three years with respect to the
Plans, Internal Revenue Service determination letters and any other related
documents requested by Vail Banks or its counsel have been, or prior to the
Closing Date will be, provided to Vail Banks.
(c) Except as set forth in Section 4.5.3(c) of the
Disclosure Memorandum, with respect to each Plan: no litigation or
administrative or other proceeding is pending or, to the knowledge of
Management, threatened; each Plan has been restated or amended so as to comply
with all applicable requirements of law, including all
21
<PAGE>
applicable requirements of ERISA, the Internal Revenue Code of 1986, as amended
(the "Code"), and the regulations promulgated thereunder by the Internal Revenue
Service and the United States Department of Labor. Neither the Plan nor any
trustee, administrator or fiduciary thereof has at any time been involved in any
transaction relating to the Plan which would constitute a breach of fiduciary
duty under ERISA or a "prohibited transaction" within the meaning of Section 406
of ERISA or Section 4975 of the Code, unless such transaction is specifically
permitted under Sections 407 or 408 of ERISA, Section 4975 of the Code or a
class or administrative exemption issued by the Department of Labor.
(d) Except as set forth in Section 4.5.3(d) of the
Disclosure Memorandum, each Plan has been administered in compliance in all
material respects with applicable law and the terms of the Plan.
(e) Except as disclosed in Section 4.5.3(e) of the
Disclosure Memorandum and except for obligations under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA"), neither the Company nor
Glenwood has any obligation to provide, or material liability for, health care,
life insurance or other benefits after termination of active employment. As of
the Closing Date, the Company and Glenwood will have provided adequate reserves,
or insurance or qualified trust funds, for all claims incurred through the
Closing Date, including adequate reserves to provide for any post-retirement
health care, life insurance or other benefits with respect to periods of
employment prior to the Closing Date, based on an actuarial valuation
satisfactory to the actuaries of the Company and Glenwood representing a
projection of claims expected to be incurred for such retirees during their
period of coverage under such Plan.
(f) To the knowledge of Management, no fact or
circumstance exists which could constitute grounds in the future for the Pension
Benefit Guaranty Corporation ("PBGC") (or any successor to the PBGC) to take any
action whatsoever under Section 4042 of ERISA in connection with any plan which
an Affiliate (as defined below) of the Company maintains within the meaning of
Section 4062 or 4064 of ERISA, and, in either case, PBGC has not previously
taken any such action which has, or reasonably might, result in any liability of
an Affiliate or the Company to the PBGC, which would have an adverse effect on
the business of the Company. The term "Affiliate" for purposes of this Section
means any trade or business (whether incorporated or unincorporated) which is a
member of a group described in Sections 414(b) or 414(c) of the Code of which
the Company is also a member.
(g) Only current and former employees of the Company or
Glenwood participate in any Plan.
4.5.4 LABOR-RELATED MATTERS. Neither the Company nor Glenwood
---------------------
is, and neither the Company nor Glenwood has been, a party to any collective
bargaining agreement or agreement of any kind with any union or labor
organization or to any agreement with any of its employees which is not
terminable at will or upon ninety (90)
22
<PAGE>
days notice at the election of, and without cost or penalty to, the Company or
Glenwood. Except as set forth in Section 4.5.4 of the Disclosure Memorandum,
neither the Company nor Glenwood has received at any time in the past five (5)
years, any demand for recognition from any union, and no attempt has been made,
or will have been made as of the Closing Date, to organize any of their
employees. The Company has complied with all obligations under the National
Labor Relations Act, as amended, the Age Discrimination in Employment Act, as
amended, and all other federal, state and local labor laws and regulations
applicable to employees. To the knowledge of Management, there are no unfair
labor practice charges pending or threatened against the Company or Glenwood,
and there are, and in the past three (3) years there have been, no charges,
complaints, claims or proceedings, or slowdowns or strikes pending or threatened
against, or involving, as the case may be, the Company or Glenwood with respect
to any alleged violation of any legal duty (including but not limited to any
wage and hour claims, employment discrimination claims or claims arising out of
any employment relationship) by the Company or Glenwood as to any of their
employees or as to any person seeking employment therefrom, and no such
violations exist.
4.5.5 RELATED-PARTY TRANSACTIONS. Except for (a) loans and
--------------------------
extensions of credit made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions by the Company or Glenwood with other persons who are not
affiliated with the Company or Glenwood, and which do not involve more than the
normal risk of repayment or present other unfavorable features, (b) deposits,
all of which are on terms and conditions identical to those made available to
all customers of Glenwood at the time such deposits were entered into, and (c)
transactions specifically described in Section 4.5.5 of the Disclosure
Memorandum, there are no contracts with or commitments to present or former 5%
or greater shareholders, directors, officers, or employees of the Company or
Glenwood involving the expenditure after December 31, 1997 of more than $60,000
as to any one individual, including with respect to any business directly or
indirectly controlled by any such person, or $100,000 for all such contracts or
commitments in the aggregate for all such individuals (other than contracts or
commitments relating to services to be performed by any officer, director or
employee as a currently-employed employee of the Company or Glenwood).
4.6 OTHER MATTERS.
-------------
4.6.1 APPROVALS, CONSENTS AND FILINGS. Except for the
-------------------------------
approval of the Federal Reserve, the Federal Deposit Insurance Corporation (the
"FDIC"), the Division of Banking, the Company Shareholders, or as set forth in
Section 4.6.1 of the Disclosure Memorandum, neither the execution and delivery
of this Agreement or the Holding Company Merger Agreement by the Company or the
Bank Merger Agreement by Glenwood, nor the consummation of the transactions
contemplated hereby or thereby, will (a) require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority, or (b) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to the Company or Glenwood, or any of
their respective assets.
23
<PAGE>
4.6.2 DEFAULT. (a) Except for those consents described in
-------
or set forth pursuant to Section 4.6.1 above or as set forth in Section 4.6.2(a)
of the Disclosure Memorandum, neither the execution of this Agreement, the
Holding Company Merger Agreement, or the Bank Merger Agreement nor the
consummation of the transactions contemplated herein or therein (i) constitutes
a breach of or default under any contract or commitment to which the Company or
Glenwood is a party or by which the Company or Glenwood or their properties or
assets are bound, (ii) does or will result in the creation or imposition of any
security interest, lien, encumbrance, charge, equity or restriction of any
nature whatsoever in favor of any third party upon any assets of the Company or
Glenwood, or (iii) constitutes an event permitting termination of any agreement
or the acceleration of any indebtedness of the Company or Glenwood.
(b) Except as set forth in Section 4.6.2(b) of the
Disclosure Memorandum, neither the Company nor Glenwood is in default under its
articles of incorporation or charter, as the case may be, or bylaws or under any
term or provision of any security deed, mortgage, indenture or security
agreement or of any other contract or instrument to which the Company or
Glenwood is a party or by which either of them or any of their property is
bound.
4.6.3 GLENWOOD. The Company owns or controls one hundred
--------
percent (100%) of the shares of the Common Stock of Glenwood (the "Glenwood
Shares"), and the Company will vote, or cause to be voted, the Glenwood Shares
in favor of the Bank Merger. Pursuant to the Holding Company Merger, Vail Banks
will acquire all of the Company's rights, title and interest in and to the
Glenwood Shares.
4.6.4 REPRESENTATIONS AND WARRANTIES. No material
------------------------------
representation or warranty contained in this Article IV or in any written
statement delivered by or at the direction of the Company or Glenwood pursuant
hereto or in connection with the transactions contemplated hereby contains or
shall contain any untrue statement, nor shall such representations and
warranties taken as a whole omit any statement necessary in order to make any
statement not misleading. Copies of all documents furnished to Vail Banks in
connection with this Agreement or pursuant hereto are true, correct and
complete.
ARTICLE V
---------
REPRESENTATIONS, WARRANTIES AND
-------------------------------
COVENANTS OF COMPANY SHAREHOLDERS
---------------------------------
Each Company Shareholder (as listed on Exhibit C) represents,
warrants, covenants and agrees as follows, which representations, warranties,
covenants and agreements are being made as of the date hereof and shall be
deemed to be made again as of the Closing:
24
<PAGE>
5.1 TITLE. Company Shareholder has good and marketable title to
-----
the Company Common Stock owned by such Company Shareholder (as listed on Exhibit
C) free and clear of any and all claims, liens, charges and encumbrances.
5.2 CONSENT. Company Shareholder's entry into this Agreement
-------
constitutes Company Shareholder's consent to this Agreement.
ARTICLE VI
----------
CONDUCT OF BUSINESS OF THE COMPANY
----------------------------------
OR GLENWOOD PENDING CLOSING
---------------------------
During the period from the date of this Agreement and
continuing until the Closing Date, or the earlier termination of this Agreement
pursuant to Article XI hereof, the Company Shareholders and Company agree
(except as expressly contemplated by this Agreement or to the extent that Vail
Banks shall otherwise consent in advance in writing) that:
(a) ORDINARY COURSE. Except in specific contemplation of
---------------
the transactions contemplated by this Agreement, the Company and Glenwood shall
carry on their businesses in the usual, regular and ordinary course in the same
manner as heretofore conducted, without the creation of any indebtedness for
borrowed money (other than deposit and similar accounts and customary credit
arrangements between banks in the ordinary course of business), and, to the
extent consistent with such businesses, use their best efforts to preserve
intact their present business organizations, keep available the services of
their present officers and employees and preserve their relationships with
representatives, customers, suppliers, personnel and others having business
dealings with the Company and Glenwood.
(b) DIVIDENDS; CHANGES IN STOCK. Except upon the prior
---------------------------
written approval of Vail Banks, neither the Company nor Glenwood shall or shall
propose to (i) declare or pay any dividends on, or make other distributions in
respect of, any of their capital stock, (ii) split, combine or reclassify any of
their capital stock or issue, authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of capital
stock of the Company or Glenwood, or (iii) repurchase or otherwise acquire any
shares of their capital stock.
(c) ISSUANCE OF SECURITIES. The Company and Glenwood shall
----------------------
not sell, issue, authorize or propose the sale or issuance of, or purchase or
propose the purchase of, any shares of their capital stock or any class of
securities convertible into, or rights, warrants or options to acquire, any such
shares or other convertible securities or enter into any agreement with respect
to the foregoing.
(d) GOVERNING DOCUMENTS; COMPLIANCE WITH LAW. The Company
----------------------------------------
and Glenwood shall not amend their articles of incorporation or charter, as the
case may be, or bylaws. The Company and Glenwood shall each maintain their
corporate
25
<PAGE>
existence and powers and fully comply with all federal, state and local laws
with respect to their operations and the conduct of their businesses.
(e) NO ACQUISITIONS. The Company and Glenwood shall not acquire by
---------------
merging or consolidating with, or by purchasing a substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership, association or other entity or division thereof or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to them.
(f) NO DISPOSITIONS. The Company and Glenwood shall not sell,
---------------
lease or otherwise dispose of any of their assets except for sales, leases
and other dispositions in the ordinary course of business consistent with
prior practice.
(g) MAINTENANCE OF PROPERTIES. The Company and Glenwood shall
-------------------------
maintain their properties and assets in satisfactory condition and repair for
the purposes intended, ordinary wear and tear and damage by fire or other
casualty excepted.
(h) BENEFIT PLANS, ETC. The Company and Glenwood shall not enter
------------------
into or amend any bonus, incentive compensation, deferred compensation, profit
sharing, retirement, pension, group insurance, stock option, stock purchase or
other benefit plan or any union, employment or consulting agreement except as
required by law or regulations and shall not accelerate the exercisability of
any options, warrants or rights to purchase securities of the Company or
Glenwood pursuant to any benefit plan.
(i) BOOKS AND RECORDS. The books and records of the Company and
-----------------
Glenwood shall be maintained in the usual, regular and ordinary course on a
basis consistent with prior years.
(j) INCREASE IN COMPENSATION. The Company and Glenwood shall not
------------------------
grant to any officer, employee or agent any increase in compensation or in
severance or termination pay, or enter into any employment agreement, except
as may be required under employment, termination or other agreements in effect
on the date of this Agreement and which are described in the Disclosure
Memorandum.
(k) PAYMENT OF DEBT. Except in the ordinary course of business and
---------------
in accordance with past practice, the Company and Glenwood shall not pay any
claim or discharge or satisfy any lien or encumbrance or pay any obligation or
liability other than in the ordinary course of business or as required by the
terms of any written instrument evidencing or governing the same, a copy of
which has been heretofore made available to Vail Banks.
(l) OTHER ACTIONS. The Company and Glenwood shall not take any
-------------
action that would or could reasonably be expected to result in any of the
representations and warranties of the Company and Glenwood set forth in this
Agreement becoming untrue at any time on or prior to the Closing Date.
26
<PAGE>
(m) MAINTENANCE OF INSURANCE. The Company and Glenwood shall
------------------------
maintain and keep or cause to be maintained and kept in full force and effect
all of the insurance referred to in Section 4.3.4 hereof or other insurance
equivalent thereto.
(n) INVESTMENT PORTFOLIO. The Company and Glenwood, in accordance
--------------------
with current practice, shall only invest funds of the Company or Glenwood in
securities of the government of the United States which have a stated maturity
of no greater than two (2) years from the Closing Date.
(o) BANKING RELATIONSHIPS. No change will be made in the banking
---------------------
and safe deposit arrangements referred to in Section 4.2.8 hereof.
(p) ADVICE OF CHANGES. The Company and Glenwood shall promptly
-----------------
advise Vail Banks orally and in writing of any change or event having, or
which Management of the Company and Glenwood believes could have, a material
adverse effect on the assets, liabilities, business, operations or financial
condition of the Company or Glenwood.
27
<PAGE>
ARTICLE VII
-----------
REPRESENTATIONS AND WARRANTIES OF VAIL BANKS
--------------------------------------------
To induce the Company to enter into and perform this Agreement, Vail
Banks represents, warrants, covenants and agrees as follows, which
representations, warranties, covenants and agreements are being made as of the
date hereof and shall be deemed to be made again as of the Closing:
7.1 GOOD STANDING. Vail Banks is a business corporation duly
-------------
organized, validly existing and in good standing under the laws of the State
of Colorado and is entitled to own or lease its properties and to carry on its
business as now conducted.
7.2 AUTHORITY. Subject to approval of the Federal Reserve, and the
---------
Division of Banking, Vail Banks has full corporate power and authority to
make, execute and perform this Agreement and the transactions contemplated
hereby and the execution, delivery and performance of this Agreement by Vail
Banks have been duly authorized by all necessary corporate action of Vail
Banks.
7.3 DEFAULT. Neither the execution and delivery of this Agreement
-------
nor performance by Vail Banks in compliance with its terms will result in a
breach of the terms or conditions of, or constitute a default under, the
articles of incorporation or bylaws of Vail Banks or of any mortgage, note,
bond, indenture, agreement, license or other instrument or obligation to which
it is a party or by which it or any of its properties or assets may be bound
or, to the knowledge of management of Vail Banks, affected.
7.4 APPLICATIONS. Vail Banks shall prepare and file, or shall
------------
cause to be prepared and filed, all regulatory applications as may be required
in order to consummate the transactions contemplated by this Agreement. Vail
Banks shall file within sixty (60) days of the date hereof all original
applications for regulatory approval with any and all governmental
authorities, bodies or agencies having jurisdiction over the transactions
contemplated by this Agreement, including, but not limited to, the Federal
Reserve, FDIC and the Division of Banking. Vail Banks shall provide the
Company with copies of all regulatory applications filed pursuant to this
Section 7.4.
7.5 DOCUMENTS RECEIVED FROM COMPANY AND GLENWOOD. Vail Banks has
--------------------------------------------
received either a copy or original of each document listed on the attached
Exhibit D.
7.6 REPRESENTATIONS AND WARRANTIES. No representation or warranty
------------------------------
contained in this Article VII contains or will contain any untrue statement,
nor shall such representations and warranties taken as a whole omit any
statement necessary in order to make any statement therein not misleading.
ARTICLE VIII
------------
28
<PAGE>
CONDITIONS TO OBLIGATIONS OF
----------------------------
VAIL BANKS
----------
All of the obligations of Vail Banks under this Agreement are
subject to the fulfillment prior to or at the Closing Date of each of the
following conditions, any one or more of which may be waived by Vail Banks:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of the Company contained herein or in any certificate, schedule or
other document delivered pursuant to the provisions hereof, or in connection
herewith, shall be true in all material respects as of the date when made and,
except where otherwise expressly provided herein, shall be deemed to be made
again at and as of the Closing Date and shall be true in all material respects
at and as of such time, except (i) for those representations and warranties
confined to a specific date, which shall be true and correct as of such date,
or (ii) as a result of changes or events expressly permitted or contemplated
herein.
8.2 PERFORMANCE OF CONDITIONS AND AGREEMENTS. The Shareholders and
----------------------------------------
the Company shall have performed and complied in all material respects with
all agreements and conditions required by this Agreement to be performed or
complied with by it prior to or on the Closing Date.
8.3 CERTIFICATES, RESOLUTIONS, OPINION. The Shareholders or the
----------------------------------
Company shall have delivered, or cause Glenwood to deliver, to Vail Banks:
(a) a certificate executed by the Shareholders or the President
or Chairman of the Company, dated as of the Closing Date, and
certifying in such detail as Vail Banks may reasonably request to
the fulfillment of the conditions specified in Sections 8.1 and 8.2
hereof;
(b) certificates executed by the Secretary of State of the State
of Colorado dated not more than thirty (30) business days prior to
the Closing Date, of the valid existence of the Company and
Glenwood, respectively, under the laws of Colorado;
(c) evidence that the Company and Glenwood have filed all
corporate tax returns required by the laws of the State of Colorado,
and have paid all taxes shown thereon to be due; and
(d) an opinion from counsel of the Company acceptable to Vail
Banks and its counsel, dated the Closing Date, in the form attached
as Exhibit E.
8.4 ACCOUNTANTS' LETTER. Vail Banks shall have received a letter
-------------------
from GRA, Thompson, White & Co., P.C. dated the Closing Date, to the effect
that: At
29
<PAGE>
the request of the Company they have carried out procedures to a specified
date not more than five business days prior to the Closing Date, which
procedures did not constitute an examination in accordance with generally
accepted auditing standards, of the financial statements of the Company, as
follows: (a) read the unaudited balance sheets and statements of income of the
Company and Glenwood from December 31, 1997 through the date of the most
recent monthly financial statements available in the ordinary course of
business; (b) read the minutes of the meetings of shareholders and Board of
Directors of the Company and Glenwood from December 31, 1997 to said date not
more than five business days prior to the Closing Date; and (c) consulted with
certain officers and employees of the Company and Glenwood responsible for
financial and accounting matters and, based on such procedures, nothing has
come to their attention which would cause them to believe that (i) such
unaudited interim balance sheets and statements of income are not fairly
presented in conformity with generally accepted accounting principles applied
on a basis consistent with that of the 1997 Financial Statements, (ii) as of
said date not more than five business days prior to the Closing Date the
shareholders' equity, long-term debt, reserve for possible loan losses and
total assets of the Company, in each case as compared with the amounts shown
in the 1997 Financial Statements, are not different except as set forth in
such letter, or (iii) for the period from December 31, 1997 to said date not
more than five business days prior to the Closing Date, the net interest
income, total and per share amounts of consolidated income (before
extraordinary items) and net income of the Company, as compared with the
corresponding portion of the preceding 12-month period, are not different
except as set forth in such letter.
8.5 REGULATORY APPROVALS. Vail Banks shall have received from any
--------------------
and all governmental authorities, bodies or agencies having jurisdiction over
the transactions contemplated by this Agreement, including, but not limited
to, the Federal Reserve, FDIC and the Division of Banking, all such consents,
authorizations and approvals as are necessary for the consummation thereof and
all applicable waiting or similar periods required by law shall have expired.
8.6 CERTIFICATES. The Secretary of State of the State of Colorado
------------
shall have issued certificates of merger with respect to (i) the merger of the
Company into Vail Banks in accordance with the provisions of Colorado law and
(ii) the Merger of Glenwood with and into WestStar in accordance with the
provisions of Colorado law.
8.7 EMPLOYMENT. All written employment, termination, consulting or
----------
similar agreements entered into by the Company or Glenwood shall have been
effectively terminated with no remaining liabilities, duties or obligations on
the part of the Company or Glenwood under said agreements.
8.8 CONSENTS TO THE HOLDING COMPANY MERGER. The Company shall have
--------------------------------------
delivered to Vail Banks all consents to the Holding Company Merger and the
Bank Merger that are required to be secured from any party to any agreement
with the Company or Glenwood.
30
<PAGE>
8.9 BOARD APPROVAL. The Board of Directors of Vail Banks shall
--------------
have approved the transactions provided for herein, which approval shall be
given no later than May 1, 1998.
8.10 AUDITED 1997 FINANCIAL STATEMENTS. The Company shall have
---------------------------------
delivered to Vail Banks audited, consolidated financial statements of the
Company and Glenwood for the year ended December 31, 1997, including balance
sheets, statements of income, statements of shareholders' equity, statements
of cash flows and related notes (the "Audited 1997 Financial Statements"), and
all representations and warranties given by the Company or Glenwood with
respect to the 1997 Financial Statements, including any disclosures related
thereto and included in the corresponding section of the Disclosure
Memorandum, shall be true and correct as of the Closing Date as applied to the
Audited 1997 Financial Statements. Vail Banks shall pay up to a maximum of
$15,000 of the expense of the preparation of the Audited 1997 Financial
Statements.
ARTICLE IX
----------
CONDITIONS TO OBLIGATIONS OF THE COMPANY
----------------------------------------
All of the obligations of the Company under this Agreement are
subject to the fulfillment prior to or at the Closing Date of each of the
following conditions, any one or more of which may be waived by the Company:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of Vail Banks contained herein or in any certificate, schedule or
other document delivered pursuant to the provisions hereof, or in connection
herewith, shall be true in all material respects as of the date when made and
shall be deemed to be made again at and as of the Closing Date and shall be
true in all material respects at and as of such time.
9.2 PERFORMANCE OF AGREEMENTS. Vail Banks shall have performed and
-------------------------
complied in all material respects with all agreements and conditions required
by this Agreement to be performed or complied with by it prior to or at the
Closing Date.
9.3 CERTIFICATES, RESOLUTIONS, OPINIONS. Vail Banks shall have
-----------------------------------
delivered to the Company:
(a) a certificate executed by the President of Vail Banks, dated
the Closing Date, certifying in such detail as the Company may
reasonably request to the fulfillment of the conditions specified in
Sections 9.1 and 9.2 hereof;
(b) duly adopted resolutions of the Board of Directors of Vail
Banks, certified by the Secretary or an Assistant Secretary thereof,
dated the Closing Date, authorizing and approving (i) the execution
of this Agreement and the Holding Company Merger Agreement, and the
consummation of the
31
<PAGE>
transactions contemplated herein and therein in accordance with
their respective terms, and (ii) all other necessary and proper
corporate action to enable Vail Banks to comply with the terms
hereof;
(c) duly adopted resolutions of the Board of Directors and
shareholders of Vail Banks, certified by the Secretary or Assistant
Secretary thereof, dated the Closing Date, authorizing and approving
(i) the execution of the Bank Merger Agreement and the consummation
of the transactions contemplated therein in accordance with its
terms, and (ii) all other necessary and proper corporate action to
enable Vail Banks to comply with the terms thereof; and
(d) an opinion of Kilpatrick Stockton LLP, counsel for Vail
Banks, dated the Closing Date, in the form attached as Exhibit F.
(e) certificates executed by the Secretary of State of the State
of Colorado, dated not more than thirty (30) business days prior to
the Closing Date, of the valid existence of Vail Banks under the
laws of Colorado.
9.4 SHAREHOLDER APPROVAL. The Holding Company Merger Agreement
--------------------
shall have been approved by the vote of the holders of at least a majority of
the Company Stock.
9.5 REGULATORY APPROVALS. Any and all governmental authorities,
--------------------
bodies or agencies having jurisdiction over the transactions contemplated by
this Agreement, including, but not limited to, the Federal Reserve, the FDIC
and the Division of Banking, shall have granted all such consents,
authorizations and approvals as are necessary for the consummation thereof,
and all applicable waiting or similar periods required by law shall have
expired.
ARTICLE X
---------
WARRANTIES, NOTICES, ETC.
-------------------------
10.1 WARRANTIES. All statements contained in any certificate or
-----------
other instrument delivered by or on behalf of the Company pursuant to Article
VIII or Vail Banks pursuant to Article IX hereto or in connection with the
transactions contemplated hereby shall be deemed representations and
warranties hereunder by the delivering party.
10.2 SURVIVAL OF REPRESENTATIONS. All representations,
---------------------------
warranties, covenants, and agreements made by either party hereto in or
pursuant to this Agreement or in any instrument, exhibit or certificate
delivered pursuant hereto shall be deemed to have been material and to have
been relied upon by the party to which made, but, except as set forth
hereafter or specifically stated in this Agreement, such representations,
warranties, covenants, and agreements shall expire and be of no further force
and effect upon the
32
<PAGE>
consummation of the Holding Company Merger; provided, however, that the
following shall survive consummation of the Holding Company Merger and the
transactions contemplated hereby:
(a) the opinions of counsel referred to in Sections 8.3(d) and
9.3(d) of this Agreement;
(b) the opinion of accountants referred to in Section 8.4 of
this Agreement;
(c) any intentional misrepresentation of any material fact made
by any party hereto in or pursuant to this Agreement or in any
instrument, document or certificate delivered pursuant hereto, which
shall survive for a period of two (2) years from the consummation of
the Holding Company Merger and the Bank Merger; and
(d) the covenant with respect to the confidentiality of certain
information contained in Section 3.4 of this Agreement.
The Company Shareholders shall be liable for any liability under Section
10.2(c) hereof arising out of a breach of any representation, warranty,
covenant or agreement delivered by or on behalf of the Company or the Company
Shareholders; provided, however, that the total amount of any such liability
shall not exceed the amount of the Purchase Price and each Company Shareholder
shall be personally liable for that percentage of the total liability which
the number of shares of Company Common Stock owned by such Company Shareholder
as set forth on Exhibit C bears to the total number of Company Common Shares
owned by all Company Shareholders as set forth on Exhibit C; and provided
further that the Company Shareholders shall be liable only to the extent any
such liability is in excess of any applicable insurance coverage.
10.3 NOTICE. All notices, requests, demands and other
------
communications required or permitted hereunder shall be in writing and shall
be deemed to have been duly given if delivered or mailed, first class,
certified mail, postage prepaid to each of the parties hereto at the
respective addresses set forth below (or at such other address either party
may have theretofore notified the other party in writing):
(a) To the Company: Independent Bankshares, Inc.
1620 Grand Avenue
Post Office Box 490
Glenwood Springs, Colorado 81602
Attn.: Donald L. Vanderhoof
33
<PAGE>
With copies to: GRA, Thompson, White & Co., P.C.
8480 East Orchard Road
Suite 3600
Englewood, Colorado 80111
Attn.: John M. Davis
(b) To Vail Banks: Vail Banks, Inc.
108 S. Frontage Road, West
Suite 101
Vail, Colorado 81657
Attn.: E. B. Chester, Jr.
With copies to: Kilpatrick Stockton LLP
Suite 2800
1100 Peachtree Street
Atlanta, Georgia 30309-4530
Attn.: R. Alexander Bransford, Jr.
10.4 ENTIRE AGREEMENT. This Agreement, the Holding Company
----------------
Merger Agreement and the Bank Merger Agreement supersede all prior discussions
and agreements by and between Vail Banks and the Company with respect to the
Holding Company Merger and the other matters with respect thereto, and the
Agreement and the Holding Company Merger Agreement contain the sole and entire
agreement between the parties hereto with respect to the transactions
contemplated herein.
10.5 WAIVER; AMENDMENT. Prior to or on the Closing Date, Vail
-----------------
Banks, acting through its Board of Directors, Chairman or President, shall
have the right to waive any default in the performance of any term of this
Agreement by the Company, to waive or extend the time for the fulfillment by
the Company of any and all of its obligations under this Agreement, and to
waive any or all of the conditions precedent to the obligations of Vail Banks
under this Agreement, except any condition which, if not satisfied, would
result in the violation of any law or applicable governmental regulation.
Prior to or on the Closing Date, the Company, acting through its Board of
Directors or Chairman, shall have the right to waive any default in the
performance of any term of this Agreement by Vail Banks, to waive or extend
the time for the fulfillment by Vail Banks of any and all of its obligations
under this Agreement, and to waive any or all of the conditions precedent to
the obligations of the Company under this Agreement, except any condition
which, if not satisfied, would result in the violation of any law or
applicable governmental regulation. This Agreement may be amended by a
subsequent writing signed by the parties hereto upon the approval of the
Boards of Directors of each of the parties hereto; provided, however, that the
provisions of Sections 8.5 and 9.5 requiring regulatory approval shall not be
amended by the parties hereto without such approval.
34
<PAGE>
ARTICLE XI
----------
TERMINATION
-----------
This Agreement may be terminated at any time prior to or on the
Closing Date upon written notice to the other party hereto as follows, and,
upon any such termination of this Agreement no party hereto shall have any
liability to the other party, except that the provisions of Sections 3.4 and
3.6 hereof shall survive the termination of this Agreement for any reason.
11.1 MATERIAL ADVERSE CHANGE OF THE COMPANY OR GLENWOOD. By Vail
--------------------------------------------------
Banks, if, after the date hereof, a material adverse change in the financial
condition or business of the Company or Glenwood shall have occurred or the
Company or Glenwood shall have suffered a material loss or damage to any of
its properties or assets, which change, loss or damage materially affects or
impairs the ability of either the Company or Glenwood to conduct its business.
A material adverse change shall be found to exist if Glenwood fails to
maintain any of the following: (a) a CAMELS rating of 2 or better; (b) a
satisfactory or better CRA rating; or (c) a satisfactory or better compliance
rating.
11.2 NONCOMPLIANCE OF THE COMPANY. By Vail Banks, if the terms,
----------------------------
covenants or conditions of this Agreement to be complied with or performed by
the Company at or before the Closing shall not have been complied with or
performed in all material respects and such noncompliance or non-performance
shall not have been waived by Vail Banks.
11.3 NONCOMPLIANCE OF VAIL BANKS. By the Company, if the terms,
---------------------------
covenants or conditions of this Agreement to be complied with or performed by
Vail Banks at or before the Closing shall not have been complied with or
performed in all material respects and such noncompliance or non-performance
shall not have been waived by the Company.
11.4 EARLY TERMINATION. By either party, if any information
-----------------
provided to or discovered by either party during the two (2) month due
diligence period is unsatisfactory to such party as determined in such party's
sole discretion.
11.5 FAILURE TO DISCLOSE. By Vail Banks, if it learns of any fact
-------------------
or condition not disclosed in this Agreement, the Disclosure Memorandum or the
1997 Financial Statements and which was required to be disclosed by the
Company pursuant to the provisions of this Agreement at or prior to the date
of execution hereof with respect to the business, properties, assets or
earnings of the Company or Glenwood which materially and adversely affects
such business, properties, assets or earnings or the ownership, value or
continuance thereof.
11.6 ENVIRONMENTAL LIABILITY. By Vail Banks, if it learns of any
-----------------------
potential liability of the Company arising from noncompliance with any
federal, state or
35
<PAGE>
local environmental law by the Company, or any potential liability of the
Company arising from any environmental condition of the properties or assets
of the Company, including any properties or assets in which the Company holds
a security interest.
11.7 ADVERSE PROCEEDINGS. By either party, if any action, suit or
-------------------
proceeding shall have been instituted or threatened against either party to
this Agreement to restrain or prohibit, or to obtain substantial damages in
respect of, this Agreement or the consummation of the transactions
contemplated herein, which, in the good faith opinion of such party, makes
consummation of the transactions herein contemplated inadvisable.
11.8 TERMINATION DATE. By either party, if all consents,
----------------
authorizations and approvals of any and all governmental authorities, bodies
or agencies having jurisdiction over the transactions contemplated by this
Agreement necessary for the consummation of such transactions have not been
granted on or before June 30, 1998; provided, however, that in the event
application has been made for all such consents, authorizations and approvals
and on June 30, 1998 any required consent, authorization or approval has not
been received or compliance with any such consent, authorization or approval
which has been received has not been completed then the Termination Date shall
be September 30, 1998.
ARTICLE XII
-----------
COUNTERPARTS, HEADINGS, ETC.
----------------------------
This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument. The headings herein set out are
for convenience of reference only and shall not be deemed a part of this
Agreement.
ARTICLE XIII
------------
BINDING EFFECT
--------------
This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and assigns; provided,
however, that this Agreement may not be assigned by any party without the
prior written consent of the others.
ARTICLE XIV
-----------
GOVERNING LAW
-------------
The validity and effect of this Agreement and the rights and
obligations of the parties hereto shall be governed by and construed and
enforced in accordance with the laws of the State of Colorado.
36
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized corporate officers and their corporate seals
to be affixed hereto all as of the day and year first above written.
VAIL BANKS, INC.
By: /s/ Lisa M. Dillon, President
(CORPORATE SEAL)
Attest:
/s/ R. Alexander Bransford, Jr.,
Assistant Secretary
INDEPENDENT BANKSHARES, INC.
By: /s/Donald L. Vanderhoof, President
(CORPORATE SEAL)
Attest:
/s/ Secretary
WESTSTAR BANK
By: /s/ Lisa M. Dillon, President
(CORPORATE SEAL)
Attest:
/s/ Sharon B. Davis, Secretary
GLENWOOD INDEPENDENT BANK
By: /s/ Steve Vanderhoof, President
(CORPORATE SEAL)
Attest:
37
<PAGE>
_________________________
Secretary
COMPANY SHAREHOLDERS:
/s/ Donald L. Vanderhoof
/s/ Eddi Vanderhoof
/s/ Steve Vanderhoof
/s/ Glen Johnson
/s/ Robert Cutter
/s/ Mark Gould
[signatures continued on following page]
38
<PAGE>
/s/ Nicholas Massaro
/s/ Jim Nelson
/s/ John Masur
39
<PAGE>
INDEX OF EXHIBITS
-----------------
Exhibit A: Agreement and Plan of Merger between Independent Bankshares, Inc.
and Vail Banks, Inc.
Exhibit B: Agreement and Plan of Merger by and between Glenwood Independent
Bank and WestStar Bank
Exhibit C: List of Glenwood Shareholders and Number of Shares Owned
Exhibit D: List of Documents Vail Banks Received from Glenwood
Exhibit E: Opinion of Glenwood's Counsel
Exhibit F: Opinion of Vail Banks' Counsel
40
<PAGE>
EXHIBIT 10.1
------------
VAIL BANKS, INC.
AND
CEDAREDGE FINANCIAL SERVICES, INC.
====================
STOCK PURCHASE AGREEMENT
======================
JULY 3, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I STOCK PURCHASE.................................................. 1
- ---------
1.1 Stock Purchase.................................................. 1
--------------
1.2 Agreements with Richard W. and Janet L. Ducic................... 1
---------------------------------------------
ARTICLE II CLOSING........................................................ 2
- ----------
ARTICLE III OTHER AGREEMENTS.............................................. 2
- -----------
3.1 Brokers; Finders' Fees; Commissions............................. 2
-----------------------------------
3.2 Access, Information and Documents............................... 2
----------------------------------
3.3 Confidentiality................................................. 3
---------------
3.4 Full Cooperation................................................ 3
----------------
3.5 Expenses........................................................ 3
--------
3.6 Approvals and Consents.......................................... 3
----------------------
3.7 Publicity....................................................... 4
---------
3.8 Preservation of Goodwill........................................ 4
------------------------
3.9 Agreement as to Efforts to Consummate........................... 4
-------------------------------------
3.10 Dividends....................................................... 4
---------
ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY....... 4
- ----------
4.1 Corporate and Financial......................................... 5
-----------------------
4.1.1 Authority................................................ 5
4.1.2 Corporate Status......................................... 5
4.1.3 Capital Structure........................................ 5
4.1.4 Corporate Records........................................ 7
4.1.5 Tax Returns, Taxes....................................... 7
4.1.6 Financial Statements..................................... 8
4.1.7 Regulatory Reports....................................... 9
4.1.8 Accounts................................................. 9
4.1.9 Notes and Obligations.................................... 9
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4.1.10 Liabilities.............................................. 10
4.1.11 Absence of Changes....................................... 10
4.1.12 Litigation and Proceedings............................... 12
4.1.13 Cash Items............................................... 12
4.2 Business Operations............................................. 12
-------------------
4.2.1 Customers................................................ 12
4.2.2 Permits; Compliance with Law............................. 12
4.2.3 Environmental............................................ 13
4.2.4 Insurance................................................ 13
4.3 Properties and Assets........................................... 14
---------------------
4.3.1 Contracts and Commitments................................ 14
4.3.2 Licenses; Intellectual Property.......................... 14
4.3.3 Personal Property........................................ 14
4.3.4 Leases................................................... 15
4.3.5 Real Property............................................ 15
4.4 Employees and Benefits.......................................... 16
----------------------
4.4.1 Compensation Structure................................... 16
4.4.2 Directors or Officers of Other Corporations.............. 16
4.4.3 Employee Benefits........................................ 16
4.4.4 Labor-Related Matters.................................... 18
4.4.5 Related-Party Transactions............................... 18
4.5 Other Matters................................................... 18
-------------
4.5.1 Approvals, Consents and Filings.......................... 19
4.5.2 Default.................................................. 19
4.5.3 Western.................................................. 19
4.5.4 Representations and Warranties........................... 19
ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS OF HOLDERS............ 19
- ---------
ARTICLE VI CONDUCT OF BUSINESS OF THE COMPANY OR WESTERN PENDING CLOSING.. 20
- ----------
ARTICLE VII REPRESENTATIONS AND WARRANTIES OF VAIL BANKS.................. 22
- -----------
7.1 Good Standing Vail Banks........................................ 22
------------------------
7.2 Authority....................................................... 22
---------
7.3 Default......................................................... 22
-------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
7.4 Applications.................................................... 23
------------
7.5 Documents Received from Company and Western..................... 23
-------------------------------------------
7.6 Representations and Warranties.................................. 23
------------------------------
ARTICLE VIII CONDITIONS TO OBLIGATIONS OF VAIL BANKS..................... 23
- -------------
8.1 Representations and Warranties.................................. 23
------------------------------
8.2 Performance of Conditions and Agreements........................ 23
----------------------------------------
8.3 Certificates, Resolutions, Opinion.............................. 23
----------------------------------
8.5 Regulatory Approvals............................................ 24
--------------------
8.6 Employment...................................................... 25
----------
ARTICLE IX CONDITIONS TO OBLIGATIONS OF THE COMPANY....................... 25
- ----------
9.1 Representations and Warranties.................................. 25
------------------------------
9.2 Performance of Agreements Vail.................................. 25
-------------------------
9.3 Certificates, Resolutions, Opinions............................. 25
------------------------------------
9.4 Regulatory Approvals............................................ 26
--------------------
ARTICLE X WARRANTIES, NOTICES, ETC........................................ 26
- -----------------------------------
10.1 Warranties...................................................... 26
----------
10.2 Survival of Representations..................................... 26
---------------------------
10.3 Notice.......................................................... 27
------
10.4 Entire Agreement................................................ 28
----------------
10.5 Waiver; Amendment............................................... 28
------------------
ARTICLE XI TERMINATION.................................................... 28
- ----------
11.1 Material Adverse Change of the Company or Western............... 28
-------------------------------------------------
11.2 Noncompliance of the Company.................................... 29
----------------------------
</TABLE>
iii
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<TABLE>
<S> <C>
11.3 Noncompliance of Vail Banks.................................... 29
---------------------------
11.4 Failure to Disclose............................................ 29
-------------------
11.5 Environmental Liability........................................ 29
-----------------------
11.6 Adverse Proceedings............................................ 29
-------------------
11.7 Termination Date............................................... 29
-----------------
ARTICLE XII COUNTERPARTS, HEADINGS, ETC................................... 30
- -----------
ARTICLE XIII BINDING EFFECT............................................... 30
- ------------
ARTICLE XIV............................................................... 30
- -----------
</TABLE>
iv
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT is made and entered into this 3rd day of
July, 1997 by and among VAIL BANKS, INC., a Colorado corporation (hereinafter
"Vail Banks"), WESTSTAR BANK, a Colorado bank (hereinafter
----------
"WestStar") [and unless the context otherwise requires, the term "Vail Banks"
- --------- ----------
shall include both Vail Banks, Inc. and its wholly-owned subsidiary, WestStar
Bank], CEDAREDGE FINANCIAL SERVICES, INC., a Colorado corporation (hereinafter
the "Company"), WESTERN COMMUNITY BANK, a Colorado bank (hereinafter "Western")
------- -------
[and unless the context otherwise requires, the term the "Company" shall include
-------
Cedaredge Financial Services, Inc. and its wholly-owned subsidiary Western], and
Joe N. Basore, Ann W. Basore, Richard W. Ducic, Janet L. Ducic, the Burton O.
George Revocable Trust, Burton O. George, Trustee, Charles D. Richards, Florence
A. Richards, Bruce Hovde, Robert E. Morris and Roxi Morris, the shareholders of
the Company (the "Company Shareholders") [and Joe N. Basore, Richard W. Ducic,
Janet L. Ducic and the Burton O. George Revocable Trust shall be referred to as
the Controlling Company Shareholders].
W I T N E S S E T H:
-------------------
WHEREAS, the Board of Directors of Vail Banks and the Company
Shareholders deem it to be in the best interests of each such corporation and
their respective shareholders that all of the issued and outstanding shares of
Common Stock, no par value, of the Company (the "Company Common Stock") be
--------------------
acquired by Vail Banks.
NOW, THEREFORE, in consideration of the premises and the mutual and
reciprocal representations, warranties, promises and covenants herein contained,
the parties hereto agree as follows:
ARTICLE I
---------
STOCK PURCHASE
--------------
1.1 STOCK PURCHASE. Pursuant to the terms and conditions
--------------
provided herein, on the Closing Date (hereinafter defined), Vail Banks shall
purchase all of the issued and outstanding shares of Company Common Stock (the
"Stock Purchase") from the Company Shareholders for a purchase price of
$3,250,000, payable as set forth on Exhibit 1.1, as adjusted pursuant to the
terms of this Agreement (the "Purchase Price"). Upon the terms and conditions
--------------
of this Agreement, Vail Banks shall make available on or before the Closing Date
for delivery to (or to the order of) the Company Shareholders sufficient funds
to provide for the payment of the Purchase Price as provided in this Agreement.
1.2 AGREEMENTS WITH RICHARD W. AND JANET L. DUCIC.
---------------------------------------------
Contemporaneously with the Stock Purchase, WestStar and Richard W. Ducic will
enter into an
1
<PAGE>
agreement substantially in the form as attached hereto as Exhibit E pursuant to
which Richard W. Ducic agrees (1) to provide consulting services to WestStar and
(2) not to compete with Vail Banks in the business of Federal or State Chartered
Commercial Banking in certain Colorado counties, in exchange for five equal
annual payments totaling $425,000. In addition, WestStar and Janet L. Ducic will
enter into an agreement substantially in the form attached hereto as Exhibit F
pursuant to which Janet L. Ducic agrees not to compete with Vail Banks in the
business of Federal or State Chartered Commercial Banking in certain Colorado
counties in exchange for five equal annual payments totaling $125,000.
ARTICLE II
----------
CLOSING
-------
The transactions contemplated herein shall be consummated (the
"Closing") at such place and mutually agreed to by the parties hereto, on or
- --------
before the fourteenth (14th) day, which day shall be by mutual agreement of the
parties (and if no mutual agreement can be reached then on the fourteenth (14th)
day), following receipt of, and compliance with the terms of, all approvals from
any and all governmental authorities or regulatory bodies having jurisdiction
over the transactions contemplated by this Agreement and the expiration of any
waiting or similar period required by applicable law, or at such other time and
place as may be mutually satisfactory to the parties hereto (the "Closing
Date").
ARTICLE III
-----------
OTHER AGREEMENTS
----------------
3.1 BROKERS; FINDERS' FEES; COMMISSIONS. Each party hereto
-----------------------------------
represents and warrants to the other that no broker or finder has acted on its
behalf in connection with this Agreement or the transactions contemplated
hereby. Notwithstanding the preceding sentence, Vail Banks has entered into an
agreement with The Wallach Company pursuant to which Vail Banks will pay to The
Wallach Company a percentage fee based upon the value of assets purchased by
Vail Banks. Each party agrees to indemnify the other and hold and save the
other harmless from any claim or demand for commissions or other compensation by
any broker, finder or similar agent claiming to have been or having been
employed by or on behalf of such party.
3.2 ACCESS, INFORMATION AND DOCUMENTS. The Company shall
---------------------------------
permit, and shall cause Western to permit, Vail Banks and its authorized
representatives full access during normal business hours from and after the date
hereof and prior to the Closing Date to all of the Company's and Western
properties, books, contracts, commitments and records and the Company shall
furnish, and shall cause Western to furnish, Vail Banks and its authorized
representatives such information concerning the Company's and Western's affairs
as Vail Banks may reasonably request. The Company shall require, and shall cause
Western to require, its personnel to assist Vail Banks in making any such
investigation of the Company or Western and shall cause the counsel,
accountants, employees and other representatives of the Company and Western to
be available to
2
<PAGE>
Vail Banks for such purposes. During such investigation, Vail Banks and its
authorized representatives shall have the right to make copies of such records,
files, tax returns and other materials as they may deem advisable and shall
advise the Company or Western of those items of which copies are made.
3.3 CONFIDENTIALITY. Prior to consummation of the Stock
---------------
Purchase, the parties to this Agreement will provide each other with information
which may be deemed by the party providing the information to be confidential or
proprietary. Each party agrees that it will hold confidential and protect all
information provided to it by the other party to this Agreement and use such
information only in connection with the consummation of the Stock Purchase,
except that the obligations contained in this Section 3.3 shall not in any way
restrict the rights of any party or person to use information that (i) was known
to such party prior to the disclosure by the other party; (ii) is or becomes
generally available to the public other than by breach of this Agreement; (iii)
otherwise becomes lawfully available to a party to this Agreement on a non-
confidential basis from a third party who is not under an obligation of
confidence to the other party to this Agreement; or (iv) is required to be
disclosed pursuant to any state or federal law. If this Agreement is terminated
prior to consummation of the Stock Purchase, each party agrees to return all
documents and other material, and any copies thereof, whether or not
confidential, provided to it by or on behalf of the other party to this
Agreement. Each party shall insure that its officers, directors, investment
advisors, attorneys and other representatives who are given access to such
information are bound by and will use the information only in accordance with
the foregoing restrictions. The provisions of this Section 3.3 shall survive
any termination of this Agreement.
3.4 FULL COOPERATION. The parties shall cooperate fully with each
----------------
other and with their respective agents, representatives, counsel and accountants
in connection with any acts or actions required to be taken as part of their
respective obligations under this Agreement, including cooperation in the filing
of all applications and other requests for consents and approvals with respect
to the transactions contemplated hereby.
3.5 EXPENSES. All of the expenses incurred by either Vail Banks,
--------
the Company or the Company Shareholders in connection with the authorization,
preparation, execution and performance of this Agreement, including, without
limitation, all fees and expenses of its agents, representatives, counsel and
accountants and the fees and expenses related to filing regulatory applications
with state and federal authorities in connection with the transactions
contemplated hereby, shall be paid by Vail Banks or the Company, as the case may
be; provided, however, that the Company Shareholders shall pay all of the
expenses incurred by them or the Company in connection with the sale of the
Company Common Stock to Vail Banks in excess of $25,000.
3.6 APPROVALS AND CONSENTS. Each party hereto represents and
----------------------
warrants to and covenants with the others that it will, and will cause its
officers, directors, employees and agents to use its and their best efforts to
obtain as soon as is reasonably practicable all approvals and consents of state
and federal departments or agencies required or deemed necessary for
consummation of the transactions contemplated by this Agreement. Provided,
however, that Vail
3
<PAGE>
Banks shall have primary responsibility for preparation, filing and prosecution
of all applications associated with such approvals and consents.
3.7 PUBLICITY. All press releases and other announcements
---------
respecting the subject matter of this Agreement to any person shall be made only
at the direction of Vail Banks.
3.8 PRESERVATION OF GOODWILL. Each party hereto shall use its
------------------------
reasonable best efforts to preserve its business organization and the business
organization of its subsidiaries, to keep available the services of its present
employees and of the present employees of its subsidiaries, and to preserve the
goodwill of customers and others having business relations with such party or
its subsidiaries.
3.9 AGREEMENT AS TO EFFORTS TO CONSUMMATE. Subject to the terms
-------------------------------------
and conditions of this Agreement, the parties agree to use all reasonable
efforts to take, or cause to be taken, all actions, and to do or cause to be
done all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective on a timely basis the transactions
contemplated by this Agreement.
3.10 DIVIDENDS. Except with prior written approval of Vail
---------
Banks, neither the Company nor Western shall (i) declare prior to Closing a
dividend or other distribution on its Common Stock or (ii) issue, sell,
repurchase, acquire or redeem any of its Common Stock; provided, however, that
Western may declare dividends and the Company may make distributions for the
sole purpose of servicing the Company's debt on the Notes.
ARTICLE IV
----------
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
-------------------------------------------------------
To induce Vail Banks to enter into and perform this Agreement, except
as otherwise disclosed in Exhibits to this Agreement, with each such Exhibit
being numbered to correspond to the section of this Article IV to which it
relates, the Controlling Company Shareholders and the Company represent covenant
and agree as follows, which representations, warranties, covenants and
agreements are being made as of the date hereof and shall be deemed to be made
again as of the Closing:
4
<PAGE>
4.1 CORPORATE AND FINANCIAL.
------------------------
4.1.1 AUTHORITY. (a) Subject to the approval of various
---------
state and federal regulatory authorities, the Company has full power and
authority to make, execute and perform this Agreement and to consummate the
transactions contemplated hereby and thereby, and no further action is necessary
on the part of the Company to authorize its consummation of the transactions
contemplated hereby and thereby. Other than such regulatory approvals, no
further corporate action is necessary on the part of the Company to consummate
the transactions contemplated hereby. This Agreement constitutes the valid and
binding obligations of the Company Shareholders and the Company, and is
enforceable in accordance with its terms, except as limited by the laws
affecting creditors' rights generally and by the discretion of courts to compel
specific performance.
(b) Subject to the approval of the various state and federal
regulators, the execution, delivery and performance of this Agreement and the
other transactions contemplated or required in connection herewith will not,
with or without the giving of notice or the passage of time, or both, (i)
violate any provision of federal or state law applicable to the Company or
Western, the violation of which could be expected to have an adverse effect on
the business, operations, properties, assets, financial condition or prospects
of the Company or Western; (ii) violate any provision of the articles of
incorporation or charter, as the case may be, or bylaws of the Company or
Western; (iii) conflict with or result in a breach of any provision of, or
termination of, or constitute a default under any instrument, license, agreement
or commitment to which the Company or Western is a party, which, singly or in
the aggregate, could be expected to have an adverse effect on the business,
operations, properties, assets, financial condition or prospects of the Company
or Western; or (iv) constitute a violation of any order, judgment or decree to
which the Company or Western is a party, or by which the Company or Western or
any of their respective assets or properties are bound.
4.1.2 CORPORATE STATUS.
----------------
(a) THE COMPANY. The Company is a corporation duly organized, validly
-----------
existing and in good standing under the laws of the state of Colorado and has no
direct or indirect subsidiaries other than Western. The Company has all
requisite corporate power and authority and is entitled to own or lease its
properties and assets and to carry on its business as and in the places where
such properties or assets are now owned, leased or operated and such business is
conducted.
(b) WESTERN. Western is a bank duly organized, validly existing and
-------
in good standing under the laws of the State of Colorado. Western has all
requisite corporate power and authority and is entitled to own and lease its
properties and assets and to carry on its business as and in the places where
such properties or assets are now owned, leased or operated and such business is
conducted.
4.1.3 CAPITAL STRUCTURE.
-----------------
5
<PAGE>
(a) The Company. (i) The Company has an authorized capital stock
consisting solely of 100,000 shares, no par value, common stock, of which 29,340
shares of common stock are issued and outstanding as of the date hereof. All of
the outstanding capital stock of the Company is duly and validly issued, fully
paid and non-assessable and was offered, issued and sold in compliance with all
applicable federal and state securities laws. No person has any right of
rescission or claim for damages under federal or state securities laws with
respect to the issuance of any shares of capital stock of the Company previously
issued. None of the capital stock of the Company has been issued in violation
of any preemptive or other rights of its shareholders.
(ii) The Company has outstanding Series I Subordinated Notes (the
"Notes") due March 1, 2003, with a total par amount of $1,600,099, which are
convertible into Company Common Stock upon the occurrence of certain events.
With the exception of the Notes, the Company does not have outstanding any
securities which are either by their terms or by contract convertible or
exchangeable into capital stock of the Company, or any other securities or debt
of the Company, or any preemptive or similar rights to subscribe for or to
purchase, or any options or warrants or agreements or understandings for the
purchase or the issuance (contingent or otherwise) of, or any calls, commitments
or claims of any character relating to, its capital stock or securities
convertible into its capital stock. The Company is not subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire, or to register, any shares of its capital stock.
(iii) There is no agreement, arrangement or understanding to which the
Company is a party restricting or otherwise relating to the transfer of any
shares of capital stock of the Company.
(iv) All shares of Company Common Stock or other capital stock, or any
other securities or debt, of the Company, which have been purchased or redeemed
by the Company have been purchased or redeemed in accordance with all applicable
federal, state and local laws, rules, and regulations, including, without
limitation, all federal and state securities laws and rules and regulations of
any securities exchange or system on which such stock, securities or debt are,
or at such time were, traded, and no such purchase or redemption has resulted or
will with the giving of notice or lapse of time, or both, result in a default or
acceleration of the maturity of, or otherwise modify, any agreement, note,
mortgage, bond, security agreement, loan agreement or other contract or
commitment of the Company.
(b) WESTERN. (i) Western has an authorized capital stock consisting
-------
solely of 18,000 shares, $10 par value, common stock, of which 18,000 shares of
common stock are issued and outstanding as of the date hereof and of which the
Company owns 18,000 shares, or 100% of the issued and outstanding common stock.
All of the outstanding capital stock of Western is duly and validly issued,
fully paid and non-assessable and was offered, issued and sold in compliance
with all applicable federal and state securities laws. No person has any right
of rescission or claim for damages under federal or state securities laws with
respect to the
6
<PAGE>
issuance of any shares of capital stock of Western previously issued. None of
the capital stock of Western has been issued in violation of any preemptive or
other rights of its shareholders.
(ii) Western does not have outstanding any securities which are either
by their terms or by contract convertible or exchangeable into capital stock of
Western, or any other securities or debt of Western, or any preemptive or
similar rights to subscribe for or to purchase, or any options or warrants or
agreements or understandings for the purchase or the issuance (contingent or
otherwise) of, or any calls, commitments or claims of any character relating to,
its capital stock or securities convertible into its capital stock. Western is
not subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire, or to register, any shares of its capital stock.
(iii) There is no agreement, arrangement or understanding to which
either Western or the Company is a party restricting or otherwise relating to
the transfer of any shares of capital stock of Western.
(iv) All shares of Western Common Stock or other capital stock, or any
other securities or debt, of Western, which have been purchased or redeemed by
Western have been purchased or redeemed in accordance with all applicable
federal, state and local laws, rules, and regulations, including, without
limitation, all federal and state securities laws and rules and regulations of
any securities exchange or system on which such stock, securities or debt are,
or at such time were, traded, and no such purchase or redemption has resulted or
will, with the giving of notice or lapse of time, or both, result in a default
or acceleration of the maturity of, or otherwise modify, any agreement, note,
mortgage, bond, security agreement, loan agreement or other contract or
commitment of Western.
4.1.4 CORPORATE RECORDS. The stock records and minute books
-----------------
of the Company and Western, as applicable, whether previously or in the future
furnished or made available to Vail Banks by the Company and Western, fully and
accurately reflect all issuances, transfers and redemptions of the common stock
of the Company or Western, as applicable, correctly show the record addresses
and the number of shares of such stock issued and outstanding on the date hereof
held by the shareholders of the Company or Western, correctly show all corporate
action taken by the directors and shareholders of the Company or Western
(including actions taken by consent without a meeting), and contain true and
correct copies or originals of their respective articles of incorporation or
charter, as the case may be, and all amendments thereto, bylaws, as amended and
currently in force, and the minutes of all meetings or consent actions of their
respective directors and shareholders. No resolutions, regulations or bylaws
have been passed, enacted, consented to or adopted by the respective directors
or shareholders of the Company or Western except those contained in the minute
books. All corporate records of the Company and Western have been maintained in
accordance with all applicable statutory requirements and are complete and
accurate.
4.1.5 TAX RETURNS, TAXES. (a) The Company and Western have
------------------
duly filed or will file when due (i) all
7
<PAGE>
required federal and state tax returns and reports, and (ii) all required
returns and reports of other governmental units having jurisdiction with respect
to taxes imposed upon their respective incomes, properties, revenues,
franchises, operations or other assets or taxes imposed which might create a
lien or encumbrance on any of such assets or affect adversely their respective
businesses or operations. Such returns or reports are, and when filed will be,
true, complete and correct, and the Company and Western have paid, or will pay
with respect to returns or reports related to their respective businesses not
yet filed because not yet due, to the extent such taxes or other governmental
charges have become due, all taxes and other governmental charges including all
applicable interest and penalties, set forth in such returns or reports related
to their respective businesses. All federal, state and local taxes and other
governmental charges paid or payable by the Company or Western have been paid,
or have been accrued or reserved on their respective books in accordance with
generally accepted accounting principles applied on a basis consistent with
prior periods. Adequate reserves for the payment of taxes have been established
on the books of the Company and Western for all periods through the date hereof,
whether or not due and payable and whether or not disputed. Until the Closing
Date, the Company and Western shall continue to reserve sufficient funds for the
payment of expected tax liabilities in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods. Neither
the Company nor Western has received any notice of a tax deficiency or
assessment of additional taxes of any kind and, to the knowledge of officers of
the Company or Western (collectively "Management"), there is no threatened claim
against either the Company or Western, or any basis for any such claim, for
payment of any additional federal, state, local or foreign taxes for any period
prior to the date of this Agreement in excess of the accruals or reserves with
respect to any such claim shown in the 1996 Financial Statements (as defined
below) or disclosed in the notes with respect thereto. There are no waivers or
agreements by either the Company or Western for the extension of time for the
assessment of any taxes. With the exception of a currently ongoing audit by the
Internal Revenue Service of the federal income tax returns of the Company and
Western for the 1995 taxable year, the federal income tax returns of the Company
or Western have not been examined by the Internal Revenue Service for any period
since January 1, 1988. To the extent that any taxes, penalties or interest are
assessed against Western prior to Closing as a result of such audit, the
Purchase Price shall be reduced by the total amount of such taxes, penalties and
interest, and, if assessed after Closing, the Shareholders shall indemnify Vail
Banks or WestStar, as the case may be, for any amounts paid. Any expenses
associated with the audit incurred by Western or the Company prior to the
Closing shall not reduce the Purchase Price and shall be paid by Western or the
Company, as the case may be, and any such expenses incurred after the Closing
shall be paid by Vail Banks or WestStar as the case may be.
(b) Proper and accurate amounts have been withheld by the Company and
Western from their employees for all periods in full and complete compliance
with the tax withholding provisions of applicable federal, state and local tax
laws, and proper and accurate federal, state and local tax returns have been
filed by the Company and Western for all periods for which returns were due with
respect to withholding, social security and unemployment taxes, and the amounts
shown thereon to be due and payable have been paid in full.
4.1.6 FINANCIAL STATEMENTS. The Company has delivered to
--------------------
Vail Banks true, correct and complete copies of (i) the financial statements of
the Company for the years
8
<PAGE>
ended December 31, 1995 and 1996, as compiled by the Company's outside
accountants, including balance sheets, statements of income, statements of
shareholders' equity, statements of cash flows and related notes, and for
Western a Directors Examination dated November 30, 1995, and Financial
Statements and Accountant's Compilation Report dated October 31, 1996 (the
Company's financial statements for the year ended December 31, 1996 and
Western's financial statements dated October 31, 1996 collectively being
referred to as the "1996 Financial Statements") and (ii) unaudited financial
statements of each of the Company and Western for the period ended March 31,
1997, including a balance sheet, statement of income and related notes. All of
such financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied or generally accepted
regulatory principles consistently applied, as the case may be, and truthfully
reflect the assets, liabilities and financial condition of the Company and
Western as of the dates indicated therein and the results of its operations for
the respective periods then ended. The Company will provide prior to Closing
audited balance sheets for each of the Company and Western for the period ended
December 31, 1996 which shall be prepared by either Dalby, Wendland, P.C. or
another accounting firm as selected by Vail Banks no later than July 15, 1997.
4.1.7 REGULATORY REPORTS. The Company has delivered to Vail
------------------
Banks for review and inspection all Forms FRY6 filed by the Company with the
Board of Governors of the Federal Reserve System (the "Federal Reserve") for the
three years ended December 31, 1996 and through the date of this Agreement,
together with all other reports filed by the Company or Western for the same
period with the Division of Banking of the Department of Regulatory Agencies of
the State of Colorado (the "Division of Banking"), and other applicable
regulatory agencies, and in the case of the CALL reports for periods ended
December 31, 1996 and March 31, 1997, the amended reports (collectively, the
"Reports"). All of such Reports, as amended, have been prepared in accordance
with applicable rules and regulations applied on a basis consistent with prior
periods and contain in all material respects all information required to be
presented therein in accordance with such rules and regulations.
4.1.8 ACCOUNTS. Exhibit 4.1.8 contains a list of each
--------
and every bank and other institution in which the Company or Western maintains
an account or safety deposit box, the account numbers and the names of all
persons who are presently authorized to draw thereon, have access thereto or
give instructions regarding distribution of funds or assets therein.
4.1.9 NOTES AND OBLIGATIONS. (a) Except as provided for in
---------------------
the loss reserve described in subsection (b) below, all notes receivable or
other obligations owned by the Company or Western or due to either of them shown
in the 1996 Financial Statements and any such notes receivable and obligations
on the date hereof and on the Closing Date are, and will be, genuine, legal,
valid and collectible obligations of the respective makers thereof and are not
and will not be subject to any offset or counterclaim. Except as set forth in
Exhibit 4.1.9(a) or in subsection (b) below, all such notes and obligations are
evidenced by written agreements, true and correct copies of which will be made
available to Vail Banks for examination prior to the Closing Date. All such
notes and obligations were entered into by either the Company or Western, as the
case may be, in the ordinary course of business and in substantial compliance
with all applicable laws and regulations.
9
<PAGE>
(b) The Company has established a loss reserve in its 1996 Financial
Statements and will continue to maintain appropriate loan loss reserves which
will be adequate to cover anticipated losses which might result from such items
as the insolvency or default of borrowers or obligors on such loans or
obligations, defects in the notes or evidences of obligation (including losses
of original notes or instruments), offsets or counterclaims properly chargeable
to such reserve, or the availability of legal or equitable defenses which might
preclude or limit the ability of the Company or Western, as the case may be, to
enforce the note or obligation, and the representations set forth in subsection
(a) above are qualified in their entirety by the aggregate of such loss reserve.
4.1.10 LIABILITIES. Neither the Company nor Western has any debt,
-----------
liability or obligation of any kind required to be shown pursuant to generally
accepted accounting principles on the consolidated balance sheet of the Company,
whether accrued, absolute, known or unknown, contingent or otherwise, including,
but not limited to, (a) liability or obligation on account of any federal, state
or local taxes or penalty, or interest or fines with respect to such taxes, (b)
liability arising from or by virtue of the distribution, delivery or other
transfer or disposition of goods, personal property or services of any type,
kind or variety, (c) unfunded liabilities with respect to any pension, profit
sharing or employee stock ownership plan, whether operated by the Company or
Western or any other entity covering employees of the Company or Western, or (d)
environmental liability, except those reflected in the 1996 Financial
Statements. On the Closing Date, the Company shall have no indebtedness of any
nature whatsoever, except those reflected in the 1996 Financial Statements, and
Western shall have no indebtedness resulting from the borrowing of any funds,
property or services, except those reflected in the 1996 Financial Statements;
provided, however, that this Section 4.1.10 shall not apply to the purchase of
Federal Funds in the ordinary course of business.
4.1.11 ABSENCE OF CHANGES. Except as specifically provided for in this
------------------
Agreement, since December 31, 1996:
(a) there have been no changes in the business, assets, properties,
liabilities, results of operations or financial condition of the Company or
Western, or in any of their respective relationships with customers, employees,
lessors or others, other than changes in the ordinary course of business, none
of which individually or in the aggregate has had or which Management believes
will have a material adverse effect on such businesses, assets, liabilities,
results of operations, financial conditions or properties;
(b) there has been no material damage, destruction or loss to the
assets, properties or business of the Company or Western, whether or not covered
by insurance, which has had or which Management believes may have an adverse
effect thereon;
(c) the businesses of the Company and Western have been operated in
the ordinary course, and not otherwise;
10
<PAGE>
(d) the properties and assets of the Company and Western used in their
respective businesses have been maintained in good order, repair and condition,
ordinary wear and tear excepted;
(e) the respective books, accounts and records of the Company and
Western have been maintained in the usual, regular and ordinary manner;
(f) there has been no declaration, setting aside or payment of any
dividend or other distribution on or in respect of the capital stock of the
Company or Western, except for dividends paid by Western to the Company solely
for the Company's payments of interest due on the Notes;
(g) except as disclosed to Vail Banks, there has been no increase in
the compensation or in the rate of compensation or commissions payable by the
Company and/or Western to any of their directors or executive officers, or to
any of their employees, or any increase in any payment of or commitment to pay
any bonus, profit sharing or other extraordinary compensation to any of their
employees;
(h) there have been no changes in the articles of incorporation or
charter, as the case may be, or bylaws of the Company or Western;
(i) there has been no labor dispute, unfair labor practice charge or
employment discrimination charge, nor, to the knowledge of Management, any
organizational effort by any union, or institution or threatened institution of
any effort, complaint or other proceeding in connection therewith, involving the
Company or Western, or affecting their respective operations;
(j) there has been no issuance, sale, repurchase, acquisition or
redemption by the Company or Western of any of their respective capital stock,
bonds, notes, debt or other securities or any modification or amendment of the
rights of the holders of any outstanding capital stock, bonds, notes, debt or
other securities thereof;
(k) there has been no mortgage, lien or other encumbrance or security
interest (other than liens for current taxes not yet due or purchase money
security interests or pledges to secure public deposits or federal funds
purchased arising in the ordinary course of business) created on or in
(including without limitation, any deposit for security consisting of) any asset
or assets of the Company or Western or assumed by either of them with respect to
any of their assets;
(l) there has been no indebtedness or other liability or obligation
(whether absolute, accrued, contingent or otherwise) incurred by the Company or
Western which would be required to be reflected on a balance sheet of the
Company or Western prepared as of the date hereof in accordance with generally
accepted accounting principles applied on a consistent basis, except as incurred
in the ordinary course of business;
11
<PAGE>
(m) no obligation or liability of either the Company or Western has
been discharged or satisfied, other than in the ordinary course of business;
(n) there have been no sales, transfers or other dispositions of any
asset or assets of either the Company or Western, other than sales in the
ordinary course of business; and
(o) there has been no amendment, termination or waiver of any right of
either the Company or Western under any contract or agreement or governmental
license, permit or permission which has had or may have an adverse effect on
either of their businesses or properties.
4.1.12 LITIGATION AND PROCEEDINGS. There are no actions,
--------------------------
decrees, suits, counterclaims, claims, proceedings or governmental actions or
investigations pending or, to the knowledge of Management, threatened against,
by or affecting either the Company or Western, or any officer, director,
employee or agent in such person's capacity as an officer, director, employee or
agent of either the Company or Western or relating to the business or affairs of
either the Company or Western, in any court or before any arbitrator or
governmental agency, and no judgment, award, order or decree of any nature has
been rendered against or with respect thereto by any agency, arbitrator, court,
commission or other authority, nor does either the Company or Western have any
unasserted contingent liabilities which might have an adverse effect on either
of their assets or on the operation of their respective businesses or which
might prevent or impede the consummation of the transactions contemplated by
this Agreement.
4.1.13 CASH ITEMS. Except as set forth on Exhibit 4.1.13,
----------
there is no cash item on Western's balance sheet which has remained unreconciled
for a period of thirty (30) days. All other cash items on Western's balance
sheet occurred in the normal course of business and neither the Company nor
Western anticipate that any such item cannot be reconciled in the normal course
of business or contains significant loss content.
4.2 BUSINESS OPERATIONS.
-------------------
4.2.1 CUSTOMERS. Management has no knowledge of any
---------
presently existing facts which could reasonably be expected to result in the
loss of any material borrower or depositor of Western or in the inability of
Western to collect amounts due therefrom or to return funds deposited thereby.
4.2.2 PERMITS; COMPLIANCE WITH LAW. (a) The Company and
----------------------------
Western have all permits, licenses, approvals, authorizations and registrations
under all federal, state, local and foreign laws required for them to carry on
their respective businesses as presently conducted, and all of such permits,
licenses, approvals, authorizations and registrations are in full force and
effect, and no suspension or cancellation of any of them is pending or, to the
knowledge of Management, threatened.
12
<PAGE>
(b) The Company and Western have complied materially with all laws,
regulations, and orders applicable to them or their businesses.
(c) No notice or warning from any governmental authority with respect
to any failure or alleged failure of the Company or Western to comply in any
respect with any law, regulation or order has been received, nor is any such
notice or warning proposed or, to the knowledge of Management, threatened.
4.2.3 ENVIRONMENTAL. (a) The Company and Western:
-------------
(i) with the exception of certain environmental concerns regarding (A)
real property in Cowdrey, Colorado owned by Western on which a grocery store is
currently located and (B) certain property in Cedaredge, Colorado which is
adjacent to an street adjacent to the property on which the offices of Cedaredge
are located, have not caused or permitted, and have no knowledge of, the
generation, manufacture, use, or handling or the release or presence of any
hazardous substances on, in, under or from any properties or facilities
currently owned or leased by the Company or Western or adjacent to any
properties so owned or leased; and
(ii) have complied with, and have kept all records and made all
filings required by, applicable federal, state and local laws, regulations,
orders, permits and licenses relating to the generation, manufacture, use,
handling, release or presence of any hazardous substance on, in, under or from
any properties or facilities currently owned or leased by the Company or
Western.
(iii) Neither the Company nor Western nor any of their officers,
directors, employees or agents, in the course of their employment by the Company
or Western, has directly or indirectly given advice with respect to, or
participated in any respect, directly or indirectly, in, the management or
operation of any entity or concern whose business relates in any way to the
generation, storage, handling, disposal, transfer, production or processing of
hazardous substances, nor has the Company or Western foreclosed on any property
on which there is a threatened release of any hazardous substances or on which
there has been such a release and full remediation has not been completed, or
any property on which contained (non-released) hazardous substances or solid
wastes are located.
(iv) Neither the Company nor Western, nor any of their officers,
directors, employees, and agents, are aware of, have been told of, or have
observed, the presence of any hazardous substance or solid waste on, in, under,
or around property on which the Company or Western holds a legal or security
interest, in violation of, or creating liability under, federal, state or local
environmental statutes, regulations, or ordinances.
4.2.4 INSURANCE. Management believes that its policies of
---------
insurance and bonds currently in effect provide adequate coverage to insure the
properties and businesses of the Company and Western and the activities of their
officers, directors and employees against such
13
<PAGE>
risks and in such amounts as are prudent and customary. Such policies and bonds
are, and will be maintained through the Closing Date, in full force and effect.
All terms, obligations and provisions of each of such policies and bonds have
been complied with, all premiums due thereon have been paid, and no notice of
cancellation with respect thereto has been received. The Company or Western will
not as of the Closing Date have any liability for premiums or for retrospective
premium adjustments for any period prior to the Closing Date. The Company and
Western have previously made available to Vail Banks a true, correct and
complete copy of each insurance policy and bond in effect since January 1, 1991
with respect to the business and affairs of the Company and Western and
information regarding all pending claims under all such policies or bonds.
4.3 PROPERTIES AND ASSETS.
---------------------
4.3.1 CONTRACTS AND COMMITMENTS. Exhibit 4.3.1 contains a
-------------------------
list identifying and briefly describing all written contracts, purchase orders,
agreements, security deeds, guaranties or commitments to which the Company or
Western is a party, or by which they may be bound, involving the payment or
receipt, actual or contingent, of more than $25,000 or having a term or
requiring performance over a period of more than ninety (90) days, other than
agreements, contracts, security deeds, guaranties or commitments made in the
ordinary course of the Company's business and other agreements pursuant to which
the Company has received a security interest. Except as set forth in Exhibit
4.3.1, each such contract, agreement, guaranty and commitment of the Company and
Western is in full force and effect and is valid and enforceable in accordance
with its terms, and constitutes a legal and binding obligation of the respective
parties thereto and is not the subject of any notice of default, termination,
partial termination or of any ongoing, pending, completed or threatened
investigation, inquiry or other proceeding or action that will give rise to any
notice of default, termination or partial termination. The Company and Western
have complied with the provisions of such contracts, agreements, guaranties and
commitments. A true and complete copy of each such document has been made
available to Vail Banks for examination.
4.3.2 LICENSES; INTELLECTUAL PROPERTY. The Company and
-------------------------------
Western have all patents, trademarks, trade names, service marks, copyrights,
trade secrets and know-how reasonably necessary to conduct their businesses as
presently conducted and neither the Company nor Western is a party, either as
licensor or licensee, to any agreement for any patent, process, trademark,
service mark, trade name, copyright, trade secret or other confidential
information, and there are no rights of third parties with respect to any
trademark, service mark, trade secrets, confidential information, trade name,
patent, patent application, copyright, invention, device or process owned or
used by the Company or Western or presently expected to be used by either of
them in the future. All patents, copyrights, trademarks, service marks, trade
names, and applications therefor or registrations thereof, owned or used by the
Company or Western, have been disclosed to Vail. The Company and Western have
complied with all applicable laws relating to the filing or registration of
"fictitious names" or trade names.
4.3.3 PERSONAL PROPERTY. The Company and Western each have
-----------------
good and marketable title to all of their respective personalty, tangible and
intangible, reflected in the
14
<PAGE>
1996 Financial Statements (except as since sold or otherwise disposed of by
either of them in the ordinary course of business), free and clear of all
encumbrances, liens or charges of any kind or character except (i) those
referred to in the notes to the 1996 Financial Statements as securing specified
liabilities (with respect to which no default exists or, to the knowledge of
Management, is claimed to exist), (ii) those described in Exhibit 4.3.3 and
(iii) liens for taxes not due and payable.
4.3.4 LEASES. (a) All leases pursuant to which either the
------
Company or Western is lessor or lessee (the "Leases") of any real or personal
property are valid and enforceable in accordance with their terms; there is not,
under any of such Leases any default or, to the knowledge of Management, any
claimed default by the Company or Western, as the case may be, or event of
default or event which with notice or lapse of time, or both would constitute a
default by the Company or Western, as the case may be, and in respect of which
adequate steps have not been taken to prevent a default on either of their parts
from occurring.
(b) Except as set forth in Exhibit 4.3.4(b), there are no contractual
obligations, agreements in principle or present plans for either the Company or
Western to enter into new leases of real property or to renew or amend existing
Leases prior to the Closing Date.
(c) The copies of the Leases heretofore furnished or made available by
the Company and Western to Vail Banks are true, correct and complete, and the
Leases have not been modified in any respect other than pursuant to amendments,
copies of which have been concurrently delivered or made available to Vail
Banks, and are in full force and effect in accordance with their terms.
(d) Except as set forth in Exhibit 4.3.4(d), no rent has been paid in
advance and no security deposit has been paid, nor is any brokerage commission
payable, by or to the Company or Western with respect to any Lease.
4.3.5 REAL PROPERTY. (a) The Company and Western have good
-------------
and marketable title to the real property reflected in the 1996 Financial
Statements (the "Realty"), and the titles to the Realty are covered by title
insurance policies providing coverage in the amount of the original purchase
price.
(b) Except as set forth in Exhibit 4.3.5(b), the interests of the
Company or Western in the Realty and in and under each of the Leases are free
and clear of any and all liens and encumbrances except for liens for current
taxes not yet due, and are subject to no present claim, contest, dispute, action
or, to the knowledge of Management, threatened action at law or in equity.
(c) The present and past use and operations of, and improvements upon,
the Realty and all real properties leased by the Company and Western (the
"Leased Properties") are in material compliance with all applicable building,
fire, zoning and other applicable laws, ordinances and regulations, including
the Americans with Disabilities Act, and
15
<PAGE>
with all deed restrictions of record, no notice of any violation or alleged
violation thereof has been received, and to the knowledge of Management, there
are no proposed changes therein that would affect the Realty, the Leased
Properties or their uses.
(d) Management is not aware of any proposed or pending change in the
zoning of, or of any proposed or pending condemnation proceeding with respect
to, any of the Realty or the Leased Properties which may adversely affect the
Realty or the Leased Properties or the current or currently contemplated use
thereof.
(e) The buildings and structures owned, leased or used by the Company
and Western are, taken as a whole, in good operating order (except for ordinary
wear and tear), usable in the ordinary course of business, and are sufficient
and adequate to carry on the businesses and affairs of the Company and Western
as presently conducted.
4.4 EMPLOYEES AND BENEFITS.
----------------------
4.4.1 COMPENSATION STRUCTURE. The Company has delivered to
----------------------
Vail Banks:
(a) a true and complete list of the names, titles, responsibilities
and compensation arrangements of each person whose earned compensation
(including without limitation all salary, wages, bonuses and fringe benefits,
other than those fringe benefits made available to all employees on a non-
discriminatory basis), regardless of whether actually payable in such year, from
the Company and Western for the current fiscal year. For purposes of this
Section 4.4.1(a), compensation shall include any amounts which are or could be
owed to any person in payment of accrued vacation time, sick leave, or as a
result of any other incentive plan currently or previously in effect with
respect to such person.
(b) copies of all written agreements, correspondence (other than
outstanding offers of employment to prospective employees whose compensation
levels will not exceed $25,000 in cash), memoranda and other written materials
currently in effect which have been provided to such employees relating to their
compensation.
4.4.2 DIRECTORS OR OFFICERS OF OTHER CORPORATIONS. Except as
-------------------------------------------
set forth in Exhibit 4.4.2, no director, officer, or employee of the Company or
Western serves, or in the past five years has served, as a director or officer
of any other corporation (other than the Company or Western) on behalf of or as
a designee of the Company or any of its subsidiaries.
4.4.3 EMPLOYEE BENEFITS. (a) Except as set forth in Exhibit
-----------------
4.4.3(a), neither the Company nor Western has or maintains a pension plan,
profit sharing plan, group insurance plan, employee welfare benefit plan (as
such term is defined in Section 3(l) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA')), severance plan, bonus plan, stock option
plan or deferred compensation plan for any of its current or former employees.
16
<PAGE>
(b) Each "employee benefit plan" as defined in Section 3(3) of ERISA,
maintained by or on behalf of the Company or Western (including any plans which
are "multiemployer plans" under Section 3(37)(A) of ERISA ("Multiemployer
Plans") and any defined benefit plan (as defined in Section 3(35) of ERISA)
terminated by the Company or Western within the five plan-years ending
immediately before the Closing Date), which covers or covered any employees of
the Company, Western, or any subsidiary or of any predecessors thereof (each a
"Plan"), is listed in Exhibit 4.4.3(b), and copies of all the Plans and Plan
trusts (if applicable), Summary Plan Descriptions, Actuarial Reports and
valuations (if any), and Annual Reports (and attachments thereto) on Form 5500,
5500-C or 5500-R, as the case may be (if required pursuant to ERISA), for the
most recent three years with respect to the Plans, Internal Revenue Service
determination letters and any other related documents requested by Vail Banks or
its counsel have been, or prior to the Closing Date will be, provided to Vail
Banks.
(c) With respect to each Plan: no litigation or administrative or
other proceeding is pending or, to the knowledge of Management, threatened; each
Plan has been restated or amended so as to comply with all applicable
requirements of law, including all applicable requirements of ERISA, the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder by the Internal Revenue Service and the United States
Department of Labor. Neither the Plan nor any trustee, administrator or
fiduciary thereof has at any time been involved in any transaction relating to
the Plan which would constitute a breach of fiduciary duty under ERISA or a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, unless such transaction is specifically permitted under
Sections 407 or 408 of ERISA, Section 4975 of the Code or a class or
administrative exemption issued by the Department of Labor.
(d) Each Plan has been administered in compliance in all material
respects with applicable law and the terms of the Plan.
(e) Except for obligations under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), neither the Company nor
Western has any obligation to provide, or material liability for, health care,
life insurance or other benefits after termination of active employment. As of
the Closing Date, the Company and Western will have provided adequate reserves,
or insurance or qualified trust funds, for all claims incurred through the
Closing Date, including adequate reserves to provide for any post-retirement
health care, life insurance or other benefits with respect to periods of
employment prior to the Closing Date, based on an actuarial valuation
satisfactory to the actuaries of the Company and Western representing a
projection of claims expected to be incurred for such retirees during their
period of coverage under such Plan.
(f) To the knowledge of Management, no fact or circumstance exists
which could constitute grounds in the future for the Pension Benefit Guaranty
Corporation ("PBGC") (or any successor to the PBGC) to take any action
whatsoever under Section 4042 of ERISA in connection with any plan which an
Affiliate (as defined below) of the
17
<PAGE>
Company maintains within the meaning of Section 4062 or 4064 of ERISA, and, in
either case, PBGC has not previously taken any such action which has, or
reasonably might, result in any liability of an Affiliate or the Company to the
PBGC, which would have an adverse effect on the business of the Company. The
term "Affiliate" for purposes of this Section means any trade or business
(whether incorporated or unincorporated) which is a member of a group described
in Sections 414(b) or 414(c) of the Code of which the Company is also a member.
(g) Only current and former employees of the Company or Western
participate in any Plan.
4.4.4 LABOR-RELATED MATTERS. Neither the Company nor Western
---------------------
is, and neither the Company nor Western has been, a party to any collective
bargaining agreement or agreement of any kind with any union or labor
organization or to any agreement with any of its employees which is not
terminable at will or upon ninety (90) days notice at the election of, and
without cost or penalty to, the Company or Western. Neither the Company nor
Western has received at any time in the past five (5) years, any demand for
recognition from any union, and no attempt has been made, or will have been made
as of the Closing Date, to organize any of their employees. The Company has
complied with all obligations under the National Labor Relations Act, as
amended, the Age Discrimination in Employment Act, as amended, and all other
federal, state and local labor laws and regulations applicable to employees. To
the knowledge of Management, there are no unfair labor practice charges pending
or threatened against the Company or Western, and there are, and in the past
three (3) years there have been, no charges, complaints, claims or proceedings,
or slowdowns or strikes pending or threatened against, or involving, as the case
may be, the Company or Western with respect to any alleged violation of any
legal duty (including but not limited to any wage and hour claims, employment
discrimination claims or claims arising out of any employment relationship) by
the Company or Western as to any of their employees or as to any person seeking
employment therefrom, and no such violations exist.
4.4.5 RELATED-PARTY TRANSACTIONS. Except for (a) loans and
--------------------------
extensions of credit made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions by the Company or Western with other persons who are not affiliated
with the Company or Western, and which do not involve more than the normal risk
of repayment or present other unfavorable features, (b) deposits, all of which
are on terms and conditions identical to those made available to all customers
of Western at the time such deposits were entered into, and (c) transactions
specifically described in Exhibit 4.4.5, there are no contracts with or
commitments to present or former 5% or greater shareholders, directors,
officers, or employees of the Company or Western involving the expenditure after
December 31, 1996 of more than $60,000 as to any one individual, including with
respect to any business directly or indirectly controlled by any such person, or
$100,000 for all such contracts or commitments in the aggregate for all such
individuals (other than contracts or commitments relating to services to be
performed by any officer, director or employee as a currently-employed employee
of the Company or Western).
4.5 OTHER MATTERS.
-------------
18
<PAGE>
4.5.1 APPROVALS, CONSENTS AND FILINGS. Except for the
-------------------------------
approval of the Federal Reserve, the Federal Deposit Insurance Corporation (the
"FDIC"), the Division of Banking, the Company Shareholders and Bank
Shareholders, neither the execution and delivery of this Agreement by the
Company nor the consummation of the transactions contemplated hereby, will (a)
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, or (b) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to the
Company or Western, or any of their respective assets.
4.5.2 DEFAULT. (a) Except for those consents described in
-------
or set forth pursuant to Section 4.5.1 above, neither the execution of this
Agreement nor the consummation of the transactions contemplated herein or
therein (i) constitutes a breach of or default under any contract or commitment
to which the Company or Western is a party or by which the Company or Western or
their properties or assets are bound, (ii) does or will result in the creation
or imposition of any security interest, lien, encumbrance, charge, equity or
restriction of any nature whatsoever in favor of any third party upon any assets
of the Company or Western, or (iii) constitutes an event permitting termination
of any agreement or the acceleration of any indebtedness of the Company or
Western.
(b) Neither the Company nor Western is in default under its articles
of incorporation or charter, as the case may be, or bylaws or under any term or
provision of any security deed, mortgage, indenture or security agreement or of
any other contract or instrument to which the Company or Western is a party or
by which either of them or any of their property is bound.
4.5.3 WESTERN. The Company owns or controls 100% of the
-------
issued and outstanding shares of the Common Stock of Western.
4.5.4 REPRESENTATIONS AND WARRANTIES. No material
------------------------------
representation or warranty contained in this Article IV or in any written
statement delivered by or at the direction of the Company or Western pursuant
hereto or in connection with the transactions contemplated hereby contains or
shall contain any untrue statement, nor shall such representations and
warranties taken as a whole omit any statement necessary in order to make any
statement not misleading. Copies of all documents furnished to Vail Banks in
connection with this Agreement or pursuant hereto are true, correct and
complete.
ARTICLE V
---------
REPRESENTATIONS, WARRANTIES AND
-------------------------------
COVENANTS OF COMPANY SHAREHOLDER
--------------------------------
Each Company Shareholder (as listed on Exhibit C) represents,
warrants, covenants and agrees as follows, which representations, warranties,
covenants and agreements are being made as of the date hereof and shall be
deemed to be made again as of the Closing:
19
<PAGE>
5.1 TITLE. Company Shareholder has good and marketable title to
-----
the Company Common Stock owned by such Company Shareholder (as listed on Exhibit
C) free and clear of any and all claims, liens, charges and encumbrances.
5.2 CONSENT. Holder's entry into this Agreement constitutes
-------
Holder' consent to this Agreement.
ARTICLE VI
----------
CONDUCT OF BUSINESS OF THE COMPANY
----------------------------------
OR WESTERN PENDING CLOSING
--------------------------
During the period from the date of this Agreement and continuing until
the Closing Date, or the earlier termination of this Agreement pursuant to
Article XI hereof, the Controlling Company Shareholders and Company agree
(except as expressly contemplated by this Agreement or to the extent that Vail
Banks shall otherwise consent in advance in writing) that:
(a) ORDINARY COURSE. Except in specific contemplation of the
---------------
transactions contemplated by this Agreement, the Company and Western shall carry
on their businesses in the usual, regular and ordinary course in the same manner
as heretofore conducted, without the creation of any indebtedness for borrowed
money (other than deposit and similar accounts and customary credit arrangements
between banks in the ordinary course of business), and, to the extent consistent
with such businesses, use their best efforts to preserve intact their present
business organizations, keep available the services of their present officers
and employees and preserve their relationships with representatives, customers,
suppliers, personnel and others having business dealings with the Company and
Western.
(b) DIVIDENDS; CHANGES IN STOCK. Except upon the prior written
---------------------------
approval of Vail Banks, neither the Company nor Western shall or shall propose
to (i) declare or pay any dividends on, or make other distributions in respect
of, any of their capital stock, (ii) split, combine or reclassify any of their
capital stock or issue, authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of capital
stock of the Company and Western, or (iii) repurchase or otherwise acquire any
shares of their capital stock; provided, however, that Western may declare
dividends and the Company may make distributions for the sole purpose of
servicing the Company's debt on the Notes.
(c) ISSUANCE OF SECURITIES. The Company and Western shall not sell,
----------------------
issue, authorize or propose the sale or issuance of, or purchase or propose the
purchase of, any shares of their capital stock or any class of securities
convertible into, or rights, warrants or options to acquire, any such shares or
other convertible securities or enter into any agreement with respect to the
foregoing.
20
<PAGE>
(d) GOVERNING DOCUMENTS; COMPLIANCE WITH LAW. The Company and
----------------------------------------
Western shall not amend their articles of incorporation or charter, as the case
may be, or bylaws. The Company and Western shall each maintain their corporate
existence and powers and fully comply with all federal, state and local laws
with respect to their operations and the conduct of their businesses.
(e) NO ACQUISITIONS. The Company and Western shall not acquire by
---------------
merging or consolidating with, or by purchasing a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other entity or division thereof or otherwise acquire or agree to
acquire any assets which are material, individually or in the aggregate, to
them.
(f) NO DISPOSITIONS. The Company and Western shall not sell, lease
---------------
or otherwise dispose of any of their assets except for sales, leases and other
dispositions in the ordinary course of business consistent with prior practice.
(g) MAINTENANCE OF PROPERTIES. The Company and Western shall
-------------------------
maintain their properties and assets in satisfactory condition and repair for
the purposes intended, ordinary wear and tear and damage by fire or other
casualty excepted.
(h) BENEFIT PLANS, ETC. The Company and Western shall not enter into
------------------
or amend any bonus, incentive compensation, deferred compensation, profit
sharing, retirement, pension, group insurance, stock option, stock purchase or
other benefit plan or any union, employment or consulting agreement except as
required by law or regulations and shall not accelerate the exercisability of
any options, warrants or rights to purchase securities of the Company and
Western pursuant to any benefit plan.
(i) BOOKS AND RECORDS. The books and records of the Company and
-----------------
Western shall be maintained in the usual, regular and ordinary course on a basis
consistent with prior years.
(j) INCREASE IN COMPENSATION. The Company and Western shall not
------------------------
grant to any officer, employee or agent any increase in compensation or in
severance or termination pay, or enter into any employment agreement, except as
may be required under employment, termination or other agreements in effect on
the date of this Agreement and which are described in the attached Exhibits.
(k) PAYMENT OF DEBT. The Company and Western shall not pay any claim
---------------
or discharge or satisfy any lien or encumbrance or pay any obligation or
liability other than in the ordinary course of business or as required by the
terms of any written instrument evidencing or governing the same, a copy of
which has been heretofore made available to Vail Banks.
(l) OTHER ACTIONS. The Company and Western shall not take any action
-------------
that would or could reasonably be expected to result in any of the
representations and
21
<PAGE>
warranties of the Company and Western set forth in this Agreement becoming
untrue at any time on or prior to the Closing Date.
(m) MAINTENANCE OF INSURANCE. The Company and Western shall maintain
------------------------
and keep or cause to be maintained and kept in full force and effect all of the
insurance referred to in Section 4.2.4 hereof or other insurance equivalent
thereto.
(n) INVESTMENT PORTFOLIO. The Company and Western shall only invest
--------------------
funds of the Company or Western in securities of the government of the United
States, Repurchase Agreements secured by securities of the government of the
United States, federal funds, or deposits insured by the FDIC; provided,
further, that no such investment by the Company or Western shall have a stated
maturity of greater than thirty (30) days.
(o) BANKING RELATIONSHIPS. No change will be made in the banking and
---------------------
safe deposit arrangements referred to in Section 4.1.8 hereof.
(p) ADVICE OF CHANGES. The Company and Western shall promptly advise
-----------------
Vail Banks orally and in writing of any change or event having, or which
Management of the Company and Western believes could have, a material adverse
effect on the assets, liabilities, business, operations or financial condition
of the Company or Western.
ARTICLE VII
-----------
REPRESENTATIONS AND WARRANTIES OF VAIL BANKS
--------------------------------------------
To induce the Company to enter into and perform this Agreement, Vail
Banks represents, warrants, covenants and agrees as follows, which
representations, warranties, covenants and agreements are being made as of the
date hereof and shall be deemed to be made again as of the Closing:
7.1 GOOD STANDING. Vail Banks is a business corporation duly
-------------
organized, validly existing and in good standing under the laws of the State of
Colorado and is entitled to own or lease its properties and to carry on its
business as now conducted.
7.2 AUTHORITY. Subject to approval of the Federal Reserve, and the
---------
Division of Banking, Vail Banks has full corporate power and authority to make,
execute and perform this Agreement and the transactions contemplated hereby and
the execution, delivery and performance of this Agreement by Vail Banks have
been duly authorized by all necessary corporate action of Vail Banks.
7.3 DEFAULT. Neither the execution and delivery of this Agreement
-------
nor performance by Vail Banks in compliance with its terms will result in a
breach of the terms or conditions of, or constitute a default under, the
articles of incorporation or bylaws of Vail Banks or of any mortgage, note,
bond, indenture, agreement, license or other instrument or obligation to
22
<PAGE>
which it is a party or by which it or any of its properties or assets may be
bound or, to the knowledge of management of Vail Banks, affected.
7.4 APPLICATIONS. Vail Banks shall prepare and file, or shall
------------
cause to be prepared and filed, all regulatory applications as may be required
in order to consummate the transactions contemplated by this Agreement. Vail
Banks shall file within sixty (60) days of the date hereof all original
applications for regulatory approval with any and all governmental authorities,
bodies or agencies having jurisdiction over the transactions contemplated by
this Agreement, including, but not limited to, the Federal Reserve, FDIC and the
Division of Banking.
7.5 DOCUMENTS RECEIVED FROM COMPANY AND WESTERN. Vail Banks has
-------------------------------------------
received either a copy or original of each document listed on the attached
Exhibit D.
7.6 REPRESENTATIONS AND WARRANTIES. No representation or
------------------------------
warranty contained in this Article VII contains or will contain any untrue
statement, nor shall such representations and warranties taken as a whole omit
any statement necessary in order to make any statement therein not misleading.
ARTICLE VIII
------------
CONDITIONS TO OBLIGATIONS OF
----------------------------
VAIL BANKS
----------
All of the obligations of Vail Banks under this Agreement are subject
to the fulfillment prior to or at the Closing Date of each of the following
conditions, any one or more of which may be waived by Vail Banks:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of the Company contained herein or in any certificate, schedule or
other document delivered pursuant to the provisions hereof, or in connection
herewith, shall be true in all material respects as of the date when made and,
except where otherwise expressly provided herein, shall be deemed to be made
again at and as of the Closing Date and shall be true in all material respects
at and as of such time, except (i) for those representations and warranties
confined to a specific date, which shall be true and correct as of such date, or
(ii) as a result of changes or events expressly permitted or contemplated
herein.
8.2 PERFORMANCE OF CONDITIONS AND AGREEMENTS. The Shareholders and
----------------------------------------
the Company shall have performed and complied in all material respects with all
agreements and conditions required by this Agreement to be performed or complied
with by it prior to or on the Closing Date.
8.3 CERTIFICATES, RESOLUTIONS, OPINION. The Shareholders or the
----------------------------------
Company shall have delivered, or cause Western to deliver, to Vail Banks:
23
<PAGE>
(a) a certificate executed by the Shareholders or the
President or Chairman of the Company, dated as of the Closing Date,
and certifying in such detail as Vail Banks may reasonably request to
the fulfillment of the conditions specified in Sections 8.1 and 8.2
hereof;
(b) certificates executed by the Secretary of State of the
State of Colorado, dated not more than five (5) business days prior to
the Closing Date, of the valid existence of the Company and Western,
respectively, under the laws of Colorado;
(c) evidence that the Company and Western have filed all
corporate tax returns required by the laws of the State of Colorado,
and have paid all taxes shown thereon to be due; and
(d) an opinion from counsel of the Company acceptable to Vail
Banks and its counsel, dated the Closing Date, in the form attached as
Exhibit A.
8.4 ACCOUNTANTS' LETTER. The Company shall provide to Vail Banks a
-------------------
letter from Dalby, Wendland, P.C. or another accounting firm selected by Vail
Banks prior to July 15, 1997 dated the Closing Date, to the effect that: At the
request of the Company they have carried out procedures to a specified date not
more than five business days prior to the Closing Date, which procedures did not
constitute an examination in accordance with generally accepted auditing
standards, of the financial statements of the Company, as follows: (a) read the
unaudited balance sheets and statements of income of the Company and Western
from December 31, 1996 through the date of the most recent monthly financial
statements available in the ordinary course of business; (b) read the minutes of
the meetings of shareholders and Board of Directors of the Company and
Western from December 31, 1996 to said date not more than five business days
prior to the Closing Date; and (c) consulted with certain officers and employees
of the Company and Western responsible for financial and accounting matters and,
based on such procedures, nothing has come to their attention which would cause
them to believe that (i) such unaudited interim balance sheets and statements of
income are not fairly presented in conformity with generally accepted accounting
principles applied on a basis consistent with that of the 1996 Financial
Statements, (ii) as of said date not more than five business days prior to the
Closing Date the shareholders' equity, long-term debt, reserve for possible loan
losses and total assets of the Company, in each case as compared with the
amounts shown in the 1996 Financial Statements, are not different except as set
forth in such letter, or (iii) for the period from December 31, 1996 to said
date not more than five business days prior to the Closing Date, the net
interest income, total and per share amounts of consolidated income (before
extraordinary items) and net income of the Company, as compared with the
corresponding portion of the preceding 12-month period, are not different except
as set forth in such letter.
8.5 REGULATORY APPROVALS. Vail Banks shall have received from any
--------------------
and all governmental authorities, bodies or agencies having jurisdiction over
the transactions contemplated by this Agreement, including, but not limited to,
the Federal Reserve, FDIC and the Division of
24
<PAGE>
Banking, all such consents, authorizations and approvals as are necessary for
the consummation thereof and all applicable waiting or similar periods required
by law shall have expired.
8.6 EMPLOYMENT. All written employment, termination, consulting or
----------
similar agreements entered into by the Company or Western shall have been
effectively terminated with no remaining liabilities, duties or obligations on
the part of the Company or Western under said agreements.
ARTICLE IX
----------
CONDITIONS TO OBLIGATIONS OF THE COMPANY
----------------------------------------
All of the obligations of the Company under this Agreement are subject
to the fulfillment prior to or at the Closing Date of each of the following
conditions, any one or more of which may be waived by the Company:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of Vail Banks contained herein or in any certificate, schedule or
other document delivered pursuant to the provisions hereof, or in connection
herewith, shall be true in all material respects as of the date when made and
shall be deemed to be made again at and as of the Closing Date and shall be true
in all material respects at and as of such time.
9.2 PERFORMANCE OF AGREEMENTS. Vail Banks shall have performed and
-------------------------
complied in all material respects with all agreements and conditions required by
this Agreement to be performed or complied with by it prior to or at the Closing
Date.
9.3 CERTIFICATES, RESOLUTIONS, OPINIONS. Vail Banks shall have
-----------------------------------
delivered to the Company:
(a) a certificate executed by the President of Vail Banks,
dated the Closing Date, certifying in such detail as the Company may
reasonably request to the fulfillment of the conditions specified in
Sections 8.1 and 8.2 hereof;
(b) duly adopted resolutions of the Board of Directors of
Vail Banks, certified by the Secretary or an Assistant Secretary
thereof, dated the Closing Date, authorizing and approving (i) the
execution of this Agreement and the consummation of the transactions
contemplated herein in accordance with their respective terms, and
(ii) all other necessary and proper corporate action to enable Vail
Banks to comply with the terms hereof;
(c) an opinion of Kilpatrick Stockton LLP, counsel for Vail
Banks, dated the Closing Date, in the form attached as Exhibit B.
25
<PAGE>
(d) certificates executed by the Secretary of State of the
State of Colorado, dated not more than five (5) business days prior to
the Closing Date, of the valid existence of Vail Banks under the laws
of Colorado.
9.4 REGULATORY APPROVALS. Any and all governmental authorities,
--------------------
bodies or agencies having jurisdiction over the transactions contemplated by
this Agreement, including, but not limited to, the Federal Reserve, the FDIC and
the Division of Banking, shall have granted all such consents, authorizations
and approvals as are necessary for the consummation thereof, and all applicable
waiting or similar periods required by law shall have expired.
ARTICLE X
---------
WARRANTIES, NOTICES, ETC.
-------------------------
10.1 WARRANTIES. All statements contained in any certificate or other
----------
instrument delivered by or on behalf of the Company pursuant to Article VII or
Vail Banks pursuant to Article VIII hereto or in connection with the
transactions contemplated hereby shall be deemed representations and warranties
hereunder by the delivering party.
10.2 SURVIVAL OF REPRESENTATIONS. All representations, warranties,
---------------------------
covenants, and agreements made by any party hereto in or pursuant to this
Agreement or in any instrument, exhibit or certificate delivered pursuant hereto
shall be deemed to have been material and to have been relied upon by the party
to which made, but, except as set forth hereafter or specifically stated in this
Agreement, such representations, warranties, covenants, and agreements shall
expire and be of no further force and effect upon the consummation of the Stock
Purchase; provided, however, that the following shall survive consummation of
the Stock Purchase and the transactions contemplated hereby:
(a) the opinions of counsel referred to in Sections 8.3(d)
and 9.3(c) of this Agreement;
(b) the opinion of accountants referred to in Section 8.4 of
this Agreement;
(c) any intentional misrepresentation of any material fact
made by any party hereto in or pursuant to this Agreement or in any
instrument, document or certificate delivered pursuant hereto, which
shall survive for a period of two (2) years from the consummation of
the Stock Purchase; and
(d) the covenant with respect to the Confidentiality of
certain information contained in Section 3.5 of this Agreement.
The Controlling Company Shareholders shall be liable for any liability under
Section 10.2(c) hereof arising out of a breach of any representation, warranty,
covenant or agreement delivered by or on
26
<PAGE>
behalf of the Company or the Controlling Company Shareholders; provided,
however, that the total amount of any such liability shall not exceed the amount
of the Purchase Price and each Controlling Company Shareholder shall be
personally liable for that percentage of the total liability which the number of
shares of Company Common Stock owned by such Controlling Company Shareholder as
set forth on Exhibit C bears to the total number of Company Common Shares owned
by all Controlling Company Shareholders as set forth on Exhibit C; and provided
further that the Controlling Company Shareholders shall be liable only to the
extent any such liability is in excess of any applicable insurance coverage.
10.3 NOTICE. All notices, requests, demands and other communications
------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or mailed, first class, certified mail, postage
prepaid or transmitted by facsimile to each of the parties hereto at the
respective addresses set forth below (or at such other address either party may
have theretofore notified the other party in writing):
(a) To the Company
prior to Closing: Mr. Richard Ducic
125 South Grand Mesa Drive
Cedaredge, Colorado 81413
(b) To the Company
after Closing: Mr. Joe Basore
311 Town Center West
Bella Vista, Arkansas 72714
Mr. Burton George
P. O. Box 412
Berryville, Arkansas 72616
Mr. Richard Ducic
560 N.E. 4th Street
Cedaredge, Colorado 81413
With copies to: Hall & Evans, L.L.C.
1200 17th Street
Suite 1700
Denver, Colorado 80202
Attn.: C. Paul Swift, Esq.
Fax: 303/628-3431
(c) To Vail Banks: Vail Banks, Inc.
108 S. Frontage Road, Suite 101
Vail, Colorado 81657
Attn.: E.B. Chester, Jr.
Fax: 970/476-0200
27
<PAGE>
With copies to: Kilpatrick Stockton LLP
Suite 2800
1100 Peachtree Street
Atlanta, Georgia 30309
Attn.: R. Alexander Bransford, Jr.
Fax: 404/815-6039
10.4 ENTIRE AGREEMENT. This Agreement supersedes all prior
----------------
discussions and agreements by and between Vail Banks and the Company with
respect to the Stock Purchase and the other matters with respect thereto, and
the Agreement contains the sole and entire agreement between the parties hereto
with respect to the transactions contemplated herein.
10.5 WAIVER; AMENDMENT. Prior to or on the Closing Date, Vail Banks,
-----------------
acting through its Board of Directors, Chairman or President, shall have the
right to waive any default in the performance of any term of this Agreement by
the Company, to waive or extend the time for the fulfillment by the Company of
any and all of its obligations under this Agreement, and to waive any or all of
the conditions precedent to the obligations of Vail Banks under this Agreement,
except any condition which, if not satisfied, would result in the violation of
any law or applicable governmental regulation. Prior to or on the Closing Date,
the Company, acting through its Board of Directors or Chairman, shall have the
right to waive any default in the performance of any term of this Agreement by
Vail Banks, to waive or extend the time for the fulfillment by Vail Banks of any
and all of its obligations under this Agreement, and to waive any or all of the
conditions precedent to the obligations of the Company under this Agreement,
except any condition which, if not satisfied, would result in the violation of
any law or applicable governmental regulation. This Agreement may be amended by
a subsequent writing signed by the parties hereto upon the approval of the
Boards of Directors of each of the parties hereto; provided, however, that the
provisions of Sections 8.5 and 9.4 requiring regulatory approval shall not be
amended by the parties hereto without such approval.
ARTICLE XI
----------
TERMINATION
-----------
This Agreement may be terminated at any time prior to or on the
Closing Date upon written notice to the other party hereto as follows, and, upon
any such termination of this Agreement no party hereto shall have any liability
to the other party, except that the provisions of Sections 3.3 and 3.5 hereof
shall survive the termination of this Agreement for any reason.
11.1 MATERIAL ADVERSE CHANGE OF THE COMPANY OR WESTERN. By Vail
-------------------------------------------------
Banks, if, after the date hereof, a material adverse change in the financial
condition or business of the Company or Western shall have occurred or the
Company or Western shall have suffered a material loss or damage to any of its
properties or assets, which change, loss or damage materially affects or impairs
the ability of either the Company or Western to conduct its business. A
material
28
<PAGE>
adverse change shall be found to exist if Western fails to maintain any
of the following: (a) a CAMEL rating of 2 or better; (b) a satisfactory or
better CRA rating; or (c) a satisfactory or better compliance rating.
11.2 NONCOMPLIANCE OF THE COMPANY. By Vail Banks, if the terms,
----------------------------
covenants or conditions of this Agreement to be complied with or performed by
the Company at or before the Closing shall not have been complied with or
performed in all material respects and such noncompliance or non-performance
shall not have been waived by Vail Banks.
11.3 NONCOMPLIANCE OF VAIL BANKS. By the Company, if the terms,
---------------------------
covenants or conditions of this Agreement to be complied with or performed by
Vail Banks at or before the Closing shall not have been complied with or
performed in all material respects and such noncompliance or non-performance
shall not have been waived by the Company.
11.4 FAILURE TO DISCLOSE. By Vail Banks, if it learns of any fact or
-------------------
condition not disclosed in this Agreement, the attached Exhibits or the 1996
Financial Statements and which was required to be disclosed by the Company
pursuant to the provisions of this Agreement at or prior to the date of
execution hereof with respect to the business, properties, assets or earnings of
the Company or Western which materially and adversely affects such business,
properties, assets or earnings or the ownership, value or continuance thereof.
11.5 ENVIRONMENTAL LIABILITY. By Vail Banks, if it learns of any
-----------------------
potential liability of the Company arising from noncompliance with any federal,
state or local environmental law by the Company, or any potential liability of
the Company arising from any environmental condition of the properties or assets
of the Company, including any properties or assets in which the Company holds a
security interest.
11.6 ADVERSE PROCEEDINGS. By either party, if any action, suit or
-------------------
proceeding shall have been instituted or threatened against either party to this
Agreement to restrain or prohibit, or to obtain substantial damages in respect
of, this Agreement or the consummation of the transactions contemplated herein,
which, in the good faith opinion of such party, makes consummation of the
transactions herein contemplated inadvisable.
11.7 TERMINATION DATE. By either party, if all consents,
----------------
authorizations and approvals of any and all governmental authorities, bodies or
agencies having jurisdiction over the transactions contemplated by this
Agreement necessary for the consummation of such transactions have not been
granted on or before December 31, 1997; provided, however, that in the event
application has been made for all such consents, authorizations and approvals
and on December 31, 1997 any required consent, authorization or approval has not
been received or compliance with any such consent, authorization or approval
which has been received has not been completed then the Termination Date shall
be March 31, 1998.
ARTICLE XII
-----------
29
<PAGE>
COUNTERPARTS, HEADINGS, ETC.
----------------------------
This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument. The headings herein set out are for
convenience of reference only and shall not be deemed a part of this Agreement.
ARTICLE XIII
------------
BINDING EFFECT
--------------
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that this Agreement may not be assigned by any party without the prior
written consent of the others.
ARTICLE XIV
-----------
GOVERNING LAW
-------------
The validity and effect of this Agreement and the rights and
obligations of the parties hereto shall be governed by and construed and
enforced in accordance with the laws of the State of Colorado.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized corporate officers and their corporate seals
to be affixed hereto all as of the day and year first above written.
VAIL BANKS, INC.
By: /s/ E.B. Chester, Jr.
-----------------------
Chairman
(CORPORATE SEAL)
Attest:
/s/ R. A. Bransford, Jr.
- --------------------------
Assistant Secretary
30
<PAGE>
CEDAREDGE FINANCIAL
SERVICES, INC.
By: /s/ Joe N. Basore
------------------
President
(CORPORATE SEAL)
Attest:
/s/ Janet L. Ducic
- ------------------
Secretary
COMPANY SHAREHOLDERS:
/s/ Joe N. Basore
-----------------
/s/ Richard W. Ducic
--------------------
/s/ Janet L. Ducic
------------------
Burton O. George Revocable Trust
/s/ Burton O. George, Trustee
-----------------------------
31
<PAGE>
The following persons have executed this Agreement solely in order to
confirm such person's contractual obligation to deliver their Company Common
Stock to Vail Banks and make the representations, warranties and covenants
contained in Article V of the Agreement.
/s/ Ann W. Basore
-----------------
/s/ Charles D. Richards
-----------------------
/s/ Florence A. Richards
------------------------
/s/ Bruce Hovde
---------------
/s/ Robert E. Morris
--------------------
/s/ Roxi Morris
---------------
32
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit A Opinion of Counsel for Cedaredge
Exhibit B Opinion of Counsel for Vail Banks
Exhibit C List of Cedaredge Shareholders and Number of Shares Owned
Exhibit D Documents Received from Company and Western
Exhibit E Form of Consulting Agreement
33
<PAGE>
EXHIBIT 10.2
------------
LOAN AGREEMENT
--------------
THIS AGREEMENT is made and entered into as of the 10th day of December,
1993, by and between BARNETT BANK OF SOUTHWEST FLORIDA (the "Lender"), a Florida
State banking corporation, and BANK OF COLORADO HOLDING COMPANY, a Colorado
corporation (the "Borrower").
RECITALS
E.B. Chester and Byron A. Rose (the "Original Borrowers") and the Lender
entered into a certain Loan Agreement dated as of March 10, 1989 (as
subsequently amended from time to time, the "Original Loan Agreement"), pursuant
to which the Lender agreed to lend $2,000,000 to the Original Borrowers to
finance the acquisition by the Original Borrowers of substantially all of the
issued and outstanding capital stock of Vail National Bank, a banking
association organized under the laws of the United States ("VNB") .
The Original Borrowers and other shareholders of VNB (the "Shareholders")
wish to reorganize VNB as a wholly-owned subsidiary of the Borrower (the
"Reorganization"), and the Federal Reserve Board issued its approval of the
Reorganization on November 2, 1993.
The Borrower wishes to obtain from the Lender a term loan in the principal
amount of $1,950,000 to purchase the shares of VNB's capital stock currently
held by the Shareholders and otherwise finance the Reorganization, and the
Lender, on the terms and conditions hereinafter set forth, is willing to lend
such sum to the Borrower.
NOW THEREFORE, for and in consideration of these premises and the mutual
agreements, warranties and representations herein made, the Lender and the
Borrower agree as follows:
ARTICLE I - DEFINITIONS
1.1 "Affiliate" means any Person directly or indirectly controlling,
controlled by, or under common control with the Borrower.
1.2. "Borrower" means Bank of Colorado Holding Company, a Colorado
corporation.
1.3. "Capital" means all primary capital or all primary components of
capital, including loan loss reserve, as defined from time to time by VNB's
primary federal regulator (as the case may be).
1.4. "Collateral" means and includes all property assigned or pledged to
the Lender or in which the Lender has been granted a security interest or to
which the Lender has been granted security title under this Agreement or the
other Financing Documents and the proceeds thereof.
<PAGE>
1.5. "Financing Documents" means and includes this Agreement, the Note,
the Pledge Agreement, and any amendments, extensions, renewals, modifications or
substitutions thereof or therefor.
1.6. "Lender" means Barnett Bank of Southwest Florida, a Florida State
banking corporation, and shall include transferees, assignees and successors of
the Lender.
1.7. "Liabilities" means all indebtedness, liabilities, and obligations
of the Borrower of any nature whatsoever which arise under or are evidenced by
this Agreement, the Note or any of the other Financing Documents and which the
Lender may now or hereafter have, own or hold, and which are now or hereafter
owing to the Lender regardless of however and whenever created, arising or
evidenced, whether now, heretofore or hereafter incurred, whether now,
heretofore or hereafter due and payable, whether alone or together with another
or others, whether direct or indirect, primary or secondary, absolute or
contingent, or joint or several, and whether as principal, maker, endorser,
guarantor, surety or otherwise, and also regardless of whether such Liabilities
are from time to time reduced and thereafter increased or entirely extinguished
and thereafter reincurred, including without limitation the Note and any
extensions, renewals, modifications or substitutions thereof or therefor.
1.8. Loan" shall have the meaning set forth in Section 2.1 hereof.
1.9. "Note" shall have the meaning set forth in Section 2.2 hereof.
1.10. "Original Loan Agreement" shall have the meaning set forth in the
first Recital paragraph hereof.
1.11. "Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
1.12. "Pledge Agreement" shall have the meaning set forth in Section 2.S
hereof.
1.13. "Reorganization" shall have the meaning set forth in the second
Recital paragraph of this Agreement.
1.14. "Shareholders" shall have the meaning set forth in the second
Recital paragraph of this Agreement.
1.15. "VNB Stock" means all of the issued and outstanding capital stock
of VNB after the Reorganization.
1.16. "VNB" means Vail National Bank, a banking association organized
under the laws of the United States.
1.17. All accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles in
effect from time to time.
2
<PAGE>
1.18. All rights of the Lender under the Financing Documents shall inure to
the benefit of its transferees, successors and assigns. All obligations of the
Borrower under the Financing Documents shall bind its heirs, legal
representatives, successors and permitted assigns.
ARTICLE II - THE LOAN
2.1. Subject to the terms and conditions of this Agreement, the Lender
agrees to lend to the Borrower the principal sum of $1,950,000 (the "Loan").
2.2. The Loan shall be evidenced by a promissory note, in form and
substance satisfactory to the Lender, duly executed and delivered by the
Borrower in favor of the Lender. Said promissory note or any extensions,
renewals, modifications or substitutions thereof or therefor which is in effect
at any particular time is hereinafter called the "Note." The Note shall provide
that:
(a) The Loan shall bear interest at a rate per annum, calculated on
the basis of a 360-day year and actual days elapsed, equal to the Prime Rate
Basis (as defined in the Note) with a minimum interest rate of seven percent
(7%) per annum and a maximum interest rate of thirteen percent (13%) per annum.
(b) Principal shall be payable in quarterly installments of $50,000
each, together with all accrued interest, on March 31, June 30, September 30,
and December 31 of each year commencing on March 31, 1994, and with a final
payment of all principal, interest, and all other Liabilities then outstanding
due on December 10, 1998.
(c) Upon any sale or other disposition of the VNB Stock or
substantially all of the assets of the Borrower or VNB, in either case which
requires the filing of (i) a notice under the Change of Bank Control Act (as
amended from time to time, or any successor thereto) or (ii) an application
under the Federal Bank Holding Company Act (as amended from time to time, or any
successor thereto), the Borrower shall, immediately upon its receipt of the
proceeds of such sale or other disposition, cause the Liabilities to be paid in
full to the Lender.
(d) No penalty or premium shall be imposed for the prepayment in
whole or in part of the principal balance of the Loan. Each such prepayment
shall be applied first to accrued interest on the date of prepayment and
thereafter to principal in inverse order of maturity.
In the event of conflict between the terms of this Section 2.2 and those of the
Note, the Note shall control.
2.3. The proceeds of the Loan shall be used by the Borrower to purchase
the shares of capital stock of VNB currently held by the Shareholders and
otherwise finance the Reorganization.
2.4. The Borrower agrees to pay to the Lender a one-time up-front fee for
the Lender's making its commitment hereunder available to the Borrower, equal to
one percent (1%) of the original loan amount, or $19,500, $5,000 of which has
previously been paid to the Lender, leaving
3
<PAGE>
a balance of $14,500 which shall be due and payable at closing and shall be
fully earned when due and non-refundable when paid.
2.5. To secure the repayment of the Loan, the Borrower shall execute and
deliver to the Lender a pledge agreement (the "Pledge Agreement") in form and
substance satisfactory to the Lender and pursuant to which the Borrower shall
pledge to the Lender, and grant to the Lender a security interest in, the VNB
Stock. On the day the Loan is made, the Borrower shall deliver to the Lender
the certificate(s) representing the VNB Stock together with stock transfer
powers for same, in form and substance satisfactory to the Lender. If, at any
time prior to repayment in full of the Loan, the Borrower acquires any
additional shares of the capital stock of VNB, or any warrants, options,
subscriptions or other rights to acquire additional shares of the capital stock
of VNB, the Borrower shall promptly deliver certificates evidencing such shares
of capital stock or any documents evidencing such warrants, options,
subscriptions or other rights to acquire additional shares of capital stock of
VNB to the Lender and such additional shares or other documents shall be added
to the collateral already pledged to the Lender under the Pledge Agreement, and
the Lender shall have a security interest in such additional shares or other
documents.
2.6. In connection with the Loan, the Borrower also will deliver to the
Lender other agreements or instruments specified in Section 6.4 hereof and such
other documents as may be reasonably required by the Lender.
ARTICLE III - REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender that each of the
following is true, correct, complete and accurate in all respects:
3.1. The Borrower is a Colorado corporation duly organized, validly
existing and in good standing under the laws of the State of Colorado. VNB is a
banking association duly organized, validly existing and in good standing under
the laws of the United States having the Borrower as its majority shareholder.
Each of the Borrower and VNB has all requisite corporate power and authority and
possesses all licenses, permits and authorizations necessary for it to own its
properties and conduct its business as presently conducted.
3.2. The quarterly financial statements of VNB dated September 30, 1993,
which have been delivered to the Lender, present fairly the financial condition
of VNB as of the date indicated therein.
3.3. Execution, delivery and performance by the Borrower of each and every
one of the Financing Documents do not violate any provision of law or
regulations and will not result in a breach of or constitute a default under any
agreement, indenture or other instrument to which the Borrower is a party or by
which the Borrower is bound.
3.4. Except for the security interest created by the Pledge Agreement,
the Borrower owns the VNB Stock free and clear of all liens, charges and
encumbrances. The VNB Stock is
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duly issued, fully paid and non-assessable, and the Borrower has the
unencumbered right to pledge the VNB Stock.
3.5. There is no claim, action, suit, arbitration, investigation,
condemnation or other proceeding at law or in equity, or by or before any
federal, state, local or other governmental agency, or by or before any other
agency or arbitrator, nor is there any judgment, order, writ, injunction or
decree of any court pending, anticipated or threatened against the Borrower or
VNB or against any properties or assets which might have a material adverse
effect on the Borrower's or VNB's properties or assets, or which might call into
question the validity or enforceability of any of the Financing Documents, or
which might involve the alleged violation by the Borrower or VNB of any federal,
state, local or other law, rule or regulation.
3.6. No consent, approval, order, authorization, designation,
registration, declaration, or filing with or of any federal, state, local, or
other governmental authority or public body on the part of the Borrower or VNB
is required in connection with the Borrower's execution, delivery or performance
of any of the Financing Documents or, if required, all such prerequisites have
been, or as of the date the Loan is advanced will be, fully satisfied. Without
limiting the generality of the foregoing, the Borrower has (or, as of the date
the Loan is advanced, the Borrower will have) received all authorizations,
consents or approvals of all governmental agencies, authorities or bodies
required under applicable federal or state law for its acquisition of the VNB
Stock, and a true and correct copy of each such authorization, consent and
approval has been or will be delivered by the Borrower to the Lender prior to
the Loan's funding, and all required waiting periods with respect thereto have
(or, as of the date the Loan is advanced, will have) expired without comment or
objection. All conditions or requirements (if any) imposed by each governmental
agency, authority or body in connection with its approval have been (or, as of
the date the Loan is advanced, will have been) met.
3.7. The Borrower is not engaged principally or as one of its important
activities in the business of extending credit for the purpose of purchasing or
carrying, and the Borrower does not own or presently intend to acquire, any
"margin security" or "margin stock" as defined in Regulations G, T, U, and X (12
C.F.R. Parts 221 and 224) of the Board of Governors of the Federal Reserve
System (herein called "margin stock"). None of the proceeds of the Loan will be
used, directly or indirectly, for the purpose of purchasing or carrying any
margin stock or for the purpose of reducing or retiring any indebtedness which
was originally incurred to purchase or carry margin stock or for any other
purpose which might constitute this transaction a "purpose credit" within the
meaning of said Regulations G, T, U, and X. Neither the Borrower nor any bank
acting on its behalf has taken or will take any action which might cause this
Agreement or the Note to violate Regulation G, T, U, or X or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
the Securities Exchange Act of 1934, in each case as now in effect or as the
same may hereafter be in effect. Neither the making of the Loan nor the use of
proceeds thereof will violate, or be inconsistent with, the provisions of
Regulation G, T, U, or X of said Board of Governors.
ARTICLE IV - AFFIRMATIVE COVENANTS
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For so long as this Agreement is in effect, and unless the Lender expressly
consents in writing otherwise or to the contrary, the Borrower hereby expressly
covenants and agrees as follows:
4.1. Upon request of the Lender, the Borrower shall, and shall cause VNB
to, make available its officers and employees to the Lender to discuss the
financial affairs of the Borrower and VNB, as applicable, at such reasonable
times and intervals as the Lender may request, and the Borrower shall promptly
confirm or furnish in reasonable detail whatever information relative to the
Borrower and VNB as the Lender or the Lender's authorized representative,
auditor or counsel may request.
4.2. The Borrower shall promptly furnish to the Lender: (1) Not later
than ninety (90) days after and as of the end of each fiscal year, audited
consolidated and consolidating financial statements of the Borrower and VNB, to
include a balance sheet and statement of income and stockholders' equity, all in
reasonable detail, prepared in accordance with generally accepted accounting
principles and certified by an independent accounting firm; (2) Not later than
thirty (30) days after and as of the end of each of the first three (3) quarters
of each fiscal year, unaudited consolidated and consolidating financial
statements of the Borrower and VNB, to include a balance sheet and statement of
income and stockholders' equity, all in reasonable detail, prepared in
accordance with generally accepted accounting principles (subject to changes
resulting from year-end adjustments), and certified by the chief financial
officer of each of the Borrower and VNB; (3) Not later than thirty (30) days
after and as of the end of each of the first three (3) quarters of each year,
copies of the Report of Condition and the Report of Income and Dividends of VNB
as filed by it with the Federal Deposit Insurance Corporation or the Office of
the Comptroller of the Currency; (4) Not later than thirty (30) days after and
as of the end of each fiscal quarter a certificate signed by an officer of the
Borrower and VNB as to compliance by the Borrower and VNB with the covenants
contained in Article IV and Article V of this Agreement and setting forth the
calculations necessary to demonstrate compliance with Sections 5.1, 5.2 and 5.3
hereof as of the end of the applicable fiscal quarter; (5) Immediately after the
occurrence of a material adverse change in the business, properties, condition,
management or prospects, financial or otherwise, of the Borrower or VNB, a
statement of the Borrower's or VNB's chief executive officer or chief financial
officer setting forth in reasonable detail such change and the action which the
Borrower and VNB propose to take with respect thereto; (6) From time to time
upon request of the Lender, such other information relating to the operations,
business, condition, management, properties and prospects of the Borrower and
VNB as the Lender may request; and (7) Notice of any supervisory or enforcement
action brought against the Borrower or VNB.
4.3. The Borrower shall, and shall cause VNB to, punctually pay and
discharge all taxes, assessments and governmental charges or levies imposed upon
it or upon its income or upon any of its property, as well as all claims of any
kind which, if unpaid, might by law become a lien or charge upon its property,
except taxes, assessments, charges, levies or claims which are in good faith
being timely litigated or otherwise properly contested by the Borrower or VNB
and as to which the contestant has established an adequate reserve on its books.
4.4. The Borrower shall, and shall cause VNB to, comply in all material
respects with the requirements of all provisions of constitutions, statutes,
rules, regulations and orders of
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governmental bodies or regulatory agencies applicable to it, and all orders and
decrees of all courts and arbitrators in proceedings or actions to which it is a
party or by which it is bound.
4.5. The Borrower shall cause VNB to maintain an adequate reserve for
loan losses that at all times shall be maintained at a level satisfactory to
VNB's primary regulator.
4.6. The Borrower shall cause VNB to insure that the financial and
managerial condition of VNB shall be maintained in compliance with all
regulatory standards and guidelines such that VNB's overall CAMEL rating shall
not be worse than 3.
4.7. The Borrower shall cause VNB's compensation programs, including
benefit and perquisite plans, director's fees, retainers and other compensation,
to be maintained at prudent levels, comparable to peer groups in the market
area.
4.8. The Borrower shall furnish to the Lender, not later than February
28, 1994, pro forma financial statements of the Borrower, which pro forma
financial statements shall be in form and substance reasonably satisfactory to
the Lender.
ARTICLE V - NEGATIVE COVENANTS
For so long as this Agreement is in effect, and unless the Lender expressly
consents in writing otherwise or to the contrary, the Borrower hereby expressly
covenants and agrees to the following negative covenants:
5.1. The Borrower shall not at any time permit the ratio of VNB's Capital
to total assets (the "Capital Ratio") during the term of this Agreement to be
less than the greater of (a) seven percent (7%) or (b) the minimum Capital Ratio
then required by VNB's primary federal regulator.
5.2. The Borrower shall not permit the Debt Service Coverage Ratio to be
less than 1.25:1.00 as of the end of each of its fiscal quarters. "Debt Service
Coverage Ratio" shall mean the ratio obtained by dividing (a) the amount of the
net income of VNB available under state or federal laws or regulations for the
payment of dividends to the shareholders of VNB during the Period plus
depreciation and amortization for such Period, by (b) the aggregate of all
principal and interest paid or due by the Borrower during the Period with
respect to indebtedness for borrowed money. "Period" shall mean the four fiscal
quarter period ending on the last day of the fiscal quarter of the Borrower
being tested; provided, however, that with respect to the first three fiscal
quarters after the date hereof, "Period" shall mean the period beginning on the
date hereof and ending on the last day of the fiscal quarter of the Borrower
being tested.
5.3. The Borrower shall not permit VNB to have a total shareholders
equity at any time of less than $5,400,000.
5.4. The Borrower shall not, and shall not permit VNB to, incur, create,
assume or permit to exist any indebtedness or liability for borrowed money other
than to the Lender or the Borrower, except that this covenant shall not apply to
deposits, repurchase agreements and other banking transactions entered into by
VNB in the ordinary course of its businesses.
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5.5. The Borrower shall not, and shall not permit VNB to, in any manner,
directly or indirectly, become a guarantor of any obligation of, or an endorser
of, or otherwise assume or become liable upon any notes, obligations, or other
indebtedness of any other Person except in connection with the depositing of
checks in the normal and ordinary course of business.
5.6. The Borrower shall not, and shall not permit VNB to, (a) transfer all
or substantially all of its assets to, consolidate with or merge with any other
Person, (b) acquire all or substantially all of the properties or capital stock
of any other Person, (c) create any subsidiary or enter into any partnership or
joint venture, or (d) change or amend VNB' s articles of association in any way
which would change the voting rights of the VNB Stock or result in the VNB Stock
constituting less than 100% (except as otherwise provided in Section 5.7 hereof)
of the total outstanding shares of VNB' s capital stock which has voting power
under general circumstances; provided, however, that VNB may open and operate
branch offices.
5.7. The Borrower shall not and shall not permit VNB (either directly or
indirectly by the issuance of rights or options for, or securities convertible
into, such shares) to issue, sell or otherwise dispose of any shares of any
class of its stock except that (a) VNB may issue or sell shares of its stock (i)
to the Borrower and (ii) to full-time employees as part of a bona fide stock
option plan, and (b) the Borrower may issue or sell shares of its stock to Lisa
Dillon and Branson Hobbs such that the aggregate number of shares held by such
Persons does not exceed 1700 shares, or 1.3% of the outstanding shares, of the
Borrower's capital stock.
5.8. The Borrower shall not, and shall not permit VNB to, incur or suffer
to exist any material accumulated funding deficiency within the meaning of the
Employee Retirement Income Security Act of 1974, as such Act may be amended
("ERISA"), or incur any material liability to the Pension Benefit Guaranty
Corporation established under ERISA (or any successor thereto under ERISA).
5.9. The Borrower shall not permit VNB to pay any dividends, make any
distributions, pay any management fees or otherwise transfer any assets to the
Borrower or any other shareholders; provided that, subject to the other
provisions hereof, VNB shall be entitled to distribute to the Borrower (a) to
the extent permitted by applicable regulations or laws, dividends or other
distributions not in excess of VNB's earnings, and (b) special dividends to
service or prepay the indebtedness to the Lender provided for herein.
5.10. The Borrower shall not permit VNB to invest in any entity which
engages in nonbanking activities.
5.11. Neither the Borrower nor VNB shall at any time engage in any
transaction with an Affiliate, nor make an assignment or other transfer of any
of its properties or assets to any Affiliate, except for the provision of
routine services and ordinary banking transactions other than loans, all of
which shall be on terms less advantageous to the Borrower or VNB than would be
the case if such transaction had been affected with a non-Affiliate.
ARTICLE VI - CONDITIONS PRECEDENT
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All of the Lender's obligations under this Agreement, including without
limitation any obligation to make the Loan to the Borrower, are subject to the
prior fulfillment of each of the following conditions, and the Borrower shall
exert its best efforts to cause each of the following conditions to be so
fulfilled:
6.1. All representations and warranties of the Borrower contained in this
Agreement and in each and every one of the other Financing Documents shall be
true, correct, complete and accurate in all respects on and as of the date the
Loan is advanced.
6.2. Each of the Borrower and VNB shall have duly and properly performed
in all respects all covenants, agreements, and obligations required by the terms
of this Agreement or any of the other Financing Documents to be performed by the
Borrower or VNB.
6.3. Neither the Borrower nor VNB shall have taken or permitted to be
taken any actions which would conflict with any of the provisions of Article IV
or Article V of this Agreement.
6.4. The Borrower shall have delivered, or shall have caused to be
delivered, to the Lender the following described documents:
(a) this Agreement duly executed by the Borrower;
(b) the Note duly executed by the Borrower;
(c) the Pledge Agreement duly executed by the Borrower;
(d) the certificates representing the VNB Stock together with a stock
power for each certificate duly executed by the Borrower;
(e) the loan certificate of the Borrower, including a certificate of
incumbency, together with appropriate attachments which shall include, without
limitation, the following: (i) the articles of incorporation of the Borrower,
certified by the Colorado Secretary of State; (ii) the by-laws of the Borrower;
(iii) a good standing certificate for the Borrower from the State of Colorado;
(iv) a copy of the corporate resolutions of the Borrower authorizing the
execution, delivery and performance by the Borrower of each of the Financing
Documents to which it is a party; (v) a true, complete and correct copy of any
shareholders' agreement or voting trust agreement with respect to the shares of
stock of the Borrower; and (vi) the charter documents of VNB, together with a
copy of all documents executed and/or delivered in connection with the
Reorganization;
(f) the opinion of Kilpatrick & Cody, counsel to the Borrower and
VNB, addressed to the Lender and satisfactory to the Lender, dated the date
hereof; and
(g) such other documents, instruments and agreements as may be
reasonably required by the Lender or the Lender's counsel in connection the Loan
hereunder.
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6.5. No Event of Default or event which, with the giving of notice or
passage of time (or both), would constitute an Event of Default under the terms
of this Agreement, shall have occurred.
6.6. All other matters incidental to the Loan hereunder shall be
satisfactory to the Lender, including, without limitation, the most recently
prepared financial statements (including, without limitation, any pro forma
financial statements) of the Borrower and VNB.
6.7. The Lender shall have received evidence satisfactory to it that the
Federal Reserve Board has approved the transfer to the Borrower of the stock of
VNB currently held by the Shareholders, all required waiting periods with
respect thereto shall have expired (without comment or objection), and all
conditions or requirements imposed by any governmental agency, authority or body
in connection with such approval shall have been met or fulfilled.
6.8. All obligations of the Original Borrowers under the Original Loan
Agreement and all documents executed in connection therewith (collectively, the
"Original Loan Documents") shall have been paid and performed in full, and the
Original Loan Documents shall have been terminated and cancelled.
ARTICLE VII - EVENTS OF DEFAULT
The occurrence of any one or more of the following events will constitute
an event of default (herein called an "Event of Default") by the Borrower under
this Agreement:
7.1. Failure of the Borrower punctually to make payment of any amount
payable, whether principal or interest, on any of the Liabilities within 5 days
after the same becomes due and payable, whether at maturity, or at a date fixed
for any prepayment or partial prepayment, or by acceleration or otherwise.
7.2. If any statement, representation, or warranty of the Borrower made
in this Agreement or in any of the other Financing Documents at any time
furnished by or on behalf of the Borrower to the Lender proves to have been
untrue, incorrect, misleading, or incomplete in any material respect as of the
date made.
7.3. Failure of the Borrower punctually and fully to perform, observe,
discharge or comply with any of the covenants set forth in Sections 4.5, 4.6,
4.7, 5.1, 5.2, 5.3, 5.10 or 5.11 of this Agreement.
7.4. Failure of the Borrower punctually and fully to perform, observe,
discharge or comply with any of the other covenants set forth in this Agreement,
which failure is not cured within thirty (30) days after notice from the Lender
to the Borrower.
7.5. The occurrence of a default, an event of default or an Event of
Default under any of the other Financing Documents.
7.6. If the Borrower or VNB becomes insolvent or makes an assignment for
the benefit of creditors; or if any action is brought by the Borrower or VNB
seeking its dissolution or
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liquidation of its assets or seeking the appointment of a trustee, interim
trustee, receiver, or other custodian for any of its property; or if the
Borrower or VNB commences a voluntary case under the Federal Bankruptcy Code; or
if any reorganization or arrangement proceeding is instituted by the Borrower or
VNB for the settlement, readjustment, composition or extension of any of its
debts upon any terms; or if any action or petition is otherwise brought by the
Borrower or VNB seeking similar relief or alleging that it is insolvent or
unable to pay its debts as they mature.
7.7. If any action is brought against the Borrower or VNB seeking its
dissolution or liquidation of any of its assets or seeking the appointment of a
trustee, interim trustee, receiver or other custodian for any of its property,
and such action is consented to or acquiesced in by the Borrower or VNB or is
not dismissed within 90 days of the date upon which it was instituted; or if any
proceeding under the Federal Bankruptcy Code is instituted against the Borrower
or VNB and (i) an order for relief is entered in such proceeding or (ii) such
proceeding is consented to or acquiesced in by the Borrower or VNB or is not
dismissed within 90 days of the date upon which it was instituted; or if any
reorganization or arrangement proceeding is instituted against the Borrower or
VNB for the settlement, readjustment, composition, or extension of any of its
debts upon any terms, and such proceeding is consented to or acquiesced in by
the Borrower or VNB or is not dismissed within 90 days of the date upon which it
was instituted; or if any action or petition is otherwise brought against the
Borrower or VNB seeking similar relief or alleging that it is insolvent, unable
to pay its debts as they mature, or generally not paying its debts as they
become due, and such action or petition is consented to or acquiesced in by the
Borrower or VNB or is not dismissed within 90 days of the date upon which it was
brought.
7.8. If a "change of control," as defined in the Bank Holding Company Act
of 1956, as amended, of VNB occurs.
ARTICLE VIII - REMEDIES UPON DEFAULT
8.1. Upon the occurrence of an Event of Default:
(a) Any of the Liabilities may (notwithstanding any provisions
contained therein or herein to the contrary), at the option of the Lender and
without presentment, demand, notice or protest of any kind (all of which are
expressly waived by the Borrower in this Agreement), be declared due and
payable, whereupon they immediately will become due and payable.
(b) The Lender may also, at its option, and without notice or demand
of any kind, exercise from time to time any and all rights and remedies
available to it under this Agreement or under any of the other Financing
Documents, as well as exercise from time to time any and all rights and remedies
available to a secured party when a debtor is in default under a security
agreement as provided in the Uniform Commercial Code of Georgia, or available to
the Lender under any other applicable law or in equity, including without
limitation the right to any deficiency remaining after disposition of the
Collateral.
(c) The Borrower shall pay all of the reasonable costs and expenses
incurred by the Lender in enforcing its rights under this Agreement and the
other Financing Documents. In
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the event any claim under this Agreement or under any of the other Financing
Documents is referred to an attorney for collection, or collected by or through
an attorney at law, the Borrower will be liable to the Lender for all expenses
incurred by it in seeking to collect the Liabilities or to enforce its rights
hereunder, in the other Financing Documents or in the Collateral, including,
without limitation, reasonable attorneys' fees (but not to exceed actual fees
incurred).
(d) Notwithstanding anything herein to the contrary, unless an Event
of Default occurs under Section 7.6, 7.7 or 7.8 above, the Lender shall give the
Borrower not less than 30 days prior written notice before it exercises any of
its rights and remedies under this Article VIII or under any of the other
Financing Documents and the Borrower shall have the opportunity during such 30-
day period to cure any existing Event of Default.
8.2. Any proceeds from disposition of any of the Collateral may be
applied by the Lender first to the payment of all expenses and costs actually
incurred by the Lender in collecting such Liabilities, in enforcing the rights
of the Lender under each and every one of the Financing Documents and in
collecting, retaking, holding, preparing the Collateral for and advertising the
sale or other disposition of and realizing upon the Collateral, including,
without limitation, reasonable attorneys' fees (but not to exceed actual fees
incurred) as well as all other legal expenses and court costs. Any balance of
such proceeds may be applied by the Lender toward the payment of such of the
Liabilities and in such order of application as the Lender may from time to time
elect. The Lender shall pay the surplus, if any, to the Borrower.
ARTICLE IX - MISCELLANEOUS
9.1. Time is of the essence of this Agreement.
9.2. This Agreement, together with all of the other Financing Documents,
supersedes all prior discussions, understandings and agreements by and between
the Borrower and the Lender with respect to the Loan and the Collateral, and
together they constitute the sole and entire agreement between the parties.
9.3. This Agreement and the security interests and security title
conveyed under the Financing Documents shall remain in full force and effect
until such time as (i) the Liabilities are repaid in full, (ii) the Lender is
under no obligation to make loans or other financial accommodations to the
Borrower, and (iii) either party in writing notifies the other that it is
thereby terminating this Agreement.
9.4. The Lender will not be deemed as a consequence of any act, delay,
failure, omission, or forbearance (including without limitation failure to
exercise its rights of accelerating the maturity of any of the Liabilities or
other indulgences granted from time to time by the Lender) or for any other
reason: (1) to have waived, or to be estopped from exercising, any of its rights
or remedies under this Agreement or under any of the other Financing Documents,
or (2) to have modified, changed, amended, terminated, rescinded, or superseded
any of the terms of this Agreement or of any of the other Financing Documents
unless such waiver, modification, amendment, change, termination, rescission, or
supersession is express, in writing and signed by a duly authorized officer of
the Lender. No single or partial exercise by the Lender of any right or
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remedy will preclude other or further exercise thereof or preclude the exercise
of any right or remedy, and a waiver expressly made in writing on one occasion
will be effective only in that specific instance and only for the precise
purpose for which given, and will not be construed as a consent to or a waiver
of any right or remedy on any future occasion.
9.5. Except as provided otherwise in this Agreement, all notices and
other communications under this Agreement are to be in writing and are to be
deemed to have been duly given and to be effective upon delivery to the party to
whom they are directed. If sent by U.S. mail, first class, certified, return
receipt requested, postage prepaid, and addressed to the Lender or to the
Borrower at their respective addresses set forth below, such notices, demands
and other communications are to be deemed to have been delivered on the second
business day after being so posted. If sent by reputable commercial overnight
delivery service or telecopy addressed to the Lender or the Borrower at their
respective addresses set forth below, such notices, demands and other
communications are to be deemed to have been delivered one (1) business day
after being delivered to such delivery service or sent by telecopy. Either the
Lender or the Borrower may, by written notice to the other, designate a
different address for receiving notices under this Agreement; provided, however,
that no such change of address will be effective until written notice thereof is
actually received by the party to whom such change of address is sent.
9.6. The Borrower may not, without the consent of the Lender, assign any
of its rights or duties hereunder or under any of the other Financing Documents.
9.7. This Agreement and all of the other Financing Documents have been
made and delivered in the State of Georgia, and the terms, provisions and
performance thereof are in all respects, including without limitation all
matters of construction, interpretation, validity, enforcement, and performance,
to be construed in accordance with and governed by the laws of that State,
including without limitation the Uniform Commercial Code of Georgia, as amended
and in effect on the date of this Agreement. Wherever possible, each provision
of this Agreement and of each and every one of the other Financing Documents is
to be interpreted in such manner as to be effective and valid under applicable
law, but if any provision thereof is prohibited or invalid under such law, such
provision is to be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement or of any of the other Financing
Documents.
9.8. "Herein," "hereof," and "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular article,
paragraph, section or other subdivision.
9.9. The titles of the Articles appear as a matter of convenience only
and shall not affect the interpretation hereof.
9.10. Words importing the singular number shall include the plural number
and vice versa, and pronouns used shall be deemed to cover all genders.
9.11. The Borrower agrees to promptly pay:
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(a) All reasonable out-of-pocket expenses of the Lender in connection
with the preparation, negotiation, execution, and delivery of this Agreement and
the other Financing Documents, the transactions contemplated hereunder and
thereunder, and the making of the Loan, including, but not limited to the
reasonable and customary fees and disbursements of counsel for the Lender;
(b) All reasonable out-of-pocket expenses of the Lender in connection
with the preparation and negotiation of any waiver, amendment, or consent
relating to this Agreement or the other Financing Documents whether or not
executed, including, but not limited to, the reasonable and customary fees and
disbursements of counsel for the Lender; and
(c) All reasonable out-of-pocket costs and expenses of collection if
default is made in the payment of the Note, which in each case shall include
reasonable and customary fees and out-of-pocket expenses of counsel for the
Lender, and the fees and out-of-pocket expenses of any experts, agents, or
consultants of the Lender.
9.12. Any brokerage commission or finder's fee payable to any Person in
connection with the transactions contemplated herein shall be payable by the
Borrower or VNB, or both of them, and not by the Lender. The Borrower hereby
indemnifies and agrees to hold the Lender harmless from and against any and all
losses, liabilities, damages, costs and expenses which may be suffered or
incurred by the Lender in respect of any claim, suit, action or cause of action
now or hereafter asserted by a broker or finder or any Person acting in a
similar capacity arising from or in connection with the execution and delivery
of this Agreement or any other Financing Document or the consummation of the
transactions contemplated herein or therein.
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IN WITNESS WHEREOF, the Lender has executed this Agreement, and the
Borrower has executed this Agreement under seal, all as of the day and year
first above written.
BORROWER:
BANK OF COLORADO HOLDING COMPANY, a Colorado
corporation
By: /s/ Lisa M. Dillon
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Title: President
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[CORPORATE SEAL]
Attest: /s/ Samantha Diedrich
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Title: Vice President/Secretary
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Address: 108 South Frontage Road West
Vail, Colorado 81657
LENDER:
BARNETT BANK OF SOUTHWEST FLORIDA
By: /s/
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Title: Vice President
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Address: Barnett Bank of S.W. Florida
P.O. Box 1478
Sarasota, FL 34230
15
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EXHIBIT 10.3
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VAIL BANKS, INC.
AMENDED AND RESTATED
STOCK INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
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<TABLE>
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ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION......................... 1
1.1 Establishment of the Plan................................. 1
1.2 Purpose of the Plan....................................... 1
1.3 Duration of the Plan...................................... 2
ARTICLE 2. DEFINITIONS.................................................. 2
ARTICLE 3. ADMINISTRATION............................................... 7
3.1 The Committee............................................. 7
3.2 Authority of the Committee................................ 8
3.3 Decisions Binding......................................... 8
ARTICLE 4. SHARES SUBJECT TO THE PLAN................................... 9
4.1 Number of Shares........................................... 9
4.2 Lapsed Awards.............................................. 9
4.3 Adjustments In Authorized Shares........................... 10
ARTICLE 5. ELIGIBILITY AND PARTICIPATION................................ 10
ARTICLE 6. STOCK OPTIONS................................................ 11
6.1 Grant of Options.......................................... 11
6.2 Agreement................................................. 11
6.3 Option Price.............................................. 12
6.4 Duration of Options....................................... 12
6.5 Exercise of Options....................................... 12
6.6 Payment................................................... 13
6.7 Limited Transferability................................... 13
6.8 Shareholder Rights........................................ 14
ARTICLE 7. RESTRICTED STOCK; STOCK AWARDS............................... 14
7.1 Grants.................................................... 14
7.2 Restricted Period; Lapse of Restrictions.................. 15
7.3 Rights of Holder; Limitations Thereon..................... 16
7.4 Delivery of Unrestricted Shares........................... 17
7.5 Nonassignability of Restricted Stock...................... 17
</TABLE>
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<TABLE>
<S> <C>
ARTICLE 8. PERFORMANCE SHARE AWARDS...................................... 18
8.1 Award...................................................... 18
8.2 Earning the Award.......................................... 18
8.3 Payment.................................................... 18
8.4 Shareholder Rights......................................... 19
ARTICLE 9. BENEFICIARY DESIGNATION....................................... 19
ARTICLE 10. DEFERRALS..................................................... 20
ARTICLE 11. RIGHTS OF EMPLOYEES........................................... 20
11.1 Employment................................................ 20
11.2 Participation............................................. 21
ARTICLE 12. CHANGE IN CONTROL............................................. 21
12.1 Definition................................................ 21
12.2 Limitation on Awards...................................... 23
ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION....................... 24
13.1 Amendment, Modification and Termination................... 24
13.2 Awards Previously Granted................................. 24
13.3 Compliance With Code Section 162(m)....................... 24
ARTICLE 14. WITHHOLDING................................................... 25
14.1 Tax Withholding........................................... 25
14.2 Share Withholding......................................... 25
ARTICLE 15. INDEMNIFICATION............................................... 26
ARTICLE 16. SUCCESSORS.................................................... 26
ARTICLE 17. LEGAL CONSTRUCTION............................................ 27
17.1 Gender and Number......................................... 27
17.2 Severability.............................................. 27
17.3 Requirements of Law....................................... 27
17.4 Regulatory Approvals and Listing.......................... 27
17.5 Governing Law............................................. 28
</TABLE>
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VAIL BANKS, INC.
AMENDED AND RESTATED
STOCK INCENTIVE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. Vail Banks, Inc., a Colorado bank holding
-------------------------
company (hereinafter referred to as the "COMPANY"), hereby amends and restates
its stock option and incentive award plan, as adopted by the Board of Directors
and ratified by the Shareholders of the Company on April 20, 1998, the "Vail
Banks, Inc. Amended and Restated Stock Incentive Plan" (the "PLAN"), as set
forth in this document. The Plan permits the grant of Incentive Stock Options,
Nonqualified Stock Options, Restricted Stock, Stock Awards, and Performance
Share Awards.
The Plan shall become effective on the date it is approved by the Board of
Directors (the "EFFECTIVE DATE"), subject to approval of the Plan by the
Company's stockholders within the 12-month period immediately thereafter, and
shall remain in effect as provided in SECTION 1.3.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to secure for
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the Company and their shareholders the benefits of the incentive inherent in
stock ownership in the Company by employees, directors, and other persons who
perform services for the Company and its subsidiaries, who are responsible for
its future growth and continued success. The Plan promotes the success and
enhances the value of the Company by linking the personal interests of
Participants (as defined below) to those of the Company's shareholders, and by
providing Participants with an incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract and retain the services of Participants upon whose
judgment, interest and special effort the successful conduct of its operation
largely depends.
<PAGE>
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective
--------------------
Date, and shall remain in effect, subject to the right of the Board of
Directors to amend or terminate the Plan at any time pursuant to ARTICLE 13,
until the day prior to the tenth (10th) anniversary of the Effective Date.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Agreement" means an agreement entered into by each Participant and
---------
the Company, setting forth the terms and provisions applicable to
Awards granted to Participants under this Plan.
(b) "Award" means, individually or collectively, a grant under this Plan
-----
of Incentive Stock Options, Nonqualified Stock Options, Restricted
Stock, Stock Awards, or Performance Share Awards.
(c) "Beneficial Owner" or "Beneficial Ownership" shall have the meaning
---------------- --------------------
ascribed to such term in Rule 13d-3 of the Exchange Act.
(d) "Board" or "Board of Directors" means the Board of Directors of the
----- ------------------
Company.
(e) "Cause" means: (i) willful misconduct on the part of a Participant
-----
that is materially detrimental to the Company; or (ii) the conviction
of a Participant for the commission of a felony. The existence of
"Cause" under either (i) or (ii) shall be determined by the Committee.
Notwithstanding the foregoing, if the Participant has entered into an
employment agreement that is binding as of the date of employment
termination, and if
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such employment agreement defines "Cause," and/or provides a means of
determining whether "Cause" exists, such definition of "Cause" and
means of determining its existence shall supersede this provision.
(f) "Code" means the Internal Revenue Code of 1986, as amended from time
----
to time.
(g) "Committee" means a committee of Directors appointed by the Board to
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administer the Plan with respect to grants of Awards, as specified in
ARTICLE 3, and to perform the function set forth therein. To the
extent necessary or desirable, the Committee (or a designated
subcommittee of the Committee) shall consist only of Non-Employee
Directors.
(h) "Common Stock" means the common stock of the Company, par value $1.00
------------
per share.
(i) "Company" means Vail Banks, Inc., a Colorado bank holding company, or
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any successor thereto as provided in ARTICLE 16.
(j) "Director" means any individual who is a member of the Board of
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Directors of the Company.
(k) "Disability" shall have the meaning ascribed to such term in the
----------
Company's long-term disability plan covering the Participant, or in
the absence of such plan, a meaning consistent with Section 22(e)(3)
of the Code.
(l) "Employee" means any employee of the Company, or the Company's
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Subsidiaries. Directors who are not otherwise employed by the Company
or the Company's
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Subsidiaries are not considered Employees under this Plan, but are
eligible to participate in the Plan.
(m) "Effective Date" shall have the meaning ascribed to such term in
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SECTION 1.1.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended
------------
from time to time, or any successor act thereto.
(o) "Fair Market Value" shall be determined as follows:
-----------------
(i) If, on the relevant date, the Shares are traded on a national or
regional securities exchange or on The Nasdaq Stock Market
("Nasdaq") and closing sale prices for the Shares are
customarily quoted, on the basis of the closing sale price on
the principal securities exchange on which the Shares may then
be traded or, if there is no such sale on the relevant date,
then on the immediately preceding day on which a sale was
reported;
(ii) If, on the relevant date, the Shares are not listed on any
securities exchange or traded on Nasdaq, but nevertheless are
publicly traded and reported on Nasdaq without closing sale
prices for the Shares being customarily quoted, on the basis of
the mean between the closing bid and asked quotations in such
other over-the-counter market as reported by Nasdaq; but, if
there are no bid and asked quotations in the over-the-counter
market as reported by Nasdaq on that date, then the mean between
the closing bid and asked quotations in the over-the-counter
market as reported by Nasdaq on the immediately preceding day
such bid and asked prices were quoted; and
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(iii) If, on the relevant date, the Shares are not publicly traded as
described in (i) or (ii), on the basis of the good faith
determination of the Board or, if the Board so directs, by the
Committee.
(p) "Incentive Stock Option" or "ISO" means an option to purchase Shares
-------------------------------
granted under ARTICLE 6 which is designated as an Incentive Stock
Option and is intended to meet the requirements of Section 422 of the
Code.
(q) "Insider" shall mean an Employee who is, on the relevant date, an
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officer or a director, a Director, or a ten percent (10%) beneficial
owner of any class of the Company's equity securities that is
registered pursuant to Section 12 of the Exchange Act or any successor
provision, as "officer" and "director" are defined under Section 16 of
the Exchange Act.
(r) "Named Executive Officer" means a Participant who, as of the date of
-----------------------
vesting and/or payout of an Award is one of the group of "covered
employees," as defined in the regulations promulgated under Code
Section 162(m), or any successor statute.
(s) "Non-Employee Director" means a Director of the Company who satisfies
---------------------
the requirements under Rule 16b-3(b)(3) of the Exchange Act.
(t) "Nonqualified Stock Option" or "NQSO" means an option to purchase
-----------------------------------
Shares granted under ARTICLE 6, and which is not intended to meet the
requirements of Code Section 422.
(u) "Option" means an Incentive Stock Option or a Nonqualified Stock
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Option.
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<PAGE>
(v) "Option Price" means the price at which a Share may be purchased by a
------------
Participant pursuant to an Option, as determined by the Committee.
The Option Price may not be less than the Fair Market Value of a Share
on the date the Option is granted.
(w) "Participant" means an Employee, a Director, or other person who
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performs services for the Company or a Subsidiary, who has been
determined by the Committee to contribute significantly to the profits
or growth of the Company and who has been granted an Award under the
Plan which is outstanding.
(x) "Performance Share Award" means an Award, which, in accordance with
-----------------------
and subject to an Agreement, will entitle the Participant, or his
estate or beneficiary in the event of the Participant's death, to
receive cash, Shares or a combination thereof.
(y) "Person" shall have the meaning ascribed to such term in Section
------
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d) thereof.
(z) "Retirement" shall mean retiring from employment with the Company or
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any Subsidiary on or after attaining age 65.
(aa) "Restricted Stock" means an Award of Shares granted in accordance with
----------------
the terms of ARTICLE 7 and the other provisions of the Plan, and which
is nontransferable and subject to a substantial risk of forfeiture.
Shares shall cease to be Restricted Stock when, in accordance with the
terms hereof and the applicable Agreement, they become transferable
and free of substantial risk of forfeiture.
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(bb) "Shares" means the shares of Common Stock of the Company (including
------
any new, additional or different stock or securities resulting from
the changes described in Section 4.3).
(cc) "Stock Award" means a grant of Shares under ARTICLE 7 that is not
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generally subject to restrictions and pursuant to which a certificate
for the Shares is transferred to the Employee.
(dd) "Subsidiary" means any corporation, partnership, joint venture or
----------
other entity in which the Company has a fifty percent (50%) or greater
voting interest.
ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. Subject to the right of the Board to ratify
-------------
decisions of the Committee,the Plan shall be administered by the Compensation
Committee of the Board, or by any other Committee appointed by the Board that is
granted authority to administer the Plan. The members of the Committee shall be
appointed from time to time by, and shall serve at the discretion of, the Board
of Directors.
3.2 AUTHORITY OF THE COMMITTEE. Subject to the right of the Board to
--------------------------
ratify decisions of the Committee,the Committee shall have full power to select
the Employees, Directors, and other persons who perform services for the Company
or a Subsidiary, who are responsible for the future growth and success of the
Company who shall participate in the Plan (who may change from year to year);
determine the size and types of Awards; determine the terms and conditions of
Awards in a manner consistent with the Plan (including conditions on the
exercisability of all or a part of an Option, restrictions on transferability
and vesting provisions on Restricted Stock or Performance Share Awards
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<PAGE>
and the duration of the Awards); construe and interpret the Plan and any
agreement or instrument entered into under the Plan; establish, amend or waive
rules and regulations for the Plan's administration; and (subject to the
provisions of ARTICLE 13) amend the terms and conditions of any outstanding
Award to the extent such terms and conditions are within the discretion of the
Committee as provided in the Plan, including accelerating the time any Option
may be exercised and establishing different terms and conditions relating to the
effect of the termination of employment or other services to the Company.
Further, the Committee shall make all other determinations which may be
necessary or advisable in the Committee's opinion for the administration of the
Plan. All expenses of administering this Plan shall be borne by the Company.
3.3 DECISIONS BINDING. All determinations and decisions made by
-----------------
the Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Board shall be final, conclusive and binding on all Persons,
including the Company, the shareholders, Employees, Participants and their
estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in SECTION 4.3,
----------------
the total number of Shares available for grant of Awards under the Plan shall
not exceed fifteen percent (15%) of the total issued and outstanding Shares as
of the date any Award is granted, including for purposes of such calculation the
number of Shares into which other securities or instruments (e.g., convertible
preferred stock or convertible debentures, but not outstanding options or
warrants to acquire stock) issued by the Company are currently convertible;
provided, that the number of Shares available for grant as ISOs under the Plan
shall not exceed an aggregate of 50,000 Shares. The Shares may, in the
discretion of the Company, be either authorized but unissued Shares or Shares
held as treasury shares, including Shares purchased by the Company.
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<PAGE>
The following rules shall apply for purposes of the determination of the
number of Shares available for grant under the Plan:
(a) While an Option, Stock Award, Restricted Stock Award or
Performance Share Award is outstanding, it shall be counted
against the authorized pool of Shares, regardless of its vested
status.
(b) The grant of an Option, Stock Award, Restricted Stock Award or
Performance Share Award shall reduce the Shares available for
grant under the Plan by the number of Shares subject to such
Award.
4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled,
-------------
terminates, expires or lapses for any reason, or if Shares are withheld in
payment of the Option Price or for withholding taxes, any Shares subject to such
Award or that are withheld shall again be available for the grant of an Award
under the Plan. However, in the event that prior to the Award's cancellation,
termination, expiration or lapse, the holder of the Award at any time received
one or more "benefits of ownership" pursuant to such Award (as defined by the
Securities and Exchange Commission, pursuant to any rule or interpretation
promulgated under Section 16 of the Exchange Act), the Shares subject to such
Award shall not again be made available for regrant under the Plan.
4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in
--------------------------------
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether or
not such reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Company, such adjustment
shall be made in the number and class of Shares which may be delivered under the
Plan, and in the number and class of
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<PAGE>
and/or price of Shares subject to outstanding Awards granted under the Plan, as
may be determined to be appropriate and equitable by the Committee, in its sole
discretion, to prevent dilution or enlargement of rights; provided, however,
that the number of Shares subject to any Award shall always be a whole number
and the Committee shall make such adjustments as are necessary to insure Awards
of whole Shares.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
Any Employee of the Company or any Subsidiary, including any such Employee
who is also a director of the Company or any Subsidiary, any non-employee
Director, and any other person who performs services for the Company or a
Subsidiary, whose judgment, initiative and efforts contribute or may be expected
to contribute materially to the successful performance of the Company or any
Subsidiary shall be eligible to receive an Award under the Plan. In determining
the individuals to whom such an Award shall be granted and the number of Shares
which may be granted pursuant to that Award, the Committee shall take into
account the duties of the respective individual, his or her present and
potential contributions to the success of the Company or any Subsidiary, and
such other factors as the Committee shall deem relevant in connection with
accomplishing the purpose of the Plan.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the
----------------
Plan, Options may be granted to Participants at any time and from time to time
as shall be determined by the Committee. The Committee shall have discretion in
determining the number of Shares subject to Options granted to each Participant.
No Participant may be granted ISOs (under the Plan and all other incentive stock
option plans of the Company and any Subsidiary) which are first exercisable in
any calendar year for
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Common Stock having an aggregate Fair Market Value (determined as of the date an
Option is granted) that exceeds $100,000. The preceding annual limit shall not
apply to NQSOs. The Committee may grant a Participant ISOs, NQSOs or a
combination thereof, and may vary such Awards among Participants.
6.2 AGREEMENT. Each Option grant shall be evidenced by an Agreement
---------
that shall specify the Option Price, the duration of the Option, the number of
Shares to which the Option pertains and such other provisions as the Committee
shall determine. The Option Agreement shall further specify whether the Award
is intended to be an ISO or an NQSO. Any portion of an Option that is not
designated as an ISO or otherwise fails or is not qualified as an ISO (even if
designated as an ISO) shall be a NQSO.
6.3 OPTION PRICE. The Option Price for each grant of an ISO or NQSO
------------
shall not be less than one hundred percent (100%) of the Fair Market Value of a
Share on the date the ISO is granted. In no event, however, shall any
Participant who, at any time would otherwise be granted an Option, owns (within
the meaning of Section 424(d) of the Code) stock of the Company possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company be eligible to receive an ISO at an Option Price less than
one hundred ten percent (110%) of the Fair Market Value of a share on the date
the ISO is granted.
6.4 DURATION OF OPTIONS. Each Option shall expire at such time as
-------------------
the Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the tenth (10th) anniversary date of its
grant; provided, further, however, that any ISO granted to any Participant who
at such time owns (within the meaning of Section 424(d) of the Code) stock of
the Company possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, shall be exercisable not later
than the fifth (5th) anniversary date of its grant.
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6.5 EXERCISE OF OPTIONS. Options granted under the Plan shall be
-------------------
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, including conditions related to
the employment of the Participant with the Company or any Subsidiary, which need
not be the same for each grant or for each Participant. Each Option shall be
exercisable for such number of Shares and at such time or times, including
periodic installments, as may be determined by the Committee at the time of the
grant. The Committee may provide in the Agreement for automatic accelerated
vesting and other rights upon the occurrence of a Change in Control of the
Company which need not be the same for each grant or each Participant. Except as
otherwise provided in the Agreement and ARTICLE 12, the right to purchase Shares
that are exercisable in periodic installments shall be cumulative so that when
the right to purchase any Shares has accrued, such Shares or any part thereof
may be purchased at any time thereafter until the expiration or termination of
the Option.
6.6 PAYMENT. Options shall be exercised by the delivery of a written
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notice of exercise to the Company, setting forth the number of Shares with
respect to which the Option is to be exercised, accompanied by full payment for
the Shares. The Option Price upon exercise of any Option shall be payable to
the Company in full, either: (a) in cash, (b) cash equivalent approved by the
Committee, (c) if approved by the Committee, by tendering previously acquired
Shares (or delivering a certification of ownership of such Shares) having an
aggregate Fair Market Value at the time of exercise equal to the total Option
Price (provided that the Shares which are tendered must have been held by the
Participant for six months [if required for accounting purposes] and for the
period required by law, if any, prior to their tender to satisfy the Option
Price), or (d) by a combination of (a), (b) and (c). The Committee also may
allow cashless exercises as permitted under Federal Reserve Board's Regulation
T, subject to applicable securities law restrictions, or by any other means
which the Committee determines to be consistent with the Plan's purpose and
applicable law.
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As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s), and may place appropriate
legends on the certificates representing such Shares.
6.7 LIMITED TRANSFERABILITY. Except as provided in the next paragraph,
-----------------------
any Option that is granted pursuant to this shall not be transferable by the
Participant otherwise than by will or by the laws of descent and distribution
and such Option shall be exercisable in the Participant's lifetime only by the
Participant.
If permitted by the Committee in the Agreement or in an amendment to an
Agreement, a Participant may transfer an Option granted hereunder, including but
not limited to transfers to members of his or her Immediate Family (as defined
below), to one or more trusts for the benefit of such Immediate Family members,
or to one or more partnerships where such Immediate Family members are the only
partners, if (i) the Participant does not receive any consideration in any form
whatsoever for such transfer, (ii) such transfer is permitted under applicable
tax laws, and (iii) the Participant is an Insider, such transfer is permitted
under Rule 16b-3 of the Exchange Act as in effect from time to time. Any Option
so transferred shall continue to be subject to the same terms and conditions in
the hands of the transferee as were applicable to said Option immediately prior
to the transfer thereof. Any reference in any such Agreement to the employment
by or performance of services for the Company by the Participant shall continue
to refer to the employment of, or performance by, the transferring Participant.
For purposes hereof, "IMMEDIATE FAMILY" shall mean the Participant and the
Participant's spouse, children and grandchildren.
6.8 SHAREHOLDER RIGHTS. No Participant shall have any rights as a
------------------
shareholder with respect to Shares subject to his Option until the issuance of
such Shares to the Participant pursuant to the exercise of such Option.
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ARTICLE 7. RESTRICTED STOCK; STOCK AWARDS
7.1 GRANTS. The Committee may from time to time in its discretion
------
grant Restricted Stock and Stock Awards to Participants and may determine the
number of Shares of Restricted Stock or Stock Awards to be granted. The
Committee shall determine the terms and conditions of, and the amount of
payment, if any, to be made by the Employee for, such Restricted Stock. A grant
of Restricted Stock may, in addition to other conditions, require the
Participant to pay for such Shares of Restricted Stock, but the Committee may
establish a price below Fair Market Value at which the Participant can purchase
the Shares of Restricted Stock. Each grant of Restricted Stock shall be
evidenced by an Agreement containing terms and conditions not inconsistent with
the Plan as the Committee shall determine to be appropriate in its sole
discretion. The Committee may require that Shares of Restricted Stock be subject
to a Shareholders Agreement, whether or not such Shares are vested.
7.2 RESTRICTED PERIOD; LAPSE OF RESTRICTIONS. At the time a grant of
----------------------------------------
Restricted Stock is made, the Committee shall establish a period or periods of
time (the "RESTRICTED PERIOD") applicable to such grant which, unless the
Committee otherwise provides, shall not be less than one year. Subject to the
other provisions of this SECTION 7, at the end of the Restricted Period all
restrictions shall lapse and the Restricted Stock shall vest in the Participant.
At the time a grant is made, the Committee may, in its discretion, prescribe
conditions for the incremental lapse of restrictions during the Restricted
Period and for the lapse or termination of restrictions upon the occurrence of
other conditions in addition to or other than the expiration of the Restricted
Period with respect to all or any portion of the Restricted Stock. Such
conditions may, but need not, include the following:
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<PAGE>
(a) The death, Disability or Retirement of the Employee to whom
Restricted Stock is granted, or
(b) The occurrence of a Change in Control (as defined in SECTION
12.1).
The Committee may also, in its discretion, shorten or terminate the Restricted
Period, or waive any conditions for the lapse or termination of restrictions
with respect to all or any portion of the Restricted Stock at any time after the
date the grant is made.
7.3 RIGHTS OF HOLDER; LIMITATIONS THEREON. Upon a grant of Restricted
-------------------------------------
Stock, a stock certificate (or certificates) representing the number of Shares
of Restricted Stock granted to the Participant shall be registered in the
Participant's name and shall be held in custody by the Company or a bank
selected by the Committee for the Participant's account. Following such
registration, the Participant shall have the rights and privileges of a
shareholder as to such Restricted Stock, including the right to receive
dividends, if and when declared by the Board of Directors, and to vote such
Restricted Stock, except that the right to receive cash dividends shall be the
right to receive such dividends either in cash currently or by payment in
Restricted Stock, as the Committee shall determine, and except further that, the
following restrictions shall apply:
(a) The Participant shall not be entitled to delivery of a
certificate until the expiration or termination of the
Restricted Period for the Shares represented by such certificate
and the satisfaction of any and all other conditions prescribed
by the Committee;
(b) None of the Shares of Restricted Stock may be sold, transferred,
assigned, pledged, or otherwise encumbered or disposed of during
the Restricted
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<PAGE>
Period and until the satisfaction of any and all other
conditions prescribed by the Committee; and
(c) All of the Shares of Restricted Stock that have not vested shall
be forfeited and all rights of the Participant to such Shares of
Restricted Stock shall terminate without further obligation on
the part of the Company, unless the Participant has remained an
employee (or non-Employee Director) of the Company or any of its
Subsidiaries, until the expiration or termination of the
Restricted Period and the satisfaction of any and all other
conditions prescribed by the Committee applicable to such Shares
of Restricted Stock. Upon the forfeiture of any shares of
Restricted Stock, such forfeited Shares shall be transferred to
the Company without further action by the Participant and shall,
in accordance with SECTION 4.2, again be available for grant
under the Plan.
With respect to any Shares received as a result of adjustments under
SECTION 4.3 hereof and any Shares received with respect to cash dividends
declared on Restricted Stock, the Participant shall have the same rights and
privileges, and be subject to the same restrictions, as are set forth in this
SECTION 7.
7.4 DELIVERY OF UNRESTRICTED SHARES. Upon the expiration or termination
-------------------------------
of the Restricted Period for any Shares of Restricted Stock and the satisfaction
of any and all other conditions prescribed by the Committee, the restrictions
applicable to such Shares of Restricted Stock shall lapse and a stock
certificate for the number of Shares of Restricted Stock with respect to which
the restrictions have lapsed shall be delivered, free of all such restrictions
except any that may be imposed by law, to the holder of the Restricted Stock.
The Company shall not be required to deliver any fractional Share but will pay,
in lieu thereof, the Fair Market Value (determined as of the date the
restrictions lapse) of such
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<PAGE>
fractional share to the holder thereof. Concurrently with the delivery of a
certificate for Restricted Stock, the holder shall be required to pay an amount
necessary to satisfy any applicable federal, state and local tax requirements as
set out in ARTICLE 14 below.
7.5 NONASSIGNABILITY OF RESTRICTED STOCK. Unless the Committee provides
------------------------------------
otherwise in the Agreement, no grant of, nor any right or interest of a
Participant in or to, any Restricted Stock, or in any instrument evidencing any
grant of Restricted Stock under the Plan, may be assigned, encumbered or
transferred except, in the event of the death of a Participant, by will or the
laws of descent and distribution.
ARTICLE 8. PERFORMANCE SHARE AWARDS
8.1 AWARD. The Committee may designate Participants to whom Performance
-----
Share Awards will be granted from time to time for no consideration and specify
the number of Shares covered by the Award.
8.2 EARNING THE AWARD. A Performance Share Award, or portion thereof,
-----------------
will be earned, and the Participant will be entitled to receive Shares, a cash
payment or a combination thereof, only upon the achievement by the Participant,
the Company, or a Subsidiary of such performance objectives as the Committee, in
its discretion, shall prescribe on the date of grant. To the extent required,
the performance objectives applicable to Awards to Named Executive Officers
intended to qualify under Code Section 162(m) shall be selected from among the
following measures: return on equity or assets, growth in equity or assets,
increase in book value,return on capital, economic value added and increase in
Fair Market Value of the Shares. The determination as to whether such objectives
have been achieved shall be made by the Committee, and such determination shall
be conclusive; provided, however, that the period in which such performance is
measured shall be at least one year.
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<PAGE>
8.3 PAYMENT. In the discretion of the Committee, the amount payable
-------
when a Performance Share Award is earned may be settled in cash, by the grant of
Shares or a combination of cash and Shares. The aggregate Fair Market Value of
the Shares received by the Participant pursuant to a Performance Share Award,
together with any cash paid to the Participant, shall be equal to the aggregate
Fair Market Value, on the date the Performance Shares are earned, of the number
of Shares equal to each Performance Share earned. A fractional share will not
be deliverable when a Performance Share Award is earned, but a cash payment will
be made in lieu thereof.
8.4 SHAREHOLDER RIGHTS. No Participant shall have, as a result of
------------------
receiving a Performance Share Award, any rights as a shareholder until and to
the extent that the Performance Shares are earned and Shares are transferred to
such Participant. If the Agreement so provides, a Participant may receive a
cash payment equal to the dividends that would have been payable with respect to
the number of Shares covered by the Award between (a) the date that the
Performance Shares are awarded and (b) the date that a transfer of Shares to the
Participant, cash settlement, or combination thereof is made pursuant to the
Performance Share Award. A Participant may not sell, transfer, pledge,
exchange, hypothecate, or otherwise dispose of a Performance Share Award or the
right to receive Shares thereunder other than by will or the laws of descent and
distribution. After a Performance Share Award is earned and paid in Shares, a
Participant will have all the rights of a shareholder with respect to the Shares
so awarded.
ARTICLE 9. BENEFICIARY DESIGNATION
To the extent applicable, each Participant under the Plan may, from time to
time, name any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid in case of his or
her death before he or she receives any or all of such
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<PAGE>
benefit. Each such designation shall revoke all prior designations by the same
Participant, shall be in a form prescribed by the Committee and shall be
effective only when filed by the Participant, in writing, with the Committee
during the Participant's lifetime. In the absence of any such designation,
benefits remaining unpaid at the Participant's death shall be paid to the
Participant's estate.
If required by the Committee, the spouse of a married Participant domiciled
in a community property jurisdiction shall join in any designation of a
beneficiary or beneficiaries other than the spouse.
ARTICLE 10. DEFERRALS
The Committee may permit a Participant to defer to another plan or program
such Participant's receipt of Shares or cash that would otherwise be due to such
Participant by virtue of the exercise of an Option, the vesting of Restricted
Stock, or the earning of a Performance Share Award. If any such deferral
election is required or permitted, the Committee shall, in its sole discretion,
establish rules and procedures for such payment deferrals.
ARTICLE 11. RIGHTS OF EMPLOYEES
11.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in
----------
any way the right of the Company or a Subsidiary to terminate any Participant's
employment by, or performance of services for, the Company at any time, nor
confer upon any Participant any right to continue in the employ or service of
the Company or a Subsidiary. For purposes of the Plan, transfer of employment
of a Participant between the Company and any one of its Subsidiaries (or between
Subsidiaries) shall not be deemed a termination of employment.
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<PAGE>
11.2 PARTICIPATION. No Employee shall have the right to be selected to
-------------
receive an Award under this Plan, or, having been so selected, to be selected to
receive a future Award.
ARTICLE 12. CHANGE IN CONTROL
12.1 DEFINITION. For purposes of the Plan, a "Change in Control" shall be
----------
deemed to have occurred if:
(a) An acquisition by any Person of Beneficial Ownership of the
Shares of the Company then outstanding (the "COMPANY COMMON
STOCK OUTSTANDING") or the voting securities of the Company then
outstanding entitled to vote generally in the election of
directors (the "COMPANY VOTING SECURITIES OUTSTANDING"), if such
acquisition of Beneficial Ownership results in the Person
beneficially owning (within the meaning of Rule 13d-3
promulgated under the Exchange Act) twenty-five percent (25%) or
more of the Company Common Stock Outstanding or twenty-five
percent (25%) or more of the combined voting power of the
Company Voting Securities Outstanding; provided, that
immediately prior to such acquisition such Person was not a
direct or indirect Beneficial Owner of twenty-five percent (25%)
or more of the Company Common Stock Outstanding or twenty-five
percent (25%) or more of the combined voting power of Company
Voting Securities Outstanding, as the case may be; or
(b) The approval by the shareholders of the Company of a
reorganization, merger, consolidation, complete liquidation or
dissolution of the Company, the sale or disposition of all or
substantially all of the assets of the Company
-20-
<PAGE>
or similar corporate transaction (in each case referred to in
this SECTION 12 as a "CORPORATE TRANSACTION") or, if
consummation of such Corporate Transaction is subject, at the
time of such approval by shareholders, to the consent of any
government or governmental agency, the obtaining of such consent
(either explicitly or implicitly);
(c) A change in the composition of the Board such that the
individuals who, as of the Effective Date, constitute the Board
(such Board shall be hereinafter referred to as the "INCUMBENT
BOARD") cease for any reason to constitute at least a majority
of the Board; provided, however, for purposes of this SECTION 12
that any individual who becomes a member of the Board subsequent
to the Effective Date whose election, or nomination for election
by the Company's shareholders, was approved by a vote of at
least a majority of those individuals who are members of the
Board and who were also members of the Incumbent Board (or
deemed to be such pursuant to this proviso) shall be considered
as though such individual were a member of the Incumbent Board;
but, provided, further, that any such individual whose initial
assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-
11 of Regulation 14A promulgated under the Exchange Act,
including any successor to such Rule), or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board, shall not be so considered as
a member of the Incumbent Board;
(d) The occurrence of such other events as may be designated by the
Committee in the agreement;
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<PAGE>
(e) Notwithstanding the provisions set forth in subsections (a) and
(b), the following shall not constitute a Change in Control for
purposes of this Plan: (1) any acquisition of Shares by, or
consummation of a Corporate Transaction with, any Subsidiary or
any employee benefit plan (or related trust) sponsored or
maintained by the Company or an affiliate; or (2) any
acquisition of Shares, or consummation of a Corporate
Transaction, following which more than fifty percent (50%) of,
respectively, the shares then outstanding of common stock of the
corporation resulting from such acquisition or Corporate
Transaction and the combined voting power of the voting
securities then outstanding of such corporation entitled to vote
generally in the election of directors is then beneficially
owned, directly or indirectly, by all or substantially all of
the individuals and entities who were Beneficial Owners,
respectively, of the Company Common Stock Outstanding and
Company Voting Securities Outstanding immediately prior to such
acquisition or Corporate Transaction in substantially the same
proportions as their ownership, immediately prior to such
acquisition or Corporate Transaction, of the Company Common
Stock Outstanding and Company Voting Securities Outstanding, as
the case may be.
12.2 LIMITATION ON AWARDS. Except as otherwise provided in the Agreement,
--------------------
if the right to receive or benefit from any Award under this Plan, either alone
or together with payments that a Participant has the right to receive from the
Company or a Subsidiary, would be subject to the rules governing "parachute
payments" and would result in the making of "excess parachute payments" (as
defined in Section 280G of the Code), all such payments shall be reduced to the
largest amount that will result in no portion being subject to the excise tax
imposed by Section 4999 of the Code.
-22-
<PAGE>
ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION
13.1 AMENDMENT, MODIFICATION AND TERMINATION. The Board may, at any time
---------------------------------------
and from time to time, alter, amend, suspend or terminate the Plan in whole or
in part; provided, that, unless approved by the holders of a majority of the
total number of Shares of the Company represented and voted at a meeting at
which a quorum is present within 12 months of the adoption of such amendment, no
amendment shall be made to the Plan if such amendment would (a) materially
modify the eligibility requirements provided in ARTICLE 5; (b) increase the
total number of Shares (except as provided in SECTION 4.3) which may be granted
under the Plan, as provided in SECTION 4.1; (c) extend the term of the Plan; or
(d) amend the Plan in any other manner which the Board, in its discretion,
determines should become effective only if approved by the shareholders even
though such shareholder approval is not expressly required by the Plan or by
law.
13.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or
-------------------------
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant holding such Award. The Committee shall, with the written consent
of the Participant holding such Award, have the authority to cancel Awards
outstanding and grant replacement Awards therefor.
13.3 COMPLIANCE WITH CODE SECTION 162(m). At all times when the
-----------------------------------
Committee determines that compliance with Code Section 162(m) is required or
desired, all Awards granted under this Plan to Named Executive Officers shall
comply with the requirements of Code Section 162(m). In addition, in the event
that changes are made to Code Section 162(m) to permit greater flexibility with
respect to any Award or Awards under the Plan, the Committee may, subject to
this ARTICLE 13, make any adjustments it deem appropriate.
-23-
<PAGE>
ARTICLE 14. WITHHOLDING
14.1 TAX WITHHOLDING. The Company shall have the power and the right
---------------
to deduct or withhold, or require a Participant to remit to the Company,
an amount sufficient to satisfy federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising in connection with an Award under this Plan.
14.2 SHARE WITHHOLDING. With respect to withholding required upon the
-----------------
exercise of Options, or upon any other taxable event arising as a result of
Awards granted hereunder which are to be paid in the form of Shares,
Participants may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date the tax is to be determined equal
to the minimum statutory total tax which could be imposed on the transaction.
All elections shall be irrevocable, made in writing, signed by the Participant,
and elections by nsiders shall additionally comply with all legal requirements
applicable to Share transactions by such Participants.
ARTICLE 15. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with the Company's approval, or paid by him in satisfaction of any judgment in
any such action, suit or proceeding against him, provided he shall give
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<PAGE>
the Company an opportunity, at its own expense, to handle and defend the same
before he undertakes to handle and defend it on his own behalf. The foregoing
right of indemnification shall be in addition to any other rights of
indemnification to which such persons may be entitled under the Company's
Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them or hold them harmless.
ARTICLE 16. SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE 17. LEGAL CONSTRUCTION
17.1 GENDER AND NUMBER. Except where otherwise indicated by the
-----------------
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
17.2 SEVERABILITY. In the event any provision of the Plan shall be held
------------
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
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<PAGE>
17.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of
-------------------
Shares under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
17.4 REGULATORY APPROVALS AND LISTING. The Company shall not be required
--------------------------------
to issue any certificate or certificates for Shares under the Plan prior to (i)
obtaining any approval from any governmental agency, securities exchange or
other agency which the Company shall, in its discretion, determine to be
necessary or advisable, and(ii) the completion of any registration or other
qualification of such Shares under any state or federal law or ruling or
regulations of any governmental body which the Company shall, in its sole
discretion, determine to be necessary or advisable.
To the extent applicable and, if required by the then-current Section 16 of
the Exchange Act, any "derivative security" or "equity security" offered
pursuant to the Plan to any Insider may not be sold or transferred for at least
six (6) months after the date of grant of such Award. The terms "equity
security" and "derivative security" shall have the meanings ascribed to them in
the then-current Rule 16(a) under the Exchange Act.
17.5 GOVERNING LAW. To the extent not preempted by Federal law, the Plan,
-------------
and all agreements hereunder, shall be construed in accordance with and governed
by the laws of the State of Colorado.
AS APPROVED BY THE BOARD OF DIRECTORS OF VAIL BANKS, INC. ON JUNE 25,
1998.
VAIL BANKS, INC.
By: /s/ Lisa M. Dillion
----------------------
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<PAGE>
EXHIBIT 10.4
------------
THE WALLACH COMPANY
INVESTMENT BANKERS
March 20, 1998
Mr. E.B. Chester
Vail Banks, Inc.
108 South Frontage Road
Suite 101
Vail, CO 81657
Dear E.B.:
This letter relates to the letter agreement between Vail Banks, Inc. (the
"Company") and the Wallach Company, Inc. ("TWC") effective April 8, 1997 under
which TWC acts as representative for the Company to render financial advisory
and investment banking services to the Company in connection with the Company's
review of possible acquisitions or mergers with banking companies in the western
slope of Colorado. Section 4 of the letter provides such agreement will be in
force until twelve (12) months from its effective date unless extended by mutual
written consent. The undersigned parties agree to extend the term of the April
8, 1997 agreement for an additional 12 month period to end on April 8, 1999,
with all provisions of that agreement continuing, including the termination
provision described in Section 7 providing for termination of the agreement at
any time upon ten days written notice.
Very truly yours,
The Wallach Company, Inc.
/s/ Wesley A. Brown
Wesley A. Brown
The above is hereby acknowledged and accepted:
Vail Banks, Inc.
By: /s/ E. B. Chester Date 3/23/98
E. B. Chester
<PAGE>
WALLACH
INVESTMENT BANKERS
April 7, 1997
Mr. E.B. Chester
Vail Banks, Inc.
108 South Frontage Road
Suite 101
Vail, CO 81657
Dear E.B.:
The purpose of this letter is to confirm in writing the mutual understanding
between Vail Banks, Inc. (the "Company") and The Wallach Company, Inc. ("TWC"),
whereby TWC will act as representative for the Company to render financial
advisory and investment banking services to the Company in connection with the
Company's review of the possible acquisitions, by way of a purchase of stock or
assets, business combination, merger or other transaction (the "Transaction")
with banking companies in the Western Slope of Colorado (the "Target Business").
Our arrangements with you in connection therewith shall be as follows:
1. SERVICES RENDERED: TWC will commence the following financial advisory and
-----------------
investment banking services as the Company may reasonably request.
(a) TWC will familiarize itself to the extent it deems reasonable with the
business, operation, properties, financial condition and prospects of
the Company including producing a financial model of the Company. As
requested, TWC will familiarize itself to the extent it deems
reasonable with the business, operation, properties, financial
condition and prospects of the Target Businesses.
(b) TWC will assist the Company, if requested, in determining an
appropriate price and terms to pay for the Target Business.
(c) TWC will provide such negotiating services as may be reasonably
requested in connection with any Transaction.
(d) TWC will advise the Company or its stockholders, if requested, of the
financial aspects of any proposed Transaction.
<PAGE>
(e) As requested, TWC will work with legal counsel, as appropriate, on any
letter of intent or definitive agreement and until the Transaction is
completed.
In providing these services, TWC acknowledges that the final purchase
price and all other terms and conditions of a Transaction shall be
subject to approval of the Board of Directors of the Company and, if
required, its Stockholders.
2. RELIANCE ON INFORMATION: The Company understands and confirms (i) that TWC
-----------------------
will be using and relying on data, material and information about the
Company and Target Business furnished to TWC by the Company and the Target
Businesses and their employees and representatives and (ii) that TWC does
not assume responsibility for independently verifying the information.
3. CONFIDENTIALITY: TWC and its employees understand the confidential nature
---------------
of the Transaction and agree that any Confidential Information shall be
held and treated by TWC in confidence, and from the date hereof, shall not,
without the prior consent of the Company, be disclosed or used by TWC, in
whole or in part, other than in connection with the provisions of services
under this agreement or as required by law. For purposes of this
agreement, "Confidential Information" shall mean any and all information,
whether written or oral, including, without limitation, all data, reports
forecasts and records about the Company, Target Businesses, or the
Transaction, to the extent that such information is material non-public
information and does not become part of the public domain (other than
through the fault of TWC), which TWC shall obtain from the Company or
persons acting on its behalf.
4. TERMS OF ENGAGEMENT: TWC shall act as the exclusive representative of the
-------------------
Company on these matters for a period of twelve (12) months from the date
of your acceptance of this letter unless extended by mutual written consent
or unless earlier terminated as provided herein.
5. COMPENSATION FOR SERVICES: The Company will pay TWC for its services
-------------------------
hereunder (a) an hourly fee equal to $250 per hour for time of Principals,
$175 for time of Vice Presidents and $100 per hour for time of Associates
(the "Hourly Fee"), plus (b) a transaction fee equal to .15% (fifteen
hundreds of one percent) of the total assets of the acquired Target
Business up to $50 million and .10% (ten hundreds of one percent) of the
total assets of the acquired Target Business in excess of $50 million as of
the end of the month prior to closing ("Transaction Fee"). The Hourly Fee
shall be billed monthly and is payable in cash immediately upon receipt.
The Transaction Fee shall be payable in cash at the closing only if a
Transaction is closed.
2
<PAGE>
In addition, the Company will reimburse TWC monthly for reasonable out-of-
pocket expenses incurred by TWC in connection with this agreement.
Typically, these expenses may include travel, lodging, telephone and
outside services, including database services, incurred by TWC.
6. OUTSIDE SERVICES REQUESTED BY THE COMPANY: TWC will not be responsible for
-----------------------------------------
any fees or commissions of any type, including financial, legal, appraisal,
accounting, or other advisors, called upon, requested, or retained by the
Company, its officers or directors. The Company agrees to pay all of its
expenses in connection with any such transaction.
7. TERMINATION: TWC's engagement may be terminated by either the Company or
-----------
TWC at any time upon ten days written notice. Notwithstanding the above,
termination of TWC's engagement shall not affect the indemnification of TWC
provided by this agreement, the Company's obligation to reimburse TWC's
reasonable out-of-pocket expenses and any Hourly Fee earned, but not yet
paid, through the date of termination, or the Company's obligation to TWC
if the Company consummates a transaction with any party as referred to in
the paragraph "Fee Due Upon Sale after Termination" below.
8. FEE DUE UPON SALE AFTER TERMINATION: If within twelve (12) months
-----------------------------------
following the termination of TWC's engagement, the Company closes a
transaction with a Target Business with which TWC has assisted the Company
in its evaluation, TWC shall be entitled to the Transaction Fee as set
forth in this agreement.
9. INDEMNIFICATION: Because TWC will be acting on behalf of the Company in
---------------
connection with this agreement, the Company and stockholders signing below
agree to indemnify and hold TWC (used in this paragraph to include any
affiliated companies and respective officers, directors, employees and
controlling persons within the meaning of Section 15 of the Securities Act
of 1933 or Section 20 of the Securities Exchange Act of 1934) harmless from
any and all losses, claims, damages or liabilities to which TWC may become
subject in connection with this agreement and to reimburse TWC for any
reasonable and necessary legal or other expenses incurred in connection
with matters covered by this indemnity. The Company will not, however, be
responsible for any losses, claims, damages, liabilities or expenses to the
extent that they result from TWC's bad faith or negligence.
In the event that the foregoing indemnity is unavailable to TWC for any
reason, the Company and any stockholders signing below agree to contribute
to any losses in such proportion as is appropriate to reflect the relative
benefits received (or anticipated to be received) by TWC and by the Company
from the Transaction; provided, however, that TWC shall not be responsible
for any amounts in excess of the amount of the Transaction Fees received
(or anticipated to be received) by TWC.
3
<PAGE>
10. USE OF INFORMATION: Except as otherwise provided by this agreement, the
------------------
Company and TWC agree that neither will use any information relating to the
Target Business for any purposes other than internal use without the
consent of TWC or the Company, respectively. The Company and TWC
acknowledge that all opinions, advice and materials (written or oral) given
by TWC to the Company are intended solely for the benefit and use of the
Company in considering the matters to which such opinions, advice and
materials relate, and TWC and the Company agree that no such opinion,
advice or materials shall be (i) used for any other purpose or (ii) except
as otherwise provided by this agreement, reproduced, disseminated, quoted
or referred to at any time, in any manner or for any purpose. The Company
agrees that no references to TWC shall be made by the Company in public
documents such as proxy statements, press releases or communications to
stockholders without the prior consent of TWC, which consent shall not be
unreasonably withheld.
11. MISCELLANY: The parties can modify or amend this agreement only by a
----------
writing that both parties have signed. Any dispute about the agreement
(including the services or payments under it) will be brought in and
resolved by a Colorado federal or state court, using Colorado law. The
parties agree to the personal jurisdiction of those courts. The agreement
binds and is for the benefit of any successor, assign, heir, or personal
representative of the parties.
12. ANNOUNCEMENTS: It is understood that if any Transaction is completed, TWC
-------------
will be entitled, at its expense, to place an announcement in such
publications and mailings, as TWC desires, stating that TWC has acted as
financial advisor in such transaction. Any such announcement shall be
subject to the Company's approval.
If the foregoing represents a correct statement of our agreement and
understanding, please execute this agreement. If executed and delivered to TWC,
a binding agreement shall thereupon exist.
4
<PAGE>
We are enthusiastic about this project and understand the importance of the
project to the Company. We are anxious to get started and look forward to
working with you.
Very truly yours,
The Wallach Company, Inc.
/s/ Wesley A. Brown
Wesley A. Brown
The above is hereby acknowledged and accepted:
Vail Banks, Inc.
By: /s/ E. B. Chester Date: April 8, 1997
-----------------
E. B. Chester
5
<PAGE>
EXHIBIT 10.5
------------
CONSULTING AGREEMENT
AGREEMENT, dated April 21, 1998 between Vail Banks, Inc. (hereinafter "Vail")
and Dillon Schramm Associates, LTD (hereinafter "DSA").
Now, therefore, the parties hereto agree as follows:
1. ENGAGEMENT. Vail shall engage DSA, and DSA shall serve Vail upon the terms
and conditions hereinafter set forth.
2. TERM AND EXTENSION. The engagement of DSA hereunder shall commence on April
21, 1998 and shall continue until Vail's completion of either their merger
transaction with Telluride Bancorp or their IPO, whichever occurs first, but
shall not extend beyond October 21, 1998. This Agreement may be extended upon
mutual, written agreement of the parties.
3. DUTIES. During the period or periods of its engagement hereunder, DSA shall
serve Vail and shall perform the following services and functions (hereinafter
"Consulting"):
a. Format and present financial information in a manner that is
acceptable in the IPO registration.
b. Assist in the assimilation and presentation of financial statement
narrative in a manner that is acceptable in the IPO registration.
c. Consolidate and integrate financial information from the various
merged banks into statements for the consolidated entity. Develop
various proforma scenarios and statements as required.
d. Facilitation and coordination of the above activities within the scope
of the entire acquisition and IPO process timelines.
<PAGE>
e. Assist in the preparation and placement of the Private Placement
Memorandum planned to fund an acquisition currently in progress.
f. Assist in the completion and closing of the Telluride acquisition.
g. Attendance of meetings required by DSA to perform the above services
and functions.
Within the limitations hereinabove provided, DSA will render such other advisory
services in connection with the Consulting of Vail as may be requested from time
to time by the officers or directors of Vail, without further compensation other
than that for which provision is made in this Agreement.
4. FACILITIES. While DSA is working on-site at the location of Vail, Vail
shall provide adequate and appropriate office space and access to necessary
equipment, including, but not limited to, fax machine, telephone, personal
computer, software, printer, and photo copier.
5. DEDICATION OF RESOURCES. DSA shall dedicate one full-time equivalent to
complete said Consulting. Other DSA resources will be made available to the
aforementioned resource to serve in advisory capacities from time to time as
needed.
6. LICENSES AND QUALIFICATIONS. Vail acknowledges that DSA will not, and is
not licensed to provide financial opinions, representations, or market
securities or other financial instruments, related to regulated investment
offerings. DSA may assist in the preparation of financial statements, opinions,
representations, and other material, which will then be reviewed and authorized
by qualified parties prior to presentation to regulatory agencies and/or
potential investors. Vail agrees not to rely on DSA for tax or legal advice.
7. COMPENSATION. Vail shall pay to DSA for Consulting the following:
a. a Monthly Fee of $14,000.00 (fourteen thousand dollars), with the
first monthly payment due upon the signing of this Agreement. This
fee will be credited back to Vail and netted against the Success Fee
referenced in Paragraph 7b in the event that the IPO or Telluride
transactions are completed within the term of this contract.
2
<PAGE>
b. a Success Fee equal to 1% (one percent) of the IPO Gross Proceeds plus
0.5% (one half of one percent) of the Acquisition Price of the
Telluride acquisition, or, if the IPO is not completed prior to the
closing of the Telluride acquisition, the Success Fee shall be equal
to 1.1% (one and one tenth percent) of the Acquisition Price of the
Telluride acquisition. The term "Gross Proceeds" means all
consideration, before deduction of any costs, fees, and expenses
associated with the IPO transaction, and received from investors in
exchange for stock as a result of the IPO during the term of this
agreement or within 2 (two) years after the termination of this
Agreement. The term "Acquisition Price" means all consideration given
to acquire, or merge with, Telluride Bancorp during the term of this
Agreement or within 2 (two) years after the termination of this
Agreement.
8. TRAVEL AND OTHER EXPENSES. Vail will reimburse DSA for reasonable and
customary travel expenses, including, but not limited to, air fare, ground
transportation, lodging, meals, and phone calls incurred in the course of
performance of Consulting.
9. INVOICING AND PAYMENT. DSA will accumulate fees and expenses and bill Vail
for such fees and expenses on a monthly basis. Each invoice will show detail of
travel expenses incurred and billable during the billing period. Payment will
be due and payable upon Vail's receipt of such invoices.
10. INDEMNIFICATION AND HOLD HARMLESS PROVISION. Vail agrees hereby to
indemnify and hold harmless DSA from any and all claims by VAIL which may arise
out of and in the course of the performance of DSA's duties performed in
accordance with this Agreement. In the event that DSA is named in any legal
action stemming from Vail's IPO, mergers, acquisitions, other activities, or
DSA's Consulting in accordance with this Agreement, Vail agrees to defend DSA
against such charges and compensate DSA for any costs incurred by DSA associated
with the litigation and any unfavorable ruling. Any and all claims for
unemployment benefits and or claims for workers' compensation benefits are
hereby expressly waived by DSA who agrees to
3
<PAGE>
maintain separate policies of liability, health, and accident insurance as may
be necessary or required by DSA in connection with the performance of its duties
herein.
11. RELATIONSHIP BETWEEN PARTIES. DSA is engaged by Vail only for the purposes
and to the extent set forth in this Agreement, and its relation to Vail shall,
during the period or periods of its engagement and services hereunder, be that
of an independent contractor. DSA shall be free to dispose of such portion of
its entire time, energy, and skill during regular business hours as it is not
obligated to devote hereunder to Vail in such manner as it sees fit and to such
persons, firms, or corporations as it deems advisable. DSA shall not be
considered as having an employee status or as being entitled to participate in
any plans, arrangements, or distributions by Vail pertaining to or in connection
with any insurance, pension, stock bonds, profit-sharing, or similar benefits
for their regular employees.
12. PROFESSIONAL RESPONSIBILITY. Nothing in this Agreement shall be construed
to interfere with or otherwise affect the rendering of services by DSA in
accordance with its independent and professional judgment. DSA shall perform
its services in a good and workmanlike manner and in accordance with generally
accepted practices.
13. ENFORCEMENT. The failure of any party to enforce at any time any of the
provisions or terms of this Agreement shall not be construed to be a waiver of
such provision or term nor shall it constitute a waiver of the right of any
party to enforce such term or provision thereafter.
14. ARBITRATION. It is agreed that in the event of any dispute between DSA and
Vail or among other contractors utilized by DSA arising out of or connected with
this Agreement, which cannot be resolved by the parties in accordance with the
terms of this Agreement, such dispute shall be submitted to arbitration in
accordance with the rules then in effect of the American Arbitration
Association, and judgment upon the reward rendered may be entered in any Court
of competent jurisdiction. The parties hereby waive any appeal of the decision
of the arbitrators. Each party may be represented by legal counsel in any such
proceeding.
4
<PAGE>
15. SEVERABILITY. If any provision of this Agreement is deemed invalid or
unenforceable in any jurisdiction, the other provisions hereof shall remain in
full force and effect. The provisions of this Agreement shall be liberally
construed in order to effectuate the purposes and intent hereof.
16. ENTIRE AGREEMENT. This Agreement shall be construed in accordance with
Colorado (State) law and shall constitute the entire Agreement between the
parties. In witness whereof, the parties have executed the Agreement as of the
date first written above.
VAIL BANKS, INC. DILLON SCHRAMM ASSOCIATES, LTD
By: /s/ Lisa M. Dillon By: /s/ Joseph S. Dillon
------------------ --------------------
Title: President, CEO Title: Contractor
5
<PAGE>
EXHIBIT 21.1
------------
LIST OF SUBSIDIARIES OF VAIL BANKS, INC.
----------------------------------------
WestStar Bank
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of Vail Banks,
Inc. on Form SB-2 of our report on the financial statements of Vail Banks, Inc.
and Subsidiary dated February 20, 1998 (except for notes W and X, as to which
the date is July 10, 1998), appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
/s/ FORTNER, BAYENS, LEVKULICH & CO., P.C.
Denver, Colorado
July 30, 1998
<PAGE>
EXHIBIT 23.2
------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of Vail Banks,
Inc. on Form SB-2 of our report on the financial statements of Cedaredge
Financial Services, Inc., and its subsidiary, dated December 30, 1997, and
Telluride Bancorp, Ltd. and its subsidiaries, dated February 27, 1998, appearing
in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DALBY, WENDLAND & CO., P.C.
July 30, 1998
<PAGE>
EXHIBIT 23.3
------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of Vail Banks,
Inc. on Form SB-2 of our report on the financial statements of Independent
Bankshares, Inc. and Subsidiary, dated May 21, 1998, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to our Firm under the heading "Experts"
in such Prospectus.
/s/ GRA, THOMPSON, WHITE & CO., P.C.
Englewood, Colorado
July 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF VAIL BANKS, INC. AND SUBSIDIARY WHICH WERE
AUDITED BY FORTNER, BAYENS, LEUKULICH & CO., P.C. WHOSE REPORT THEREON IS DATED
FEBRUARY 20, 1998 (EXCEPT FOR NOTES W AND X, AS TO WHICH THE DATE IS JULY 10,
1998) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 16,516 16,680
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 19,450 17,063
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 8,600 9,607
<INVESTMENTS-CARRYING> 7,946 10,125
<INVESTMENTS-MARKET> 7,967 10,128
<LOANS> 162,311 154,913
<ALLOWANCE> 1,335 1,364
<TOTAL-ASSETS> 240,113 231,191
<DEPOSITS> 216,573 206,215
<SHORT-TERM> 1,083 308
<LIABILITIES-OTHER> 1,555 5,034
<LONG-TERM> 1,100 1,200
4,560 4,560
0 0
<COMMON> 2,286 2,251
<OTHER-SE> 12,383 11,057
<TOTAL-LIABILITIES-AND-EQUITY> 240,113 231,191
<INTEREST-LOAN> 8,508 12,570
<INTEREST-INVEST> 524 956
<INTEREST-OTHER> 804 496
<INTEREST-TOTAL> 9,836 14,022
<INTEREST-DEPOSIT> 3,475 4,251
<INTEREST-EXPENSE> 3,622 4,514
<INTEREST-INCOME-NET> 6,214 9,508
<LOAN-LOSSES> 0 232
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 5,993 9,787
<INCOME-PRETAX> 1,280 762
<INCOME-PRE-EXTRAORDINARY> 835 474
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 835 474
<EPS-PRIMARY> .32 .23
<EPS-DILUTED> .30 .21
<YIELD-ACTUAL> 9.82 10.02
<LOANS-NON> 51 136
<LOANS-PAST> 56 78
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,364 823
<CHARGE-OFFS> 54 58
<RECOVERIES> 25 24
<ALLOWANCE-CLOSE> 1,335 1,364
<ALLOWANCE-DOMESTIC> 1,335 1,364
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,098 1,119
</TABLE>
