<PAGE>
As filed with the Securities and Exchange Commission on September 30, 1998
Registration No. 333-61655
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
NORTHERN STAR FINANCIAL INC.
(Name of small business issuer in its charter)
MINNESOTA 6021 41-1912467
(State or other
jurisdiction of
incorporation or
organization)
(Primary Standard Industrial Classification Code)
(I.R.S. Employer
Identification Number)
Northern Star Financial, Inc.
410 Jackson Street, Suite 510
Mankato, Minnesota 56001
(507) 388-4855
(Address and telephone number of registrant's
principal executive offices and principal place of business)
--------------
Thomas Stienessen, Chief Executive Officer
Northern Star Financial, Inc.
410 Jackson Street, Suite 510
Mankato, Minnesota 56001
(507) 388-4855
(Name, address, and telephone number of agent for service)
Copies to:
Daniel A. Yarano, Esq. William K. Theodore L. Eissfeldt, Esq. Howard &
Sjostrom, Esq. Fredrikson & Byron, Howard 321 Liberty Street, Suite 200
P.A. 900 Second Avenue South, Suite Peoria, Illinois 61602 (309) 672-1483
1100 Minneapolis, Minnesota 55402
(612) 347-7000
--------------
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, please check the following
box and list the Securities Act registration 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, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS 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 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
Disclosure alternative used (check one): Alternative 1 [_] ; Alternative 2 [X]
<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 SEPTEMBER 30, 1998
LOGO
A PROPOSED HOLDING COMPANY FOR
NORTHERN STAR BANK
329,000 SHARES
OF
COMMON STOCK
This Prospectus relates to the offer (the "Offering") of a minimum of 157,000
(the "Minimum") and a maximum of 329,000 (the "Maximum") shares of common
stock, par value $.01 per share (the "Common Stock"), to be issued by Northern
Star Financial, Inc., a Minnesota corporation ("the Company"), which has been
organized to own all of the capital stock of Northern Star Bank (the "Bank").
Neither the Company nor the Bank has ever conducted any business operations
other than matters related to initial organization and capital raising. See
"Proposed Business." The Company's temporary address is 410 Jackson Street,
Suite 510, Mankato, Minnesota 56001 and its temporary telephone number is (507)
388-4855.
This is a "best efforts" Offering by the Company, and it will be terminated
upon the sale of 329,000 shares of Company Common Stock or [Date], 1998,
whichever occurs first, unless the Offering is extended, at the discretion of
the Company, for an additional period ending no later than [Date], 1998.
However, the Company reserves the right to terminate the Offering at any time
after the sale of the Minimum. Subscriptions are binding on subscribers and may
not be revoked by subscribers without the consent of the Company. Subscribers
must acknowledge in the Stock Order Form that they have received a copy of this
Prospectus and identify their state of residence in order to subscribe for the
shares.
Prior to this Offering, there has been no public market for the Common Stock.
The Company intends to make arrangements to quote the Common Stock on the OTC
Bulletin Board. See "Risk Factors Absence of Trading Market."
-----------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION,
FDIC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT DEPOSITS. THE SHARES ARE
NOT INSURED BY THE FDIC OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
<TABLE>
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) THE COMPANY(3)
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<S> <C> <C> <C>
Per Share ............................. $10.00 $0.65 $9.35
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Total (Minimum 157,000 shares)......... $1,570,000 $102,050 $1,467,950
(Maximum 329,000 shares)............... $3,290,000 $213,850 $3,076,150
</TABLE>
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(1) The Offering price has been arbitrarily established by the Company. See
"Risk Factors Offering Price."
(2) The Offering will be made on a best-efforts basis by Banc Stock Financial
Services, Inc. as Sale Agent. The Sales Agent's commission will be 5.5%
with respect to up to 100,000 shares sold in the Offering to certain
investors identified by the Organizers (as defined on page 4) and 6.5%
with respect to other shares sold in the Offering. The commissions
described above reflect the payment of a 6.5% commission on all sales. The
Company has agreed to sell to the Sales Agent a Warrant to purchase 10,000
shares of the Company's Common Stock. The Company has agreed to indemnify
the Sales Agent against certain civil liabilities, including liabilities
under the Securities Act of 1933. See "The Offering."
(3) Before deducting expenses related of this Offering, estimated to be
approximately $75,000. See "Use of Proceeds By the Company."
-----------------
LOGO
-----------------
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
NORTHERN STAR BANK PRINCIPAL MARKET AREA
LOGO
[Map showing the geographic location
of the Bank in the State of Minnesota]
-----------------------------
Prospective investors should carefully review this Prospectus before
subscribing for shares. Subscribers must represent in the Subscription
Agreement that they have received a copy of this Prospectus. See "The
Offering--How to Subscribe." The Company has established a minimum
subscription of 100 shares and a maximum subscription by any subscriber of
4.9% of the total number of shares sold in the Offering. However, the Company
reserves the right to waive these limits without notifying any subscriber.
Proceeds of the Offering will be deposited in an escrow account at Resource
Trust Company, as escrow agent, pending receipt of subscriptions and
subscription proceeds for the Minimum and satisfaction of certain other
conditions of the Offering. Any subscription proceeds accepted after the
closing of the Minimum but before termination of this Offering will not be
deposited in escrow but will be available for immediate use by the Company.
See "The Offering--Conditions of the Offering and Release of Funds."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE SALES AGENT MAY BID FOR AND PURCHASE SHARES OF THE COMMON
STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "THE
OFFERING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT DEPOSITS OR SAVINGS
ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FDIC OR
ANY OTHER GOVERNMENTAL AGENCY.
THE COMPANY
Northern Star Financial, Inc. (the "Company") was formed to hold all the
capital stock of Northern Star Bank (the "Bank"), a proposed state bank
currently being organized to serve the community of Mankato, Minnesota and
surrounding area. The Company has filed an application with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") to operate as a
bank holding company. The Company has no operating history, nor will it
commence business until the Organizers and the Company have obtained all
necessary approvals from government authorities. Assuming timely receipt of all
necessary government approvals and receipt of subscriptions for the Minimum,
the Company currently anticipates commencing business in October 1998. The
major asset of the Company will be the ownership of all the issued and
outstanding capital stock of the Bank.
The Company intends to concentrate its efforts on the banking needs of the
Minnesota counties of Blue Earth and Nicollet, which includes the communities
of Mankato, North Mankato, LeHillier and Skyline, Minnesota. All of the
Organizers and directors of the Company are residents of the Mankato area. The
Company intends to focus on customers' needs for personalized and community
oriented banking service. It believes that, as a locally-owned community bank
holding company, it will be well positioned to provide local banking services
and compete with other financial institutions in Mankato, most of which are
owned and controlled by companies outside of the local area.
The Company was incorporated under the laws of the State of Minnesota in
January 1998. The Company currently maintains offices at 410 Jackson Street,
Suite 510, Mankato, Minnesota 56001. The Company's temporary telephone number
is (507) 388-4855.
THE BANK
The Organizers filed applications with the Minnesota Department of Commerce
(the "DOC") and the Federal Deposit Insurance Corporation (the "FDIC") in July
1998 to charter the Bank as a state bank and obtain federal deposit insurance.
The Bank has no operating history and will not commence operations until: (i)
the Organizers obtain all necessary approvals from the DOC and FDIC; (ii) the
Company obtains approval from the Federal Reserve to operate as a bank holding
company; and (iii) the Company closes on the Minimum. The Bank is expected to
provide a wide range of commercial and consumer banking services. The
Organizers are active in area civic organizations and the Company believes they
have strong networks of personal and business contacts within the Mankato
region. The Bank intends to distinguish itself from its competitors by
responding to the changing needs of the region's residents. The Company
believes that the insight gained by the Organizers from their years of living
in the Mankato region will aid the Bank in determining which products and
services to offer its customers. The Company expects that the Organizers will
be substantial customers of the Bank and will be able to provide valuable
referrals.
The Bank plans to offer a full range of deposit products and services, as
well as credit and operational services. Depository services will include (i)
IRA plans, (ii) tax depository and payment services, (iii) automatic transfers,
(iv) bank by mail, (v) direct deposits, (vi) no-fee savings accounts, (vii)
money-market savings accounts, (viii) passbook savings, and (ix) various forms
and terms of certificates of deposit ("CDs"), both fixed and variable rate. The
Bank intends to attract deposits by advertising and by pricing depository
services competitively. Credit services will likely include (i) commercial
loans, (ii) consumer loans, (iii) real estate loans, including construction and
land development loans, conventional rate loans secured by residential
properties and loans secured by commercial properties, (iv) agricultural loans,
and (v) construction loans. Bank operation
3
<PAGE>
services are expected to include (i) cashier's checks, (ii) traveler's checks,
(iii) money orders, (iv) collections, (v) currency and coin processing, (vi)
wire transfer services, (vii) deposit bag rentals, (viii) stop payments, and
(ix) savings bonds. Other services are expected to include servicing of
secondary market real estate loans, notary services, photocopying, faxing and
signature guarantees. The Bank does not plan to offer trust services at this
time.
Following receipt of all necessary governmental approvals and the closing of
the Minimum, the Bank will be fully charted as a Minnesota state bank. Upon
commencement of banking operations, the Bank's address will be 1650 Madison
Avenue, Mankato, Minnesota.
THE ORGANIZERS
The organizers of the Company and the Bank (the "Organizers") are Dean
Doyscher, Frank Gazzola, Michael Reynolds, Thomas Reynolds and Thomas
Stienessen. Additional individuals may be added as Organizers, subject to
regulatory approval. All of the Organizers serve as directors of the Company
and, following the closing of the Minimum, will serve as directors of the Bank.
In June 1998, in order to meet certain DOC requirements with respect to the
Bank's application for a state bank charter, the Organizers entered into
binding subscription agreements with the Company for the purchase of an
aggregate of 121,000 shares of Common Stock at $10.00 per share in a separate
private offering (the "Private Offering"). The Organizers are purchasing the
shares for investment purposes only and not for resale. Proceeds from such
subscriptions will be deposited in an escrow account on the effective date of
this Offering. The closing on the Private Offering is contingent upon and will
occur simultaneously with the closing of the Minimum. If this Offering
terminates prior to the closing of the Minimum, the subscription proceeds from
the Private Offering will be refunded without interest. Taking the Private
Offering subscriptions into account and assuming none of the Organizers
purchase shares in this Offering or exercise any options to purchase shares of
Common Stock, following completion of the Minimum or the Maximum, the
Organizers, as a group, will beneficially own approximately 43.5% or 26.9%,
respectively, of the outstanding Common Stock. See "Principal Shareholders."
Although there is no formal agreement to do so, the Organizers may purchase
additional shares in this Offering, if necessary to complete the Minimum, and
some Organizers may decide to purchase additional shares even if the Minimum
has been achieved.
COMPANY AND BANK MANAGEMENT
As of the date of this Prospectus, the Company's management consists of Mr.
Thomas Stienessen, who serves as the Company's President and Chief Executive
Officer and Mr. Frank Gazzola who serves as the Company's temporary Chief
Financial Officer. The Bank intends to enter into an employment agreement with
Mr. Stienessen following the closing of the Minimum. See "Management--
Employment Agreement."
Following completion of the Minimum, Mr. Stienessen will serve as the Bank's
President and Chief Executive Officer, and the Bank anticipates it will hire
qualified persons with banking experience for the following key management
positions: (i) vice president and chief financial officer; (ii) vice president
of lending; and (iii) vice president of operations. Although the Company has
not entered into any agreement with any person to serve in any of the positions
identified above, it has interviewed and identified potential qualified
candidates. No assurance can be made, however, that a formal offer will be made
to any of the potential qualified candidates or that such candidates will
accept employment with the Bank.
The Company anticipates that persons hired for such key management positions
will not be employed pursuant to formal employment agreements, and the Company
expects that the Bank will pay approximately an aggregate of $130,000 as the
base salaries of such positions. See "Management--Executive Officers and
Directors." In addition, the Company anticipates that it will grant each key
manager incentive stock options to purchase 1,000 shares of Company Common
Stock. See "Management 1998--Equity Incentive Plan."
4
<PAGE>
THE OFFERING
Securities Offered .......... Up to 329,000 shares of Common Stock of the Com-
pany, par value $.01 per share.
Offering Price............... $10.00 per share
Use of Proceeds .............
The Company plans to use approximately
$1,390,000 of the estimated net proceeds from
the sale of the Minimum plus $1,210,000 in net
proceeds from the sale of shares to the Organ-
izers in the Private Offering, a total of ap-
proximately $2,600,000, to capitalize the Bank
by purchasing all the Bank's common stock to be
issued. After payment by the Bank of approxi-
mately $433,000 in pre-offering expenses and
$70,000 in organizational expenses the Bank es-
timates that it will have approximately
$2,097,000 available for working capital. The
Company expects that the DOC and FDIC will re-
quire the Bank to be capitalized at a level of
at least $2,500,000 before it can commence
banking operations. Approximately $75,000 of
net proceeds will be used to pay the Company's
organizational and offering expenses. The Com-
pany plans to initially invest all remaining
sums in excess of the Minimum in United States
government securities or as a deposit at the
Bank. The Company may use such remaining sums
to purchase additional capital stock of the
Bank or make loans to the Bank as necessary to
maintain compliance with regulatory capital re-
quirements and borrowing restrictions as the
Bank grows
If the conditions for releasing subscription
funds from escrow are met and such funds are
released but final regulatory approval to com-
mence banking operations is not obtained from
the DOC or FDIC or the Bank does not open for
any other reason, it is possible that subscrib-
ers could be returned an amount less than their
original investment. See "Risk Factors--Return
of Less Than Subscription Amount."
The Bank will use the $2,600,000 received from
the sale of its stock to the Company for pre-
opening expenses, working capital and general
corporate purposes. See "Use of Proceeds."
Conditions to Offering....... This Offering will be terminated and all sub-
scription funds (without interest, except to
residents of certain states, as described in
"The Offering") will be returned promptly to
subscribers unless on or before [termination
date] (or such later date if the offering is
extended by the Company for additional periods
not to extend beyond [extension date]), (i) the
Company has accepted subscriptions and payment
in full for at least the Minimum; (ii) the Es-
crow Agent has received an aggregate of
$1,210,000 from the Organizers for their Pri-
vate Offering subscriptions; and (iii) the Com-
pany has received approval from the Federal Re-
serve to become a bank holding company under
the BHCA and the Organizers have received rea-
sonable assurances from the DOC and FDIC that
the Bank will receive a certificate of deposi-
tory insurance from the FDIC and a state char-
ter from the DOC. Subscription proceeds from
this Offering and the Private Offering will be
deposited promptly, in an escrow account with
5
<PAGE>
Resource Trust Company, as escrow agent (the
"Escrow Agent"), under the terms of an escrow
agreement (the "Escrow Agreement"), pending the
satisfaction of the conditions set forth above
or the termination of the Offering. Upon satis-
faction of the conditions set forth above, all
subscription funds held in escrow and any in-
terest earned thereon, will be released to the
Company for immediate use. Any subscription
proceeds accepted after satisfaction of the
conditions set forth above but before termina-
tion of this Offering will not be deposited in
escrow but will be immediately available to the
Company. See "The Offering."
Plan of Distribution......... The Company has established a minimum investment
by any subscriber (together with his or her af-
filiates) of 100 shares and a maximum invest-
ment of 4.9% of the total number of shares sold
in the Offering, unless the Company, in its
sole discretion, elects to waive these limits
with respect to any subscriber. The Company has
engaged Banc Stock Financial Services, Inc. of
Columbus, Ohio, as the Company's Sales Agent to
sell shares in the Offering on a best-efforts
basis. The Sales Agent's business address is
1105 Schrock Road, Suite 437, Columbus, Ohio
43229. The Sales Agent will receive a 5.5% com-
mission with respect to shares sold in the Of-
fering to certain investors identified by the
Organizers (up to an aggregate of 100,000
shares) and 6.5% with respect to other shares
sold in the Offering. The Company will issue to
the Sales Agent a Warrant to purchase 10,000
Shares of Common Stock at $10.00 per share. The
Company will also pay the Sales Agent's ex-
penses of this Offering, including the Sales
Agent counsel's fees and expenses up to $20,000
and other out-of-pocket expenses up to a maxi-
mum of $15,000
Listing...................... The Company intends to make arrangements to
quote the Common Stock on the OTC Bulletin
Board.
RISK FACTORS
Prospective investors should consider certain risk factors in connection with
the purchase of the Common Stock offered hereby. See "Risk Factors."
SELECT SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
AS ADJUSTED(1)
---------------------
ACTUAL MINIMUM MAXIMUM
------- ---------- ----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and investments........ $ -0- $2,780,000 $4,500,000
Total assets.................................. 14,806 2,794,806 4,514,806
Total liabilities............................. 18,665 18,665 18,665
Total stockholder's equity.................... (3,859) 2,776,141 4,496,141
</TABLE>
- --------
(1) Adjusted to reflect the sale of 121,000 shares sold to the Organizers in
the Private Offering, plus the Minimum and the Maximum of this Offering and
the application of the estimated net proceeds from both offerings and the
redemption of 10 shares of Common Stock at $10.00 per share concurrently
with the closing of the Minimum. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. A subscription for shares should be made only after careful
consideration of the risk factors set forth below and elsewhere in this
Prospectus and should be undertaken only by persons who can afford an
investment involving such risks. THE SHARES OF COMMON STOCK OFFERED HEREBY ARE
NOT DEPOSITS OR SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
RETURN OF LESS THAN SUBSCRIPTION AMOUNT
Even after release of subscription funds from escrow, there can be no
assurance that the Bank will open for business. If the conditions for
releasing subscription funds from escrow are met and such funds are released
but final regulatory approval to commence banking operations is not obtained
from the DOC or FDIC or the Bank does not open for any other reason, the
Company's board of directors intends to propose that the shareholders approve
a plan to liquidate the Company. Upon such a liquidation, the Company would be
dissolved and the Company's net assets (generally consisting of the amounts
received in this Offering plus any interest earned thereon, less the amount of
all costs and expenses incurred by the Company and Bank, including the
salaries of employees of the Bank and other pre-opening expenses) would be
distributed to the shareholders; provided that, in this event, no
distributions would be made to the Organizers until shareholders other than
the Organizers have received an amount equal to their initial investment in
the Company.
RECENT FORMATION OF COMPANY, LACK OF OPERATING HISTORY AND OPERATING LOSSES
EXPECTED
The Company was formed as a Minnesota corporation in January 1998, and has
not engaged in any operations other than matters related to its initial
organization and capital raising. It is a development stage enterprise,
subject to all risks inherent in any new business venture, as well as those
risks specifically relating to banking. As a consequence, there is only
limited information and financial data on which to base an investment
decision. The Company intends to operate as a bank holding company, presuming
the successful organization of the Bank and, as such, the Company's
profitability, if any, depends entirely on the Bank's operations. The Bank's
proposed operations are subject to the risks inherent in the establishment of
any new business, and specifically a bank. There can be no assurance that the
Company will be able to realize its business goals of forming and operating
the Bank and achieving and maintaining profitability. The Company expects that
the Bank will lose money at least during its first year of operation. Banks
are rarely profitable immediately after establishment, and substantial time is
required before profits and surplus will be realized, if at all. Investors
face a high risk of experiencing little or no return on their investment for a
lengthy period of time. No assurance can be given that the Bank's activities
will achieve or maintain profitability in the future.
COMPETITION
The banking business is highly competitive, and the Bank will encounter
strong competition from other banks, as well as from commercial banks,
mortgage banking firms, consumer finance companies, securities brokerage
firms, insurance companies, money market mutual funds, and other financial
institutions operating in the Mankato, Minnesota area and elsewhere.
Specifically, the Bank will compete with branches of three large commercial
banks, TCF Bank, U.S. Bank and Norwest Bank, as well as branch offices of four
other community banks. A number of these competitors are well established in
the Mankato, Minnesota area. The main offices of Security State Bank of
Mankato and Norwest Bank are located within two miles of the proposed Bank.
All of these banks have substantially greater resources and lending limits, as
well as a lower cost of funds, than the Bank and may offer certain services,
such as extensive and established branch networks and trust services, that the
Bank either does not expect to provide or will not provide initially. As a
result of these competitive factors, the Bank may have to pay higher rates of
interest to attract deposits. In addition, non-depository institution
competitors are generally not subject to the extensive regulations applicable
to the Company and the Bank. Recent federal legislation permits commercial
banks to establish operations nationwide, further increasing competition from
out-of-state financial institutions. See "Proposed--Business Competition" and
"Supervision and Regulation." Although the Organizers believe that the Bank
will be able to compete effectively with these institutions, no assurances can
be given in this regard.
7
<PAGE>
INTEREST RATE RISK
The Company's financial condition is substantially dependent on the Bank's
cash flow and net income. The net income of the Bank depends to a great extent
upon its net interest rate spread, which is the difference between the average
interest rate earned by the Bank on its loans, securities and other interest-
earning assets, and the average interest rate it pays on deposits and other
interest-bearing liabilities. Interest rates are highly sensitive to many
factors beyond the control of the Bank, including general economic conditions
and policies of various governmental and regulatory authorities. Economic
conditions such as inflation, recession, unemployment, high interest rates,
short money supply and other factors beyond the control of the Company and the
Bank may adversely affect the Bank's deposit levels and loan demand, and
therefore, the profitability of the Company. Increases or decreases in
interest rates may cause significant decreases in the net interest income and
net income of the Bank. At any given time, the Bank's assets and liabilities
will be such that they are affected differently by a given change in interest
rates. As a result, an increase or decrease in rates, the length of loan terms
or the mix of adjustable and fixed rate loans in the Bank's portfolio could
have a positive or negative effect on the Bank's net income, capital and
liquidity.
LENDING RISKS AND LIMITS
The risk of nonpayment of loans is inherent in commercial banking, and such
nonpayment, if it occurs, may have a material adverse effect on the Company's
earnings and overall financial condition as well as the value of the Common
Stock. Moreover, the Bank expects to focus on small-to-medium sized
businesses, which may result in a larger concentration by the Bank of loans to
such businesses. As a result, the Bank may assume greater lending risks than
banks which have a lesser concentration of such loans and tend to make loans
to larger, better capitalized, companies or than banks that focus on mortgage
lending. Management will attempt to minimize the Bank's credit exposure by
carefully monitoring the concentration of its loans within specific industries
and through prudent loan application and approval procedures, but there can be
no assurance that such monitoring and procedures will reduce such lending
risks.
Furthermore, the Bank is limited in the amount it can loan a single borrower
(including the borrower's related interests) by the amount of the Bank's
capital. These limits will increase and decrease as the Bank's capital
increases and decreases. Unless the Bank is able to sell participations in its
loans to other financial institutions, the Bank will not be able to meet all
of the lending needs of loan customers requiring aggregate extensions of
credit above these limits.
LOCAL ECONOMIC CONDITIONS
The success of the Company depends to a great extent upon general economic
conditions in the communities it serves, primarily the Mankato, Minnesota
area, and particularly conditions affecting small and medium sized businesses
which are expected to be a significant portion of the Bank's borrowers. A
decline in the economy of this area could have an adverse effect on the
Company's 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 the Bank's net income. Although, the
Company currently has no reason to believe that such a decline will occur in
the near future, there can be no assurance that such decline will not occur.
See "Business--Banks" and "Business--Lending and Investments."
NEED FOR CAPITAL
Although the Company does not currently anticipate the need for additional
capital in the next 12 months, because of regulatory capital requirements and
borrowing limits additional capital beyond that which will be provided by this
Offering and amounts generated by the Bank's operations will likely be
necessary for the Bank to grow significantly, especially if only the Minimum
is sold. There can be no assurance that funds necessary to enable such growth
will be available. To the extent the Company relies upon the sale of
additional equity securities to finance future expansion, such sale could
result in significant dilution to the interests of investors purchasing shares
in this Offering. See "Use of Proceeds."
8
<PAGE>
SUPERVISION AND REGULATION
The banking industry is heavily regulated by both state and federal
regulatory authorities. These regulations are primarily intended to protect
depositors, not shareholders. The Bank will be subject to supervision and
regular examination by agents of the DOC and FDIC. Under state and federal
banking law, the Bank is subject to substantial supervision and limitations
with respect to making loans, extending credit, purchasing securities, paying
dividends, making acquisitions, branching and many other aspects of the
banking business. Regulation includes, among other things, capital reserve
requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community
investment requirements and restrictions on transactions with affiliated
parties. Regulation of the financial institutions industry is undergoing
continued changes, and the ultimate effect of such changes cannot be
predicted. In December 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted, and FDICIA and the regulations
thereunder have increased the regulatory and supervisory requirements for
financial institutions, which has resulted and will continue to result in
increased operating expenses. Additional regulations affecting financial
institutions have been proposed and may be enacted, none of which is within
the Company's control. This regulation substantially affects the business and
financial results of all financial institutions and holding companies,
including the Company and Bank. The Company is not able to predict the impact
of changes in such regulations on the Company's business and profitability.
Regulations now affecting the Company and the Bank may be modified at any
time, and there is no assurance that such modifications will not adversely
affect the business of the Company and the Bank. See "Supervision and
Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent upon the financial assurances and personal
efforts and abilities of its Board of Directors. The loss of the services of
any of the directors could have a material adverse impact upon the Company.
Success of the Bank will also be highly dependent on the retention of Mr.
Stienessen, the proposed president and chief executive officer of the Bank, as
well as upon the Bank's ability to hire and retain additional qualified
personnel in the future. The Bank intends to enter into an employment
agreement with Mr. Stienessen following the closing of the Minimum. See
"Management--Employment Agreement." The Company is not expected to enter into
formal employment agreements with any other prospective managers of the Bank.
The loss of services of Mr. Stienessen or the inability of the Company to
attract, hire and retain qualified management personnel could have a material
adverse effect on the Company and the Bank. The Company does not currently
have, but expects in the foreseeable future to obtain, key person life
insurance on Mr. Stienessen.
RISKS ASSOCIATED WITH THE YEAR 2000
The Company and the Bank will rely upon computer software and hardware
systems, some of which will be managed internally by the Company and Bank and
others that will be provided by third party vendors. The Company is aware of
the computer software and hardware issues associated with the programming code
in existing computer software programs and non-information technology such as
microcontrollers found in computer hardware. The issue is whether computer
software and hardware systems will properly recognize date sensitive
information. Much of the computer software and hardware in use today is unable
to recognize a year that begins with "20" instead of "19." Many computers will
be unable to recognize the Year 2000 and, as a result, could generate
erroneous data or cause a computer system to fail. Some computer systems may
begin to fail sooner for failure to read other dates such as September 9,
1999. If not addressed properly, the Year 2000 issue could have a material
adverse effect on the Company, Bank and the Bank's customers.
Because the Company and Bank have not yet begun operations, they do not have
any existing computer software or hardware to evaluate or fix. The Company
intends to evaluate all hardware and software it purchases, licenses, leases
or contracts to use from any third party to determine whether such hardware
and software is capable of recognizing the Year 2000 and will perform
properly. The Company is currently in the process of reviewing software and
hardware vendors. The Company is considering entering into a contract with
Fiserve to use its ITT client-server core retail banking system. The Company
intends to seek assurances that Fiserve's
9
<PAGE>
software and hardware computer systems are, or will be, Year 2000 compliant.
In the proposed agreement that the Company may enter with Fiserve, Fiserve
represents and warrants that its system is or will be Year 2000 compliant. The
Company will not begin operations until it has assurances that its computer
software and hardware systems are, or will be, Year 2000 compliant. The
Company has not contracted with any independent source to analyze the
Company's Year 2000 exposure but, believes its exposure is manageable because
it is aware of the issues and will only use systems that are, or will be, Year
2000 compliant. The Company believes that its cost in addressing the Year 2000
issues is nominal since it will not have to replace or fix any existing
computer software programs or hardware.
The Company has developed a "Year 2000 Project Plan" whereby it plans to
create a "Year 2000 Project Team" to be formed from the Bank's management and
staff to address the Year 2000 issues. The Year 2000 Project Team is expected
to evaluate all software and hardware systems to determine compliance. After
the Bank commences operations, the Year 2000 Project Team is expected to
monitor the Bank's own systems and third party systems regularly to assess any
risks to the Company and Bank and proactively work with third party vendors to
ensure all the Company's and Bank's systems are Year 2000 compliant.
The Bank intends to actively assess and monitor its Year 2000 exposure
created when it loans money to its customers. In conjunction with other
lenders, the Company has developed a Year 2000 questionnaire to help screen
credit applicants to determine the applicant's Year 2000 exposure. The Bank
intends to incorporate Year 2000 representations and compliance requirements
into its credit documents. Each applicant's year 2000 exposure will be
considered by the Bank's loan committee to determine an applicant's loan
qualifications.
NO IMMEDIATE PAYMENT OF DIVIDENDS
The Company has no plans to pay any cash dividends to its shareholders in
the foreseeable future. Since the Company and the Bank are both start-up
operations and will likely incur initial losses, both the Company and the Bank
intend to retain any earnings for the period of time management believes
necessary to ensure the success of their respective operations. The Company
will be dependent upon the Bank for its earnings and funds to pay dividends on
the Common Stock. The payment of dividends by the Company and the Bank is also
subject to legal and regulatory restrictions. Any payment of dividends by the
Company in the future will depend on the Bank's earnings, capital
requirements, financial condition, and other factors considered relevant by
the Board of Directors. See "Dividend Policy," "Proposed Business," and
"Supervision and Regulation."
CONTROL OF THE COMPANY; PURCHASES BY ORGANIZERS
Assuming no officers or directors purchase shares in this Offering or
exercise options to purchase shares of Common Stock, following completion of
the Minimum or the Maximum, the officers and directors of the Company, as a
group, will beneficially own approximately 43.5% or 26.9%, respectively of the
outstanding Common Stock. See "Principal Shareholders." As of the date of this
Prospectus, options to purchase 36,200 shares at $10.00 per share are
outstanding, of which option to purchase 24,200 shares are immediately
exercisable. Following the closing of the Minimum, the Company expects to
issue up to 6,000 incentive stock options to the Company's management
personnel and a warrant to purchase 10,000 shares of Common Stock at $10.00
per share to the Sales Agent. Because of such share ownership, officers and
directors as a group may be able to control the election of the members of the
Company's board of directors and the outcome of other corporate activity.
Furthermore, although there is no formal agreement to do so, the Organizers
may purchase additional shares in the Offering, if necessary to complete the
minimum amount, and some Organizers may decide to purchase additional shares
even if the minimum subscription amount has been achieved. See "Principal
Shareholders."
ABSENCE OF TRADING MARKET
Prior to this Offering, there has been no public trading market for the
Common Stock. The Company expects that the Common Stock will be quoted on the
OTC Bulletin Board. The Sales Agent has advised the Company that, upon the
closing of the Minimum, it presently intends to act as a market maker in the
Common Stock,
10
<PAGE>
subject to applicable laws and regulatory requirements. The development of a
public trading market depends, however, upon the existence of willing buyers
and sellers, the presence of which is not within the control of the Company,
the Bank or any market maker. Even with a market maker, factors such as the
limited size of the Offering, the lack of earnings history of the Company and
the absence or a reasonable expectation of dividends in the near future mean
that there can be no assurance of the development of an active and liquid
market for the Common Stock. Even if a market develops, there can be no
assurance that a market will continue, or that shareholders will be able to
sell their shares at or above the public offering price. Furthermore, the
Sales Agent has no obligation to make a market in the Common Stock and, if
commenced, may cease market making activities at any time. As a result, an
investment in the Common Stock is likely to be relatively illiquid for the
foreseeable future. Thus, investors who may need or wish to dispose of all or
part of their shares may be unable to do so except in private, directly
negotiated sales.
ADVERSE EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors may authorize the issuance of additional
shares of Common Stock or, from the 5,000,000 shares of undesignated stock,
Preferred Stock without further action by the Company shareholders, unless
such action is required in a particular case by applicable laws or regulation.
The authority to issue additional Common Stock or Preferred Stock provides the
Company with the flexibility necessary to meet its future needs without the
delay resulting from seeking shareholder approval. The unissued Common Stock
or Preferred Stock may be issued from time to time for any corporate purposes,
including without limitation, stock splits, stock dividends, employee benefit
and compensation plans, acquisitions and public and private sales for cash as
a means of raising capital. Such shares could be used to dilute the stock
ownership of persons seeking to obtain control of the Company. In addition,
the sale of a substantial number of shares of Common Stock or Preferred Stock
to persons who have an understanding with the Company concerning the voting of
such shares, or the distribution or dividend of Common Stock or Preferred
Stock (or right to receive such shares) to the Company's shareholders, may
have the effect of discouraging or otherwise increasing the cost of
unsolicited attempts to acquire control of the Company. Further, because the
Company's Board has the power to determine the voting, conversion or other
rights of the Preferred Stock, the issuance of a series of Preferred Stock to
persons friendly to management could effectively discourage or preclude
consummation of a change in control transaction or have the effect of
maintaining the position of the Company's incumbent management.
The Company does not currently have any plans or commitments to use its
authority to effect any such issuance, but reserves the right to take any
action that the Board of Directors deems to be in the best interests of the
Company and its shareholders. Furthermore, as a Minnesota corporation, the
Company is subject to provisions of the Minnesota Business Corporations Act
("MBCA") that could have an anti-takeover effect on the Company. In addition,
certain provisions of the Company's Bylaws will impede changes in majority
control of the Company's Board of Directors. The Company's Bylaws provides
that the Board of Directors will be divided into three classes, with directors
in each class elected for three-year staggered terms. Thus assuming five
directors, as currently is the case, it would take two annual meetings for the
election of directors to replace a majority of the Board. The Company may also
consider adopting additional anti-takeover measures. The authority of the
Board to issue additional shares of Common Stock or undesignated stock and the
anti-takeover provisions of the MBCA, as well as any future anti-takeover
measures adopted by the Company, may, in certain circumstances, delay, deter
or prevent takeover attempts and other changes in control of the Company not
approved by management and the Board of Directors. As a result, the Company's
stockholders may lose opportunities to dispose of their shares at a premium
over prevailing prices in the event of a change in control, and the market
price, voting and other rights of the holders of Common Stock may also be
affected. See "Description of Capital Stock--Anti-Takeover Provisions."
DILUTION FROM ISSUANCE OF STOCK OPTIONS AND OTHER ISSUANCES OF SECURITIES
In August, 1998, the Company's Board of Directors and stockholders of the
Company adopted the 1998 Equity Incentive Plan (the "Plan") in order to
provide for the granting of stock options to officers, directors and key
employees of the Company. See "Management--1998 Equity Incentive Plan." The
Plan permits the
11
<PAGE>
granting of incentive stock options to Company employees meeting the
requirements of Section 422A of the Internal Revenue Code of 1996 and
nonqualified options to non-employee directors, consultants and advisors. The
Plan provides that no stock options will be granted at less than the fair
market value of the Common Stock on the date of the grant. The Company has
reserved 41,700 shares of Common Stock for issuance upon exercise of options
under the Plan. As of the date of this Prospectus, the Company has granted
nonqualified options to purchase 12,000 shares of Common Stock at $10.00 per
share to its non-employee directors under the Plan. The Company has also
granted nonqualified options, that are immediately exercisable, to purchase an
aggregate of 24,200 shares of Company stock at $10.00 per share to the
Organizers in consideration for their services to the Company. In addition,
upon completion of this Offering, the Company will issue to the Sales Agent a
warrant to purchase 10,000 shares of Company Common Stock at $12.00 per share.
Exercise of these options and the Sales Agent's warrant could have a dilutive
effect on the shareholders' interest in the Company's earnings and book value.
In addition, the Company may issue additional stock options, warrants or
shares of Common Stock or preferred stock in the future. Any such stock
offering by its nature could be dilutive to the holdings of purchasers in this
Offering.
ARBITRARY DETERMINATION OF OFFERING PRICE
Because the Company and the Bank are in organization, the offering price of
$10.00 per share was determined by the Organizers without reference to
traditional criteria for determining stock value such as book value or
historical or projected earnings since such criteria are not applicable to
companies with no history of operations. The price per share was set to enable
the Company to raise gross proceeds of between $1,570,000 and $3,290,000 in
this Offering through the sale of a reasonable number of shares of Common
Stock, and the price per share is essentially equivalent to the initial book
value per share prior to the payment of the Company's and the Bank's
organizational expenses. No assurance is or can be given that any of the
shares could be resold for the offering price or any other amount.
12
<PAGE>
THE OFFERING
GENERAL
The Company is offering for sale a minimum of 157,000 shares and a maximum
of 329,000 shares of its Common Stock at a price of $10.00 per share to raise
gross proceeds of between $1,570,000 and $3,290,000 for the Company. The
minimum purchase for any one investor (together with the investor's
affiliates) is 100 shares and the maximum purchase is 4.9% of the offering
unless the Company, in its sole discretion, accepts a subscription for a
lesser or greater number of shares.
In June 1998, in order to meet certain DOC requirements with respect to the
Bank's application for a state bank charter, the Organizers entered into
binding subscription agreements with the Company for the purchase of an
aggregate of 121,000 shares of Common Stock at $10.00 per share in a separate
private offering (the "Private Offering"). The Organizers are purchasing the
shares for investment purposes only and not for resale. Proceeds from such
subscriptions will be deposited in the same escrow account as the subscribers
of this Offering, on the effective date of this Offering. The closing on the
Private Offering is contingent upon and will occur simultaneously with the
closing of the Minimum. If this Offering terminates prior to closing on the
Minimum, the subscription proceeds from the Private Offering will be refunded
without interest.
The Organizers may subscribe for up to 100% of the shares in this Offering
if necessary to help the Company achieve the Minimum, and some Organizers may
decide to purchase additional shares even if the Minimum has been achieved.
Any additional shares purchased by the Organizers will be purchased for
investment and not with a view to resale. Because purchases by the Organizers
may be substantial, investors should not place any reliance on the sale of a
specified minimum offering amount as an indication of the merits of this
Offering or that an Organizer's investment decision is shared by unaffiliated
investors. See "Management."
Subscriptions to purchase shares will be received until midnight,
Minneapolis, Minnesota time, on [termination. date], unless all of the shares
are earlier sold or the Offering is earlier terminated or extended by the
Company. See "Conditions to the Offering and Release of Funds." The Company
reserves the right to terminate the Offering at any time or to extend the
expiration date for additional periods not to extend beyond [extension date].
The date the Offering terminates is referred to herein as the "Expiration
Date." No written notice of an extension of the Offering period need be given
prior to any extension and any such extension will not alter the binding
nature of subscriptions already accepted by the Company. Extension of the
Expiration Date might cause an increase in the expenses incurred with this
Offering. The Company intends to use the Sales Agent to sell the shares. See
"Plan of Distribution."
Following acceptance by the Company, subscriptions will be binding on
subscribers and may not be revoked by subscribers except with the consent of
the Company. In addition, the Company reserves the right to cancel accepted
subscriptions at any time and for any reason until the proceeds of this
Offering are released from escrow (as discussed in greater detail in
"Conditions to the Offering and Release of Funds" below), and the Company
reserves the right to reject, in whole or in part and in its sole discretion,
any subscription. The Company may, in its sole discretion, allocate shares
among subscribers in the event of an oversubscription for the shares. In
determining which subscriptions to accept, in whole or in part, the Company
may take into account any factors it considers relevant, including the order
in which subscriptions are received, a subscriber's potential to do business
with, or to direct customers to, the Bank, and the Company's desire to have a
broad distribution of stock ownership. If the Company rejects any
subscription, or accepts a subscription but in its discretion subsequently
elects to cancel all or part of such subscription, the Company will refund
promptly the amount remitted that corresponds to $10.00 multiplied by the
number of shares as to which the subscription is rejected or canceled.
Certificates representing shares duly subscribed and paid for will be issued
by the Company promptly after the offering conditions are satisfied and
escrowed funds are delivered to the Company.
CONDITIONS TO THE OFFERING AND RELEASE OF FUNDS
Subscription proceeds accepted by the Company for the initial 157,000 shares
subscribed for in this Offering will be promptly deposited in an escrow
account with the Escrow Agent until the conditions to this Offering
13
<PAGE>
have been satisfied or the Offering has been terminated. The Offering will be
terminated, no shares will be issued, and no subscription proceeds will be
released from escrow to the Company, unless on or before the Expiration Date
(i) the Company has accepted subscriptions and payment in full for a minimum
of 157,000 shares in this Offering, and (ii) the Company has received payment
in full from the Organizers for 121,000 shares in the Private Offering, and
(iii) the Company has received approval from the Federal Reserve to become a
bank holding company under the BHCA, and the Organizers have received
reasonable assurances from the DOC and FDIC that the Bank will receive a
certificate of depository insurance from the FDIC and a state charter from the
DOC. If the above conditions are satisfied, the subscription amounts for this
Offering and the Private Offering held in escrow may be paid to the Company
and shares issued to subscribers and Organizers. Once the Company has closed
on the Minimum, the Escrow Agreement will be terminated, and any subscription
proceeds accepted after satisfaction of the conditions before termination of
this Offering will not be deposited in escrow but will be available for
immediate use by the Company to fund offering and organizational expenses and
for working capital. Following release of proceeds to the Company, the Company
will use a portion of the proceeds to repay the Organizers the amounts
advanced by them for organizing the Company and Bank. See "Use of Proceeds"
and "Interest of Management and Other Certain Transactions."
If the conditions for releasing subscription funds from escrow are met and
such funds are released but final regulatory approval to commence banking
operations is not obtained from the FDIC or DOC or the Bank does not open for
any other reason, the Board of Directors intends to propose that the
shareholders approve a plan to liquidate the Company. Upon such a liquidation,
the Company would be dissolved and the Company's net assets (generally
consisting of the amounts received in this Offering and the Private Offering,
plus any interest earned thereon, less the amount of all costs and expenses
incurred by the Company and the Bank, including the salaries of employees of
the Bank and other pre-opening expenses) would be distributed to the
shareholders; provided that, in this event, no distributions would be made to
the Organizers until shareholders other than the Organizers have received an
amount equal to their initial investment, plus interest, if applicable, in the
Company.
If the above conditions are not satisfied by the Expiration Date or the
Offering is otherwise earlier terminated, (i) accepted subscription agreements
will be of no further force or effect and subscribers in this Offering and the
Private Offering will not be shareholders of the Company, (ii) the funds held
in the escrow account shall not be subject to the claims of any creditor of
the Company or available to defray the expenses of this Offering, and (iii)
the full amount of all subscription funds will be returned promptly to
subscribers and Organizers, without interest, except to residents of states
the securities commissions of which require the payment of interest (currently
expected to be Ohio, Missouri, Iowa and Pennsylvania). The Company will retain
any interest earned thereon to repay the expenses incurred by the Organizers
in organizing the Company and the Bank, except that the Company would include
with any subscriptions returned to residents of states where interest is
required the actual interest earned on such amounts while the subscriptions
were held in the escrow account. Any expenses not paid with such interest will
be paid by the Organizers pro rata in proportion to each Organizer's
respective proposed ownership, based solely on the subscriptions from the
Private Offering.
The Escrow Agent has not investigated the desirability or advisability of an
investment in the shares by prospective investors and has not approved,
endorsed, or passed upon the merits of an investment in the shares.
Subscription funds held in escrow will be invested in interest-bearing savings
accounts, short-term United States Treasury securities, FDIC-insured bank
deposits, or such other investments as the Escrow Agent and the Company shall
agree. The Organizers do not intend to invest the subscription proceeds held
in escrow in instruments that would mature after the Expiration Date of the
offering.
PLAN OF DISTRIBUTION
The Company has entered into an Agency Agreement with Banc Stock Financial
Services, Inc. (the "Sales Agent"), pursuant to which the Sales Agent has
agreed, subject to the terms of the Agency Agreement, to offer and sell to the
public as the Company's agent, on a "best efforts" basis, a minimum of 157,000
shares of Common Stock up to a maximum of 329,000 shares of Common Stock at
$10.00 per share. The Sales Agent is required to use its best efforts through
the Expiration Date to sell the shares. The Sales Agent and the Company have
agreed that: (i) with respect to shares purchased by the Organizers, no
commission will be payable by the
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<PAGE>
Company to the Sales Agent, and (ii) with respect to shares purchased by
certain persons introduced to the Sales Agent by the Company (up to an
aggregate of 100,000 shares), the commission will be 5.5% of the aggregate
price of such shares. The Sales Agent's commission will be 6.5% on all other
shares it sells in the Offering. The Sales Agent may select other dealers who
are members of the National Association of Securities Dealers, Inc. to sell
shares and who will receive a selling commission not to exceed 4.0% of the
gross offering proceeds. The Company will also pay the Sales Agent's expenses
of this Offering, including Sales Agent counsel's fees and expenses up to
$20,000, and other out-of-pocket expenses of the Sales Agent up to a maximum
of $15,000.
In addition, subject to FDIC approval, upon closing of the Minimum, the
Company will issue the Sales Agent a warrant to purchase 10,000 shares of
Common Stock (the "Sales Agent's Warrant"). The Sales Agent's Warrant will be
exercisable commencing one year after the closing on the Minimum and for a
period of four years thereafter, at an exercise price of $12.00. The Sales
Agent's Warrant may not be transferred for a period of one year from the
closing on the Minimum other than by will or pursuant to operation of law,
except to persons who are officers and shareholders of the Sales Agent. The
Sales Agent's Warrant contains anti-dilution provisions providing for
appropriate adjustments on the occurrence of certain events.
The Sales Agent has the right to terminate the Agency Agreement under
certain circumstances (for example, if conditions exist in the over-the-
counter market which cause the Sales Agent to believe that no favorable public
market exists for the sale of the shares). In such event, offers and sales may
be made on behalf of the Company by certain of its officers and directors, or
the Company may engage one or more other broker/dealers to make sales on its
behalf. The Company does not currently have any other arrangements in place.
As described above, until the Minimum has been sold, all funds received by the
Sales Agent or the Company in connection with the sale of shares will be
promptly transmitted to the Escrow Agent.
The Agency Agreement provides for reciprocal indemnification between the
Company and the Sales Agent against certain liabilities in connection with
this Offering, including liabilities under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted pursuant to the Agency Agreement, the Company has been advised that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed by the Securities Act and is, therefore,
unenforceable. The Company has also agreed to provide the Sales Agent with a
right of first refusal to serve as a managing underwriter on any financing or
to act as an adviser on any merger or similar transaction occurring within one
year of this Offering, in each case for compensation that is reasonable and
customary within the industry.
Prior to the date of the Prospectus, there has been no public market for the
shares. The initial offering price of the shares offered hereby has been
established by the Company based upon its assessment of the capital needs of
the Company and the commercial potential of the services to be offered by the
Company. The Company has had discussions with the Sales Agent regarding the
establishment and maintenance of a market for the shares after the Offering.
Based upon such discussions, the Company expects that a secondary market may
eventually develop for the shares, although the Company can make no assurances
in this regard. In general, if a secondary market develops, the shares will be
freely transferable and assignable by the holder thereof (except shares held
by affiliates), and nonaffiliate shareholders may sell any number of shares in
such secondary market. See "Description of the Capital Stock of the Company--
Shares Available for Future Sale." In addition, factors such as the degree to
which the secondary market is active will determine the willingness of the
market makers, once a secondary market is established, to continue to maintain
the secondary market.
Once the Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), it will file annual reports on Form
10-KSB and quarterly reports on Form 10-QSB and will make such documents
available to subscribers who request a copy.
HOW TO SUBSCRIBE
Shares may be subscribed for by delivering the subscription agreement (the
"Subscription Agreement") attached hereto as Attachment A, completed and
executed in full, to the Sales Agent, on or prior to the Expiration Date.
Subscribers should retain a copy of the completed Subscription Agreement for
their records. The
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<PAGE>
subscription price is due and payable when the Subscription Agreement is
delivered. Payment must be made in United States dollars by cash or by check,
bank draft or money order drawn to the order of "RESOURCE TRUST COMPANY,
ESCROW ACCOUNT FOR NORTHERN STAR FINANCIAL, INC." in the amount of $10.00
multiplied by the number of shares subscribed for.
USE OF PROCEEDS
BY THE COMPANY
Upon satisfaction of all of the conditions discussed in "The Offering--
Conditions to the Offering and Release of Funds," all subscription funds held
in escrow for this Offering and the Private Offering will be released and will
become capital of the Company. The Company expects that net proceeds from the
sale of the Minimum and Maximum will be $1,467,950 and $3,076,150,
respectively, after deducting the Sales Agent's commission (which the Company
anticipates will be $102,050 if the Minimum is sold and $213,850 if the
Maximum is sold). The net proceeds from the Private Offering will be
$1,210,000.
The Company plans to use $1,390,000 of the estimated net proceeds from the
sale of the Minimum plus $1,210,000 in net proceeds from the sale of shares to
the Organizers in the Private Offering, a total of $2,600,000, to capitalize
the Bank by purchasing all the Bank's common stock to be issued. The Company
expects that the DOC and FDIC will require the Bank to be capitalized at a
level of at least $2,500,000 before it can commence banking operations.
Approximately $75,000 of net proceeds will be used to pay organizational and
offering expenses of the Company, including legal and accounting fees,
printing expenses and blue sky fees and expenses, some of which have been
advanced by the Organizers (as of June 30, 1998, approximately $18,665 of the
Company's organizational expenses have been funded by the Organizers). The
Company plans to initially invest all remaining sums in United States
government securities or as a deposit at the Bank. Such funds may be used to
purchase additional capital stock of the Bank or make loans to the Bank as
necessary to maintain compliance with regulatory capital requirements and
borrowing restrictions as the Bank grows.
The following table sets forth the anticipated use of proceeds by the
Company from this Offering and the Private Offering based on the sale of the
Minimum and Maximum number of shares in this Offering.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
OFFERING(1) OFFERING(2)
----------- ----------
<S> <C> <C>
Gross proceeds from Private Offering (3)........... $1,210,000 $1,210,000
Gross proceeds from this Offering.................. 1,570,000 3,290,000
Sales Agent's commission (4)....................... (102,050) (213,850)
Organizational and Offering expenses............... (75,000) (75,000)
Investment in capital stock of the Bank............ (2,600,000) (2,600,000)
---------- ----------
Remaining proceeds................................. $ 2,950 $1,611,150
========== ==========
</TABLE>
- --------
(1) Assumes that 157,000 shares of Common Stock are sold in this Offering.
(2) Assumes that 329,000 shares of Common Stock are sold in this Offering.
(3) Includes proceeds from subscriptions purchased by the Organizers in the
amount of $1,210,000.
(4) The Sales Agent's commission will be 5.5% with respect to shares sold in
this Offering to certain investors identified by the Organizers (up to an
aggregate of 100,000 shares) and 6.5% with respect to other shares sold in
this Offering, except that the Sales Agent will not receive any commission
on shares to be purchased by the Organizers in this Offering and the
Private Offering. The commissions described in this table reflect the
payment of a 6.5% commission on all sales.
BY THE BANK
The Company anticipates that approximately $433,000 will be used for pre-
opening expenses of the Bank including leasehold improvements and the
acquisition of furniture, fixtures, and equipment (including computer
equipment), and $70,000 for organizational expenses of the Bank including
consulting fees, expenses for market
16
<PAGE>
analysis and feasibility studies, and legal fees and expenses. The balance of
the proceeds to be received by the Bank and available for use in the first
year (estimated at $2,097,000 if the Minimum or the Maximum is sold) will be
used for loans to customers, investments, and other general corporate
purposes.
The following table depicts the anticipated use of proceeds by the Bank. All
proceeds received by the Bank will be in the form of an investment by the
Company in the Bank's capital stock.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
OFFERING(1) OFFERING(2)
----------- ----------
<S> <C> <C>
Investment by the Company in the Bank's capital
stock (3)........................................ $2,600,000 $2,600,000
Pre-Opening Expenses.............................. (433,000) (433,000)
Organizational Expenses........................... (70,000) (70,000)
---------- ----------
Remaining Proceeds................................ $2,097,000 $2,097,000
========== ==========
</TABLE>
- --------
(1) Assumes that 157,000 shares of Common Stock are sold in this Offering.
(2) Assumes that 329,000 shares of Common Stock are sold in this Offering.
(3) Includes proceeds from subscriptions purchased by the Organizers in the
amount of $1,210,000.
Although the amounts set forth above provide an indication of the proposed
use of funds based on the Organizers' plans and estimates, actual expenses may
vary from the estimates. These estimates were based on assumptions that the
Organizers believed were reasonable, but as to which no assurances can be
given. The Organizers believe that the estimated minimum net proceeds of this
Offering will satisfy the cash requirements of the Company and the Bank for
their respective first three years of operations and that neither the Company
nor the Bank will need to raise additional funds for operations during this
period, but there can be no assurance that this will be the case.
Pending utilization of the net proceeds of this Offering, the Company plans
to invest net proceeds in short-term money market investments, high grade
commercial paper and interest-bearing bank accounts.
17
<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization of the
Company as of June 30, 1998, and the pro forma capitalization as adjusted to
reflect the cancellation of ten shares concurrently with the closing of the
Minimum, the sale of the Minimum and Maximum number of shares offered hereby
and the 121,000 shares offered in the Private Offering and the application of
the estimated proceeds from such offerings as set forth in "Use of Proceeds."
This table should be read in conjunction with the Company's Consolidated
Financial Statements (including the Notes thereto) included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------
AS ADJUSTED(3)
----------------------
ACTUAL MINIMUM MAXIMUM
------- ---------- ----------
<S> <C> <C> <C>
Shareholders' equity:
Common stock, $0.01 par value; 20,000,000
shares authorized; 10 shares issued and
outstanding (278,000 shares as adjusted for
the Minimum and 450,000 shares as adjusted
for the Maximum) (1)....................... $0.10 $2,780 $4,500
Paid-in capital............................. 99.90 2,777,220 4,595,500
Accumulated deficit(2)...................... (3,959) (3,959) (3,959)
------- ---------- ----------
Total shareholders' equity.................... $(3,859) $2,776,041 $4,496,041
======= ========== ==========
</TABLE>
- --------
(1) Does not include: (i) 12,000 shares of Common Stock issuable upon exercise
of outstanding nonqualified stock options granted to the Company's non-
employee directors pursuant to the Company's 1998 Equity Incentive Plan;
(ii) 24,200 shares of Common Stock issuable upon exercise of outstanding
nonqualified options issued to the Organizers and 10,000 shares of Common
Stock reserved for issuance under the Sales Agent's warrants. Following
the closing of the Minimum, the Company intends to grant incentive stock
options to Mr. Stienessen to purchase 3,000 shares of Common Stock and an
aggregate of an additional 3,000 incentive stock options to key management
personnel at the initial public offering price. See "Management."
(2) The accumulated deficit as of June 30, 1998, is comprised of operating
expenses.
(3) Concurrently with the closing of the Minimum, the Company will redeem the
10 shares of Common Stock presently outstanding at $10.00 per share, the
same price per share at which the Common Stock was issued.
DIVIDEND POLICY
The Board of Directors expects initially to follow a policy of retaining any
earnings to provide funds to operate and expand the business. Consequently, it
is unlikely that any cash dividends will be paid in the near future. The
Company's ability to pay any cash dividends to its shareholders in the future
will depend primarily on the Bank's ability to pay dividends to the Company.
In order to pay dividends to the Company, the Bank must comply with the
requirements of all applicable laws and regulations. For example, before any
dividend can be paid by the Bank to the Company, Minnesota statutes require
the Bank to set aside all of its net profits to a surplus fund until the fund
equals a certain percentage of the Bank's capital. See "Supervision and
Regulation Bank Regulation--Payment of Dividend by the Bank." In addition to
the availability of funds from the Bank, the future dividend policy of the
Company is subject to the discretion of the Board of Directors and will depend
upon a number of factors, including future earnings, financial condition, cash
needs, and general business conditions. The discretion of the Company's Board
of Directors is constrained by Minnesota law, which provides that the Board of
Directors may only authorize a dividend in good faith and only after the Board
determines that the Company will be able to pay its debts in the ordinary
course of business after paying the dividend.
18
<PAGE>
PLAN OF OPERATION
Northern Star Financial, Inc. was formed to organize and own all of the
capital stock of Northern Star Bank. The Organizers filed an application with
the DOC and FDIC in July 1998 to charter the Bank with the State of Minnesota
and to obtain deposit insurance. The issuance of a charter will depend, among
other things, upon compliance with certain legal requirements that may be
imposed by the DOC and FDIC, including capitalization of the Bank with at
least a specified minimum amount of capital, which the Organizers believe will
be $2,500,000. Additionally, the Company must obtain the approval of the
Federal Reserve to become a bank holding company before acquiring the capital
stock of the Bank. The Organizers expect to receive all regulatory approvals
by October 15, 1998.
As of June 30, 1998, the Company had total assets of $14,806, consisting
primarily of deferred organization costs ($9,226) and prepaid expenses
($5,580). The Company incurred a net loss of $(3,959) for the period from
inception (January 22, 1998) to June 30 1998. Management believes that the
current level of expenditures is within the financial capabilities of the
Organizers and is adequate to meet existing obligations and fund current
operations.
Upon the completion of the sale of the Minimum and opening of the Bank,
incurred organization and Private Offering expenses of the Company, estimated
to be $5,000 (consisting principally of legal, regulatory and incorporation
fees), will be deferred and amortized over the Company's initial 60 months of
operations. Offering expenses, estimated to be $75,000 (consisting principally
of direct incremental costs of this Offering), will be deducted from the
proceeds of this Offering and result in an decrease in additional paid-in
capital.
Following the opening of the Bank, the Bank is expected to incur
approximately: (1) $403,000 in expenses relating to leasehold improvements,
and the acquisition of furniture, fixtures and equipment which will be
collectively depreciated over approximately 10 years; (2) $30,000 in pre-
opening expenses which will be expensed currently; and (3) $70,000 in
organizational expenses including consulting fees, and expenses for market
analysis and feasibility studies and legal expenses which will be amortized to
expense over 60 months upon commencement of operations.
During the first twelve months of the Bank's operation, the Company
anticipates that it will focus on developing a strong community banking
organization. In doing so, the Bank intends to initially focus on the many
operational issues associated with opening a new bank, including attracting
deposits, developing and implementing loan policies and procedures and
originating loans, hiring new employees, and marketing. Thereafter, the
Company may seek opportunities to expand operations through branch purchases
or through acquisitions.
The Company believes that this Offering will provide the Company with
sufficient capital to successfully implement its current business plan during
the three year period following the closing of the Minimum, although there can
be no assurance that the Company will not modify its current business plan or
require additional capital to execute its current or modified plan.
The Company and the Bank will rely upon computer software and hardware
systems, some of which will be managed internally by the Company and Bank and
others that will be provided by third party vendors. The Company is aware of
the computer software and hardware issues associated with the programming code
in existing computer software programs and non-information technology such as
microcontrollers found in computer hardware. The issue is whether computer
software and hardware systems will properly recognize date sensitive
information. Much of the computer software and hardware in use today is unable
to recognize a year that begins with "20" instead of "19." Many computers will
be unable to recognize the Year 2000 and, as a result, could generate
erroneous data or cause a computer system to fail. Some computer systems may
begin to fail sooner for failure to read other dates such as September 9,
1999. If not addressed properly, the Year 2000 issue could have a material
adverse effect on the Company, Bank and the Bank's customers.
19
<PAGE>
Because the Company and Bank have not yet begun operations, they do not have
any existing computer software or hardware to evaluate or fix. The Company
intends to evaluate all hardware and software it purchases, licenses, leases or
contracts to use from any third party to determine whether such hardware and
software is capable of recognizing the Year 2000 and will perform properly. The
Company is currently in the process of reviewing software and hardware vendors.
The Company is considering entering into a contract with Fiserve to use its ITT
client-server core retail banking system. The Company intends to seek assurances
that Fiserve's software and hardware computer systems are, or will be, Year 2000
compliant. In the proposed agreement that the Company may enter into with
Fiserve, Fiserve represents and warrants that its system is or will be Year 2000
compliant. The Company will not begin operations until it has assurances that
its computer software and hardware systems are, or will be, Year 2000 compliant.
The Company has not contracted with any independent source to analyze the
Company's Year 2000 exposure but, believes its exposure is manageable because it
is aware of the issues and will only use systems that are, or will be, Year 2000
compliant. The Company believes that its cost in addressing the Year 2000 issues
is nominal since it will not have to replace or fix any existing computer
software programs or hardware.
The Company has developed a "Year 2000 Project Plan" whereby it plans to
create a "Year 2000 Project Team" to be formed from the Bank's management and
staff to address the Year 2000 issues. The Year 2000 Project Team is expected
to evaluate all software and hardware systems to determine compliance. After
the Bank commences operations, the Year 2000 Project Team is expected to
monitor the Bank's own systems and third party systems regularly to assess any
risks to the Company and Bank and proactively work with third party vendors to
ensure all the Company's and Bank's systems are Year 2000 compliant.
The Bank intends to actively assess and monitor its Year 2000 exposure
created when it loans money to its customers. In conjunction with other
lenders, the Company has developed a Year 2000 questionnaire to help screen
credit applicants to determine the applicant's Year 2000 exposure. The Bank
intends to incorporate Year 2000 representations and compliance requirements
into its credit documents. Each applicant's year 2000 exposure will be
considered by the Bank's loan committee to determine an applicant's loan
qualifications.
20
<PAGE>
PROPOSED BUSINESS
GENERAL
The Company, a Minnesota corporation, was formed for the purpose of becoming
a bank holding company to own all of the issued and outstanding capital stock
of the Bank. The Company intends to engage in the business of owning the bank
as its primary asset. In the future, the Company may engage in certain
activities permitted by the Bank Holding Company Act of 1956, as amended (the
"BHCA"), pursuant to approvals which may be sought and granted hereafter by
the Federal Reserve. Any such activities would consist primarily of financial
activities closely related to the business of banking. For the near future,
subject to the completion of the transactions contemplated herein, the
business of the Company will essentially be the operation of the Bank.
In July 1998, the Organizers filed an application to charter the Bank with
the State of Minnesota Department of Commerce (the "DOC"). The DOC is expected
to make a determination of the Bank's application within sixty (60) days after
the submission. Concurrently with the submission of the application to the
DOC, the Organizers submitted to the FDIC an application for deposit insurance
coverage. It is anticipated that the FDIC will act on the Bank's application
within sixty (60) days of its submission. Following initial approval of the
charter application from the DOC, if obtained, the Company will submit an
application to the Federal Reserve for prior approval of the Company to become
a bank holding company under the BHCA. The Federal Reserve is expected to make
a determination on the Company's application within sixty (60) days following
submission of the application. Although the Company expects approval of all of
these applications by October 15, 1998, no assurances can be given that all
approvals will be obtained or if obtained, that such approvals will be within
the stated time frames.
The Bank is expected to provide a wide range of commercial and consumer
banking services primarily to residents of the Minnesota counties of Blue
Earth and Nicollet, which include the Mankato, Minnesota area. The Bank's
Organizers are active in area civic organizations and have developed strong
networks of personal and business contacts within the community. The Bank
intends to distinguish itself by responding quickly to the changing needs of
its market. The Company believes that the insight gained by the Organizers
from their years of living in the community will aid the Bank in determining
what products and services to offer the Bank's customers. The Company expects
that many of the Organizers will be substantial customers of the Bank and will
be able to provide valuable referrals.
The Bank plans to offer a full range of deposit products and services, as
well as credit and operational services. Depository services will likely
include (i) IRA plans, (ii) tax depository and payment services,
(iii) automatic transfers, (iv) bank by mail, (v) direct deposits, (vi) no-fee
savings account, (vii) money-market savings accounts, (viii) passbook savings,
and (ix) various forms and terms of certificates of deposit ("CDs"), both
fixed and variable rate. The Bank intends to attract deposits through
advertising and by pricing depository services competitively. Credit services
will likely include (i) commercial loans, (ii) consumer loans, (iii) real
estate loans, including construction and land development loans, conventional
rate loans secured by residential properties and loans secured by commercial
properties, (iv) agricultural loans, and (v) construction loans. Bank
operation services are expected to include (i) cashier's checks, (ii)
traveler's checks, (iii) money orders, (iv) collections, (v) currency and coin
processing, (vi) wire transfer services, (vii) deposit bag rentals, (viii)
stop payments and (ix) savings bonds. Other services are expected to include
servicing of secondary market real estate loans, notary services,
photocopying, faxing and signature guarantees. The Bank does not plan to offer
trust services at this time.
DEPOSITS
The Bank intends to leverage its location, near Mankato's retail,
residential and industrial areas, to attract and retain core deposits. The
Bank intends to offer a full range of deposit services that are typically
available in most banks, including commercial and consumer checking accounts,
pass book accounts, time deposits of various
21
<PAGE>
types, ranging from daily money market accounts to longer-term certificates of
deposit, Individual Retirement Accounts ("IRAs") and Keogh accounts. The
accounts' terms will vary with principal differences being the minimum balance
required, the time period funds must remain on deposit and interest rate, and
will be tailored to the Bank's principal market area at rates competitive to
those in the Mankato, Minnesota area. The Bank intends to solicit these
accounts from individuals, businesses, associations and organizations, and
government authorities through advertising and by pricing depository services
competitively.
LENDING ACTIVITIES
General. The Bank plans to emphasize a range of lending activities,
including commercial, agricultural, construction, residential and consumer
loans, to individuals and small- to- medium-sized businesses and professional
concerns that are located in or conduct a substantial portion of their
business in the Bank's market area. The Bank will initially focus on
commercial and consumer lending, emphasizing its philosophy of becoming a
community bank with an expertise in residential lending.
Commercial Loans. The Bank intends to make secured and unsecured loans to
businesses and professional concerns. Such loans are expected to include
commercial and industrial loans for plant and equipment, operating loans,
deposit secured loans, loans guaranteed by the Small Business Administration
and letters of credit. Short-term loans secured by commercial or residential
property will likely be classified as commercial loans rather than mortgage
loans if they are not taken out for the purpose of acquiring real estate.
Variable rate loans will generally have a floor rate but not a ceiling rate.
In a falling interest rate environment, the floor rates should help limit the
Bank's interest rate risk exposure. The Bank intends to develop its own risk
rating system, defined in terms of both loan and borrower characteristics, to
measure credit risk in its commercial and industrial loan portfolio. The
principal economic risk associated with each category of anticipated loans,
including commercial loans, is the creditworthiness of the Bank's borrowers.
The risks associated with commercial loans will vary with many economic
factors, including the economy in the Mankato area. The well-established banks
in the Mankato area will make proportionately more loans to medium- to large-
sized businesses than the Bank. Many of the Bank's anticipated commercial
loans will likely be made to small- to medium-sized businesses which may be
less able than larger borrowers to withstand competitive, economic and
financial conditions.
Consumer Loans. The Bank considers consumer loans to be an important
component of its strategic plan because such loans generally have shorter
terms to maturity, thereby reducing the Bank's exposure to interest rate
changes, and generally carry higher rates of interest than do commercial or
residential loans. The Bank intends to make a variety of loans to individuals
for personal and household purposes, including secured and unsecured
installment and term loans, home equity and home improvement loans and lines
of credit. Additionally, the Bank will make loans for the purchase of cars,
recreation vehicles and household appliances, including computers, lawn and
stereo equipment. The Bank expects to originate student loans and sell such
loans in the secondary market. The underwriting standards employed by the Bank
for consumer loans will include a determination of the applicant's payment
history on other debts and an assessment of his ability to meet existing
obligations and payments on the proposed loan. Although creditworthiness of
the applicant will be a primary consideration, the underwriting process will
generally also include a comparison of the value of the security, if any, in
relation to the proposed loan amount. The underwriting criteria for home
equity loans and lines of credit will generally be the same as applied by the
Bank when making a first mortgage loan, as described above. Home equity lines
of credit will typically expire ten years or less after origination. As with
other categories of loans, the principal economic risk associated with
consumer loans is the creditworthiness of the Bank's borrowers, and the
principal competitors for consumer loans will be the established banks in the
Bank's market area.
Real Estate Loans. The Bank intends to provide residential and non-
residential loans secured by first or second mortgages on real estate. The
Bank intends to emphasize the origination of adjustable-rate mortgage ("ARM")
loans and loans with shorter terms to maturity than traditional 30-year fixed-
rate loans. Generally, the Bank will limit the term of residential loans held
in its portfolio to 15 years. The Bank's strategy will be to have a high
percentage of assets in portfolio with more frequent re-pricing or shorter
maturity, and in some cases, higher yields, than long-term fixed rate mortgage
loans. In addition, the Bank may originate fixed-rate mortgages. As general
market interest rates decrease, the Bank expects that borrowers will favor
fixed-rate loans over
22
<PAGE>
adjustable-rate loans which provide borrowers a more predictable payment
schedule. As a result, the origination of adjustable-rate loans is expected to
decrease while fixed-rate loans are expected to be in greater favor with
borrowers. The relative demand for adjustable-rate and fixed-rate loans is
expected to vary considerably, depending upon such factors as the level of
interest rates, expectations regarding future interest rates and the
relationship between long-term and short-term interest rates. Current loan
demand is expected to remain strong because of low interest rates and damage
to area homes by summer storms. The Federal Emergency Management
Administration estimates that over 700 homes in the Bank's market area were
totally destroyed as a result of spring and summer storms, with hundreds more
severely damaged. The Bank anticipates that many of the homeowners will be
seeking new mortgages. Substantially all of the Bank's fixed-rate one-to-four
family loans will be originated in accordance with criteria which permits
their sale in the secondary market, and substantially all such loans with
terms in excess of 15 years will be sold on a best efforts basis. As a result,
the bank believes it will not be subject to exposure to losses incurred as a
result of changes in interest rates.
The Bank will also seek to originate nonresidential real estate loans
consisting of office, office warehouse and owner occupied commercial property.
The Bank intends to originate commercial real estate loans in amounts of up to
75% of the appraised value of the property. Such appraised value will likely
be determined by an independent appraiser previously approved by the Bank. The
Bank's commercial real estate loans will likely be permanent loans secured by
approved property such as small office buildings, retail stores, small strip
plazas, and other non-residential buildings. The Bank intends to originate
commercial real estate loans with amortization periods of up to 25 years,
primarily as adjustable rate mortgages.
Loans secured by commercial real estate involve a greater degree of risk
than do residential real estate loans. Consequently, the Bank intends to place
great reliance on the cash flow from the project being financed as well as the
borrower's ability to support the debt obligation in periods of reduced cash
flows. The increased credit risk is the result of several factors, including
the concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans. The
repayment of loans secured by commercial real estate is typically dependent
upon the successful operation of the related real estate project.
Risks associated with residential and nonresidential mortgage loans include
the inherent risk of the credit worthiness of the Bank's borrowers, the Bank's
inability to sell foreclosed real estate in a down market or economy, shifts
in the demographics of a given market from residential zoning to commercial,
the displacement of individual consumers due to corporate downsizing/loss of
income, and an overall economic downturn creating unemployment due to lack of
product demand.
Agricultural. The Bank intends to make credit available to farmers for feed,
seed, fertilizer, livestock, machinery and equipment, and to meet operating
expenses. The related loans will are expected to be both secured and unsecured
and payable on time or on demand.
Construction Loans. The Bank will seek to make construction loans to
builders and to single-family owner-occupied home owners for which the Bank
also provides permanent financing. Construction financing is generally
considered to involve a higher degree of risk of loss than long-term financing
on improved, occupied real estate. Risk of loss on a construction loan is
dependent upon the accuracy of the initial estimate of the property's value at
completion of the project and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result
in delays and cost overruns. If the estimate of construction proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to
maturity of the loan, with a project having a value which is insufficient to
assure full repayment. As a result, the Bank will place a strong emphasis on
the availability of "take-out" financing, and upon the borrower's ability to
repay principal and interest and of the experience a expertise of the builder
who is constructing the property.
23
<PAGE>
Loan Approval and Review. The Bank's loan approval policies will provide for
various levels of officer lending authority. When the amount of aggregate
loans to a single borrower exceeds that individual officer's lending
authority, the loan request will be considered and approved by an officer with
a higher lending limit or the officers' loan committee. The Bank will
establish an officers' loan committee that has lending limits, and any loan in
excess of this lending limit will be approved by the directors' loan
committee. The Bank will not make any loans to any director, officer, or
employee of the Bank unless the loan is approved by the board of directors of
the Bank and is made on terms not more favorable to any person than would be
available to a person not affiliated with the Bank.
Lending Limits. The Bank's lending activities will be subject to a variety
of lending limits imposed by Minnesota law. While differing limits apply in
certain circumstances based on the type of loan or the nature of the borrower
(including the borrower's relationship to the Bank), in general the Bank will
be subject to a loan-to-one-borrower limit. Pursuant to Minnesota law, the
Bank may not loan or guaranty more than 20% of its actual paid-in-capital and
its actual surplus to any individual. Unless the Bank is able to sell
participations in its loans to other financial institutions, the Bank will not
be able to meet all of the lending needs of the loan customers requiring
aggregate extensions of credit above these limits. It is not currently
anticipated that the Bank will have an initial loan loss reserve when it
commences operations.
OTHER BANKING SERVICES
Other anticipated bank services include cash management services, safe
deposit boxes, travelers checks, direct deposit of payroll and social security
checks, and automatic drafts for various accounts. The Bank plans to become
associated with a shared network of automatic teller machines that may be used
by the Bank customers throughout the Mankato area. The Organizers believe that
by being associated with a shared network of ATMs, the Bank will be better
able to serve its customers and will be able to attract customers who are
accustomed to the convenience of using ATMs, although the Organizers do not
believe that maintaining this association will be critical to the Bank's
success. The Bank intends to begin offering these services shortly after the
Bank's opening. The Bank also plans to offer MasterCard and Visa credit card
services through a correspondent bank as an agent for the Bank. The Bank does
not plan to exercise trust powers during its initial years of operation.
MARKET AND COMPETITION
The Bank's principal market area is the Minnesota counties of Blue Earth and
Nicollet, which areas include the communities of Mankato, North Mankato,
LeHillier and Skyline, Minnesota, from which it is expected to draw at least
80% of its business. The population of the market area is approximately 85,000
people. The 1997 median household income for the area was approximately
$43,000. Management believes that the Bank's local ownership provides it an
advantage within this market area.
The business of operating a community bank is highly competitive. The Bank
will compete with community and national banks, credit unions, thrifts, and
non-financial institutions such as insurance companies and investment banks.
As of the date of this Memorandum, the two Minnesota counties of Blue Earth
and Nicollet are served by 42 offices of 22 different banks, three federal
savings banks and five credit unions. The communities of Mankato and North
Mankato are served by four locally chartered commercial banks and one locally
chartered savings bank. The acquisition of two of the four bank charters and
the relocation of the savings bank charter are pending. Banks and credit
unions located outside of the counties of Blue Earth and Nicollet also will
compete with the Bank. Most, if not all, of the Bank's competitors have
substantially greater financial resources than the Company. The Organizers,
however, believe that the Mankato region can support and benefit from the
Bank. The Bank believes its competitive strength will lie in providing long-
term, relationship-oriented banking services by management and employees with
strong ties to the Mankato area. The Bank expects to target all members of the
area, especially local business and home owners.
24
<PAGE>
The Bank intends to utilize newspaper, radio and billboard advertising in
the two county region which it serves. It intends to focus on image building
and name recognition and emphasize its deposit products and services.
FACILITIES
The Bank has entered into a 10-year lease agreement to lease a banking
office at 1650 Madison Avenue, Mankato, Minnesota. The lease is subject to the
Bank obtaining all government approvals necessary to begin banking operations.
The Company believes this site is desirable because of the high visibility of
its location and the amount of traffic which passes it each day. The Bank will
occupy approximately 5,000 square feet of a 18,000 square foot colonial style
office building. The building will include a teller line with three tellers,
two platform positions, a drive-through and adjacent executive and
administrative offices and other facilities necessary to operate a full-
service consumer and commercial bank. The Bank will pay monthly rent of
approximately $6,042 during the first three years of the lease, $6,250 for the
next three years, and $6,458 for the last four years, and will have the option
to extend the lease term for two consecutive five year periods with a right of
first refusal on any additional space that becomes available. A company
affiliate is also an affiliate of the lessor. See "Interest of Management and
Others in Certain Transaction."
EMPLOYEES
Currently, the Company has only one employee, Thomas Stienessen, who will be
the President and Chief Executive Officer of the Bank. Assuming regulatory
approval is obtained, the Company will recruit other appropriate employees for
the Bank staff as its opening date approaches. The Bank intends that its
operating staff will consist of 8-10 people at the time of its opening.
LITIGATION
The Company is not a party to any pending legal proceedings.
25
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's directors and executive officers, as of the date of this
Prospectus, and the proposed directors and executive officers of the Bank,
upon completion of this Offering, are:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY POSITION WITH BANK
- ---- --- ------------------------------- -------------------------------
<S> <C> <C> <C>
Thomas Stienessen 52 Chief Executive Officer, Director; Chief Executive
President and a Director Officer and President
Dean Doyscher (1) 53 Director Director
Frank Gazzola (1) 70 Chief Financial Officer,
Treasurer, Secretary and a
Director Director
Michael Reynolds (1) 55 Director Director
Thomas Reynolds (1) 61 Director Director
</TABLE>
- --------
(1) Member of the Compensation and Audit Committees of the Board of
Directors.
THOMAS P. STIENESSEN--has been Chief Executive Officer, President and a
Class II Director of the Company since its formation. Prior to forming the
Company, Mr. Stienessen served as Chief Executive Officer and President of
SGL, Inc., a holding company for the Family Bank, where Mr. Stienessen served
as Chairman, Chief Executive Officer, President and Director as well as a
member of the Executive and Operating Committees since January 1991. Mr.
Stienessen has more than 25 years of experience in banking and in mortgage
banking including consumer, residential, construction, commercial and
commercial real estate lending. Mr. Stienessen's experience includes bank
marketing, branch management, branch operations, accounting, planning and
budgeting, underwriting and correspondent/ending. Previous banking experiences
include positions as Senior Vice President of TCF Mortgage Corporation and
Vice President and Regional Manager of TCF Bank. Mr. Stienessen's residential
address is 11 Marie Lane Lake Emily, St. Peter, Minnesota 56082.
DEAN DOYSCHER--has been a Class III Director of the Company since its
formation. Mr. Doyscher, a Minnesota native, has served as President of
Security Management and Realty, Inc. since 1978. Security Management and
Realty, Inc. owns and manages commercial property throughout all of rural
Minnesota including rural housing projects in over 55 Minnesota cities. Mr.
Doyscher attended Mankato State University where he earned both undergraduate
and graduate degrees in Urban and Regional Planning. Mr. Doyscher was employed
as the Deputy Director of the Model Cities Program for Lewiston, Maine before
becoming the Director of Planning for the City of Mankato and Blue Earth
County in 1972. During 1973-1976 Mr. Doyscher served as the first Executive
Director of the Region Nine Development Commission serving nine counties in
South Central Minnesota. Prior to forming his own management and realty
company in 1988, Mr. Doyscher served from 1976-1988 as a consultant with
Professional Planning and Development providing rural Minnesota cities with
tax increment financing, economic development, zoning and housing plans.
Professional Planning and Development was named Minnesota's Economic Developer
of the Year in 1988. Mr. Doyscher's other relevant experience includes service
as President, Minnesota Planning Association; Director, Minnesota Council for
Affordable and Rural Housing; and past member of the Board of Directors, Mid-
America, Bank South. Mr. Doyscher's residential address is 78 Cree Point,
Mankato, Minnesota 56001.
FRANK GAZZOLA--has been Chief Financial Officer, Treasurer, Secretary and a
Class II Director of the Company since its formation. Mr. Gazzola has served
as President of Frank L. Gazzola, Chartered, Certified Public Accountants
since 1987. Mr. Gazzola has been engaged in public accounting for over 25
years, for most of that time as the founder and managing partner of one of
Southern Minnesota's largest CPA firms. Mr. Gazzola was a founder of SGL,
Inc., a holding company for the Family Bank and served as an officer and
director until April 1998. He has served on the boards of numerous civic,
commercial and financial enterprises including Mankato District 77 School
Board and Director and Treasurer of American Western Corporation, a
manufacturer of extruded plastic products. Mr. Gazzola attended Columbia
University, the University of Minnesota, and
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Mankato State University from which he received a B.S. in Business
Administration. Mr. Gazzola's residential address is 224 Crestwood Drive,
North Mankato, Minnesota 56003.
MICHAEL REYNOLDS--has been a Class I Director of the Company since its
formation. Mr. Reynolds served as Vice-President of Reynolds Welding Supply
Company in Mankato, Minnesota and Welders Supply Company in Wilmar, Minnesota
since 1963. Reynolds Welding Supply Company is engaged in the sale of
industrial gases and welding supplies and operates in three states. Mr.
Reynolds has been involved in many fund raising efforts for the Mankato State
University Athletic Department. He previously served as volunteer for the
Mankato United Way and is a past president of the Mankato Golf Club. Mr.
Reynolds is the brother of Thomas Reynolds. Mr. Reynold's residential address
is 74 Cree Point, Mankato, Minnesota 56001.
THOMAS REYNOLDS--has been a Class III Director of the Company since its
formation. Mr. Reynolds is a Mankato native and has served as President of
Welders Supply Company and Reynolds Welding Supply, since 1952. Mr. Reynolds
served on the Board of Directors for the National Bank of Commerce, presently
called Mid-America Bank, for six years from 1984 to 1990. Mr. Reynolds is the
brother of Michael Reynolds. Mr. Reynold's residential address is 19 Dellview
Lane, Mankato, Minnesota 56001.
As of the date of this Prospectus, Mr. Thomas Stienessen, the Company's sole
employee, serves as the Company's President and Chief Executive Officer and
Frank Gazzola, a director who is not employed by the Company, serves as the
Company's temporary Chief Financial Officer. The Bank intends to enter into an
employment agreement with Mr. Stienessen following the closing of the Minimum.
See "Management--Employment Agreement." Following completion of the Minimum,
the Bank anticipates it will hire qualified persons with banking experience
for the following key management positions: (i) vice president and chief
financial officer; (ii) vice president of lending; and (iii) vice president of
operations. Although the Company has not entered into any agreement with any
person to serve in any of the positions identified above, it has interviewed
and identified potential qualified candidates. No assurance can be made,
however, that a formal offer will be made to any of the potential qualified
candidates or that such candidates will accept employment with the Bank. The
Company anticipates that it will pay the three key managers an aggregate of
$130,000 per year in annual base salary compensation and each manager will be
granted an incentive stock option to purchase 1,000 shares of Common Stock.
The number of directors is determined by the shareholders at their annual
meeting, subject to the right of the shareholders to change such number
between annual meetings and the right of the Board to increase such number
between annual meetings. The Board of Directors consists of three classes of
directors: Class I who hold office until the 1999 Annual Shareholders Meeting,
Class II who hold office until the 2000 Annual Shareholders Meeting and Class
III who hold office until the 2001 Annual Shareholders Meeting, or in all
cases until their successors are elected. Executive officers of the Company
and Bank are appointed by and serve at the discretion of the Board of
Directors. The Board of Directors has a Compensation Committee which provides
recommendations concerning salaries and other compensation to be paid to
executive officers of the Company and administers the Company's 1998 Equity
Incentive Plan and an Audit Committee which is responsible for reviewing the
Company's audit process.
DIRECTOR COMPENSATION
Directors of the Company and the Bank will be reimbursed for their expenses
incurred in attending board meetings and will receive director compensation in
an amount to be determined. Company board meetings are expected to be held at
least every quarter, as necessary, and Bank board meetings are expected to be
held at least once each month. Pursuant to the Company's 1998 Equity Incentive
Plan, non-employee directors upon initial election to the Board of Directors
are automatically granted a nonqualified option to purchase 3,000 shares of
Common Stock at fair market value. Each non-employee director who is re-
elected as a director or whose term of office continues after a meeting of
shareholders at which directors are elected, is automatically granted an
option to purchase 3,000 shares of Common Stock at fair market value. The non-
employee directors currently hold nonqualified options to purchase an
aggregate of 12,000 shares of Common Stock at an exercise price of $10.00 per
share. See "Management--1998 Equity Incentive Plan."
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<PAGE>
EMPLOYMENT AGREEMENT
The Bank intends to enter into a three-year employment agreement with Mr.
Stienessen, following the closing of the Minimum, pursuant to which Mr.
Stienessen will serve as the President and Chief Executive Officer of the
Bank. During the term of the agreement, Mr. Stienessen will be paid an annual
salary of $100,000 and is eligible to participate in discretionary bonuses
that may be authorized by the board of directors to its senior management. Mr.
Stienessen will be eligible to participate in any management incentive program
of the Bank or any long-term equity incentive program and will be eligible for
grants of stock options and other awards thereunder. Additionally, Mr.
Stienessen will participate in the Bank's retirement, welfare and other
benefit programs and is entitled to a life insurance policy and an accident
liability policy and reimbursement for automobile expenses, club dues, and
travel and business expenses. Furthermore, if in connection with a change of
control of the Bank, Mr. Stienessen is terminated without cause or voluntarily
quits because of certain specified reasons, he is entitled to a lump sum
payment of 2.99 times his annual base salary. As of the date of this
Prospectus, neither the Company nor the Bank has paid any compensation to its
executive officers. The Company will pay Mr. Stienessen additional
compensation of $25,000, upon receipt of approval of the Organizers'
applications with the FDIC and the DOC and the Company's application with the
Federal Reserve, for organizational services he rendered prior to approval of
the applications.
STOCK OPTIONS
In August 1998, the Board of Directors and shareholders adopted the Northern
Star Financial, Inc. 1998 Equity Incentive Plan (the "Plan"), and reserved
41,700 shares of Common Stock for issuance pursuant to the Plan. As of the
date of this Prospectus, the Company has outstanding under the Plan options to
purchase an aggregate of 12,000 shares at an exercise price of $10.00 per
share. In addition, the Company has outstanding nonqualified options, granted
to the Organizers outside the Plan, to purchase an aggregate of 24,200 shares
of Common Stock. Following the closing of the Minimum, the Company anticipates
that it will issue incentive stock options to Mr. Stienessen to purchase 3,000
shares of Common Stock at $10.00 per share and incentive stock options to
purchase an aggregate of 3,000 shares to key management personnel. The Company
will not grant options and warrants in excess of 15% of the outstanding shares
to officers, directors, employees, 5% shareholders or affiliates for a one
year period following the Offering.
1998 EQUITY INCENTIVE PLAN
A general description of the basic features of the Plan is presented below,
but such description is qualified in its entirety by reference to the full
text of the Plan, a copy of which may be obtained without charge upon written
request to Thomas Stienessen, the Company's Chief Executive Officer.
Purpose. The purpose of the Plan is to promote the success of the Company by
facilitating the employment and retention of competent personnel and by
furnishing incentive to directors, officers and employees of the Company and
consultants and advisors to the Company, upon whose efforts the success of the
Company will depend to a large degree.
Term. Incentive stock options may be granted pursuant to the Plan during a
period of ten (10) years from the date the Plan was adopted by the Board of
Directors (until August 2008), and nonqualified stock options may be granted
until the Plan is discontinued or terminated by the Board of Directors.
Administration. With the exception of the stock options automatically issued
to Non-Employee Directors as described below, the Plan is administered by the
Board of Directors or the Compensation Committee of the Board of Directors,
all of the members of which are "non-employee directors" under Rule 16b-3 of
the Securities Exchange Act of 1934 (collectively referred to as the
"Administrator"). The Plan gives broad powers to the Administrator to
administer and interpret the Plan, including the authority to select the
individuals to be granted options and to prescribe the particular form and
conditions of each option granted.
Eligibility. All employees of the Company or any subsidiary are eligible to
receive incentive stock options pursuant to the Plan. All employees, officers
and directors of and consultants and advisors to the Company or
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<PAGE>
any subsidiary are eligible to receive nonqualified stock options. As of the
date of this Prospectus, the Company had one employee, who is an officer, and
four directors who are not employees.
Options. When an option is granted under the Plan, the Administrator, at its
discretion, specifies the option price and the number of shares of Common
Stock which may be purchased upon exercise of the option. The exercise price
of an incentive stock option and nonqualified stock option set by the
Administrator may not be less than 100% of the fair market value of the
Company's Common Stock, as that term is defined in the Plan. The period during
which an option may be exercised and whether the option will be exercisable
immediately, in stages, or otherwise is set by the Administrator. Generally,
an incentive stock option may not be exercisable more than ten (10) years from
the date of grant. Optionees may pay for shares upon exercise of options with
cash, certified check or Common Stock of the Company valued at the stock's
then "fair market value" as defined in the Plan. Each option granted under the
Plan is generally nontransferable during the lifetime of the optionee;
however, the Administrator may, in its sole discretion, permit the transfer of
a nonqualified stock option to immediate family members or to certain family
trusts or family partnerships.
Generally, under the form of option agreement which the Administrator is
currently using for options granted under the Plan, if the optionee's
affiliation with the Company terminates before expiration of the option for
reasons other than death or disability, the optionee has a right to exercise
the option for three months after termination of such affiliation or until the
option's original expiration date, whichever is earlier. If the termination is
because of death or disability, the option typically is exercisable until its
original stated expiration or until the 12-month anniversary of the optionee's
death or disability, whichever is earlier. The Administrator may impose
additional or alternative conditions and restrictions on the incentive or
nonqualified stock options granted under the Plan; however, each incentive
option must contain such limitations and restrictions upon its exercise as are
necessary to ensure that the option will be an incentive stock option as
defined under the Internal Revenue Code.
Change of Control. In the event that (i) the Company is acquired through the
sale of substantially all of its assets or through a merger or other
transaction (a "Transaction"), (ii) after the effective date of the Plan a
person or entity becomes the holder of 30% or more the Company's outstanding
Common Stock, or (iii) individuals who constituted the Board on the effective
date of the Plan ceased for any reason thereafter to constitute at least a
majority of the Board of Directors (with exceptions for individuals who are
nominated by the current Board of Directors), all outstanding options will
become immediately exercisable in full and will remain exercisable during the
remaining terms of such outstanding options, whether or not the participants
to whom the options have been granted remain employees of the Company or a
subsidiary. The acceleration of the exercisability of outstanding options may
be limited, however, if the acquiring party seeks to account for a Transaction
on a "pooling of interests" basis which would be precluded if such options are
accelerated. The Board may also take certain additional actions, such as
terminating the Plan, providing cash or stock valued at the amount equal to
the excess of the fair market value of the stock over the exercise price, or
allowing exercise of the options for stock of the succeeding company.
Automatic Grants to Non-Employee Directors. The Plan provides for automatic
option grants to each director who is not an employee of the Company (a "Non-
Employee Director"). Each Non-Employee Director who is a director on the date
the Plan was adopted by the Board of Directors or who is elected for the first
time as a director shall automatically be granted a nonqualified option to
purchase 3,000 shares of the Common Stock at an option price per share equal
to 100% of the fair market value of the common stock on the date of the Non-
Employee Director's initial election, which option is exercisable, to the
extent of 1,000 shares immediately and on each of the first two anniversaries
of the date of grant. Each Non-Employee Director who is re-elected as a
director of the Company or whose term of office continues after a meeting of
shareholders at which directors are elected shall, as of the date of such re-
election or shareholder meeting, automatically be granted an immediately
exercisable nonqualified option to purchase 3,000 shares of the common stock
at an option price per share equal to 100% of the fair market value of the
common stock on the date of such re-election or shareholder meeting. No
director shall receive more than one option to purchase 3,000 shares pursuant
to the formula plan in any one
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<PAGE>
fiscal year. All options granted pursuant to these provisions shall expire on
the earlier of (i) three months after the optionee ceases to be a director
(except by death) and (ii) ten (10) years after the date of grant.
Notwithstanding the foregoing, in the event of the death of a Non-Employee
Director, any option granted to such Non-Employee Director pursuant to this
formula plan may be exercised at any time within six months of the death of
such Non-Employee Director or on the date on which the option, by its terms
expires, whichever is earlier.
Amendment. The Board of Directors may from time to time suspend or
discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment may impair the terms and conditions of any
outstanding option to the material detriment of the optionee without the
consent of the optionee, except as authorized in the event of a sale, merger,
consolidation or liquidation of the Company. The Plan may not be amended in
any manner that will cause incentive stock options to fail to meet the
requirements of Code Section 422, and may not be amended in any manner that
will: (i) materially increase the number of shares subject to the Plan except
as provided in the case of stock splits, consolidations, stock dividends or
similar events; (ii) change the designation of the class of employees eligible
to receive options; (iii) decrease the price at which options will be granted;
or (iv) materially increase the benefits accruing to optionees under the Plan,
without the approval of the shareholders, if such approval is required to
comply with Code Section 422 or the requirements of Section 16(b) of the Act.
The Board of Directors will equitably adjust the maximum number of shares of
Common Stock reserved for issuance under the Plan, the number of shares
covered by each outstanding option and the option price per share in the event
of stock splits or consolidations, stock dividends or other transactions in
which the Company receives no consideration. Generally, the Board of Directors
may also provide for the protection of optionees in the event of a merger,
liquidation or reorganization of the Company.
Federal Income Tax Consequences of the Plan. Under present law, an optionee
will not realize any taxable income on the date a nonqualified stock option is
granted to the optionee pursuant to the Plan. Upon exercise of the
nonqualified stock option, however, the optionee will realize, in the year of
exercise, ordinary income to the extent of the difference between the option
price and the fair market value of the Company's Common Stock on the date of
exercise. Upon the sale of the shares, any resulting gain or loss will be
treated as capital gain or loss. The Company will be entitled to a tax
deduction in its fiscal year in which nonqualified stock options are
exercised, equal to the amount of compensation required to be included as
ordinary income by those optionees exercising such options.
Incentive stock options granted pursuant to the Plan are intended to qualify
for favorable tax treatment to the optionee under Code Section 422. Under Code
Section 422, an employee realizes no taxable income when the incentive stock
option is granted. If the employee has been an employee of the Company or any
subsidiary at all times from the date of grant until three months before the
date of exercise, the employee will realize no taxable income when the option
is exercised. If the employee does not dispose of shares acquired upon
exercise for a period of two years from the granting of the incentive stock
option and one year after receipt of the shares, the employee may sell the
shares and report any gain as capital gain. The Company will not be entitled
to a tax deduction in connection with either the grant or exercise of an
incentive stock option. If the employee should dispose of the shares prior to
the expiration of the two-year or one-year periods described above, the
employee will be deemed to have received compensation taxable as ordinary
income in the year of the early sale in an amount equal to the lesser of (i)
the difference between the fair market value of the Company's Common Stock on
the date of exercise and the option price of the shares, or (ii) the
difference between the sale price of the shares and the option price of
shares. In the event of such an early sale, the Company will be entitled to a
tax deduction equal to the amount recognized by the employee as ordinary
income. The foregoing discussion ignores the impact of the alternative minimum
tax, which may particularly be applicable to the year in which an incentive
stock option is exercised.
Plan Benefits. Except for the automatic grants to Non-Employee Directors,
future grants of stock options are subject to the discretion of the
Administrator. Therefore, the future benefits under the Plan cannot be
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<PAGE>
determined at this time. Following the closing of the Minimum, the Company
expects to grant incentive stock options to purchase 3,000 shares of Common
Stock at $10.00 per share to Mr. Stienessen and, subsequently, following the
organization of the Bank, grant options to purchase an aggregate of 3,000
shares of Common Stock to the key managers who will be employed by the Bank.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
The Company and the Bank expect to have banking and other transactions in
the ordinary course of business with Organizers, directors, and officers of
the Company and the Bank and their affiliates, including members of their
families or corporations, partnerships, or other organizations in which such
Organizers, officers, or directors have a controlling interest, on
substantially the same terms (including price, or interest rates and
collateral) as those prevailing at the time for comparable transactions with
unrelated parties. Such transactions are not expected to involve more than the
normal risk of collectibility nor present other unfavorable features to the
Company and the Bank. Loans to individual directors and officers must also
comply with the Bank lending policies and regulatory lending limits and
restrictions on loans to affiliates, and directors with a personal interest in
any loan application will be excluded from the consideration of such loan
application.
The Bank has entered into a 10-year lease agreement with Colonial Square
Partners, Inc. to lease approximately 5,000 square feet of a 18,000 square
foot single level, multi-tenant colonial style office building. The lease is
subject to the Bank obtaining all governmental approvals necessary to begin
banking operations. Dean Doyscher, an Organizer, director and principal
shareholder of the Company, is a partner of Colonial Square Partners, Inc. The
Bank anticipates that it will invest approximately $195,000 for leasehold
improvements including the construction of walls, windows, and doors, paint,
floor tile and carpet, electrical and a drive-through canopy. See "Proposed
Business--Facilities." The Company has obtained an independent appraisal of
market rents in the Bank's proposed market. The Company believes that this
transaction is on terms no less favorable to the Bank than could be obtained
from an unaffiliated third party.
The Company believes that all prior transactions between the Company and its
officers, directors or other affiliates of the Company were on terms no less
favorable than could have been obtained from unaffiliated third parties on an
arm's-length basis. All future transactions, loans and any forgiveness of
loans, with directors, officers or stockholders holding more than 5% of the
Company's outstanding Common Stock, or affiliates of any such persons, will be
made for bona fide business purposes and will be on terms no less favorable
than could be obtained from an unaffiliated third party and will be approved
by a majority of the independent outside directors who do not have an interest
in the transactions and who have access, at the Company's expense, to the
Company's independent legal counsel.
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PRINCIPAL SHAREHOLDERS
The following table sets forth as of June 30, 1998, and as adjusted to
reflect the sale of shares from the Private Offering and the Minimum and
Maximum shares offered hereby, certain information with respect to the
beneficial ownership of the Company's Common Stock, by (i) each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
Common Stock, (ii) each director of the company, and (iii) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES
BENFICIALLY
OWNED AFTER
OFFERING
-------------
NUMBER OF
SHARES NUMBER OF
BENEFICIALLY SHARES
OWNED PRIOR TO BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL THE OWNED AFTER THE
OWNED OFFERING(1) OFFERING(1) MINIMUM MINIMUM
- ------------------------------ -------------- --------------- ------- -------
<S> <C> <C> <C> <C>
Thomas Stienessen (2)(3)........ 6,410 38,400 13.5% 8.4%
Dean Doyscher (2)(4)............ 6,000 31,000 10.9% 6.8%
Frank Gazzola (2)(5)............ 7,400 39,400 13.8% 8.6%
Michael Reynolds (2)(6)......... 2,000 7,000 3.2% 1.5%
Thomas Reynolds (2)(7).......... 6,400 33,400 11.7% 7.3%
All directors and executive
officers as a group
(5 persons) (8)................ 28,200 149,200 48.7% 31.2%
</TABLE>
- --------
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of August 1, 1998, or within 60 days
of such date, are treated as outstanding when determining the percent of
the class owned by such individual and when determining the percent owned
by the group. For purposes of calculating the percent of class owed after
this Offering, it was assumed that the officers, directors and principal
shareholders will not be purchasing shares in this Offering. Unless
otherwise indicated, each person named or included in the group has sole
voting and investment power with respect to the shares of common stock set
forth opposite his name.
(2) The business address of the directors and executive offices of the Company
is 410 Jackson Street, Suite 510, Mankato, Minnesota 56001.
(3) Includes 6,400 shares purchasable upon exercise of nonqualified options.
In June 1998, Mr. Stienessen purchased 10 shares of Company Common Stock
at $10.00 per share in order to capitalize and organize the Company and
approve the Plan. Concurrently with the closing of the Minimum, the
Company will redeem the 10 shares purchased by Mr. Stienessen.
(4) Includes 6,000 shares purchasable upon exercise of options.
(5) Includes 7,400 shares purchasable upon exercise of options.
(6) Includes 2,000 shares purchasable upon exercise of options.
(7) Includes 6,400 shares purchasable upon exercise of options.
(8) Includes 28,200 shares purchasable upon exercise of options.
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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
Commercial banking is highly regulated at both the federal and state level.
Deposits, reserves, investments, loans, consumer law compliance, issuance of
securities, payment of dividends, mergers and consolidations, electronic funds
transfers, management practices and other aspects of a holding company's and a
bank's operations are subject to regulation. This regulation is designed
primarily to protect depositors and not to benefit holders of securities of
the holding company or the bank. The highly regulated environment in which
commercial banks operate is subject to frequent change. Federal banking bills
are currently under consideration in Congress which, if enacted, could have a
variety of effects on this regulatory environment. In general, pending
legislation would repeal portions of the Glass-Steagall Act and would broaden
the permissible range of affiliations between commercial banks and investment
banks. In addition, these bills could limit the authority of the Office of the
Comptroller of the Currency to authorize new insurance activities for banks,
and could provide relief from a variety of federal banking regulations. The
Company cannot fully predict the nature or the extent of any effects which
these proposed regulatory changes or other possible regulatory changes may
have on its business and earnings. Such changes may have the effect of
increasing or decreasing the cost of doing business, modifying permissible
activities, or enhancing the competitive position of other financial
institutions.
BANK HOLDING COMPANY REGULATION
In addition to a variety of generally applicable state and federal laws
governing businesses and employers, the Company is extensively regulated by
special laws applicable only to financial institutions. Virtually all aspects
of the Company's operations are subject to specific requirements or
restrictions and general regulatory oversight. With few exceptions, state and
federal banking laws have as their principal objective either the maintenance
of the safety and soundness of the financial institution and the federal
deposit insurance system or the protection of consumers or classes of
consumers, rather than the specific protection of shareholders of the Company.
Supervision. As a bank holding company, the Company is subject to regulation
by the Federal Reserve Board under the BHC Act and various regulations adopted
by the Federal Reserve Board. The Company is required to file with the Federal
Reserve Board quarterly and annual reports and such additional information as
the Federal Reserve Board may require pursuant to the BHC Act. The Federal
Reserve Board also may examine the Company. The Company is not subject to any
formal or informal enforcement actions by any bank regulatory office as a
result of such examination or for any other reason. The Federal Reserve Board
also has authority, in certain circumstances, to approve or disapprove stock
redemptions, changes in ownership or control, and dividend payments. The
Federal Reserve Board may also require that the Company terminate an activity
or terminate control of or liquidate or divest certain non-bank subsidiaries
or affiliates when the Federal Reserve Board believes the activity or the
control of the subsidiary or affiliate constitutes a significant risk to the
financial safety, soundness or stability of any of its banking subsidiaries.
Under the BHC Act and regulations adopted by the Federal Reserve Board, a bank
holding company and its non-banking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease
or sale of property or furnishing of services. Further, the Company is
required by the Federal Reserve Board to maintain certain levels of capital.
Payment of Dividends by the Company. The Federal Reserve Board has indicated
that banking organizations should generally pay cash dividends out of current
operating earnings and the current rate of earnings retention should be
consistent with the organization's capital needs, asset quality and overall
financial condition. The Federal Reserve Board policy strongly discourages a
bank holding company from declaring or paying a cash dividend which would
impose undue pressure on the capital of subsidiary banks or would be funded
only through
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<PAGE>
borrowings or other arrangements that might adversely affect the holding
company's financial position. The Federal Reserve may, and in certain
circumstances must, prohibit a bank holding company from making any capital
distributions without prior approval of the Federal Reserve Board, if the
subsidiary institution is undercapitalized. The Federal Reserve Board also may
impose limitations on the payment of dividends as a condition to its approval
of certain applications, including applications for approval of mergers or
acquisitions.
In addition to the restrictions on dividends imposed by the Federal Reserve,
under the Minnesota Business Corporation Act, the discretion of the Company's
Board of Directors is constrained by Minnesota Statutes, section 302A.551.
Under that section, the Board may only authorize a dividend if in good faith,
in a manner that the directors reasonably believe to be in the best interests
of the corporation, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances, the board determines that
the corporation will be able to pay its debts in the ordinary course of
business after making a distribution.
Regulatory Capital Requirements. The Federal Reserve Board's capital
guidelines establish the following minimum regulatory capital requirements for
bank holding companies: (i) a capital leverage requirements expressed as a
percentage of total assets, (ii) a risk-based requirement expressed as a
percentage of total risk-weighted assets, and (iii) a Tier 1 leverage
requirement expressed as a percentage of total assets. Tier 1 capital consists
of common stockholders' equity, qualifying preferred stock, and minority
interests in the equity accounts of consolidated subsidiaries. On October 21,
1996, the Federal Reserve Board approved the use of certain cumulative
preferred stock instruments in Tier 1 capital as minority interest in the
equity accounts of consolidated subsidiaries. The failure of a bank holding
company to meet its risk-weighted capital ratios may result in supervisory
action, as well as an inability to obtain approval of any regulatory
applications and, potentially, increased frequency of examination. The federal
bank regulators have previously indicated a desire to raise minimum capital
requirements for banking organizations and have suggested that revisions to
the risk-based capital requirements should be made. The effect of any future
change in the required capital ratios of the Company cannot be determined at
this time.
Activity Limitations. The BHC Act, in general, limits the activities that
may be engaged in by a bank holding company and its subsidiaries to those so
closely related to banking, managing or controlling banks as to be a proper
incident thereto. The Federal Reserve Board, in making such determinations,
considers whether performance of the activities by a bank holding company can
reasonably be expected to produce benefits to the public without any adverse
effects such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. A bank
holding company may engage, subject to Federal Reserve Board guidelines and
approvals, in such closely-related activities as: (1) making or acquiring
loans and other extensions of credit of the type made by mortgage, finance,
credit card, or factoring companies; (2) operating an industrial bank; (3)
servicing loans and other extensions of credit; (4) performing the functions
of a trust company; (5) acting as an investment or financial advisor; (6)
leasing certain real estate or personal property; (7) making investments to
promote community welfare; (8) providing data processing and data transmission
services; (9) acting as an underwriter for credit life insurance and credit
health and accident insurance directly related to extensions of credit by the
holding company system; (10) providing courier services for checks and certain
other instrument exchanges among banks and for audit and accounting media of a
banking or financial nature; (11) providing certain kinds of management
consulting advice; (12) selling, at retail, money orders, travelers' checks
and U.S. savings bonds; (13) performing real estate appraisals; (14) arranging
commercial real estate equity financing; (15) providing securities brokerage
services; (16) underwriting or dealing in government obligations and money
market instruments; (17) engaging in foreign exchange advisory and
transactional services; and (18) acting as a futures commission merchant.
Recently enacted legislation allows well capitalized bank holding companies to
engage in certain activities without the advance approval of the Federal
Reserve Board. Well capitalized bank holding companies are required merely to
notify the Federal Reserve Board within ten business days of engaging in such
activity. [The Federal Reserve Board recently proposed amendments to its
regulations defining the scope of permissible bank holding company activities
which will, if adopted, broaden the scope of such activities.] The Company
may, in the future, if appropriate
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opportunities arise, engage in the acquisition of additional banks, subject to
the approval of the Federal Reserve Board.
Under the BHC Act, the Company must obtain prior Federal Reserve approval
before it acquires direct or indirect ownership or control of any voting
shares of any bank or other bank holding company if, after such acquisition,
it will own or control directly or indirectly more than 5% of the voting stock
of the entity, unless it already owns a majority of the voting stock of the
entity. The Company also must obtain prior Federal Reserve approval before it
acquires all or substantially all of the assets of a bank or merges or
consolidates with another bank holding company. The Company will be, with
limited exceptions, prohibited from acquiring direct or indirect ownership or
control of a company which is not a bank or a bank holding company, and must
engage in the business of banking or managing or controlling banks or
furnishing services to or performing services for its subsidiary Banks. The
Federal Reserve, by order or regulation, may authorize the Company to engage
in or acquire stock in a company engaged in activities so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
In reviewing any application or proposal by the Company, the Federal Reserve
is required to consider the financial and managerial resources and future
prospects of the Company and the banks concerned, the convenience and needs of
the community to be served, as well as the probable effect of the transaction
upon competition. Recent decisions by the Federal Reserve under the BHC Act
have underscored the importance placed by the Federal Reserve upon the record
of the applicant and its subsidiary banks in meeting the credit needs of its
community in accordance with the Community Reinvestment Act of 1977. See
"Community Reinvestment Act and Other Consumer Protection Statutes" below.
BANK REGULATION
The continued earnings and growth of the Company's Banks will be influenced
by general economic conditions, the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies by its open-market operations in United States Government securities,
by adjusting the required level of reserves for financial institutions subject
to its reserve requirement and by varying the discount rate applicable to
borrowings by banks which are members of the Federal Reserve System. The
actions of the Federal Reserve Board in these areas influence the growth of
bank loans, investments and deposits and also affect interest rates charged on
loans and deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
Supervision. Northern Star Bank, as a state chartered banking corporation,
is subject to primary supervision, examination and regulation by the Minnesota
Department of Commerce and the Federal Deposit Insurance Corporation. Various
requirements and restrictions under the laws of the State of Minnesota and the
United States also affect the operation of the Bank. These statutes and
regulations relate to many aspects of the operations of the Bank, including
reserves against deposits, loans, investments, mergers and acquisitions,
borrowings, dividends and locations of branch offices. Some of these statutes
and regulations and their effect on the Bank are discussed below. Moreover,
from time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
intermediaries. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made. The likelihood of any major changes and
the impact of such changes are impossible to predict.
Deposit Insurance. As an FDIC-insured institution, the Bank will be required
to pay deposit insurance premium assessments to the FDIC. The amount each
insured depository institution pays for FDIC deposit insurance coverage is
determined in accordance with a risk-based assessment system under which all
insured depository institutions are placed into one of nine categories and
assessed insurance premiums based upon their level of capital and supervisory
evaluation. BIF-member institutions classified as well capitalized (as defined
by the FDIC) and considered healthy pay the lowest premium currently 0% of
deposits while BIF-member institutions that are under capitalized (as defined
by the FDIC) and considered of substantial supervisory concern pay the highest
premium (currently up to 0.27% of deposits).
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The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged in or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or when agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the
institution has no tangible capital. Management of the Company is not aware of
any activity or condition that could result in termination of the deposit
insurance of the Bank.
Payment of Dividends by the Bank. There are state and federal statutory and
regulatory requirements limiting the amount of dividends which may be paid to
the Company by the Bank. Generally, a bank may pay cash dividends out of
current operating earnings to the extent that the current rate of earnings
retention is consistent with the bank's capital needs, asset quality and
overall financial condition. The governing regulatory agency has the authority
to prohibit a bank from engaging in business practices which the governing
regulatory agency considers to be unsafe or unsound. It is possible, depending
upon the financial condition of the Bank, that the governing regulatory agency
may assert that the payment of dividends to the Company by the Bank might,
under some circumstances, be such an unsafe and unsound practice.
For Example, as a prerequisite to the payment of dividends, Minnesota
Statutes, section 48.09, subd. 1, requires the Bank to set aside all of its
net profits to a surplus fund until the surplus fund is equal to 20% of the
Bank's capital stock, and 10% of its net profits while the surplus fund is
equal to between 20% and 50% of the Bank's capital stock. Even when the
surplus fund requirements are met, all bank decisions regarding dividends are
subject to the DOC approval.
Common Liability. Under federal law, a depository institution insured by the
FDIC 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
FDIC-insured depository institution or any assistance provided by the FDIC to
a commonly controlled FDIC-insured institution in danger of default.
Affiliate Transaction Limitations. Financial institutions are subject to
certain restrictions imposed by federal law on any extensions of credit to, or
the issuance of a guarantee or letter of credit on behalf of, the Company or
other affiliates, the purchase of or investment in stock or other securities
thereof, the taking of such securities as collateral for loans and the
purchase of assets from the Company or other affiliates. Such restrictions
prevent the Company and such other affiliates from borrowing from the Bank and
any other subsequently acquired bank unless the loans are secured by
marketable obligations of specified amounts. Further, such secured loans,
investments and other transactions between any of the Bank and the Company or
any other affiliate are limited to 10% of the Bank's capital and surplus (as
defined by federal regulations) and such secured loans, investments and other
transactions are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). Such transactions must also
comply with regulations prohibiting terms that would be preferential to the
Company or other affiliates of the Bank.
Regulatory Capital Requirements. The Bank is required to comply with capital
adequacy standards set by the respective primary federal regulatory agency.
The regulations may establish higher minimum requirements if, for example, a
bank has previously received special attention or has a high susceptibility to
interest rate risk. Banks with capital ratios below the required minimum are
subject to certain administrative actions. More than one capital adequacy
standard applies, and all applicable standards must be satisfied for an
institution to be considered to be in compliance. There are two basic measures
of capital adequacy: a risk-based capital measure, and a Tier 1 leverage
measure.
The risk-based capital measure was adopted to assist in the assessment of
capital adequacy of financial institutions by, (i) making regulatory capital
requirements more sensitive to differences in risk profiles among
organizations; (ii) introducing off-balance-sheet items into the assessment of
capital adequacy; (iii) reducing the disincentive to holding liquid, low-risk
assets; and (iv) achieving greater consistency in evaluation of capital
adequacy of major banking organizations throughout the world. The risk-based
guidelines include both a
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definition of capital and a framework for calculating risk-weighted assets by
assigning assets and off-balance-sheet items to broad risk categories. An
institution's risk-based capital ratios are calculated by dividing its
qualifying capital by its risk-weighted assets.
Qualifying capital consists of two types of capital components: "core
capital elements" ("Tier 1" capital) and "supplementary capital elements"
("Tier 2" capital). Tier 1 capital is generally defined as the sum of core
capital elements less goodwill and other intangibles. Core capital elements
consist of (i) common shareholders' equity, (ii) qualifying perpetual
preferred stock, subject to certain limitations, and (iii) minority interests
in the equity accounts of consolidated subsidiaries. Supplementary capital
("Tier 2" capital) consists of such additional capital elements as (i)
allowance for loan and lease losses (subject to limitations); (ii) perpetual
preferred stock which does not qualify as Tier 1 capital (subject to certain
conditions); (iii) hybrid capital instruments, perpetual debt and mandatory
convertible debt securities; and (iv) term subordinated debt and intermediate-
term preferred stock (subject to limitations). The maximum amount of Tier 2
capital that may be included in qualifying total capital is limited to 100% of
Tier 1 capital (net of goodwill).
Under current capital adequacy standards, financial institutions must meet a
minimum ratio of qualifying capital to risk-weighted assets of 8%. Of that
ratio, at least half, or 4%, must be in the form of Tier 1 capital.
The Bank also must maintain an allowable leverage ratio. The leverage ratio
is defined as the ratio of Tier 1 capital to average total assets. Under
current capital adequacy standards, financial institutions must meet a minimum
leverage ratio of 4%.
As a result of the FDIC Improvement Act of 1991, the federal bank regulatory
agencies are directed to adopt regulations defining banks as "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under the law, depending
upon the bank's classification, a bank may be directed to prepare and
implement a capital restoration plan, to be guaranteed by its parent bank
holding company. Further, banks are subject to increased restrictions upon
activities and heightened regulatory management as capital classifications
decline.
Generally, under regulations adopted by all of the bank federal regulatory
agencies, "well capitalized" has been defined as an institution with a total
capital to risk-based asset ratio of 10%, a Tier 1 capital to risk-based asset
ratio of 6% and a Tier 1 leverage ratio of 5%. The regulations further provide
that an "adequately capitalized" institution must have a total capital to
risk-based asset ratio of at least 8%, a Tier 1 capital to risk-based asset
ratio of 4% and a Tier 1 leverage ratio of 4%. Institutions not satisfying the
requirements for "adequately capitalized" will be deemed "undercapitalized."
Institutions with a total capital to risk-based asset ratio of 6% or less, a
Tier 1 capital to risk-based asset ratio of 3% or less, or a Tier 1 leverage
ratio of 3% or less will be deemed "significantly undercapitalized." Finally,
the regulations provide that an institution with a Tier 1 leverage ratio of
less than 2% will be deemed "critically undercapitalized." Federal bank
regulatory agencies, including the FDIC, are authorized to down-grade a
financial institution from one capital category to the next if an examination
reveals that the asset quality, management, earnings or liquidity of that
institution are less than satisfactory. Under the regulations, the Bank would
be deemed an institution based upon its equity capital as of June 30, 1998 and
would be deemed "well capitalized" if the minimum is sold or "well
capitalized" if the maximum is sold.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for depository institutions under its jurisdiction
standards relating to, among other things: internal controls; information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; compensation; fees and benefits; and such
other operational and managerial standards as the agency deems appropriate.
The federal banking agencies adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness (the "Guidelines")
to implement these safety and soundness standards. The Guidelines set forth
the safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems, internal audit system, credit writing, loan
documentation,
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interest rate risk exposure, asset growth, asset quality, earnings and
compensation, and fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard.
Acquisitions and Branching. Banks, such as the Bank, have the authority
under Minnesota law to establish branches (referred to under Minnesota law as
"detached facilities") in any municipality in the state of Minnesota, subject
to receipt of all require regulatory approvals, except a municipality having a
population of 10,000 or less, unless all the banks having a principal office
in the municipality have consented in writing to the establishment of the
branch (this rule is often called the "home town protection rule.")
Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "RNA") allows the responsible Federal banking
agency to approve applications for mergers of depository institutions across
state lines without regard to whether such activity is contrary to state law.
Any statue could, however, by adoption of a non-discriminatory law after
September 29, 1994 and before June 1, 1997, either elect to have this
provision take effect before June 1, 1997 or opt-out of the provision. The
effect of opting out is to prevent banks chartered by, or having their main
office located in, such state from participating in any interstate branch
merger. Each state is permitted to retain a minimum age requirement of up to
five years, a non-discriminatory deposit cap, and non-discriminatory notice or
filing requirements The RNA also imposes limitations on the aggregate amount
of depository that may be held by the surviving bank and all of its insured
depository institution affiliates. Only Texas opted-out of the interstate
merger provision. The Minnesota legislature has taken action to opt in and has
authorized interstate branching effective June 1, 1997. It exercised its
discretion, however, to retain a minimum age requirement (or "seasoning
requirement") of 5 years. Therefore, the Bank may not be acquired by an out-
of-state bank nor may the Bank merge into an out-of-state bank for 5 years
after its creation. Nevertheless, the RNA could present acquisition and
branching opportunities to the Company, and could allow out-of-state banks
easy access to markets currently served by the Company thereby increasing
competition. See "Business--Competition."
Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA")
requires a financial institution to help meet the credit needs of its entire
community, including low-income and moderate-income areas. On May 3, 1995, the
federal banking agencies issued final regulations which change the manner in
which they measure a bank's compliance with its CRA obligations. The final
regulations adopt a performance-based evaluation system which bases CRA
ratings on an institution's actual lending, service and investment
performance, rather than the extent to which the institution conducts needs
assessments, documents community outreach or complies with other procedural
requirements. Federal banking agencies may take CRA compliance into account
when regulating and supervising bank and holding company activities; for
example, CRA performance may be considered in approving proposed bank
acquisitions. The Banks are also subject to a variety of consumer protection
laws and fair lending laws. Violations of these laws may cause regulators to
impose substantial penalties or take other administrative action.
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DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
GENERAL
The Company's Amended and Restated Articles of Incorporation (the
"Articles") authorize the issuance of 20,000,000 shares of capital stock
having a par value of $0.01 per share, of which 15,000,000 shares are Common
Stock and 5,000,000 shares are undesignated.
COMMON STOCK
General. As of June 30, 1998, 10 shares of Common Stock were issued and
outstanding and held of record by Mr. Stienessen. No share of Common Stock is
entitled to preference over any other share and each such share is equal to
other shares of Common Stock in all respects. In any distribution of capital
assets, whether voluntary or involuntary, holders of Common Stock are entitled
to receive pro rata the assets remaining after creditors and holders, if any,
of stock with a liquidation preference have been paid in full.
Voting. Common shareholders are entitled to one vote for each share held of
record on each matter submitted to a vote of the common shareholders.
Dividends, Distributions and Redemptions. Subject to the preferential
dividend rights of any subsequent classes or series of stock with such rights
and preferences superior to the Common Stock as the Board of Directors may
designate, the Common Stock shareholders are entitled to receive dividends as
and when declared by the Board of Directors of the Company. However, dividends
on the Company's Common Stock are not contemplated in the foreseeable future.
Under the Minnesota Business Corporation Act (the "MBCA"), the Company may
declare and pay dividends on the Common Stock only if the Company will be able
to pay its debts in the ordinary course of business after making the
distribution. In addition, the Company's primary source of cash to make
dividend payments is dividends that the Company receives from the Bank, which
may be unable to make payments to the Company under various applicable
regulations. See "--Dividend Policy" and "Supervision and Regulation."
Federal and state banking laws regulate the Company's ability to pay
dividends and redeem its equity securities. No redemptions of any equity
securities are permitted without the approval of the Federal Reserve Board if
the aggregate amount of such redemptions exceeds 10% of the net worth of the
Company over a 12-month period. In addition, no redemption of or dividend on
the Common Stock is permitted if it would constitute an unsafe or unsound
practice according to the Federal Reserve Board.
If the Company were liquidated, the common stockholders would be entitled to
receive, pro rata, all assets available for distribution to them after
satisfaction of the Company's liabilities and any payment applicable to any
preferred stock then outstanding.
No Cumulative Voting. The Articles of the Company provide that the Company
shareholders will not have cumulative voting rights in the electing of
directors. Under cumulative voting, a shareholder could cast that number of
votes equal to such shareholder's shares multiplied by the number of directors
to be elected in favor of one candidate or among several candidates.
Cumulative voting makes it possible for less than a majority of the
shareholders to elect one or more members of the board of directors. Under
non-cumulative voting, a majority of the shareholders can elect the entire
board of directors.
No Preemptive Rights. The Articles of the Company provide that the Company
shareholders will not have any preemptive rights to subscribe for or purchase
additional shares of the Company capital stock. This means that a Company
shareholder will not be entitled to acquire a certain fraction of the unissued
securities or rights to purchase securities of the Company before the Company
may offer them to other persons. Preemptive rights enable a shareholder to
maintain the shareholder's proportional voting power and proportional rights
to receive and other distributions by the company.
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UNDESIGNATED STOCK
Under governing Minnesota law and the Company's Articles, no action by the
Company's stockholders is necessary, and only action of the Board of Directors
is required, to authorize the issuance of any of the undesignated stock. The
Board of Directors is empowered to establish and to designate each class or
series of the undesignated shares and to set the terms of such shares
(including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive, conversion and voting rights and preferences).
Accordingly, the Board of Directors, without stockholder approval, may issue
such undesignated shares in one or more series of preferred stock having
rights, preferences, privileges or restrictions, including voting rights, that
may be greater than the rights of holders of Common Stock, provided however,
that the issuance of preferred stock is approved by a majority of the
Company's independent directors who do not have an interest in the transaction
and who have access, at the Company's expense, to the Company's or independent
legal counsel.
It is not possible to state the actual effect of the issuance of any shares
of preferred stock upon the rights of holders of the Common Stock until the
Board of Directors determines the specific rights of the holders of such
preferred stock. However, the effects might include, among other things,
restricting dividends on the Common Stock, diluting the voting power of the
Common Stock, impairing the liquidation rights of the Common Stock and
delaying or preventing a change in control of the Company without further
action by the stockholders. The Company has no present plans to issue any
shares of preferred stock.
LIMITATION OF DIRECTOR LIABILITY, INDEMNIFICATION
The Minnesota Business Corporations Act ("MBCA") permits Minnesota
corporations, in their Articles of Incorporation or Bylaws, to limit or
eliminate the personal liability of directors to corporations and their
shareholders for monetary damages for breach of directors' fiduciary duty of
care. The duty of care requires that, when acting on behalf of a corporation,
directors must exercise an informed business judgment based on all material
information reasonably available to them. Absent the limitations authorized by
the MBCA, directors are accountable to corporations and their shareholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Although the MBCA provision does not change directors'
duty of care, it enables corporations to limit available relief to equitable
remedies such as injunction or rescission. The Company's Bylaws state that a
director of the Company will not be personally liable for monetary damages for
breach of their fiduciary duty as a director, except for liability for (i) any
breach of the director's duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) corporate distributions which
are in contravention of restrictions in the MBCA, the Company's Articles of
Incorporation or Bylaws, or any agreement to which the Company is a party, or
(iv) any transaction from which the director derives an improper personal
benefit. The Company's Bylaws also provide that if the MBCA is later amended,
then the liability of the directors of the Company will be eliminated or
limited to the fullest extent permitted by the MBCA, as so amended. The
inclusion of this provision in the Bylaws may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter shareholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful, might
otherwise have benefited the Company and its shareholders.
Minnesota Statutes Section 302A.521 provides that officers and directors of
the Company have the right to indemnification from the Company for liability
arising out of certain actions. The Company has included in its Bylaws a
provision to indemnify its directors and officers for expenses and liabilities
to the fullest extent permitted by Minnesota law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in
the Securities Act, and is, therefore, unenforceable.
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ANTI-TAKEOVER PROVISIONS
Certain provisions of Minnesota law and the Company's Articles described
below could have an anti-takeover effect. These provisions are intended to
provide management flexibility to enhance the Company shareholder value, the
likelihood of continuity and stability in the composition of the Company's
Board of Directors and in the policies formulated by the Board and to
discourage an unsolicited takeover of the Company, if the Board determines
that such a takeover is not in the best interests of the Company and its
shareholders. However, these provisions could have the effect of discouraging
certain attempts to acquire the Company which could deprive the Company's
shareholders of opportunities to sell their shares of Common Stock at prices
higher than prevailing market prices.
Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisitions of voting stock of the Company (from a person other than
the Company, and other than in connection with certain mergers and exchanges
to which the Company is a party) resulting in the beneficial ownership of 20%
or more of the voting stock then outstanding. Section 302A.671 requires
approval of the granting of voting rights for the shares received pursuant to
any such acquisition by a majority vote of the shareholders of the Company. In
general, shares acquired without such approval are denied voting rights and
are redeemable at their then fair market value by the Company within 30 days
after the acquiring person has failed to deliver a timely information
statement to the Company or the date the shareholders voted not to grant
voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
shareholder who purchases 10% or more of the Company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company before the interested shareholder's share acquisition
date.
The Company's Board of Directors may authorize the issuance of additional
shares of Common Stock or, from the 5,000,000 shares of undesignated stock,
Preferred Stock without further action by the Company shareholders, unless
such action is required in a particular case by applicable laws or regulation.
The authority to issue additional Common Stock or Preferred Stock provides the
Company with the flexibility necessary to meet its future needs without the
delay resulting from seeking shareholder approval. The unissued Common Stock
or Preferred Stock may be issued from time to time for any corporate purposes,
including without limitation, stock splits, stock dividends, employee benefit
and compensation plans, acquisitions and public and private sales for cash as
a means of raising capital. Such shares could be used to dilute the stock
ownership of persons seeking to obtain control of the Company. In addition,
the sale of a substantial number of shares of Common Stock or Preferred Stock
to persons who have an understanding with the Company concerning the voting of
such shares, or the distribution or dividend of Common Stock or Preferred
Stock (or right to receive such shares) to the Company's shareholders, may
have the effect of discouraging or otherwise increasing the cost of
unsolicited attempts to acquire control of the Company. Further, because the
Company's Board has the power to determine the voting, conversion or other
rights of the Preferred Stock, the issuance of a series of Preferred Stock to
persons friendly to management could effectively discourage or preclude
consummation of a change in control transaction or have the effect of
maintaining the position of the Company's incumbent management. The Company
does not currently have any plans or commitments to use its authority to
effect any such issuance, but reserves the right to take any action that the
Board of Directors deems to be in the best interests of the Company and its
shareholders. Furthermore, as a Minnesota corporation, the Company is subject
to provisions of the Minnesota Business Corporations Act ("MBCA") that could
have an anti-takeover effect on the Company.
In addition, certain provisions of the Company's Bylaws will impede changes
in majority control of the Company's Board of Directors. The Company's Bylaws
provides that the Board of Directors will be divided into three classes, with
directors in each class elected for three-year staggered terms. Thus assuming
five directors, as currently is the case, it would take two annual meetings
for the election of directors to replace a majority of the Board.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Company's Common Stock
is Continental Stock Transfer and Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the open market
may adversely affect the price of the Common Stock offered hereby and the
ability of the Company to raise equity capital in the future.
Upon completion of this Offering, the Company will have a minimum of 278,000
and a maximum of 450,000 shares of Common Stock outstanding, assuming no
exercise of the Sales Agent's warrants and outstanding options to purchase
10,000 and 28,200 shares of Common Stock, respectively. Of the aggregate
amount outstanding, 121,000 shares of Common Stock issued to the Organizers,
pursuant to the Private Offering will be "restricted securities" as that term
is defined in Rule 144 under the Securities Act, and may be sold in the public
market only if registered or if they qualify for an exemption from
registration under Rule 144, 144(k) or 701 or otherwise.
The shares sold in this Offering will be freely tradable, without resale
restrictions or further registration under the Securities Act, unless
purchased by an "Affiliate" of the Company, whose sales would be subject to
certain volume limitations and other restrictions described below. An
affiliate of the issuer is defined in Rule 144 under the Securities Act as a
person that directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with the issuer. Rule
405 under the Securities Act defines the term "control" to mean the
possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of the person whether through the ownership of
voting securities, by contract or otherwise. Directors of the Company and the
Bank will likely be deemed to be affiliates.
In general, under Rule 144, an affiliate of the Company or a person holding
restricted shares may sell, within any three-month period, a number of shares
not greater than 1% of the then outstanding shares of the Common Stock or the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the sale, whichever is greater. Rule 144 also requires that
the securities must be sold in "brokers' transactions," as defined in the
Securities Act, and the person selling the securities may not solicit order or
make any payment in connection with the offer or sale of securities to any
person other than the broker who executes the order to sell the securities.
This requirement may make the sale of the Common Stock by affiliates of the
Company pursuant to Rule 144 difficult if no trading market develops in the
Common Stock. Rule 144 also requires persons holding restricted securities to
hold the shares for at least one year prior to sale.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permits non-Affiliates to sell their Rule 701 shares without complying with
the public information, holding period, volume limitation or notice provisions
of Rule 144 and which permits Affiliates to sell their Rule 701 shares without
complying with the Rule 144 holding period restrictions, in each case
commencing 90 days after the date of this Prospectus.
42
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the Company will be passed upon for the
Company by Farrish, Johnson & Maschka, P.L.L.P., whose business address is
P.O. Box 550, Mankato, Minnesota 56002. The validity of the issuance of the
shares offered hereby will be passed upon for the Company by Fredrikson &
Byron, P.A., whose business address is 900 Second Avenue South, Minneapolis,
Minnesota 55402. Certain legal matters relating to this Offering will be
passed upon for the Sales Agent by Howard & Howard, whose business address is
321 Liberty Street, Suite 200, Peoria, Illinois 61602.
EXPERTS
The audited financial statements of Northern Star Financial, Inc. as of June
30, 1998, included in this Prospectus and elsewhere in the Registration
Statement, have been audited by Bertram Cooper & Co., LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said report.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto but does include
a description of the material exhibits. For further information with respect
to the Company and the Common Stock offered hereby, reference is hereby made
to such Registration Statement, exhibits and schedules. Statements contained
in this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete and in each instance reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference. The Registration Statement of
which this Prospectus is a part and the exhibits and schedules thereto, may be
inspected by anyone without charge at the principal office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, or at one of the
Commission's regional offices: Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of all or any part of such material may
be obtained upon payment of the prescribed fees from the Public Reference
Section of the Commission at 450 Fifth Street, N.W. Washington, D.C. The
Commission maintains a World Wide Website at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the
Registration Statement of which this Prospectus is a part, including all
exhibits thereto.
Prior to this Offering, the Company has not been subject to the reporting
requirements of the Exchange Act. After completion of this Offering, the
Company intends to comply with such requirements, including distributing to
its shareholders an annual report containing audited financial statements.
43
<PAGE>
NORTHERN STAR FINANCIAL, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
JUNE 30, 1998
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report................................................ F-2
Balance Sheet--June 30, 1998................................................ F-3
Statement of Operations for the Period from Inception
(January 22, 1998) to June 30, 1998........................................ F-4
Statement of Changes in Stockholders' Equity for the Period
From Inception (January 22, 1998) to June 30, 1998......................... F-5
Statement of Cash Flows for the Period from Inception
(January 22, 1998) to June 30, 1998........................................ F-6
Notes to Financial Statements as of and for the Period from
Inception (January 22, 1998) to June 30, 1998.............................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Northern Star Financial, Inc.
(A Development Stage Company)
Mankato, Minnesota 56001
We have audited the accompanying balance sheet of Northern Star Financial,
Inc. (a development stage company), as of June 30, 1998, and the related
statements of operations, changes in stockholders' equity and cash flows for
the period from inception (January 22, 1998) to June 30, 1998. These financial
statements are the responsibility of Northern Star Financial, Inc.'s
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 financial statements referred to above present fairly,
in all material respects, the financial position of Northern Star Financial,
Inc. as of June 30, 1998, and the results of its operations, changes in
stockholders' equity and cash flows for the period from inception (January 22,
1998) to June 30, 1998, in conformity with generally accepted accounting
principles.
Bertram Cooper & Co., LLP
Waseca, Minnesota 56093
July 29, 1998
F-2
<PAGE>
NORTHERN STAR FINANCIAL, INC.
(A DEVELOPMENTAL STAGE COMPANY)
BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current Assets
Cash................................................................. $ --
Other Assets
Deferred organizational costs........................................ 9,226
Prepaid expenses..................................................... 5,580
-------
Total Other Assets................................................. 14,806
-------
TOTAL ASSETS....................................................... $14,806
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
</TABLE>
<TABLE>
<S> <C>
Current Liabilities
Advance from organizers............................................. $18,665
-------
Total Current Liabilities......................................... 18,665
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share; 15,000,000 shares
authorized,
10 shares issued and outstanding................................... 0
Undesignated stock, par value $0.01 per share; 5,000,000 shares
authorized,
no shares issued................................................... --
Paid-in surplus..................................................... 100
Stock subscriptions (Note 1)........................................ --
Deficit accumulated during the development stage.................... (3,959)
-------
Total Stockholders' Equity (Deficit).............................. (3,859)
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $14,806
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NORTHERN STAR FINANCIAL, INC.
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JANUARY 22, 1998) TO JUNE 30, 1998
EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Other operating..................................................... $ 3,959
Income tax expense (benefit)........................................ --
-------
NET LOSS.......................................................... $(3,959)
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NORTHERN STAR FINANCIAL, INC.
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 22, 1998) TO JUNE 30, 1998
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
COMMON PAID-IN DEVELOPMENT
STOCK SURPLUS STAGE TOTAL
------ ------- ----------- -------
<S> <C> <C> <C> <C>
Net Loss................................... $ -- $-- $(3,959) $(3,959)
Issuance of 10 shares of common stock at
$0.01 par value........................... 0 100 -- 100
----- ---- ------- -------
Balance June 30, 1998...................... $ 0 $100 $(3,959) $(3,859)
===== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NORTHERN STAR FINANCIAL, INC.
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JANUARY 22, 1998) TO JUNE 30, 1998
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss............................................................ $(3,959)
Adjustments to reconcile net loss to net cash used by operating
activities:
Increase in prepaid assets........................................ (5,580)
-------
NET CASH USED IN OPERATING ACTIVITIES........................... (9,539)
CASH FLOWS FROM INVESTING ACTIVITIES
Deferred organizational costs....................................... (9,226)
-------
NET CASH USED IN INVESTING ACTIVITIES........................... (9,226)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from organizers............................................ 18,665
Proceed from issuance of common stock............................... 100
-------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................... 18,765
-------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................... --
-------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................... --
-------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ --
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NORTHERN STAR FINANCIAL, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JANUARY 22, 1998) TO JUNE 30, 1998
NOTE 1--ORGANIZATION
Northern Star Financial, Inc. was formed to organize and own all of the
capital stock of Northern Star Bank (the "Bank"); together they are herein
referred to as the "Company." The Organizers of the Company have filed an
application to charter the Bank as a state bank with the Minnesota Department
of Commerce ("DOC") and the Federal Deposit Insurance Corporation ("FDIC").
Provided the necessary capital is raised and the necessary regulatory
approvals are received, it is expected that banking operations will commence
in the fourth quarter of calendar 1998.
The Company plans to raise a minimum of $2,780,000, to a maximum of
$4,500,000, through an offering of its $0.01 par value common stock at a
subscription price of $10.00 per share. The Organizers and directors have
subscribed to purchase 121,000 shares of the Common Stock at $10 per share for
a total of $1,210,000 due upon the Company's receipt of all appropriate
regulatory approvals, including bank charter approval from the DOC and FDIC.
Upon the completion of the sale of common stock and the opening of the Bank,
incurred organization costs, estimated to be $145,000 ($70,000 for the Bank
and $75,000 for the Company, consisting principally of legal, regulatory,
consulting and incorporation fees) will be deferred and amortized over the
Bank's and the Company's initial 60 months of operations. Offering expenses,
estimated to be a minimum of $102,050 to maximum of $213,850 (consisting
principally of direct incremental costs of the stock offering) will be
deducted from the proceeds of the offering, and pre-opening expenses,
estimated to be $30,000 (consisting principally of salaries, overhead and
other operating costs) will be charged against the operating results.
The Company's Articles of Incorporation originally authorized 20,000,000
shares of stock at a par value of $1.00 per share. The Articles of
Incorporation were amended subsequent to June 30, 1998 to reduce the par value
to $0.01 per share and allocate the authorized shares as 15,000,000 of common
shares and 5,000,000 of undesignated shares. The balance sheet at June 30,
1998 reflects the authorized stock shares and par value as amended.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share". Basic earnings per share is based on the weighted
average outstanding common shares. Dilutive net income per share is based on
the weighted average outstanding shares reduced by the effect of stock options
and warrants. Ten shares were outstanding at June 30, 1998, and presentation
of earnings per share for the initial development state operating period would
not be meaningful.
F-7
<PAGE>
NORTHERN STAR FINANCIAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--LIQUIDITY AND GOING CONCERN CONSIDERATIONS
The Company incurred a net loss of $3,959 for the period from inception
(January 22, 1998) to June 30, 1998. Operations through June 30, 1998, related
primarily to expenditures for incorporating and organizing the Company. At
June 30, 1998, the Company had been funded by an $18,665 advance from the
Organizers.
Management believes that the current level of expenditures is well within
the financial capabilities of the Organizers and is adequate to meet existing
obligations and fund current operations, but commencing banking operations is
dependent upon the Company successfully completing the stock offering and
obtaining regulatory approval.
To provide permanent funding for its operation, the Organizers have
subscribed to purchase 121,000 shares at $10 per share and the Company is
currently anticipating offering a minimum of 157,000 and a maximum of 329,000
shares of its common stock $0.01 par value, at $10 per share in an initial
public offering. Costs related to the organization and registration of the
Company's common stock will be paid from the gross proceeds of the offering.
Should subscriptions for the minimum offering not be obtained, amounts paid by
subscribers with their subscriptions will be returned, net of expenses, and
the offer will be withdrawn.
NOTE 4--INCOME TAXES
There was no provision (benefit) for income taxes for the period from
inception (January 22, 1998) to June 30, 1998, due to the Company's net
operating loss and its valuation reserve against deferred tax assets.
The following difference gives rise to deferred income taxes as of June 30,
1998:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss carryforward................................... $1,584
Valuation reserve................................................. (1,584)
------
Net deferred tax asset............................................ $ -0-
======
</TABLE>
As of June 30, 1998, the Company has a net operating loss carryforward of
approximately $3,959.
NOTE 5--STOCK OPTION PLAN
The Company is planning to adopt a stock option plan, the Stock Option Plan
(the SOP). The Company Organizers, in consideration for their services, will
be granted options that are immediately exercisable to purchase an aggregate
of 24,200 shares of common stock. In addition, 41,700 shares of common stock
are reserved under the SOP of which 12,000 shares will be granted to directors
and 6,000 shares will be awarded to key management personnel upon completion
of the stock offering described in Note 1. All of the previously described
awarded options are at an exercise price of $10.00 per share. Option shares of
23,700 will remain available for future granting.
The Company will use the intrinsic value method as described in APB Opinion
No. 25 and related interpretations to account for the SOP and accordingly, no
compensation cost will be recognized. The Company has adopted Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation", and will disclose the estimated pro forma effect on net income
of the fair value method established by SFAS No. 123, using the Black Scholes
Method.
F-8
<PAGE>
NORTHERN STAR FINANCIAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--COMMITMENTS
The Company entered into a lease agreement for office space at its planned
main office location, subject to the Bank obtaining all government approvals
necessary to begin banking operations. The anticipated commencement date of
the lease is November, 1998, with a ten-year term. The monthly base rent will
be $6,042 during its first three years of the lease, $6,250 for the next three
years and $6,458 for the last four years. Dean Doyscher, an organizer,
director and principal shareholder of the Company, is a partner of Colonial
Square Partners, Inc., owners of the leased building.
The Company is currently negotiating a software license agreement for the
data processing applications and implementation of the Company's electronic
data processing system.
The Bank will enter into a three-year employment agreement with Thomas P.
Stienessen, effective upon receipt of approval of the Company's bank charter
application to the FDIC and the DOC, pursuant to which Mr. Stienessen will
serve as the President and Chief Executive Officer of the Bank. Mr. Stienessen
will be paid an annual salary of $100,000 , and is eligible to participate in
discretionary bonuses that may be authorized by the board of directors to its
senior management. Mr. Stienessen will be eligible to participate in any
management incentive program of the Bank or any long-term equity incentive
program and will be eligible for grants of stock options and other awards
thereunder. Additionally, Mr. Stienessen will participate in the Bank's
retirement, welfare and other benefit programs. As of June 30, 1998, neither
the Company nor the Bank has paid any compensation to its executive officers.
The Company will pay Mr. Stienessen additional compensation of $25,000, upon
receipt of approval of the Company's applications with the FDIC and the DOC,
for organizational services he rendered prior to approval of the applications.
The Company has signed a Letter Agreement to finalize an Agency Agreement
for services to place on a best efforts basis common shares of the Company.
Commission and out-of-pocket costs to be paid the agent are described in Note
1. In addition, the agent will be granted warrants to purchase up to 10,000
shares at $10 per share, subject to regulatory approval.
NOTE 7--FISCAL YEAR-END
Management has elected to use June 30 as the Company's fiscal year end for
financial reporting.
F-9
<PAGE>
ATTACHMENT A
NORTHERN STAR FINANCIAL, INC.
STOCK ORDER FORM
NOTE: PLEASE READ THE STOCK ORDER FORM GUIDE AND INSTRUCTIONS ACCOMPANYING
THIS FORM, BEFORE COMPLETION.
- --------------------------------------------------------------------------------
DEADLINE: The Offering began September , 1998. A condition of the Offering
is that the Minimum Offering (sale of 157,000 shares of Common Stock) must be
completed on or before November , 1998, unless extended by the Board of
Directors for up to an additional 90 days, or the Offering will be
terminated. If the Minimum Offering is consummated, the Offering will
continue so long as shares remain available or until 5:00 p.m. Local Time, on
December , 1998, whichever occurs first, unless terminated by the Company
beforehand.
- --------------------------------------------------------------------------------
NUMBER OF SHARES
- --------------------------------------------------------------------------------
(1) Number of Shares Price Per Share (2) Total Amount
Due
x $10.00 = $
The minimum number of shares that may be subscribed for is 100. The maximum
any individual and their related party may subscribe for in the Offering is
13,600 shares. See the Section entitled "THE OFFERING--General" on page 12 of
the Prospectus dated September , 1998.
- --------------------------------------------------------------------------------
METHOD OF PAYMENT AND PURCHASE INFORMATION
- --------------------------------------------------------------------------------
(3) Enclosed is a check, bank draft or money order payable to: "Resource
Trust Company", Escrow Agent for Northern Star Financial, Inc. for
$ .
- --------------------------------------------------------------------------------
BROKER DEALER NAME AND ADDRESS
- --------------------------------------------------------------------------------
(4) If purchased through a broker/dealer, please list the name, address, and
phone number in the space provided.
Company Name: ___________________ City: _______________
Broker Name: ____________________ State: ______________ Zip Code: ___
Street Address: _________________ Phone Number: _______
- --------------------------------------------------------------------------------
STOCK REGISTRATION ONE OWNERSHIP PER STOCK ORDER FORM
- --------------------------------------------------------------------------------
(5)Form of stock ownership
[_] Individual [_] Uniform Transfer to Minors
[_] Partnership
minor's soc. sec. # required
[_] Joint Tenants [_] Uniform Gift to Minors
[_] IRA (Custodian name &
signature required)
[_] Tenants in Common
[_] Corporation
[_] Fiduciary/Trust (Under
Agreement Dated )
Name Social Security or Tax I.D.
- --------------------------------------------------------------------------------
Name Daytime Telephone
- --------------------------------------------------------------------------------
Street Address Evening Telephone
- --------------------------------------------------------------------------------
City State Zip Code State of Residence
OFFICE USE Batch # ____
Date Order # __________
Rec'd / /
Check # ________________ Category _________
Amount $ _________ Initials _________
<PAGE>
ATTACHMENT A
- --------------------------------------------------------------------------------
NASD AFFILIATION (This section only applies to those individuals who meet the
delineated criteria)
- --------------------------------------------------------------------------------
Check here if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of
the immediate family of any such person to whose support such person
contributes, directly or indirectly, or the holder of an account in which an
NASD member or person associated with an NASD member has a beneficial
interest. To comply with conditions under which an exemption from the NASD's
Interpretation with Respect to Free-Riding and Withholding is available, you
agree, if you have checked the NASD affiliation box: (1) not to sell,
transfer or hypothecate the shares subscribed for herein for a period of
three months following the issuance, and (2) to report this subscription in
writing to the applicable NASD member within one day of the payment therefor.
- --------------------------------------------------------------------------------
RECEIPT OF PROSPECTUS
- --------------------------------------------------------------------------------
1. By signing below, I acknowledge receipt of the Prospectus dated September
, 1998.
2. ACCEPTANCE OF SUBSCRIPTION. The Company has the right to accept or reject
this subscription in whole or in part, for any reason whatsoever. The
Company may reduce the number of shares for which the Subscriber has
subscribed, indicating acceptance of less than all of the shares
subscribed on the Company's written form of acceptance.
3. RESIDENCE. The Subscriber is a bona fide resident (or if an entity is
organized or incorporated under the laws of, and is domiciled in) of the
State indicated on the cover page of this Form.
THIS FORM MUST BE SIGNED AND DATED. THIS ORDER IS NOT VALID IF THE STOCK
ORDER FORM IS NOT SIGNED. YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH THE
PROVISIONS OF THE PROSPECTUS.
When purchasing as a custodian, corporate officer, etc.; include your full
title.
BY SIGNING BELOW, I ALSO ACKNOWLEDGE THAT I HAVE NOT WAIVED ANY RIGHTS UNDER
THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.
<TABLE>
<CAPTION>
SIGNATURE TITLE (IF APPLICABLE) DATE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
1.
- ---------------------------------------------------------------------------------------------
2.
- ---------------------------------------------------------------------------------------------
3.
</TABLE>
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS AND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
RETURN THIS FORM TO:
RESOURCE TRUST COMPANY
ATTN: EVONNE M. COSTELLO
300 INTERNATIONAL CENTRE
900 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402-3380
A-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE SALES AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES
OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE ANY OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
The Company................................................................ 3
The Bank................................................................... 3
Risk Factors............................................................... 7
The Offering............................................................... 12
Use of Proceeds............................................................ 15
Capitalization............................................................. 17
Dividend Policy............................................................ 17
Plan of Operation.......................................................... 18
Proposed Business.......................................................... 20
Management................................................................. 25
Principal Shareholders..................................................... 31
Supervision and Regulation................................................. 32
Description of the Company's Capital Stock................................. 37
Shares Eligible for Future Sale............................................ 40
Legal Matters.............................................................. 41
Experts.................................................................... 41
Available Information...................................................... 41
Index to Financial Statements.............................................. F-1
</TABLE>
----------------
UNTIL , 1998 (90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOGO
COMMON STOCK
----------------
PROSPECTUS
----------------
LOGO
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company to
indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect
to the Company, against judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements and reasonable expenses, including
attorneys' fees and disbursements, incurred by the person in connection with
the proceeding with respect to the same acts or omissions if such person (1)
has not been indemnified by another organization or employee benefit plan for
the same judgments, penalties or fines: (2) acted in good faith; (3) received
no improper personal benefit and statutory procedure has been followed in the
case of any conflict of interest by director; (4) in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and
(5) in the case of acts or omissions occurring in the person's official
capacity as a director, officer, board committee member or employee,
reasonably believed that the conduct was in the best interests of the Company,
or, in the case of acts or omissions occurring in the person's official
capacity as a director, officer or employee of the Company involving service
as a director, officer, partner, trustee, employee or agent of another
organization or employee benefit plan, reasonably believed that the conduct
was not opposed to the best interests of the Company. In addition, Section
302A.521, subd. 3, requires payment by the Company, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in
certain circumstances. A decision as to required indemnification is made by a
disinterested majority of the Board of Directors present at a meeting at which
a disinterested quorum is present, or by a designated committee of the Board,
by special legal counsel, by the shareholders or by a court.
The Company's Bylaws provide for indemnification to the full extent
permitted by the laws of the state of Minnesota, pursuant to Minnesota
Statutes Section 302A.521, as now enacted or hereafter amended, against and
with respect to threatened, pending or completed actions, suits or proceedings
arising from, or alleged to arise from, a party's actions or omissions as a
director, officer, employee or agent of the Company or any subsidiary of the
Company or of any other corporation, partnership, joint venture, trust or
other enterprise which has served in such capacity at the request of the
Company if such acts or omissions occurred or were or are alleged to have
occurred, while said party was a director or officer of the Company.
Generally, under Minnesota law, indemnification will only be available where
an officer or director can establish that he/she acted in good faith and in a
manner he/she reasonably believed to be in or not opposed to the best
interests of the Company.
ITEM 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses will be paid by the Company in connection with the
distribution of the securities registered hereby and do not include the
underwriting discount to be paid to the Sales Agent. All of such expenses,
except for the SEC registration fee and NASD fee, are estimated.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee............................................. $ 971
NASD Fee......................................................... 829
Sales Agent Expenses............................................. 35,000
Legal Fees....................................................... 20,000
Accountants' Fees and Expenses................................... 8,000
Printing Expenses................................................ 8,000
Blue Sky Fees and Expenses....................................... 5,000
Miscellaneous.................................................... 200
-------
Total.......................................................... $75,000
</TABLE>
II-1
<PAGE>
ITEM 3. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
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 of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant 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, the Registrant 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 whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, 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 of
1933, 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.
(3) It will provide to the Sales Agent at the closing specified in the Sales
Agency Agreement certificates in such denominations and registered in such
names as required by the Sales Agent to permit prompt delivery to each
purchaser.
ITEM 4. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR.
1. In June 1998, the Registrant issued and sold 10 shares of Common Stock to
the Company's President and CEO, an accredited investor, at $10.00 per share
in reliance upon Section 4(2) of the Securities Act. The purchaser acquired
such shares for his own account and not with a view to any distribution
thereof to the public. The certificate evidencing the shares bears a legend
stating that the shares are not to be offered, sold or transferred other than
pursuant to an effective registration statement under the Securities Act or an
exemption from such registration requirements. No underwriting commissions or
discounts were paid with respect to the sale of such shares
2. In June 1998, the Registrant accepted binding subscription agreements for
the purchase of an aggregate of 121,000 shares of Common Stock at a price of
$10.00 per share by the Company's five directors who are all accredited
investors. Pursuant to the subscription agreements, the directors' obligations
to purchase the shares are conditioned upon the Bank and the Registrant
receiving all necessary governmental approvals to begin banking operations and
the closing of the Minimum. The Registrant intends to rely upon Section 4(2)
of the Securities Act and Regulation D thereunder for the issuance and sale of
such shares. The subscribers have represented that they are acquiring the
shares for their own accounts and not with a view to any distribution thereof
to the public. The certificates evidencing the shares will bear a legend
stating that the shares are not to be offered, sold or transferred other than
pursuant to an effective registration statement under the Securities Act or an
exemption from such registration requirements. No underwriting commissions or
discounts will be paid with respect to the sale of such shares.
II-2
<PAGE>
Item 5. Index to Exhibits and Item 6. Description of Exhibits
EXHIBIT DESCRIPTION
1.1* Form of Agency Agreement
1.2* Form of Selected Dealer's Agreement between Banc Stock Financial
Services, Inc. and selected dealers.
2.1* Amended and Restated Articles of Incorporation
2.2* Bylaws
3.1* Amended and Restated Articles of Incorporation (Filed as Exhibit 2.1)
3.2* Bylaws (Filed as Exhibit 2.2)
3.3* Form of Stock Certificate
4.1** Form of Subscription Agreement to be used in connection with the
purchase of shares in this Offering
6.1* Lease Agreement between the Bank and Colonial Square Partners relating
to the space located at 1650 Madison Avenue, Mankato, Minnesota
6.2* Form of Employment Agreement between the Bank and Thomas P. Stienessen
6.3* Form of Subscription Agreement executed by the Organizers in connection
with the Private Offering
6.4* Letter of Intent dated April 29, 1998 between the Company and Banc Stock
Financial Services, Inc.
6.5** Company's Incentive 1998 Stock Option Plan, including specimen of
Incentive Stock Option Agreement and Nonqualified Stock Option
Agreement
6.6* Form of Nonqualified Stock Option Agreement governing option granted to
Organizers
6.7* Form of Warrant issued to Banc Stock Financial Services, Inc. to
purchase 10,000 shares of Company Common Stock
9.1* Escrow Agreement among the Company, Banc Stock Financial Services, Inc.
and Resource Trust Company
10.1*Consent of Fredrikson & Byron, P.A. (Included in Exhibit 11.1)
10.2** Consent of Bertram Cooper & Co., LLP
11.1* Opinion and Consent of Fredrikson & Byron, P.A.
15.1* Power of Attorney (included on signature page of Registration Statement)
- --------
* Previously filed
** Filed herewith
II-3
<PAGE>
SIGNATURES
Pursuant to 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-1 and authorized this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned, in
the City of Mankato, State of Minnesota, on September 30, 1998.
Northern Star Financial, Inc.
By /s/ Thomas Stienessen
---------------------------------
Thomas Stienessen, President and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to this Registration Statement was signed by the following
persons in the capacities indicated on September 30, 1998.
SIGNATURES TITLE
/s/ Thomas Stienessen
- ------------------------------------- President and Chief
Thomas Stienessen Executive Officer,
and Director
(principal
executive officer)
Director
*
- -------------------------------------
Dean Doyscher
Chief Financial
* Officer, Treasurer,
- ------------------------------------- Secretary and
Frank Gazzola Director (principal
accounting and
financial officer)
Director
*
- -------------------------------------
Michael Reynolds
Director
*
- -------------------------------------
Thomas Reynolds
/s/ Thomas Stienessen
- -------------------------------------
* Thomas Stienessen Attorney-in-fact
II-4
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
NORTHERN STAR FINANCIAL, INC.
EXHIBIT INDEX TO FORM SB-1 REGISTRATION STATEMENT
EXHIBIT DESCRIPTION
1.1* Form of Agency Agreement
1.2* Form of Selected Dealer's Agreement between Banc Stock Financial
Services, Inc. and selected dealers.
2.1* Amended and Restated Articles of Incorporation
2.2* Bylaws
3.1* Amended and Restated Articles of Incorporation (Filed as Exhibit 2.1)
3.2* Bylaws (Filed as Exhibit 2.2)
3.3* Form of Stock Certificate
4.1** Form of Subscription Agreement to be used in connection with the
purchase of shares in this Offering
6.1* Lease Agreement between the Bank and Colonial Square Partners relating
to the space located at 1650 Madison Avenue, Mankato, Minnesota
6.2* Form of Employment Agreement between the Bank and Thomas P. Stienessen
6.3* Form of Subscription Agreement executed by the Organizers in connection
with the Private Offering
6.4* Letter of Intent dated April 29, 1998 between the Company and Banc Stock
Financial Services, Inc.
6.5** Company's Incentive 1998 Stock Option Plan, including specimen of
Incentive Stock Option Agreement and Nonqualified Stock Option
Agreement
6.6* Form of Nonqualified Stock Option Agreement governing option granted to
Organizers
6.7* Form of Warrant issued to Banc Stock Financial Services, Inc. to
purchase 10,000 shares of Company Common Stock
9.1* Escrow Agreement among the Company, Banc Stock Financial Services, Inc.
and Resource Trust Company
10.1*Consent of Fredrikson & Byron, P.A. (Included in Exhibit 11.1)
10.2** Consent of Bertram Cooper & Co., LLP
11.1* Opinion and Consent of Fredrikson & Byron, P.A.
15.1* Power of Attorney (included on signature page of Registration Statement)
- --------
* Previously filed
** Filed herewith
<PAGE>
EXHIBIT 4.1
NORTHERN STAR FINANCIAL, INC.
STOCK ORDER FORM
NOTE: PLEASE READ THE STOCK ORDER FORM GUIDE AND INSTRUCTIONS ACCOMPANYING
THIS FORM, BEFORE COMPLETION.
- --------------------------------------------------------------------------------
DEADLINE: The Offering began September , 1998. A condition of the Offering
is that the Minimum Offering (sale of 157,000 shares of Common Stock) must be
completed on or before November , 1998, unless extended by the Board of
Directors for up to an additional 90 days, or the Offering will be
terminated. If the Minimum Offering is consummated, the Offering will
continue so long as shares remain available or until 5:00 p.m. Local Time, on
December , 1998, whichever occurs first, unless terminated by the Company
beforehand.
- --------------------------------------------------------------------------------
NUMBER OF SHARES
- --------------------------------------------------------------------------------
(1) Number of Shares Price Per Share (2) Total Amount
Due
x $10.00 = $
The minimum number of shares that may be subscribed for is 100. The maximum
any individual and their related party may subscribe for in the Offering is
13,600 shares. See the Section entitled "THE OFFERING--General" on page 12 of
the Prospectus dated September , 1998.
- --------------------------------------------------------------------------------
METHOD OF PAYMENT AND PURCHASE INFORMATION
- --------------------------------------------------------------------------------
(3) Enclosed is a check, bank draft or money order payable to: "Resource
Trust Company", Escrow Agent for Northern Star Financial, Inc. for
$ .
- --------------------------------------------------------------------------------
BROKER DEALER NAME AND ADDRESS
- --------------------------------------------------------------------------------
(4) If purchased through a broker/dealer, please list the name, address, and
phone number in the space provided.
Company Name: ___________________ City: _______________
Broker Name: ____________________ State: ______________ Zip Code: ___
Street Address: _________________ Phone Number: _______
- --------------------------------------------------------------------------------
STOCK REGISTRATION ONE OWNERSHIP PER STOCK ORDER FORM
- --------------------------------------------------------------------------------
(5)Form of stock ownership
[_] Individual [_] Uniform Transfer to Minors
[_] Partnership
minor's soc. sec. # required
[_] Joint Tenants [_] Uniform Gift to Minors
[_] IRA (Custodian name &
signature required)
[_] Tenants in Common
[_] Corporation
[_] Fiduciary/Trust (Under
Agreement Dated )
Name Social Security or Tax I.D.
- --------------------------------------------------------------------------------
Name Daytime Telephone
- --------------------------------------------------------------------------------
Street Address Evening Telephone
- --------------------------------------------------------------------------------
City State Zip Code State of Residence
OFFICE USE Batch # ____
Date Order # __________
Rec'd / /
Check # ________________ Category _________
Amount $ _________ Initials _________
<PAGE>
- --------------------------------------------------------------------------------
NASD AFFILIATION (This section only applies to those individuals who meet the
delineated criteria)
- --------------------------------------------------------------------------------
Check here if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of
the immediate family of any such person to whose support such person
contributes, directly or indirectly, or the holder of an account in which an
NASD member or person associated with an NASD member has a beneficial
interest. To comply with conditions under which an exemption from the NASD's
Interpretation with Respect to Free-Riding and Withholding is available, you
agree, if you have checked the NASD affiliation box: (1) not to sell,
transfer or hypothecate the shares subscribed for herein for a period of
three months following the issuance, and (2) to report this subscription in
writing to the applicable NASD member within one day of the payment therefor.
- --------------------------------------------------------------------------------
RECEIPT OF PROSPECTUS
- --------------------------------------------------------------------------------
1. By signing below, I acknowledge receipt of the Prospectus dated September
, 1998.
2. ACCEPTANCE OF SUBSCRIPTION. The Company has the right to accept or reject
this subscription in whole or in part, for any reason whatsoever. The
Company may reduce the number of shares for which the Subscriber has
subscribed, indicating acceptance of less than all of the shares
subscribed on the Company's written form of acceptance.
3. RESIDENCE. The Subscriber is a bona fide resident (or if an entity is
organized or incorporated under the laws of, and is domiciled in) of the
State indicated on the cover page of this form.
THIS FORM MUST BE SIGNED AND DATED. THIS ORDER IS NOT VALID IF THE STOCK
ORDER FORM IS NOT SIGNED. YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH THE
PROVISIONS OF THE PROSPECTUS.
When purchasing as a custodian, corporate officer, etc.; include your full
title.
BY SIGNING BELOW, I ALSO ACKNOWLEDGE THAT I HAVE NOT WAIVED ANY RIGHTS UNDER
THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.
<TABLE>
<CAPTION>
SIGNATURE TITLE (IF APPLICABLE) DATE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
1.
- ---------------------------------------------------------------------------------------------
2.
- ---------------------------------------------------------------------------------------------
3.
</TABLE>
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS AND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
RETURN THIS FORM TO:
RESOURCE TRUST COMPANY
ATTN: EVONNE M. COSTELLO
300 INTERNATIONAL CENTRE
900 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402-3380
<PAGE>
Exhibit 6.5
NORTHERN STAR FINANCIAL, INC.
1998 EQUITY INCENTIVE PLAN
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) "Committee" shall mean a Committee of two or more
directors who shall be appointed by and serve at the pleasure of the
Board. If the Company's securities are registered pursuant to Section
12 of the Securities Exchange Act of 1934, as amended, then, to the
extent necessary for compliance with Rule 16b-3, or any successor
provision, each of the members of the Committee shall be a
"non-employee director." Solely for purposes of this Section 1(a),
"non-employee director" shall have the same meaning as set forth in
Rule 16b-3, or any successor provision, as then in effect, of the
General Rules and Regulations under the Securities Exchange Act of
1934, as amended.
(b) The "Company" shall mean Northern Star Financial, Inc., a
Minnesota corporation.
(c) "Fair Market Value" as of any day shall mean (i) if such
stock is reported by the Nasdaq National Market or Nasdaq SmallCap
Market or is listed upon an established stock exchange or exchanges,
the reported closing price of such stock by the Nasdaq National Market
or Nasdaq SmallCap Market or on such stock exchange or exchanges on
such date or, if no sale of such stock shall have occurred on such
date, on the next preceding day on which there was a sale of stock;
(ii) if such stock is not so reported by the Nasdaq National Market or
Nasdaq SmallCap Market or listed upon an established stock exchange,
the average of the closing "bid" and "asked" prices quoted by the
National Quotation Bureau, Inc. (or any comparable reporting service)
on such date or, if there are no quoted "bid" and "asked" prices on
such date, on the next preceding date for which there are such quotes;
or (iii) if such stock is not publicly traded as of such date, the per
share value as determined by the Board, or the Committee, in its sole
discretion by applying principles of valuation with respect to the
Company's Common Stock.
(d) The "Internal Revenue Code" is the Internal Revenue Code
of 1986, as amended from time to time.
(e) "Non-Employee Director" shall mean members of the Board
who are not employees of the Company or any Subsidiary.
(f) The "Participant" means (i) an employee of the Company or
any Subsidiary to whom an incentive stock option has been granted
pursuant to Section 9 and (ii) a consultant or advisor to or director
(including a Non-Employee Director), employee or officer of the Company
or any Subsidiary to whom a nonqualified stock option has been granted
pursuant to Section 10.
<PAGE>
(g) "Parent" shall mean any corporation which owns, directly
or indirectly in an unbroken chain, fifty percent (50%) or more of the
total voting power of the Company's outstanding stock.
(h) The "Plan" means the Northern Star Financial, Inc. 1998
Equity Incentive Plan, as amended hereafter from time to time,
including the form of Option Agreements as they may be modified by the
Board from time to time.
(i) "Stock" shall mean Common Stock of the Company (subject to
adjustment as described in Section 12) reserved for incentive and
nonqualified stock options pursuant to this Plan.
(j) A "Subsidiary" shall mean any corporation of which fifty
percent (50%) or more of the total voting power of outstanding stock is
owned, directly or indirectly in an unbroken chain, by the Company.
SECTION 2.
PURPOSE
The Plan has been established to promote the interests of the Company,
its Subsidiaries and its stockholders by (i) attracting and retaining
exceptional employees and directors; (ii) motivating such employees and
directors by means of performance-related incentives to achieve long-range
performance goals; and (iii) enabling such employees and directors to
participate in the long-term growth and financial success of the Company.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "incentive stock options" under
the provisions of Section 422 of the Internal Revenue Code, or any successor
provision, pursuant to Section 9 of this Plan and through the granting of
nonqualified stock options pursuant to Section 10 of this Plan. Adoption of this
Plan shall be and is expressly subject to the condition of approval by the
shareholders of the Company within 12 months before or after the adoption of the
Plan by the Board of Directors. Any incentive stock options granted after
adoption of the Plan by the Board of Directors shall be treated as nonqualified
stock options if shareholder approval is not obtained within such 12-month
period.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date of adoption by the Board of
Directors, subject to approval by the shareholders of the Company as required in
Section 2.
2
<PAGE>
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(hereinafter referred to as the "Board") or by a Committee which may be
appointed by the Board from time to time (collectively referred to as the
"Administrator"). The Administrator shall have all of the powers vested in it
under the provisions of the Plan, including but not limited to exclusive
authority (where applicable and within the limitations described in the Plan) to
determine, in its sole discretion, whether an incentive stock option or
nonqualified stock option shall be granted, the individuals to whom, and the
time or times at which, options shall be granted, the number of shares subject
to each option, the option price, and terms and conditions of each option. The
Administrator shall have full power and authority to administer and interpret
the Plan, to make and amend rules, regulations and guidelines for administering
the Plan, to prescribe the form and conditions of the respective stock option
agreements (which may vary from Participant to Participant) evidencing each
option and to make all other determinations necessary or advisable for the
administration of the Plan. The Administrator's interpretation of the Plan, and
all actions taken and determinations made by the Administrator pursuant to the
power vested in it hereunder, shall be conclusive and binding on all parties
concerned.
No member of the Board or the Committee shall be liable for any action
taken or determination made in good faith in connection with the administration
of the Plan. In the event the Board appoints a Committee as provided hereunder,
any action of the Committee with respect to the administration of the Plan shall
be taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Administrator shall from time to time, at its discretion and
without approval of the shareholders, designate those employees to whom
incentive stock options shall be granted pursuant to Section 9 of the Plan and
those employees, officers, directors (including Non-Employee Directors),
consultants, and advisors of the Company or of any Subsidiary to whom
nonqualified stock options shall be granted pursuant to Section 10 of the Plan;
provided, however, that consultants or advisors shall not be eligible to receive
stock options hereunder unless such consultant or advisor renders bona fide
services to the Company or Subsidiary and such services are not in connection
with the offer or sale of securities in a capital raising transaction. The
Administrator may grant additional incentive stock options and nonqualified
stock options under this Plan to some or all Participants then holding options
or may grant options solely or partially to new Participants. In designating
Participants, the Administrator shall also determine the number of shares to be
optioned to each such Participant. The Board may from time to time designate
individuals as being ineligible to participate in the Plan.
3
<PAGE>
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized
but unissued shares of Stock. Forty-One Thousand Seven Hundred (41,700) shares
of Stock shall be reserved and available for stock options under the Plan;
provided, however, that the total number of shares of Stock reserved for options
under this Plan shall be subject to adjustment as provided in Section 12 of the
Plan. In the event that any outstanding stock option under the Plan for any
reason expires or is terminated prior to the exercise thereof, the shares of
Stock allocable to such portion of the option shall continue to be reserved for
stock options under the Plan and may be optioned hereunder.
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time
to time during a period of ten (10) years from the effective date as defined in
Section 3. Nonqualified stock options may be granted pursuant to the Plan from
time to time after the effective date of the Plan and until the Plan is
discontinued or terminated by the Board. Any incentive stock option granted
during such ten-year period and any nonqualified stock option granted prior to
the termination of the Plan by the Board shall remain in full force and effect
until the expiration of the option as specified in the written stock option
agreement and shall remain subject to the terms and conditions of this Plan.
SECTION 8.
PAYMENT
Participants may pay for shares upon exercise of stock options granted
pursuant to this Plan with cash, personal check, certified check, Common Stock
of the Company valued at such Stock's then Fair Market Value, or such other form
of payment as may be authorized by the Administrator. The Administrator may, in
its sole discretion, limit the forms of payment available to the Participant and
may exercise such discretion any time prior to the termination of the option
granted to the Participant or upon any exercise of the option by the
Participant.
With respect to payment in the form of Common Stock of the Company, the
Administrator may require advance approval or adopt such rules as it deems
necessary to assure compliance with Rule 16b-3, or any successor provision, as
then in effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to this Section 9 shall be
evidenced by a written stock option agreement (the "Option Agreement"). The
Option Agreement shall be in such form as may be approved from time to time by
the Administrator and may vary from Participant to
4
<PAGE>
Participant; provided, however, that each Participant and each Option Agreement
shall comply with and be subject to the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement
shall state the total number of shares covered by the incentive stock
option. To the extent required to qualify the Option as an incentive
stock option under Section 422 of the Internal Revenue Code, or any
successor provision, the option price per share shall not be less than
one hundred percent (100%) of the Fair Market Value of the Common Stock
per share on the date the Administrator grants the option; provided,
however, that if a Participant owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of
stock of the Company or of its Parent or any Subsidiary, the option
price per share of an incentive stock option granted to such
Participant shall not be less than one hundred ten percent (110%) of
the Fair Market Value of the Common Stock per share on the date of the
grant of the option. The Administrator shall have full authority and
discretion in establishing the option price and shall be fully
protected in so doing.
(b) Term and Exercisability of Incentive Stock Option. The
term during which any incentive stock option granted under the Plan may
be exercised shall be established in each case by the Administrator. To
the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, in no event shall any incentive stock option be exercisable
during a term of more than 10 years after the date on which it is
granted; provided, however, that if a Participant owns stock possessing
more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or of its parent or any Subsidiary, the
incentive stock option granted to such Participant shall be exercisable
during a term of not more than five years after the date on which it is
granted.
The Option Agreement shall state when the incentive
stock option becomes exercisable and shall also state the maximum term
during which the option may be exercised. In the event an incentive
stock option is exercisable immediately, the manner of exercise of the
option in the event it is not exercised in full immediately shall be
specified in the Option Agreement. The Administrator may accelerate the
exercisability of any incentive stock option granted hereunder which is
not immediately exercisable as of the date of grant.
(c) Nontransferability. No incentive stock option shall be
transferable, in whole or in part, by the Participant other than by
will or by the laws of descent and distribution. During the
Participant's lifetime, the incentive stock option may be exercised
only by the Participant. If the Participant shall attempt any transfer
of any incentive stock option granted under the Plan during the
Participant's lifetime, such transfer shall be void and the incentive
stock option, to the extent not fully exercised, shall terminate.
(d) No Rights as Shareholder. A Participant (or the
Participant's successor or successors) shall have no rights as a
shareholder with respect to any shares covered by an incentive stock
option until the date of the issuance of a stock certificate evidencing
such shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in
5
<PAGE>
cash, securities or other property), distributions or other rights for
which the record date is prior to the date such stock certificate is
actually issued (except as otherwise provided in Section 12 of the
Plan).
(e) Other Provisions. The Option Agreement authorized under
this Section 9 shall contain such other provisions as the Administrator
shall deem advisable. Any such Option Agreement shall contain such
limitations and restrictions upon the exercise of the option as shall
be necessary to ensure that such option will be considered an
"incentive stock option" as defined in Section 422 of the Internal
Revenue Code or to conform to any change therein.
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to this Section 10
shall be evidenced by a written Option Agreement. The Option Agreement shall be
in such form as may be approved from time to time by the Administrator and may
vary from Participant to Participant; provided, however, that each Participant
and each Option Agreement shall comply with and be subject to the following
terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement
shall state the total number of shares covered by the nonqualified
stock option. The option price per share shall be one hundred percent
(100%) of the Fair Market Value of the Common Stock per share on the
date the Administrator grants the option.
(b) Term and Exercisability of Nonqualified Stock Option. The
term during which any nonqualified stock option granted under the Plan
may be exercised shall be established in each case by the
Administrator. The Option Agreement shall state when the nonqualified
stock option becomes exercisable and shall also state the maximum term
during which the option may be exercised. In the event a nonqualified
stock option is exercisable immediately, the manner of exercise of the
option in the event it is not exercised in full immediately shall be
specified in the Option Agreement. The Administrator may accelerate the
exercisability of any nonqualified stock option granted hereunder which
is not immediately exercisable as of the date of grant.
(c) Withholding. The Company or its Subsidiary shall be
entitled to withhold and deduct from future wages of the Participant
all legally required amounts necessary to satisfy any and all
withholding and employment-related taxes attributable to the
Participant's exercise of a nonqualified stock option. In the event the
Participant is required under the Option Agreement to pay the Company,
or make arrangements satisfactory to the Company respecting payment of,
such withholding and employment-related taxes, the Administrator may,
in its discretion and pursuant to such rules as it may adopt, permit
the
6
<PAGE>
Participant to satisfy such obligation, in whole or in part, by
electing to have the Company withhold shares of Common Stock otherwise
issuable to the Participant as a result of the option's exercise equal
to the amount required to be withheld for tax purposes. Any stock
elected to be withheld shall be valued at its Fair Market Value, as of
the date the amount of tax to be withheld is determined under
applicable tax law. The Participant's election to have shares withheld
for this purpose shall be made on or before the date the option is
exercised or, if later, the date that the amount of tax to be withheld
is determined under applicable tax law. Such election shall be approved
by the Administrator and otherwise comply with such rules as the
Administrator may adopt to assure compliance with Rule 16b-3, or any
successor provision, as then in effect, of the General Rules and
Regulations under the Securities Exchange Act of 1934, if applicable.
(d) Transferability. The Administrator may, in its sole
discretion, permit the Participant to transfer any or all nonqualified
stock options to any member of the Participant's "immediate family" as
such term is defined in Rule 16a-1(e) promulgated under the Securities
Exchange Act of 1934, or any successor provision, or to one or more
trusts whose beneficiaries are members of such Participant's "immediate
family" or partnerships in which such family members are the only
partners; provided, however, that the Participant cannot receive any
consideration for the transfer and such transferred nonqualified stock
option shall continue to be subject to the same terms and conditions as
were applicable to such nonqualified stock option immediately prior to
its transfer.
(e) No Rights as Shareholder. A Participant (or the
Participant's successor or successors) shall have no rights as a
shareholder with respect to any shares covered by a nonqualified stock
option until the date of the issuance of a stock certificate evidencing
such shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property),
distributions or other rights for which the record date is prior to the
date such stock certificate is actually issued (except as otherwise
provided in Section 12 of the Plan).
(f) Other Provisions. The Option Agreement authorized under
this Section 10 shall contain such other provisions as the
Administrator shall deem advisable.
SECTION 11.
GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Upon Joining Board. Each Non-Employee Director of the Company who
is a director of the Company at the time this Plan became effective, or
whose initial election or appointment to the Board of Directors occurs
on or after the date this Plan is approved by the Company's
shareholders shall, as of the date of such election, automatically be
granted an option to purchase 3,000 shares of the Common Stock at an
option price per share equal to 100% of the Fair Market Value of the
Common Stock on such date. Options granted pursuant to this subsection
(a) shall be immediately exercisable to the extent of 1,000 shares
subject to such option and to the extent of an additional 1,000 shares
on each of the two anniversaries of the date of grant.
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<PAGE>
(b) Upon Re-election to Board. Each Non-Employee Director who, on and
after the date this Plan is approved by the Company's shareholders, is
re-elected as a director of the Company or whose term of office
continues after a meeting of shareholders at which directors are
elected shall, as of the date of such re-election or shareholder
meeting, automatically be granted an option to purchase 3,000 shares of
the Common Stock at an option price per share equal to 100% of the Fair
Market Value of the Common Stock on the date of such re-election or
shareholder meeting. Options granted pursuant to this subsection (b)
shall be immediately exercisable in full.
(c) General. No director shall receive more than one option pursuant to
subsection (b) of this Section 11 in any one fiscal year. All options
granted pursuant to this Section 11 shall be designated as nonqualified
options and shall be subject to the same terms and provisions as are
then in effect with respect to granting of nonqualified options to
officers and employees of the Company except that the option shall
expire on the earlier of (i) three months after the Optionee ceases to
be a director (except by death) and (ii) ten (10) years after the date
of grant. Notwithstanding the foregoing, in the event of the death of a
Non-Employee Director, any option granted to such Non-Employee Director
pursuant to this Section 11 may be exercised at any time within six
months of the death of such Non-Employee Director or on the date on
which the option, by its terms expires, whichever is earlier.
SECTION 12.
RECAPITALIZATION, SALE, MERGER, EXCHANGE
OR LIQUIDATION
In the event of an increase or decrease in the number of shares of
Common Stock resulting from a subdivision or consolidation of shares or the
payment of a stock dividend or any other increase or decrease in the number of
shares of Common Stock effected without receipt of consideration by the Company,
the number of shares of Stock reserved under Section 6 hereof and the number of
shares of Stock covered by each outstanding stock option and the price per share
thereof shall be adjusted by the Board to reflect such change. Additional shares
which may be credited pursuant to such adjustment shall be subject to the same
restrictions as are applicable to the shares with respect to which the
adjustment relates.
Unless otherwise provided in the Option Agreement, in the event of an
acquisition of the Company through the sale of substantially all of the
Company's assets and the consequent discontinuance of its business or through a
merger, consolidation, exchange, reorganization, reclassification, extraordinary
dividend, divestiture or liquidation of the Company (collectively referred to as
a "transaction"), all outstanding stock options shall become immediately
exercisable, whether or not such options had become exercisable prior to the
transaction; provided, however, that if the acquiring party seeks to have the
transaction accounted for on a "pooling of interests" basis and, in the opinion
of the Company's independent certified public accountants, the acceleration of
the exercisability of such options would preclude a pooling of interests under
generally accepted accounting principles, the exercisability of such options
shall not accelerate. In
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<PAGE>
addition to the foregoing, or in the event a pooling of interests transaction
precludes the acceleration of the exercisability of outstanding options, the
Board may provide for one or more of the following:
(a) the complete termination of this Plan, the cancellation of
outstanding options not exercised prior to a date specified by the
Board (which date shall give Participants a reasonable period of time
in which to exercise the options prior to the effectiveness of such
transaction);
(b) that Participants holding outstanding stock options shall
receive, with respect to each share of Stock subject to such options,
as of the effective date of any such transaction, cash in an amount
equal to the excess of the Fair Market Value of such Stock on the date
immediately preceding the effective date of such transaction over the
option price per share of such options; provided that the Board may, in
lieu of such cash payment, distribute to such Participants shares of
stock of the Company or shares of stock of any corporation succeeding
the Company by reason of such transaction, such shares having a value
equal to the cash payment herein;
(c) the continuance of the Plan with respect to the exercise
of options which were outstanding as of the date of adoption by the
Board of such plan for such transaction and provide to Participants
holding such options the right to exercise their respective options as
to an equivalent number of shares of stock of the corporation
succeeding the Company by reason of such transaction.
The Board may restrict the rights of or the applicability of this Section 12 to
the extent necessary to comply with Section 16(b) of the Securities Exchange Act
of 1934, the Internal Revenue Code or any other applicable law or regulation.
The grant of an option pursuant to the Plan shall not limit in any way the right
or power of the Company to make adjustments, reclassifications, reorganizations
or changes of its capital or business structure or to merge, exchange or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
SECTION 13.
SECURITIES LAW COMPLIANCE
No shares of Common Stock shall be issued pursuant to the Plan unless
and until there has been compliance, in the opinion of Company's counsel, with
all applicable legal requirements, including without limitation, those relating
to securities laws and stock exchange listing requirements. As a condition to
the issuance of Stock to Participant, the Administrator may require Participant
to (i) represent that the shares of Stock are being acquired for investment and
not resale and to make such other representations as the Administrator shall
deem necessary or appropriate to qualify the issuance of the shares as exempt
from the Securities Act of 1933 and any other applicable securities laws, and
(ii) represent that Participant shall not dispose of the shares of Stock in
violation of the Securities Act of 1933 or any other applicable securities laws.
9
<PAGE>
As a further condition to the grant of any stock option or the issuance
of Stock to Participant, Participant agrees to the following:
(a) In the event the Company advises Participant that it plans
an underwritten public offering of its Common Stock in compliance with
the Securities Act of 1933, as amended, and the underwriter(s) seek to
impose restrictions under which certain shareholders may not sell or
contract to sell or grant any option to buy or otherwise dispose of
part or all of their stock purchase rights of the underlying Common
Stock, Participant will not, for a period not to exceed 180 days from
the prospectus, sell or contract to sell or grant an option to buy or
otherwise dispose of any stock option granted to Participant pursuant
to the Plan or any of the underlying shares of Common Stock without the
prior written consent of the underwriter(s) or its representative(s).
(b) In the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary
to reduce the number of issued but unexercised stock purchase rights so
as to comply with any states securities or Blue Sky law limitations
with respect thereto, the Board of Directors of the Company shall have
the right (i) to accelerate the exercisability of any stock option and
the date on which such option must be exercised, provided that the
Company gives Participant prior written notice of such acceleration,
and (ii) to cancel any options or portions thereof which Participant
does not exercise prior to or contemporaneously with such public
offering.
(c) In the event of a transaction (as defined in Section 13 of
the Plan) which is treated as a "pooling of interests" under generally
accepted accounting principles, Participant will comply with Rule 145
of the Securities Act of 1933 and any other restrictions imposed under
other applicable legal or accounting principles if Participant is an
"affiliate" (as defined in such applicable legal and accounting
principles) at the time of the transaction, and Participant will
execute any documents necessary to ensure compliance with such rules.
The Company reserves the right to place a legend on any stock
certificate issued upon exercise of an option granted pursuant to the Plan to
assure compliance with this Section 13.
SECTION 14.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend
or discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 12, shall
impair the terms and conditions of any stock option which is outstanding on the
date of such revision or amendment to the material detriment of the Participant
without the consent of the Participant. Notwithstanding the foregoing, no such
revision or amendment shall (i) materially increase the number of shares subject
to the Plan except as provided in Section 12 hereof, (ii) change the designation
of the class of employees eligible to receive stock options, (iii) decrease the
price at which options may be granted, or (iv) materially increase the benefits
accruing to Participants under the Plan without the approval of the
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<PAGE>
shareholders of the Company if such approval is required for compliance with the
requirements of any applicable law or regulation. Furthermore, the Plan may not,
without the approval of the shareholders, be amended in any manner that will
cause incentive stock options to fail to meet the requirements of Section 422 of
the Internal Revenue Code.
SECTION 15.
NO OBLIGATION TO EXERCISE OPTION
The granting of a stock option shall impose no obligation upon the
Participant to exercise such option. Further, the granting of a stock option
hereunder shall not impose upon the Company or any Subsidiary any obligation to
retain the Participant in its employ for any period.
SECTION 16.
COMPLIANCE WITH OTHER LAWS
This Plan shall be administered in accordance with all applicable
federal or state laws, regulations and policies, including but not limited to
regulations or policies issued by the Federal Deposit Insurance Corporation from
time to time. In the event any provision of this Plan or any Option Agreement
conflicts with or is invalid under any such law, regulation or policy, such
provision shall be amended to the extent necessary to make such provision
enforceable under such law, regulation or policy, and shall be enforced as
amended. All other provisions shall remain enforceable according to their terms.
In addition to the foregoing, if the Company's capital decreases below
the minimum level required by the Company's state or primary federal regulator
and the Company's primary federal regulator so directs, the Administrator shall
cancel any outstanding incentive or nonqualified stock options not exercised
prior to the date specified by the Administrator, which date shall give the
Participants a reasonable period of time in which to exercise such options.
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<PAGE>
INCENTIVE STOCK OPTION AGREEMENT
NORTHERN STAR FINANCIAL, INC.
1998 EQUITY INCENTIVE PLAN
THIS AGREEMENT, made effective as of this ____ day of _____________,
19____, by and between Northern Star Financial, Inc., a Minnesota corporation
(the "Company"), and ("Participant").
W I T N E S S E T H:
WHEREAS, Participant on the date hereof is a key employee or officer of
the Company or one of its Subsidiaries; and
WHEREAS, the Company wishes to grant an incentive stock option to
Participant to purchase shares of the Company's Common Stock pursuant to the
Company's 1998 Equity Incentive Plan (the "Plan"); and
WHEREAS, the Administrator of the Plan has authorized the grant of an
incentive stock option to Participant and has determined that, as of the
effective date of this Agreement, the fair market value of the Company's Common
Stock is $___ per share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Participant on the
date set forth above (the "Date of Grant"), the right and option (the "Option")
to purchase all or portions of an aggregate of ________________________________
(______) shares of Common Stock at a per share price of $______ on the terms and
conditions set forth herein, and subject to adjustment pursuant to Section 12 of
the Plan. This Option is intended to be an incentive stock option within the
meaning of Section 422, or any successor provision, of the Internal Revenue Code
of 1986, as amended (the "Code"), and the regulations thereunder, to the extent
permitted under Code Section 422(d).
2. DURATION AND EXERCISABILITY.
a. GENERAL. The term during which this Option may be exercised
shall terminate on _________, ____, except as otherwise provided in
Paragraphs 2(b) through 2(d) below. This Option shall become
exercisable according to the following schedule:
Vesting Date Cumulative
------------ Percentage of Shares
--------------------
First Anniversary of Date of Grant 33-1/3%
Second Anniversary of Date of Grant 66-2/3%
Third Anniversary of Date of Grant 100%
<PAGE>
Once the Option becomes exercisable to the extent of
one hundred percent (100%) of the aggregate number of shares specified
in Paragraph 1, Participant may continue to exercise this Option under
the terms and conditions of this Agreement until the termination of the
Option as provided herein. If Participant does not purchase upon an
exercise of this Option the full number of shares which Participant is
then entitled to purchase, Participant may purchase upon any subsequent
exercise prior to this Option's termination such previously unpurchased
shares in addition to those Participant is otherwise entitled to
purchase.
b. TERMINATION OF EMPLOYMENT (OTHER THAN DISABILITY OR DEATH).
If Participant's employment with the Company or any Subsidiary is
terminated for any reason other than disability or death, this Option
shall completely terminate on the earlier of (i) the close of business
on the three-month anniversary date of such termination of employment,
and (ii) the expiration date of this Option stated in Paragraph 2(a)
above. In such period following the termination of Participant's
employment, this Option shall be exercisable only to the extent the
Option was exercisable on the vesting date immediately preceding such
termination of employment, but had not previously been exercised. To
the extent this Option was not exercisable upon such termination of
employment, or if Participant does not exercise the Option within the
time specified in this Paragraph 2(b), all rights of Participant under
this Option shall be forfeited.
c. DISABILITY. If Participant's employment terminates because
of disability (as defined in Code Section 22(e), or any successor
provision), this Option shall terminate on the earlier of (i) the close
of business on the twelve-month anniversary date of the such
termination of employment, and (ii) the expiration date of this Option
stated in Paragraph 2(a) above. In such period following the
termination of Participant's employment, this Option shall be
exercisable only to the extent the Option was exercisable on the
vesting date immediately preceding such termination of employment, but
had not previously been exercised. To the extent this Option was not
exercisable upon such termination of employment, or if Participant does
not exercise the Option within the time specified in this Paragraph
2(c), all rights of Participant under this Option shall be forfeited.
d. DEATH. In the event of Participant's death, this Option
shall terminate on the earlier of (i) the close of business on the
twelve-month anniversary date of the date of Participant's death, and
(ii) the expiration date of this Option stated in Paragraph 2(a) above.
In such period following Participant's death, this Option shall be
exercisable by the person or persons to whom Participant's rights under
this Option shall have passed by Participant's will or by the laws of
descent and distribution only to the extent the Option was exercisable
on the vesting date immediately preceding the date of Participant's
death. To the extent this Option was not exercisable upon the date of
Participant's death, or if such person or persons do not exercise this
Option within the time specified in this Paragraph 2(d), all rights
under this Option shall be forfeited.
3. MANNER OF EXERCISE.
a. GENERAL. The Option may be exercised only by Participant
(or other proper party in the event of death or incapacity), subject to
the conditions of the Plan and subject to such
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<PAGE>
other administrative rules as the Administrator may deem advisable, by
delivering within the Option Period written notice of exercise to the
Company at its principal office. The notice shall state the number of
shares as to which the Option is being exercised and shall be
accompanied by payment in full of the Option price for all shares
designated in the notice. The exercise of the Option shall be deemed
effective upon receipt of such notice by the Company and upon payment
that complies with the terms of the Plan and this Agreement. The Option
may be exercised with respect to any number or all of the shares as to
which it can then be exercised and, if partially exercised, may be so
exercised as to the unexercised shares any number of times during the
Option period as provided herein.
b. FORM OF PAYMENT. Subject to approval by the Administrator,
payment of the option price by Participant shall be in the form of
cash, personal check, certified check or previously acquired shares of
Common Stock of the Company, or any combination thereof. Any stock so
tendered as part of such payment shall be valued at its Fair Market
Value as provided in the Plan. For purposes of this Agreement,
"previously acquired shares of Common Stock" shall include shares of
Common Stock that are already owned by Participant at the time of
exercise.
c. STOCK TRANSFER RECORDS. As soon as practicable after the
effective exercise of all or any part of the Option, Participant shall
be recorded on the stock transfer books of the Company as the owner of
the shares purchased, and the Company shall deliver to Participant one
or more duly issued stock certificates evidencing such ownership. All
requisite original issue or transfer documentary stamp taxes shall be
paid by the Company.
4. MISCELLANEOUS.
a. EMPLOYMENT; RIGHTS AS SHAREHOLDER. This Agreement shall not
confer on Participant any right with respect to continuance of
employment by the Company or any of its Subsidiaries, nor will it
interfere in any way with the right of the Company to terminate such
employment. Participant shall have no rights as a shareholder with
respect to shares subject to this Option until such shares have been
issued to Participant upon exercise of this Option. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property), distributions or other rights for which
the record date is prior to the date such shares are issued, except as
provided in Section 12 of the Plan.
b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts
of this Option shall only be effective at such time as counsel to the
Company shall have determined that the issuance and delivery of Common
Stock pursuant to such exercise will not violate any state or federal
securities or other laws. Participant may be required by the Company,
as a condition of the effectiveness of any exercise of this Option, to
agree in writing that all Common Stock to be acquired pursuant to such
exercise shall be held, until such time that such Common Stock is
registered and freely tradable under applicable state and federal
securities laws, for Participant's own account without a view to any
further distribution thereof, that the certificates for such shares
shall bear an appropriate legend to that effect and that such shares
will be not transferred or disposed of except in compliance with
applicable state and federal securities laws.
3
<PAGE>
c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and
subject to Section 12 of the Plan, certain changes in the number or
character of the Common Stock of the Company (through sale, merger,
consolidation, exchange, reorganization, divestiture (including a
spin-off), liquidation, recapitalization, stock split, stock dividend
or otherwise) shall result in an adjustment, reduction or enlargement,
as appropriate, in Participant's rights with respect to any unexercised
portion of the Option (i.e., Participant shall have such
"anti-dilution" rights under the Option with respect to such events,
but shall not have "preemptive" rights).
d. SHARES RESERVED. The Company shall at all times during the
option period reserve and keep available such number of shares as will
be sufficient to satisfy the requirements of this Agreement.
e. WITHHOLDING TAXES ON DISQUALIFYING DISPOSITION. In the
event of a disqualifying disposition of the shares acquired through the
exercise of this Option, Participant hereby agrees to inform the
Company of such disposition. Upon notice of a disqualifying
disposition, the Company may take such action as it deems appropriate
to insure that, if necessary to comply with all applicable federal or
state income tax laws or regulations, all applicable federal and state
payroll, income or other taxes are withheld from any amounts payable by
the Company to Participant. If the Company is unable to withhold such
federal and state taxes, for whatever reason, Participant hereby agrees
to pay to the Company an amount equal to the amount the Company would
otherwise be required to withhold under federal or state law.
Participant may, subject to the approval and discretion of the
Administrator or such administrative rules it may deem advisable, elect
to have all or a portion of such tax withholding obligations satisfied
by delivering shares of the Company's Common Stock having a fair market
value equal to such obligations.
f. NONTRANSFERABILITY. During the lifetime of Participant, the
accrued Option shall be exercisable only by Participant or by the
Participant's guardian or other legal representative, and shall not be
assignable or transferable by Participant, in whole or in part, other
than by will or by the laws of descent and distribution.
g. 1998 EQUITY INCENTIVE PLAN. The Option evidenced by this
Agreement is granted pursuant to the Plan, a copy of which Plan has
been made available to Participant and is hereby incorporated into this
Agreement. This Agreement is subject to and in all respects limited and
conditioned as provided in the Plan. The Plan governs this Option and,
in the event of any questions as to the construction of this Agreement
or in the event of a conflict between the Plan and this Agreement, the
Plan shall govern, except as the Plan otherwise provides.
h. LOCKUP PERIOD LIMITATION. Participant agrees that in the
event the Company advises Participant that it plans an underwritten
public offering of its Common Stock in compliance with the Securities
Act of 1933, as amended, and that the underwriter(s) seek to impose
restrictions under which certain shareholders may not sell or contract
to sell or grant any option to buy or otherwise dispose of part or all
of their stock purchase rights of the underlying Common Stock,
Participant hereby agrees that for a period not to exceed 180 days from
the prospectus,
4
<PAGE>
Participant will not sell or contract to sell or grant an option to buy
or otherwise dispose of this option or any of the underlying shares of
Common Stock without the prior written consent of the underwriter(s) or
its representative(s).
i. BLUE SKY LIMITATION. Notwithstanding anything in this
Agreement to the contrary, in the event the Company makes any public
offering of its securities and determines in its sole discretion that
it is necessary to reduce the number of issued but unexercised stock
purchase rights so as to comply with any state securities or Blue Sky
law limitations with respect thereto, the Board of Directors of the
Company shall have the right (i) to accelerate the exercisability of
this Option and the date on which this Option must be exercised,
provided that the Company gives Participant 15 days' prior written
notice of such acceleration, and (ii) to cancel any portion of this
Option or any other option granted to Participant pursuant to the Plan
which is not exercised prior to or contemporaneously with such public
offering. Notice shall be deemed given when delivered personally or
when deposited in the United States mail, first class postage prepaid
and addressed to Participant at the address of Participant on file with
the Company.
j. ACCOUNTING COMPLIANCE. Participant agrees that, if a
merger, reorganization, liquidation or other "transaction" as defined
in Section 12 of the Plan is treated as a "pooling of interests" under
generally accepted accounting principles and Participant is an
"affiliate" of the Company or any Subsidiary (as defined in applicable
legal and accounting principles) at the time of such transaction,
Participant will comply with all requirements of Rule 145 of the
Securities Act of 1933, as amended, and the requirements of such other
legal or accounting principles, and will execute any documents
necessary to ensure such compliance.
k. STOCK LEGEND. The Administrator may require that the
certificates for any shares of Common Stock purchased by Participant
(or, in the case of death, Participant's successors) bear an
appropriate legend to reflect the restrictions of Paragraphs 4(b) and
Paragraphs 4(h) through 4(j) of this Agreement.
l. FORFEITURE. Notwithstanding anything in this Agreement to
the contrary, if the Company's capital decreases below the minimum
level required by the Company's state or primary federal regulator and
the Company's primary federal regulator so directs, the Administrator
shall cancel any portion of this Option which either has not become
exercisable or which has not been exercised by Participant prior to the
date specified by the Administrator.
m. SCOPE OF AGREEMENT. This Agreement shall bind and inure to
the benefit of the Company and its successors and assigns and
Participant and any successor or successors of Participant permitted by
Paragraph 2 or Paragraph 4(f) above.
n. ARBITRATION. Any dispute arising out of or relating to this
Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between
the disputing parties in a good faith effort to arrive at a mutual
settlement of any such controversy. If, notwithstanding, such dispute
cannot be resolved, such dispute shall be settled by binding
arbitration. Judgment upon the award rendered by the arbitrator
5
<PAGE>
may be entered in any court having jurisdiction thereof. The arbitrator
shall be a retired state or federal judge or an attorney who has
practiced securities or business litigation for at least 10 years. If
the parties cannot agree on an arbitrator within 20 days, any party may
request that the chief judge of the District Court for Hennepin County,
Minnesota, select an arbitrator. Arbitration will be conducted pursuant
to the provisions of this Agreement, and the commercial arbitration
rules of the American Arbitration Association, unless such rules are
inconsistent with the provisions of this Agreement. Limited civil
discovery shall be permitted for the production of documents and taking
of depositions. Unresolved discovery disputes may be brought to the
attention of the arbitrator who may dispose of such dispute. The
arbitrator shall have the authority to award any remedy or relief that
a court of this state could order or grant; provided, however, that
punitive or exemplary damages shall not be awarded. The arbitrator may
award to the prevailing party, if any, as determined by the arbitrator,
all of its costs and fees, including the arbitrator's fees,
administrative fees, travel expenses, out-of-pocket expenses and
reasonable attorneys' fees. Unless otherwise agreed by the parties, the
place of any arbitration proceedings shall be Hennepin County,
Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed on the day and year first above written.
NORTHERN STAR FINANCIAL, INC.
By:
------------------------------------
Its:
--------------------------------
---------------------------------------
Participant
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<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
NORTHERN STAR FINANCIAL, INC.
1998 EQUITY INCENTIVE PLAN
THIS AGREEMENT, made effective as of this day of ___________, 19__, by
and between Northern Star Financial, Inc., a Minnesota corporation (the
"Company"), and _________________ ("Participant").
W I T N E S S E T H:
WHEREAS, Participant on the date hereof is a key employee, officer or
nonemployee director of the Company or one of its Subsidiaries; and
WHEREAS, the Company wishes to grant a nonqualified stock option to
Participant to purchase shares of the Company's Common Stock pursuant to the
Company's 1998 Equity Incentive Plan (the "Plan"); and
WHEREAS, the Administrator has authorized the grant of a nonqualified
stock option to Participant and has determined that, as of the effective date of
this Agreement, the fair market value of the Company's Common Stock is $___ per
share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Participant on the
date set forth above (the "Date of Grant"), the right and option (the "Option")
to purchase all or portions of an aggregate of _______________________ (_______)
shares of Common Stock at a per share price of $______ on the terms and
conditions set forth herein, and subject to adjustment pursuant to Section 12 of
the Plan. This Option is a nonqualified stock option and will not be treated as
an incentive stock option, as defined under Section 422, or any successor
provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder.
2. DURATION AND EXERCISABILITY.
a. GENERAL. The term during which this Option may be exercised
shall terminate on ______________, _____, except as otherwise provided
in Paragraphs 2(b) through 2(d) below. This Option shall become
exercisable according to the following schedule:
Vesting Date Cumulative
------------ Percentage of Shares
--------------------
First Anniversary of Date of Grant 33-1/3%
Second Anniversary of Date of Grant 66-2/3%
Third Anniversary of Date of Grant 100%
<PAGE>
Once the Option becomes fully exercisable, Participant
may continue to exercise this Option under the terms and conditions of
this Agreement until the termination of the Option as provided herein.
If Participant does not purchase upon an exercise of this Option the
full number of shares which Participant is then entitled to purchase,
Participant may purchase upon any subsequent exercise prior to this
Option's termination such previously unpurchased shares in addition to
those Participant is otherwise entitled to purchase.
b. TERMINATION OF RELATIONSHIP (OTHER THAN DISABILITY OR
DEATH). If Participant ceases to be [an employee] [a nonemployee
director] of the Company or any Subsidiary for any reason other than
disability or death, this Option shall completely terminate on the
earlier of (i) the close of business on the three-month anniversary
date of the termination of such relationship, and (ii) the expiration
date of this Option stated in Paragraph 2(a) above. In such period
following such termination, this Option shall be exercisable only to
the extent the Option was exercisable on the vesting date immediately
preceding the date on which Participant's relationship with the Company
or Subsidiary has terminated, but had not previously been exercised. To
the extent this Option was not exercisable upon the termination of such
relationship, or if Participant does not exercise the Option within the
time specified in this Paragraph 2(b), all rights of Participant under
this Option shall be forfeited.
c. DISABILITY. If Participant ceases to be [an employee] [a
nonemployee director] of the Company or any Subsidiary because of
disability (as defined in Code Section 22(e), or any successor
provision), this Option shall completely terminate on the earlier of
(i) the close of business on the 12-month anniversary date of the
termination of all such relationships, and (ii) the expiration date of
this Option stated in Paragraph 2(a) above. In such period following
such termination, this Option shall be exercisable only to the extent
the Option was exercisable on the vesting date immediately preceding
the date on which all of Participant's relationships with the Company
or Subsidiary have terminated, but had not previously been exercised.
To the extent this Option was not exercisable upon the termination of
such relationship, or if Participant does not exercise the Option
within the time specified in this Paragraph 2(c), all rights of
Participant under this Option shall be forfeited.
d. DEATH. In the event of Participant's death, this Option
shall terminate on the earlier of (i) the close of business on the
twelve-month anniversary date of the date of Participant's death, and
(ii) the expiration date of this Option stated in Paragraph 2(a) above.
In such period following Participant's death, this Option may be
exercised by the person or persons to whom Participant's rights under
this Option shall have passed by Participant's will or by the laws of
descent and distribution only to the extent the Option was exercisable
on the vesting date immediately preceding the date of Participant's
death. To the extent this Option was not exercisable upon the date of
Participant's death, or if such person or persons fail to exercise this
Option within the time specified in this Paragraph 2(d), all rights
under this Option shall be forfeited.
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3. MANNER OF EXERCISE.
a. GENERAL. The Option may be exercised only by Participant
(or other proper party in the event of death or incapacity), subject to
the conditions of the Plan and subject to such other administrative
rules as the Administrator may deem advisable, by delivering within the
option period written notice of exercise to the Company at its
principal office. The notice shall state the number of shares as to
which the Option is being exercised and shall be accompanied by payment
in full of the option price for all shares designated in the notice.
The exercise of the Option shall be deemed effective upon receipt of
such notice by the Company and upon payment that complies with the
terms of the Plan and this Agreement. The Option may be exercised with
respect to any number or all of the shares as to which it can then be
exercised and, if partially exercised, may be exercised as to the
unexercised shares any number of times during the option period as
provided herein.
b. FORM OF PAYMENT. Subject to the approval of the
Administrator, payment of the option price by Participant shall be in
the form of cash, personal check, certified check or previously
acquired shares of Common Stock of the Company, or any combination
thereof. Any stock so tendered as part of such payment shall be valued
at its Fair Market Value as provided in the Plan. For purposes of this
Agreement, "previously acquired shares of Common Stock" shall include
shares of Common Stock that are already owned by Participant at the
time of exercise.
c. STOCK TRANSFER RECORDS. As soon as practicable after the
effective exercise of all or any part of the Option, Participant shall
be recorded on the stock transfer books of the Company as the owner of
the shares purchased, and the Company shall deliver to Participant one
or more duly issued stock certificates evidencing such ownership. All
requisite original issue or transfer documentary stamp taxes shall be
paid by the Company.
4. MISCELLANEOUS.
a. RIGHTS AS SHAREHOLDER. This Agreement shall not confer on
Participant any right with respect to the continuance of any
relationship with the Company or any of its Subsidiaries, nor will it
interfere in any way with the right of the Company to terminate any
such relationship. Participant shall have no rights as a shareholder
with respect to shares subject to this Option until such shares have
been issued to Participant upon exercise of this Option. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for
which the record date is prior to the date such shares are issued,
except as provided in Section 12 of the Plan.
b. SECURITIES LAW COMPLIANCE. The exercise of all or any parts
of this Option shall only be effective at such time as counsel to the
Company shall have determined that the issuance and delivery of Common
Stock pursuant to such exercise will not violate any state or federal
securities or other laws. Participant may be required by the Company,
as a condition of the effectiveness of any exercise of this Option, to
agree in writing that all Common Stock to be acquired pursuant to such
exercise shall be held, until such time that such Common Stock is
registered and freely tradable under applicable state and federal
securities laws, for Participant's
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own account without a view to any further distribution thereof and that
such shares will be not transferred or disposed of except in compliance
with applicable state and federal securities laws.
c. MERGERS, RECAPITALIZATIONS, STOCK SPLITS, ETC. Pursuant and
subject to Section 12 of the Plan, certain changes in the number or
character of the Common Stock of the Company (through sale, merger,
consolidation, exchange, reorganization, divestiture (including a
spin-off), liquidation, recapitalization, stock split, stock dividend
or otherwise) shall result in an adjustment, reduction or enlargement,
as appropriate, in Participant's rights with respect to any unexercised
portion of the Option (i.e., Participant shall have such
"anti-dilution" rights under the Option with respect to such events,
but shall not have "preemptive" rights).
d. SHARES RESERVED. The Company shall at all times during the
option period reserve and keep available such number of shares as will
be sufficient to satisfy the requirements of this Agreement.
e. WITHHOLDING TAXES. In order to permit the Company to comply
with all applicable federal or state income tax laws or regulations,
the Company may take such action as it deems appropriate to insure
that, if necessary, all applicable federal or state payroll, income or
other taxes are withheld from any amounts payable by the Company to
Participant. If the Company is unable to withhold such federal and
state taxes, for whatever reason, Participant hereby agrees to pay to
the Company an amount equal to the amount the Company would otherwise
be required to withhold under federal or state law. Participant may,
subject to the approval and discretion of the Administrator or such
administrative rules it may deem advisable, elect to have all or a
portion of such tax withholding obligations satisfied by delivering
shares of the Company's Common Stock having a fair market value equal
to such obligations.
f. NONTRANSFERABILITY. During the lifetime of Participant, the
accrued Option shall be exercisable only by Participant or by the
Participant's guardian or other legal representative, and shall not be
assignable or transferable by Participant, in whole or in part, other
than by will or by the laws of descent and distribution.
g. 1998 EQUITY INCENTIVE PLAN. The Option evidenced by this
Agreement is granted pursuant to the Plan, a copy of which Plan has
been made available to Participant and is hereby incorporated into this
Agreement. This Agreement is subject to and in all respects limited and
conditioned as provided in the Plan. All defined terms of the Plan
shall have the same meaning when used in this Agreement. The Plan
governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between
the Plan and this Agreement, the Plan shall govern, except as the Plan
otherwise provides.
h. LOCKUP PERIOD LIMITATION. Participant agrees that in the
event the Company advises Participant that it plans an underwritten
public offering of its Common Stock in compliance with the Securities
Act of 1933, as amended, and that the underwriter(s) seek to impose
restrictions under which certain shareholders may not sell or contract
to sell or grant any option to buy or otherwise dispose of part or all
of their stock purchase rights of the underlying Common Stock,
Participant hereby agrees that for a period not to exceed 180 days from
the prospectus,
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Participant will not sell or contract to sell or grant an option to buy
or otherwise dispose of this option or any of the underlying shares of
Common Stock without the prior written consent of the underwriter(s) or
its representative(s).
i. BLUE SKY LIMITATION. Notwithstanding anything in this
Agreement to the contrary, in the event the Company makes any public
offering of its securities and determines in its sole discretion that
it is necessary to reduce the number of issued but unexercised stock
purchase rights so as to comply with any state securities or Blue Sky
law limitations with respect thereto, the Board of Directors of the
Company shall have the right (i) to accelerate the exercisability of
this Option and the date on which this Option must be exercised,
provided that the Company gives Participant 15 days' prior written
notice of such acceleration, and (ii) to cancel any portion of this
Option or any other option granted to Participant pursuant to the Plan
which is not exercised prior to or contemporaneously with such public
offering. Notice shall be deemed given when delivered personally or
when deposited in the United States mail, first class postage prepaid
and addressed to Participant at the address of Participant on file with
the Company.
j. ACCOUNTING COMPLIANCE. Participant agrees that, if a
merger, reorganization, liquidation or other "transaction" as defined
in Section 12 of the Plan is treated as a "pooling of interests" under
generally accepted accounting principles and Participant is an
"affiliate" of the Company or any Subsidiary (as defined in applicable
legal and accounting principles) at the time of such transaction,
Participant will comply with all requirements of Rule 145 of the
Securities Act of 1933, as amended, and the requirements of such other
legal or accounting principles, and will execute any documents
necessary to ensure such compliance.
k. STOCK LEGEND. The Administrator may require that the
certificates for any shares of Common Stock purchased by Participant
(or, in the case of death, Participant's successors) shall bear an
appropriate legend to reflect the restrictions of Paragraph 4(b) and
Paragraphs 4(h) through 4(j) of this Agreement.
l. FORFEITURE. Notwithstanding anything in this Agreement to
the contrary, if the Company's capital decreases below the minimum
level required by the Company's state or primary federal regulator and
the Company's primary federal regulator so directs, the Administrator
shall cancel any portion of this Option which either has not become
exercisable or which has not been exercised by Participant prior to the
date specified by the Administrator.
m. SCOPE OF AGREEMENT. This Agreement shall bind and inure to
the benefit of the Company and its successors and assigns and
Participant and any successor or successors of Participant permitted by
Paragraph 2 or Paragraph 4(f) above.
n. ARBITRATION. Any dispute arising out of or relating to this
Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between
the disputing parties in a good faith effort to arrive at a mutual
settlement of any such controversy. If, notwithstanding, such dispute
cannot be resolved, such dispute shall be settled by binding
arbitration. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. The arbitrator shall
be a retired state or
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federal judge or an attorney who has practiced securities or business
litigation for at least 10 years. If the parties cannot agree on an
arbitrator within 20 days, any party may request that the chief judge
of the District Court for Hennepin County, Minnesota, select an
arbitrator. Arbitration will be conducted pursuant to the provisions of
this Agreement, and the commercial arbitration rules of the American
Arbitration Association, unless such rules are inconsistent with the
provisions of this Agreement. Limited civil discovery shall be
permitted for the production of documents and taking of depositions.
Unresolved discovery disputes may be brought to the attention of the
arbitrator who may dispose of such dispute. The arbitrator shall have
the authority to award any remedy or relief that a court of this state
could order or grant; provided, however, that punitive or exemplary
damages shall not be awarded. The arbitrator may award to the
prevailing party, if any, as determined by the arbitrator, all of its
costs and fees, including the arbitrator's fees, administrative fees,
travel expenses, out-of-pocket expenses and reasonable attorneys' fees.
Unless otherwise agreed by the parties, the place of any arbitration
proceedings shall be Hennepin County, Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed on the day and year first above written.
NORTHERN STAR FINANCIAL, INC.
By:
-------------------------------
Its:
---------------------------
-----------------------------------
Participant
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EXHIBIT 10.2
To the Board of Directors
Northern Star Financial, Inc.
Mankato, Minnesota 56001
We consent to the use of our report dated July 29, 1998, relating to the balance
sheet as of June 30, 1998, and the related statements of operation, changes in
stockholder's equity, and cash flows from inception (January 22, 1998) to June
30, 1998 of Northern Star Financial, Inc. (a development stage company) and to
the use of our name under the caption of "Experts" in the Form SB-1 Registration
Statement and Prospectus of Northern Star Financial, Inc.
/s/ Bertram Cooper & Co., LLP
- ---------------------------------
Bertram Cooper & Co., LLP
September 30, 1998
