UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 30, 1999
1-2981
(Commission File Number)
---------------------------
FIRSTAR CORPORATION
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 39-1940778
(State of Incorporation) (I.R.S. EMPLOYER
Identification No.)
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
(Address of Registrant's principal executive office)
(414) 765-4321
(Registrant's telephone number)
<PAGE>
Item 5. Other Events
This Form 8-K/A amends the Form 8-K filed by Firstar Corporation on May 4,
1999, and related to the Agreement and Plan of Merger dated as of April 30,
1999, by and between Firstar Corporation and Mercantile Bancorporation, Inc.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Mercantile Bancorporation Inc.
The following consolidated financial statements of Mercantile
Bancorporation, Inc. are incorporated herein by reference to Exhibit 99.1
filed herewith.
- Consolidated Balance Sheets as of December 31, 1998 and 1997
- Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
- Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended 1998, 1997, and 1996
- Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996
- Notes to Consolidated Financial Statements
The following consolidated financial statements of Mercantile
Bancorporation, Inc. are incorporated herein by reference to Exhibit 99.2
filed herewith.
- Independent Auditors Report
- Consolidated Balance Sheets as of March 31, 1999 and 1998
- Consolidated Statements of Income for the Three Months Ended March
31, 1999 and 1998
- Consolidated Statements of Changes in Stockholders' Equity for the
Three Months Ended March 31, 1999 and 1998
- Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998
- Notes to Consolidated Financial Statements
The consent of KPMG LLP is incorporated herein by reference to Exhibit
99.3 filed herewith.
(c) Exhibits
99.1 Consolidated Financial Statements of Mercantile Bancorporation
Inc. for the Years Ended December 31, 1998, 1997, and 1996
<PAGE>
99.2 Consolidated Financial Statements of Mercantile Bancoporation
Inc. for the Three Months Ended March 31, 1999 and 1998
99.3 Consent of KPMG LLP
Signature
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Firstar Corporation
May 18, 1999 /s/David M. Moffett
---------------------------
David M. Moffett
Vice Chairman
and Chief Financial Officer
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
<TABLE>
<CAPTION>
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CONSOLIDATED BALANCE SHEET December 31
----------------------------------------------
(Thousands) 1998 1997 1996
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<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,760,636 $ 1,330,512 $ 1,448,637
Due from banks - interest bearing 367,304 251,909 96,714
Federal funds sold and repurchase
agreements 226,730 303,859 310,963
Investments in debt and equity
securities
Trading 126,540 70,536 31,361
Available-for-sale (Amortized cost
of $9,185,770, $8,023,157 and
$4,731,005, respectively) 9,246,790 8,059,066 4,741,677
Held-to-maturity (Estimated fair
value of $99,336, $341,954 and
$661,632, respectively) 97,607 335,279 656,721
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Total Investments in Debt and
Equity Securities 9,470,937 8,464,881 5,429,759
Loans held-for-sale 217,941 96,955 75,377
Loans and leases, net of
unearned income 22,093,317 21,265,000 16,861,877
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Total Loans and Leases 22,311,258 21,361,955 16,937,254
Reserve for possible loan
losses (308,890) (284,165) (257,718)
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Net Loans and Leases 22,002,368 21,077,790 16,679,536
Bank premises and equipment 545,559 531,650 428,972
Intangible assets 781,188 839,285 202,071
Other assets 645,455 532,304 399,083
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Total Assets $35,800,177 $33,332,190 $24,995,735
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LIABILITIES
Deposits
Non-interest bearing $ 4,453,048 $ 3,956,138 $ 3,389,776
Interest bearing 20,526,576 20,267,878 16,143,182
Foreign 481,773 585,439 251,887
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Total Deposits 25,461,397 24,809,455 19,784,845
Federal funds purchased and repurchase
agreements 2,087,373 2,127,443 1,861,994
Other short-term borrowings 915,287 1,551,097 270,680
Bank notes 25,000 175,000 175,000
Long-term Federal Home Loan Bank
advances 2,790,336 578,484 37,085
Other long-term debt 782,998 789,687 290,590
Company-obligated mandatorily
redeemable preferred securities of
Mercantile Capital Trust I 150,000 150,000 --
Other liabilities 514,031 388,722 312,298
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Total Liabilities 32,726,422 30,569,888 22,732,492
Commitments and contingent
liabilities -- -- --
-----------------------------
SHAREHOLDERS' EQUITY 1998 1997 1996
-----------------------------
Preferred stock - no par value
Shares authorized 5,000 5,000 5,000
Shares issued and outstanding -- -- -- -- -- --
Common stock - $.01 par value at
December 31, 1998 and 1997, and
$5.00 par value at
December 31, 1996
Shares authorized 400,000 200,000 200,000
Shares issued 157,487 148,874 136,766 1,574 1,489 683,832
Capital surplus 999,595 1,016,844 16,091
Retained earnings 2,035,157 1,724,752 1,638,610
Accumulated other comprehensive
income 41,160 25,222 8,911
Treasury stock, at cost 83 162 2,591 (3,731) (6,005) (84,201)
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Total Shareholders' Equity 3,073,755 2,762,302 2,263,243
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Total Liabilities and
Shareholders' Equity $35,800,177 $33,332,190 $24,995,735
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</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME Year Ended December 31
---------------------------------------------
(Thousands except per share data) 1998 1997 1996
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<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $ 1,771,235 $ 1,651,816 $ 1,404,809
Investments in debt and equity securities
Trading 8,821 7,077 3,630
Taxable 558,635 406,663 315,120
Tax-exempt 23,230 25,797 28,255
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Total Investments in Debt and Equity Securities 590,686 439,537 347,005
Due from banks - interest bearing 13,293 10,379 4,128
Federal funds sold and repurchase agreements 16,904 16,946 15,178
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Total Interest Income 2,392,118 2,118,678 1,771,120
INTEREST EXPENSE
Interest bearing deposits 908,534 816,771 681,637
Foreign deposits 23,182 26,178 10,501
Short-term borrowings 174,335 159,013 89,676
Bank notes 3,423 10,537 15,333
Long-term debt and mandatorily redeemable preferred securities 178,384 58,441 25,010
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Total Interest Expense 1,287,858 1,070,940 822,157
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Net Interest Income 1,104,260 1,047,738 948,963
PROVISION FOR POSSIBLE LOAN LOSSES* 51,154 86,355 78,766
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Net Interest Income After Provision for Possible Loan Losses 1,053,106 961,383 870,197
OTHER INCOME
Trust 112,999 103,928 93,704
Service charges 119,277 109,058 98,908
Investment banking and brokerage 41,137 38,181 35,351
Securitization revenue 20,011 18,404 16,008
Mortgage banking 31,300 23,348 13,518
Gain on sale of mortgage servicing rights 23,155 3,277 --
Securities gains (losses)* 15,435 7,649 292
Gain on sale of subsidiaries* 48,051 -- --
Miscellaneous 130,553 110,348 110,229
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Total Other Income 541,918 414,193 368,010
OTHER EXPENSE
Salaries 418,351 381,942 335,803
Employee benefits 77,608 85,048 77,437
Net occupancy 67,003 61,697 55,489
Equipment 85,426 70,272 60,605
Intangible asset amortization 57,794 40,170 13,237
Restructuring and merger-related costs* 134,322 121,393 51,071
Loss on sale of credit card loans* -- 50,000 --
Miscellaneous* 186,253 175,856 211,545
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Total Other Expense 1,026,757 986,378 805,187
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Income Before Income Taxes 568,267 389,198 433,020
INCOME TAXES* 192,964 142,376 148,567
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Net Income* $ 375,303 $ 246,822 $ 284,453
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PER SHARE DATA
Basic earnings per share $ 2.45 $ 1.76 $ 2.12
Diluted earnings per share 2.41 1.73 2.09
Dividends declared 1.24 1.148 1.092
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*Includes the following infrequent amounts:
Provision for possible loan losses $ 19,600 $ 20,340 $ 13,666
Securities losses 1,649 -- 3,114
Gain on sale of subsidiaries (48,051) -- --
Loss on sale of credit card loans -- 50,000 --
Restructuring and merger-related costs 134,322 121,393 51,071
Miscellaneous expense -- -- 12,385
Income tax benefit (30,828) (59,356) (23,697)
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Reduction of Net Income $ 76,692 $ 132,377 $ 56,539
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</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------- Total
Outstanding Preferred Capital Retained Treasury Shareholders'
(Dollars in thousands) Shares Dollars Stock Surplus Earnings* Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 134,845,809 $ 684,581 $ 12,153 $ 72,528 $1,502,140 $ (60,557) $ 2,210,845
Net income 284,453 284,453
Common dividends declared:
Mercantile Bancorporation
Inc., $1.092 per share (101,499) (101,499)
Pooled companies prior to
acquisition (33,938) (33,938)
Preferred dividends declared (408) (408)
Redemption of preferred
stock (12,153) (531) (12,684)
Issuance of common stock in
acquisitions of:
Today's Bancorp, Inc. 1,690,587 (2,195) 52,321 50,126
First Financial
Corporation of America 388,113 (1,226) 12,954 11,728
Peoples State Bank 488,756 849 14,791 15,640
Metro Savings Bank, F.S.B. 296,853 57 14 8,983 9,054
Security Bank of Conway,
F.S.B. 482,946 75 14,614 14,689
First Sterling Bancorp,
Inc. 782,126 3,911 572 13,772 18,255
Issuance of common stock
for:
Employee incentive plans 411,775 1,638 (4,318) 2,397 (283)
Convertible notes 438,002 2,190 2,681 4,871
Other comprehensive income (16,841) (16,841)
Purchase of treasury stock (5,890,426) (186,811) (186,811)
Reissuance and retirement
of treasury stock (9,688) (47,478) 57,166 --
Pre-merger transactions of
pooled companies and other 240,056 1,200 (5,454) 359 (59) (3,954)
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BALANCE AT DECEMBER 31, 1996 134,174,597 683,832 -- 16,091 1,647,521 (84,201) 2,263,243
Net income 246,822 246,822
Common dividends declared:
Mercantile Bancorporation
Inc., $1.148 per share (132,535) (132,535)
Pooled companies prior to
acquisition (28,134) (28,134)
Issuance of common stock in
acquisitions of:
Roosevelt Financial Group,
Inc. 18,948,884 123 353,128 6,872 280,981 641,104
Regional Bancshares, Inc. 900,625 (474) 361 28,813 28,700
Change in par value of
common stock from
$5.00 per share to $.01
per share (676,575) 676,575 --
Issuance of common stock
for:
Employee incentive plans 899,716 322 5,846 5,512 11,680
Convertible notes 79,335 80 802 882
Other comprehensive income 8,805 8,805
Purchase of treasury stock (6,778,324) (287,288) (287,288)
Reissuance and retirement
of treasury stock (7,396) (42,950) 50,346 --
Pre-merger transactions of
pooled companies and other 487,474 1,103 7,826 262 (168) 9,023
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BALANCE AT DECEMBER 31, 1997 148,712,307 1,489 -- 1,016,844 1,749,974 (6,005) 2,762,302
Net income 375,303 375,303
Common dividends declared:
Mercantile Bancorporation
Inc., $1.24 per share (179,642) (179,642)
Pooled companies prior to
acquisition (10,466) (10,466)
Issuance of common stock in
acquisitions of:
First Financial
Bancorporation 3,138,823 31 8,522 50,343 58,896
Financial Services
Corporation of the Midwest 2,071,448 21 5,093 27,730 32,844
HomeCorp, Inc. 854,760 9 6,727 13,792 20,528
Horizon Bancorp, Inc. 2,549,970 25 10,755 35,615 357 46,752
Issuance of common stock
for:
Employee incentive plans 1,613,060 14 41,800 8,446 50,260
Convertible notes 26,407 1 293 294
Other comprehensive income 13,703 13,703
Purchase of treasury stock (1,834,375) (101,000) (101,000)
Reissuance and retirement
of treasury stock (94,471) 94,471 --
Pre-merger transactions of
pooled companies and other 271,638 (16) 4,032 (35) 3,981
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BALANCE AT DECEMBER 31, 1998 157,404,038 $ 1,574 $ -- $ 999,595 $2,076,317 $ (3,731) $ 3,073,755
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*Includes accumulated other comprehensive income.
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31
----------------------------------------------
(Thousands) 1998 1997 1996
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<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 375,303 $ 246,822 $ 284,453
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses 51,154 86,355 78,766
Depreciation and amortization 74,028 62,637 52,566
Provision for deferred income tax credits (11,724) (9,995) (23,318)
Net change in loans held-for-sale (114,912) (21,578) 30,516
Net change in trading securities (43,298) (53,020) 32,745
Net change in accrued interest receivable 8,120 (2,780) 11,366
Net change in accrued interest payable (8,176) 36,254 (12,348)
Other, net 26,244 55,194 85,651
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Net Cash Provided by Operating Activities 356,739 399,889 540,397
INVESTING ACTIVITIES
Investments in debt and equity securities, other than trading securities
Purchases (6,928,474) (4,509,883) (2,455,696)
Proceeds from maturities 4,358,854 3,608,721 2,366,128
Proceeds from sales of available-for-sale securities 2,040,541 802,007 506,636
Net change in loans and leases (148,977) (642,617) (898,355)
Purchases of loans and leases (626,655) (442,154) (141,600)
Proceeds from sale of mortgage servicing rights 26,330 4,958 --
Proceeds from sales of loans and leases 880,656 696,454 255,043
Purchases of premises and equipment (93,008) (122,785) (76,386)
Proceeds from sales of premises and equipment 21,081 19,679 4,997
Proceeds from sales of foreclosed property 55,925 45,905 32,353
Net cash and cash equivalents received from (paid for) acquisitions 124,071 (231,537) 57,152
Net cash and cash equivalents received from (paid for) sale of banking offices 16,300 (193,058) (12,154)
Other, net 24,167 14,160 18,391
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Net Cash Used by Investing Activities (249,189) (950,150) (343,491)
FINANCING ACTIVITIES
Net change in consumer certificates under $100,000 (1,255,266) (726,907) (406,202)
Net change in time certificates $100,000 and over 33,637 (68,418) 74,010
Net change in other time deposits (9,623) (42,798) 190,437
Net change in foreign deposits (103,666) 333,552 42,717
Net change in other deposits 685,658 156,414 460,853
Net change in short-term borrowings (738,915) 259,830 23,670
Issuance of bank notes -- -- 25,000
Principal payments on bank notes (150,000) -- (100,000)
Issuance of long-term debt, including FHLB advances 2,336,500 980,175 2,607
Issuance of company-obligated mandatorily redeemable preferred securities -- 150,000 --
Principal payments on long-term debt, including FHLB advances (176,162) (16,195) (41,081)
Cash dividends paid (182,286) (160,347) (135,578)
Net proceeds from issuance of common stock from employee
incentive plans and pre-merger transactions of pooled companies 22,096 13,220 (22,089)
Purchase of treasury stock (101,000) (299,063) (175,036)
Redemption of preferred stock -- -- (12,684)
Other, net (133) 764 2,176
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Net Cash Provided (Used) by Financing Activities 360,840 580,227 (71,200)
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Increase in Cash and Cash Equivalents 468,390 29,966 125,706
Cash and Cash Equivalents at Beginning of Year 1,886,280 1,856,314 1,730,608
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,354,670 $ 1,886,280 $ 1,856,314
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year Ended December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 375,303 $ 246,822 $ 284,453
Other comprehensive income, before tax:
Holding gains (losses) on available-for-sale securities 36,517 21,186 (25,635)
Less: Reclassification adjustment on available-for-sale securities
gains included in net income above 15,435 7,640 274
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Other Comprehensive Income (Loss) Before Tax 21,082 13,546 (25,909)
Income taxes related to other comprehensive income (loss) 7,379 4,741 (9,068)
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Other Comprehensive Income (Loss), Net of Tax 13,703 8,805 (16,841)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 389,006 $ 255,627 $ 267,612
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</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--ACCOUNTING POLICIES
Mercantile Bancorporation Inc. ("Corporation" or "Mercantile") and its
subsidiaries follow generally accepted accounting principles and reporting
practices applicable to the banking industry. The significant accounting
policies are summarized below.
Basis of Presentation
Consolidation: The Consolidated Financial Statements include the accounts of
Mercantile Bancorporation Inc. and its subsidiaries. Material intercompany
transactions are eliminated.
Reclassification: Certain reclassifications have been made to the 1997 and
1996 historical financial statements to conform with the 1998 presentation.
New Accounting Standards
Financial Accounting Standard ("FAS") 130, "Reporting Comprehensive Income," was
issued in June 1997. Comprehensive income is defined as net income plus certain
items that are recorded directly to shareholders' equity, such as unrealized
gains and losses on available-for-sale securities. The Corporation's
Consolidated Statement of Comprehensive Income is presented on page 58.
FAS 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. An operating segment is defined under FAS 131 as a component
of an enterprise that engages in business activities that generate revenue and
expense for which operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance. The new
disclosures are included in Note U to the Consolidated Financial Statements.
FAS 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," addresses disclosure of such benefit plans and is effective for
fiscal years beginning after December 15, 1997. The new disclosures are included
in Note N to the Consolidated Financial Statements.
FAS 133, "Accounting for Derivative Instruments and Hedging Activities," which
was issued in June 1998, establishes accounting and reporting standards for
derivative instruments and hedging activities. Under FAS 133, derivatives are
recognized on the balance sheet at fair value as an asset or liability. Changes
in the fair value of derivatives are reported as a component of other
comprehensive income or recognized as earnings through the income statement
depending on the nature of the instrument. FAS 133 is effective for all quarters
of fiscal years beginning after June 15, 1999 with earlier adoption permitted.
The Corporation has not adopted FAS 133 yet and is currently evaluating FAS
133's effect on its financial position and results of operations, but it is not
expected to have a material impact.
Use of Estimates
Management of the Corporation has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the Consolidated Financial
Statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Investments in Debt and Equity Securities
Trading securities, which include any security held primarily for near-term
sale, are valued at fair value. Gains and losses on trading securities, both
realized and unrealized, are recorded in investment banking and brokerage
income.
Available-for-sale securities, which include any security for which the
Corporation has no immediate plan to sell but which may be sold in the future,
are valued at fair value. Realized gains and losses, based on the amortized cost
of the specific security, are included in other income as securities gains
(losses). Unrealized gains and losses are recorded, net of related income tax
effects, in retained earnings.
Held-to-maturity securities, which include any security for which the
Corporation has the positive intent and ability to hold until maturity, are
valued at historical cost adjusted for amortization of premiums and accretion of
discounts computed by the level-yield method. Unrealized losses on held-to-
maturity and available-for-sale securities are recognized in the Consolidated
Statement of Income only if market valuation differences are deemed to be other
than temporary impairments in value.
Loans Held-for-Sale
In its lending activities, the Corporation originates residential mortgage loans
and student loans intended for sale in the secondary market. Loans held-for-sale
are carried at the lower of cost or fair value, which is determined on an
aggregate basis. Gains or losses on the sale of loans held-for-sale are
determined on a specific identification method.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Loans and Leases
Interest income on loans is generally accrued on a simple interest basis. Loan
fees and direct costs of loan originations are deferred and amortized over the
estimated life of the loans under methods approximating the interest method.
The finance method is used to account for direct and leveraged equipment lease
contracts. Income is recorded over the lease periods in proportion to the
unrecovered investment in the leases after consideration of investment tax
credits and other related income tax effects.
When, in management's opinion, the collection of interest on a loan (exclusive
of certain consumer and credit card loans) is unlikely, or when either principal
or interest is past due over 90 days, that loan is generally placed on non-
accrual status. When a loan is placed on non-accrual status, accrued interest
for the current year is reversed and charged against current earnings, and
accrued interest from prior years is charged against the reserve for possible
loan losses. Interest payments received on non-accrual loans are applied to
principal if there is doubt as to the collectibility of such principal;
otherwise, these receipts are recorded as interest income. A loan remains on
non-accrual status until the loan is current as to payment of both principal and
interest, and/or the borrower demonstrates the ability to pay and remain
current.
All non-accrual and renegotiated commercial-related loans are considered
impaired. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price, or the fair value of the collateral, if the loan
is collateral dependent.
Reserve for Possible Loan Losses
The reserve for possible loan losses is increased by provisions charged to
expense and reduced by loans charged off, net of recoveries. The reserve is
maintained at a level considered adequate to provide for potential loan losses
based on management's evaluation of current economic conditions, changes in the
character and size of the portfolio, past experience, expected future losses and
other pertinent factors. Mercantile charges off credit card loans after six
cycles of nonpayment, or within 15 days of receipt of personal bankruptcy
notice, if earlier.
Foreclosed Assets
Foreclosed assets include real estate and other assets acquired through
foreclosure or other proceedings and are included in other assets in the
Consolidated Balance Sheet.
Foreclosed assets are valued at the lower of cost or fair value less estimated
costs to sell. Losses arising at the time of transfer from loans are charged to
the reserve for possible loan losses. Subsequent reductions in valuation based
upon periodic appraisals are charged against current earnings.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Provisions for depreciation are computed principally by the straight-line method
and are based on estimated useful lives of the assets. The carrying values of
assets sold or retired and the related accumulated depreciation are eliminated
from the accounts, and the resulting gains or losses are reflected in net
income.
Expenditures for maintenance and repairs are expensed, while expenditures for
major renewals are capitalized.
Intangible Assets
Intangible assets consist primarily of goodwill and mortgage servicing rights.
Goodwill, the excess of cost over the net assets acquired in business
combinations accounted for as purchases, is amortized using the straight-line
method over the estimated period to be benefited, most recently 15 years, but
not exceeding 40 years.
Mortgage servicing rights represent recorded value associated with the
contractual right to service loans in return for a fee. These assets may be
purchased and recorded at fair value or result from the sale of loans, where
servicing is retained and recorded at an allocated carrying amount based on the
relative fair value of the assets sold. This intangible is amortized using the
level-yield method over the estimated lives of the related loans. The carrying
value of mortgage servicing rights is subject to periodic adjustment based upon
changing market conditions.
Income Taxes
Deferred income taxes, computed using the liability method, are provided on
temporary differences between the financial reporting basis and the tax basis of
the assets and liabilities of the Corporation.
Treasury Stock
The purchase of the Corporation's common stock is recorded at cost. Upon
subsequent reissuance, the treasury stock account is reduced by the average cost
basis of such stock.
Cash Equivalents
Cash and due from banks, due from banks--interest bearing, and federal funds
sold and repurchase agreements are considered cash equivalents for purposes of
the Consolidated Statement of Cash Flows.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Financial Instruments
Financial instruments include cash, evidence of an ownership interest in an
entity or a contract that both a) imposes on the Corporation a contractual
obligation, 1) to deliver a financial instrument to another party or 2) to
exchange other financial instruments on potentially unfavorable terms with
another party; and b) conveys to another party a contractual right, 1) to
receive a financial instrument from the Corporation or 2) to exchange other
financial instruments on potentially favorable terms with the Corporation.
Derivative Financial Instruments
The Corporation is a party to certain financial instruments, primarily to
stabilize interest rate margins and to hedge against interest rate movements. An
instrument designated as a hedge of an asset or liability carried at cost is
accounted for on an accrual basis, in which the interest income or interest
expense of the related asset or liability is adjusted for the net amount of any
interest receivable or payable generated by the hedging instrument. There is no
market valuation on these interest rate contracts. If the underlying assets or
liabilities hedged are no longer recorded on the Consolidated Balance Sheet
(e.g., due to sale), the remaining gain or loss related to the interest rate
contract is recognized through earnings immediately.
In the normal course of business, the Corporation does not maintain trading
positions in interest rate derivative financial instruments. The Corporation's
non-hedging transactions are entered into on behalf of customers and are
simultaneously hedged by the Corporation. As a consequence, these transactions
do not represent exposure to market risk. The Corporation manages the potential
credit exposure through established credit approvals, risk control limits and
other monitoring procedures. These contracts are recorded at their fair value
with gains or losses included in the Consolidated Statement of Income.
Mercantile has entered into foreign exchange forward contracts, primarily to
facilitate customers' foreign exchange requirements. The Corporation maintains a
generally matched position; therefore, exchange rate and market risks are
minimal. Credit risk to the Corporation could result from non-performance by a
counterparty to a contract. Credit risk is managed as indicated in the previous
paragraph. Unrealized gains and losses on these foreign exchange forward
contracts are reflected in the Consolidated Statement of Income.
NOTE B--EARNINGS PER SHARE
Basic earnings per share data is calculated by dividing net income, after
deducting dividends on preferred stock, by the weighted average number of common
shares outstanding during the period.
Diluted earnings per share gives effect to both the increase in the average
shares outstanding that would have resulted from both the exercise of dilutive
stock options and the conversion of the entire balance of outstanding
convertible notes. Net income attributable to common shareholders' equity in the
diluted earnings per share computation is increased by interest expense that
would not be incurred on notes if they converted, net of taxes. The components
of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
(Thousands except
per share data) 1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
BASIC
Net income $ 375,303 $ 246,822 $ 284,453
Preferred stock
dividends -- -- (408)
- ----------------------------------------------------------------------
Net Income
Attributable
to Common
Shareholders' Equity $ 375,303 $ 246,822 $ 284,045
- ----------------------------------------------------------------------
Weighted average
common shares
outstanding 153,462,295 140,009,105 133,925,697
- ----------------------------------------------------------------------
Basic Earnings
per Share $ 2.45 $ 1.76 $ 2.12
- ----------------------------------------------------------------------
DILUTED
Net income
attributable
to common
shareholders' equity $ 375,303 $ 246,822 $ 284,045
Interest on convertible
notes, net of taxes 43 83 120
- ----------------------------------------------------------------------
Diluted Net Income $ 375,346 $ 246,905 $ 284,165
- ----------------------------------------------------------------------
Weighted average
common shares
outstanding 153,462,295 140,009,105 133,925,697
Employee
incentive plans 2,370,290 2,493,277 1,775,913
Convertible notes 88,613 136,605 294,419
- ----------------------------------------------------------------------
Diluted Weighted
Average Common
Shares Outstanding 155,921,198 142,638,987 135,996,029
- ----------------------------------------------------------------------
Diluted Earnings
per Share $ 2.41 $ 1.73 $ 2.09
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTE C--ACQUISITIONS
Listed below are the acquisitions completed by Mercantile during the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Original Consideration
Intangible -------------------------- Accounting
(Dollars in thousands) Date Assets Asset Cash Gross Shares Method
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ACQUISITIONS COMPLETED
Bruno Stolze & Company, Inc. Sept. 30, 1998 /1/ $ -- /1/ /1/ Purchase
First Financial Bancorporation Sept. 28, 1998 $ 558,483 -- $ 12 3,138,823 Pooling/2/
Financial Services Corporation of the
Midwest Aug. 3, 1998 514,051 -- 4 2,071,448 Pooling/2/
CBT Corporation ("CBT") July 1, 1988 1,006,384 -- 34 5,123,214 Pooling
Firstbank of Illinois Co.
("Firstbank") July 1, 1998 2,285,146 -- 64 13,352,641 Pooling
HomeCorp, Inc. Mar. 2, 1998 335,137 -- 14 854,760 Pooling/2/
Horizon Bancorp, Inc. Feb. 2, 1998 536,507 -- 2 2,549,970 Pooling/2/
Roosevelt Financial
Group, Inc. ("Roosevelt") July 1, 1997 7,251,985 608,076 374,477 18,948,884 Purchase
Mark Twain Bancshares, Inc.
("Mark Twain") April 25, 1997 3,227,972 -- 73 24,088,713 Pooling
Regional Bancshares, Inc. March 5, 1997 171,979 16,217 12,300 900,625 Purchase
Today's Bancorp, Inc. Nov. 7, 1996 501,418 46,854 34,912 1,690,587 Purchase
First Financial
Corporation of America Nov. 1, 1996 87,649 5,137 3,253 388,113 Purchase
Peoples State Bank Aug. 22, 1996 95,657 7,552 -- 488,756 Purchase
Metro Savings Bank, F.S.B. March 7, 1996 80,857 3,016 5 296,853 Purchase
Security Bank of Conway,
F.S.B. Feb. 9, 1996 102,502 6,000 1 482,946 Purchase
Hawkeye Bancorporation Jan. 2, 1996 1,978,540 -- 80 11,838,294 Pooling
First Sterling Bancorp, Inc. Jan. 2, 1996 167,610 -- 1 782,126 Pooling/2/
- ------------------------------------------------------------------------------------------------------------------------------------
/1/ Terms of the transaction not disclosed.
/2/ The historical financial statements of the Corporation were not restated for
the acquisition due to the immateriality of the acquiree's financial condition
and results of operations to those of Mercantile.
</TABLE>
The Firstbank and CBT acquisitions were accounted for as poolings-of-
interests. Net income, net interest income and basic earnings per share in 1998
for the Corporation, CBT and Firstbank prior to this restatement were as
follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30
-------------
(Thousands except per share data) 1998
- --------------------------------------------------
<S> <C>
Corporation
Net income $198,902
Net interest income 482,912
Basic earnings per share 1.50
CBT
Net income 7,151
Net interest income 21,038
Basic earnings per share 1.40
Firstbank
Net income 15,953
Net interest income 44,073
Basic earnings per share 1.21
- --------------------------------------------------
</TABLE>
During 1998, the Corporation recorded adjustments related to the acquisitions
of Bruno Stolze & Company, Inc., First Financial Bancorporation, Financial
Services Corporation of the Midwest, CBT, Firstbank, HomeCorp, Inc. and Horizon
Bancorp, Inc. These adjustments consisted of $19,600,000 in provision for loan
losses, $1,649,000 in realized losses on securities sold in portfolio
restructurings, $89,192,000 of other expense and a related tax benefit of
$15,028,000. Of the $89,192,000 merger-related liability established,
$48,960,000 had been used by December 31, 1998 and $40,232,000 remains to absorb
future payments.
As a result of the acquisition by Mercantile, Firstbank's two Missouri banks
were sold in September 1998 due to state restrictions on deposit concentration.
An after-tax gain of $29,421,000 was recorded in connection with these
divestitures.
Firstbank acquired BankCentral Corporation and its wholly-owned subsidiary,
Central National Bank of Mattoon on June 10, 1997. The acquisition involved an
exchange of cash and Firstbank common stock totaling approximately $13,000,000,
and was recorded using the purchase method of accounting.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The Roosevelt acquisition was accounted for as a purchase. The following
unaudited pro forma combined consolidated financial data gives effect to the
July 1, 1997 acquisition of Roosevelt as if it had been consummated on January
1, 1996. The unaudited pro forma combined consolidated financial data provided
includes the impact of goodwill amortization and the reduction in net interest
income due to: 1) interest lost on cash paid for share repurchases or paid
directly to Roosevelt shareholders as consideration; and 2) interest on
$650,000,000 of senior debt, subordinated debt and redeemable preferred
securities issued in 1997 largely to finance the Roosevelt acquisition, offset
by interest earned on funds not utilized in the acquisition. There is no
estimate of potential cost savings included in the following table:
<TABLE>
<CAPTION>
As of or for the
Year Ended December 31
-----------------------
(Thousands except per share data) 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Total assets N/A $33,025,746
Net interest income $1,125,021 1,080,885
Other income 401,619 332,043
Net income 216,564 224,351
Basic earnings per share 1.48 1.53
- ------------------------------------------------------------
</TABLE>
The Mark Twain acquisition was accounted for as a pooling-of-interests. Net
income, net interest income and basic earnings per share for the Corporation and
Mark Twain in 1997 prior to this restatement were as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------
(Thousands except per share data) 1997
- -------------------------------------------------
<S> <C>
Corporation
Net income $ 60,336
Net interest income 179,515
Basic earnings per share .67
Mark Twain
Net income 14,659
Net interest income 32,446
Basic earnings per share .85
- -------------------------------------------------
</TABLE>
During 1997, Mercantile recorded adjustments related to the acquisitions of
Roosevelt, Mark Twain and Regional Bancshares, Inc. The adjustments consisted of
$20,340,000 in provision for loan losses, $121,393,000 other expense, reduced by
a related tax benefit of $41,856,000, for a net income reduction of $99,877,000.
Of the $121,393,000 merger-related liability established, $117,491,000 had been
utilized at December 31, 1998.
During 1996, adjustments were recorded by the Corporation related to companies
acquired that year. These adjustments consisted of a $13,666,000 increase in
provision for loan losses, $3,114,000 in losses on securities sold in portfolio
restructurings, a $51,071,000 charge to other expense and a related tax benefit
of $19,362,000, resulting in an after-tax reduction to net income of
$48,489,000. These accruals have been substantially exhausted.
For all acquisitions accounted for as purchases, the unamortized excess of
cost over the fair value of assets acquired was $723,186,000, $777,693,000 and
$171,539,000 at December 31, 1998, 1997 and 1996, respectively.
NOTE D--CASH FLOWS
The Corporation paid interest on deposits, short-term borrowings, bank notes
and long-term debt of $1,320,709,000, $1,033,434,000 and $834,516,000 in 1998,
1997 and 1996, respectively. The Corporation paid Federal income taxes of
$114,926,000, $159,797,000 and $162,068,000 in 1998, 1997 and 1996,
respectively.
The following details cash and cash equivalents from acquisitions accounted
for as purchases or poolings without restatement, net of cash paid:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of
assets purchased $(1,943,257) $(8,065,744) $(1,260,315)
Fair value of
liabilities assumed 1,780,406 7,044,026 1,090,663
Issuance of common stock 159,319 676,433 136,124
- ------------------------------------------------------------------------
Net Cash Paid
for Acquisitions (3,532) (345,285) (33,528)
Cash and cash
equivalents acquired 127,603 113,748 90,680
- ------------------------------------------------------------------------
Net Cash and Cash
Equivalents Received from
(Paid for) Acquisitions $ 124,071 $ (231,537) $ 57,152
- ------------------------------------------------------------------------
</TABLE>
NOTE E--CASH AND DUE FROM BANKS RESTRICTIONS
The Corporation's subsidiary banks are required to maintain average reserve
balances that place withdrawal and/or usage restrictions on cash and due from
banks balances. The average amount of these restricted balances for the year
ended December 31, 1998 was $205,533,000.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTE F--INVESTMENTS IN DEBT AND EQUITY SECURITIES
Available-for-Sale
The amortized cost, estimated fair values, and unrealized gains and losses of
available-for-sale securities were as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
(Thousands) Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Government $6,271,816 $50,590 $ 5,385 $6,317,021
State and political subdivisions:
Tax-exempt 405,109 12,991 21 418,079
Taxable 24,711 211 -- 24,922
- ------------------------------------------------------------------------------------------------------
Total State and Political Subdivisions 429,820 13,202 21 443,001
Privately issued collateralized mortgage obligations 864,584 5,949 4,030 866,503
Other 1,619,550 10,345 9,630 1,620,265
- ------------------------------------------------------------------------------------------------------
Total $9,185,770 $80,086 $19,066 $9,246,790
- ------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
U.S. Government $4,998,860 $33,373 $ 7,697 $5,024,536
State and political subdivisions:
Tax-exempt 359,834 8,214 243 367,805
Taxable 61,817 279 82 62,014
- ------------------------------------------------------------------------------------------------------
Total State and Political Subdivisions 421,651 8,493 325 429,819
Privately issued collateralized mortgage obligations 1,727,572 8,698 8,182 1,728,088
Other 875,074 3,372 1,823 876,623
- ------------------------------------------------------------------------------------------------------
Total $8,023,157 $53,936 $18,027 $8,059,066
- ------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
U.S. Government $4,042,304 $21,839 $17,432 $4,046,711
State and political subdivisions:
Tax-exempt 403,803 8,555 936 411,422
Taxable 112,158 490 469 112,179
- ------------------------------------------------------------------------------------------------------
Total State and Political Subdivisions 515,961 9,045 1,405 523,601
Privately issued collateralized mortgage obligations 20,316 316 172 20,460
Other 152,424 144 1,663 150,905
- ------------------------------------------------------------------------------------------------------
Total $4,731,005 $31,344 $20,672 $4,741,677
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Held-to-Maturity
The amortized cost, estimated fair values, and unrealized gains and losses of
held-to-maturity securities were as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
(Thousands) Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Government $ 95,754 $ 3,477 $1,707 $ 97,524
Other 1,853 -- 41 1,812
- -----------------------------------------------------------------------------------------
Total $ 97,607 $ 3,477 $1,748 $ 99,336
- -----------------------------------------------------------------------------------------
DECEMBER 31, 1997
U.S. Government $247,705 $ 6,625 $3,938 $250,392
State and political subdivisions:
Tax-exempt 80,330 3,825 8 84,147
Taxable 3,822 132 -- 3,954
- -----------------------------------------------------------------------------------------
Total State and Political Subdivisions 84,152 3,957 8 88,101
Other 3,422 158 119 3,461
- -----------------------------------------------------------------------------------------
Total $335,279 $10,740 $4,065 $341,954
- -----------------------------------------------------------------------------------------
DECEMBER 31, 1996
U.S. Government $558,911 $ 9,784 $7,750 $560,945
State and political subdivisions:
Tax-exempt 88,287 3,294 525 91,056
Taxable 4,304 66 3 4,367
- -----------------------------------------------------------------------------------------
Total State and Political Subdivisions 92,591 3,360 528 95,423
Other 5,219 220 175 5,264
- -----------------------------------------------------------------------------------------
Total $656,721 $13,364 $8,453 $661,632
- -----------------------------------------------------------------------------------------
</TABLE>
In conjunction with the acquisition of Roosevelt, the Corporation acquired
privately issued adjustable-rate mortgage-backed securities that have incurred
an impairment in value which is considered other than temporary. The loan pools
backing these securities have been affected by high delinquency and foreclosure
rates, and higher than anticipated losses on foreclosed property sales. The net
book value of these mortgage-backed securities was $62,056,000 as of December
31, 1998.
During the third quarter of 1996, the Corporation transferred securities from
the available-for-sale classification to the held-to-maturity classification.
The securities transferred had an amortized cost basis of $370,014,000 and an
estimated fair value of $373,557,000 on the transfer date. The unrealized gain
on the date of the transfer remained in shareholders' equity and is being
amortized over the remaining life of the transferred securities. The unamortized
balance as of December 31, 1998 was $1,007,000.
Securities with a carrying value of $5,656,506,000 at December 31, 1998,
$3,918,545,000 at December 31, 1997 and $3,348,145,000 at December 31, 1996 were
pledged to secure public and trust deposits, securities sold under agreements to
repurchase and for other purposes required by law.
The following table presents proceeds from sales of securities and the
components of net securities gains. There were no transfers of securities from
the held-to-maturity category to available-for-sale during 1996, 1997 and 1998.
Held-to-maturity securities gains and losses resulted from portfolio
restructurings in connection with subsidiary bank acquisitions or calls by the
security issuer prior to maturity.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
(Thousands) 1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales of
available-for-sale securities $2,040,541 $802,007 $506,636
- ----------------------------------------------------------------------
Securities gains on:
Available-for-sale securities $ 19,390 $ 8,225 $ 4,295
Held-to-maturity securities -- 9 18
- ----------------------------------------------------------------------
Total Securities Gains 19,390 8,234 4,313
Securities losses on:
Available-for-sale securities 3,955 585 4,021
Held-to-maturity securities -- -- --
- ----------------------------------------------------------------------
Total Securities Losses 3,955 585 4,021
- ----------------------------------------------------------------------
Net Securities Gains
Before Income Taxes 15,435 7,649 292
Applicable income taxes (5,402) (2,677) (102)
- ----------------------------------------------------------------------
Net Securities Gains $ 10,033 $ 4,972 $ 190
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTE G--LOANS AND LEASES
Loans and leases consisted of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------------
(Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial $ 6,099,692 $ 4,990,505 $ 4,591,604
Real estate--commercial 3,798,032 3,569,922 3,255,590
Real estate--construction 922,915 734,722 643,345
Real estate--residential
mortgage 8,153,824 8,702,879 4,787,012
Real estate--home equity
credit loans 526,097 588,228 439,806
Consumer 2,765,556 2,492,150 2,306,184
Credit card 45,142 283,549 913,713
- -------------------------------------------------------------------------------------------------------------
Total Loans and Leases $22,311,258 $21,361,955 $16,937,254
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Changes in the reserve for possible loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
(Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 284,165 $ 257,718 $ 261,339
Provision 51,154 86,355 78,766
Charge-offs (64,866) (109,259) (114,127)
Recoveries 22,782 28,189 21,934
- -------------------------------------------------------------------------------------------------------------
Net Charge-offs (42,084) (81,070) (92,193)
Acquired reserves 15,655 21,162 9,806
- -------------------------------------------------------------------------------------------------------------
Ending Balance $ 308,890 $ 284,165 $ 257,718
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Non-performing loans consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------------------------------
(Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual $ 132,713 $ 113,134 $ 81,037
Renegotiated 5,950 4,335 5,413
- -------------------------------------------------------------------------------------------------------------
Non-performing Loans $ 138,663 $ 117,469 $ 86,450
- -------------------------------------------------------------------------------------------------------------
</TABLE>
By the Corporation's definition, all non-accrual and renegotiated commercial-
related loans are considered impaired. The following table presents information
on impaired loans:
<TABLE>
<CAPTION>
As of or for the Year Ended December 31
-----------------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Ending impaired loans $47,598 $65,188 $53,294
Related reserve for possible
loan losses 6,487 13,890 11,284
Average impaired loans 61,622 66,785 59,532
Interest income recognized
on impaired loans 332 374 748
- -----------------------------------------------------------------------------
</TABLE>
Certain directors and executive officers of the Corporation were loan
customers of the Corporation's banks during 1998, 1997 and 1996. Such loans were
made in the ordinary course of business at normal terms, including interest rate
and collateralization, and did not represent more than a normal risk. Loans to
those persons, their immediate families and companies in which they were
principal owners were $55,539,000, $15,255,000 and $26,570,000, at December 31,
1998, 1997 and 1996, respectively. During 1998, $56,641,000 of new loans were
made to these persons, and repayments totaled $16,357,000.
NOTE H--BANK PREMISES AND EQUIPMENT
Bank premises and equipment were as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------
(Thousands) 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Land $ 81,830 $ 82,154 $ 70,021
Bank premises 466,540 460,408 392,250
Leasehold improvements 48,864 45,343 50,519
Furniture and equipment 504,748 462,179 366,444
- ---------------------------------------------------------------
Total Cost 1,101,982 1,050,084 879,234
Accumulated depreciation (556,423) (518,434) (450,262)
- ---------------------------------------------------------------
Net Carrying Value $ 545,559 $ 531,650 $ 428,972
- ---------------------------------------------------------------
</TABLE>
At December 31, 1998, the Corporation had certain long-term leases, none of
which were considered to be capital leases, which were principally related to
the use of land, buildings and equipment. The following table summarizes the
future minimum rental commitments for noncancelable operating leases which had
initial or remaining noncancelable lease terms in excess of one year:
<TABLE>
<CAPTION>
Minimum
Rental
Period (Thousands)
- -----------------------------
<S> <C>
1999 $18,374
2000 15,884
2001 11,928
2002 8,840
2003 6,403
2004 and later 19,160
- -----------------------------
Total $80,589
- -----------------------------
</TABLE>
Net rental expense for all operating leases was $19,031,000 in 1998,
$19,706,000 in 1997 and $15,232,000 in 1996.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTE I--DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest bearing $ 4,453,048 $ 3,956,138 $ 3,389,776
Interest bearing demand 3,281,788 3,086,259 2,800,964
Money market accounts 4,151,540 3,811,081 3,152,825
Savings 1,766,918 1,559,441 1,323,775
Consumer time certificates
under $100,000 9,186,531 9,850,437 7,136,532
Other time 189,122 191,199 233,997
- --------------------------------------------------------------------
Total Core Deposits 23,028,947 22,454,555 18,037,869
Time certificates $100,000
and over 1,950,677 1,769,461 1,495,089
Foreign 481,773 585,439 251,887
- --------------------------------------------------------------------
Total Purchased
Deposits 2,432,450 2,354,900 1,746,976
- --------------------------------------------------------------------
Total Deposits $25,461,397 $24,809,455 $19,784,845
- --------------------------------------------------------------------
</TABLE>
The scheduled maturities of Mercantile's consumer time certificates under
$100,000, time certificates $100,000 and over and other time deposits were as
follows:
<TABLE>
<CAPTION>
Scheduled
Maturity
Amount
Period (Thousands)
- ------------------------------
<S> <C>
1999 $ 7,929,081
2000 2,021,757
2001 621,143
2002 350,619
2003 302,714
2004 and later 101,016
- ------------------------------
Total $11,326,330
- ------------------------------
</TABLE>
NOTE J--SHORT-TERM BORROWINGS
Short-term borrowings were as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and
repurchase agreements $2,087,373 $2,127,443 $1,861,994
Short-term Federal Home
Loan Bank ("FHLB")
advances 667,672 1,412,701 123,094
Treasury tax and loan notes 222,044 104,535 118,886
Commercial paper 3,025 1,510 19,405
Other short-term borrowings 22,546 32,351 9,295
- -----------------------------------------------------------------
Total Short-term
Borrowings $3,002,660 $3,678,540 $2,132,674
- -----------------------------------------------------------------
</TABLE>
The average balance of total short-term borrowings was $3,294,078,000,
$2,929,826,000 and $1,671,352,000 during 1998, 1997 and 1996, respectively. The
average rate on total short-term borrowings was 5.29% in 1998, 5.43% in 1997 and
5.37% in 1996.
The maximum balances at month-end are listed below:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and
repurchase agreements $2,370,228 $2,579,789 $1,886,127
Short-term FHLB advances 1,472,114 1,412,701 130,239
Treasury tax and loan notes 402,733 260,822 439,181
Commercial paper 5,010 24,800 21,660
Other short-term borrowings 79,366 102,833 45,142
- -----------------------------------------------------------------
</TABLE>
The Corporation had unused lines of credit arrangements with unaffiliated
banks for support of commercial paper and for other uses totaling $100,000,000
at December 31, 1998.
NOTE K--LONG-TERM DEBT AND BANK NOTES
Long-term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------
(Thousands) 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
MERCANTILE
BANCORPORATION INC.
(PARENT COMPANY ONLY)
7.300% subordinated notes,
due 2007 $ 200,000 $ 200,000 $ --
6.800% senior notes,
due 2001 150,000 150,000 --
7.050% senior notes,
due 2004 150,000 150,000 --
7.625% subordinated notes,
due 2002 150,000 150,000 150,000
7.000% convertible
subordinated notes,
due 1999 859 1,153 --
- ---------------------------------------------------------------
Subtotal 650,859 651,153 150,000
SECOND-TIER HOLDING
COMPANIES 3,641 -- 2,036
BANKS AND OTHER
SUBSIDIARIES
6.375% subordinated notes,
due 2004 75,000 75,000 75,000
9.000% mortgage-backed
notes, due 1999 53,450 53,450 53,450
Other 48 10,084 10,104
- ---------------------------------------------------------------
Subtotal 128,498 138,534 138,554
- ---------------------------------------------------------------
Total Long-term Debt
Before FHLB Advances 782,998 789,687 290,590
FHLB advances 2,790,336 578,484 37,085
- ---------------------------------------------------------------
Total Long-term Debt $3,573,334 $1,368,171 $327,675
- ---------------------------------------------------------------
</TABLE>
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
In June 1997, the Corporation issued $200,000,000 of subordinated notes with a
10-year maturity and a coupon rate of 7.300%, $150,000,000 of senior notes with
a four-year maturity and a coupon rate of 6.800%, and $150,000,000 of senior
notes with a seven-year maturity and a coupon rate of 7.050%. The subordinated
and senior debt was primarily issued to assist in the financing of the Roosevelt
acquisition. For regulatory purposes the subordinated notes qualify as Tier II
capital.
In June 1987, Mark Twain issued 7.000% convertible subordinated capital notes
which are due in 1999. These convertible notes were transferred to Mercantile
Bancorporation Inc. (Parent Company Only) during 1997. The balance of the
convertible notes was $2,036,000 at December 31, 1996. The notes are convertible
into common stock at a conversion price equivalent to $11.127 per Mercantile
share.
Included in other long-term debt in 1997 and 1996 was a $10,000,000 term note
to Fidelity Credit Corporation, a subsidiary of CBT. This term note was paid off
and refinanced with loans from Mercantile subsidiary banks in the third quarter
of 1998.
FHLB advances at December 31, 1998 consisted of various debt instruments with
rates varying from 4.850% to 6.850%. This debt was collateralized by certain
loans and securities.
During 1996, Roosevelt defeased mortgage-backed bonds totaling $19,700,000 by
delivering treasury securities to the bond trustee for the periodic payment of
interest and the ultimate payment of the bonds to the bondholders on the
maturity date of April 15, 2018. Mercantile exercised the bonds' call provision
during the second quarter of 1998.
A summary of annual principal reductions of long-term debt is presented below:
<TABLE>
<CAPTION>
(Thousands)
Period FHLB Advances Other Total
- -----------------------------------------------------
<S> <C> <C> <C>
1999 $1,410,716 $ 55,068 $1,465,784
2000 98,120 653 98,773
2001 12,075 152,277 164,352
2002 124,604 150,000 274,604
2003 355,650 -- 355,650
2004 and later 789,171 425,000 1,214,171
- -----------------------------------------------------
Total $2,790,336 $782,998 $3,573,334
- -----------------------------------------------------
</TABLE>
Bank Notes
Beginning in 1994, certain subsidiary banks could offer unsecured bank notes. In
1998, the bank note program was restructured. Note maturities can range from
seven days to 30 years from the date of issue and may be issued with fixed or
floating interest rates. Each bank note issued will be an obligation solely of
that issuing bank and will not be an obligation of, or otherwise guaranteed by,
the other issuing banks or the Corporation. The bank notes issued under this
program may be senior bank notes or subordinated bank notes. The bank notes are
being offered and sold only to institutional investors, and are not insured by
the Federal Deposit Insurance Corporation or any other governmental agency.
Bank notes as presented below were issued under the 1994 program:
<TABLE>
<CAPTION>
December 31
---------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------
<S> <C> <C> <C>
MERCANTILE BANK N.A.
5.462% floating-rate bank
notes, due 1999 $25,000 $ 25,000 $ 25,000
6.056% floating-rate bank
notes, due 1998 -- 150,000 150,000
- --------------------------------------------------------
Total Bank Notes $25,000 $175,000 $175,000
- --------------------------------------------------------
</TABLE>
NOTE L -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
MERCANTILE CAPITAL TRUST I
In January 1997, the Corporation formed Mercantile Capital Trust I. Through this
trust, the Corporation obtained $150,000,000 of floating-rate debt maturing in
2027 that, for regulatory purposes, is part of Tier I capital. Mercantile
Capital Trust I is a subsidiary of which the Corporation owns all the
outstanding common securities; its sole assets are the $150,000,000 in
mandatorily redeemable preferred securities, and considered together, the back-
up undertakings constitute a full and unconditional guarantee by Mercantile
Bancorporation Inc. of the trust's obligations under the preferred securities.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
NOTE M -- INCOME TAXES
The Corporation's results include income tax expense as follows:
<TABLE>
<CAPTION>
(Thousands) Current Deferred Total
- ---------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1998
U.S. Federal $179,319 $ (11,342) $167,977
State and local 25,369 (382) 24,987
- ---------------------------------------------------
Total $204,688 $ (11,724) $192,964
- ---------------------------------------------------
YEAR ENDED
DECEMBER 31, 1997
U.S. Federal $141,435 $ (9,593) $131,842
State and local 10,936 (402) 10,534
- ---------------------------------------------------
Total $152,371 $ (9,995) $142,376
- ---------------------------------------------------
YEAR ENDED
DECEMBER 31, 1996
U.S. Federal $155,218 $ 22,306) $132,912
State and local 16,667 (1,012) 15,655
- ---------------------------------------------------
Total $171,885 $(23,318) $148,567
- ---------------------------------------------------
</TABLE>
The tax effects of temporary differences that gave rise to the deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
December 31
---------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Reserve for possible
loan losses $ 99,130 $ 91,027 $ 82,964
Foreclosed property 140 839 1,448
Deferred compensation 9,451 5,290 5,869
Expenses not currently
allowable for tax purposes 58,353 20,977 23,386
State tax liabilities -- -- 1,595
Retirement expenses in
excess of tax deduction 12,478 9,324 5,130
Other 5,215 13,775 7,780
- -----------------------------------------------------------------
Total Gross Deferred
Tax Assets 184,767 141,232 128,172
DEFERRED TAX LIABILITIES
Leasing (20,915) (26,938) (29,956)
Intangible assets -- -- (5,637)
Depreciation (7,769) (6,000) (6,698)
Investments in debt and
equity securities -- FAS 115 (19,595) (13,583) (3,413)
FHLB stock dividends (11,073) (9,672) --
Other (21,582) (10,330) (12,132)
- -----------------------------------------------------------------
Total Gross Deferred
Tax Liabilities (80,934) (66,523) (57,836)
- -----------------------------------------------------------------
Net Deferred Tax Assets $103,833 $ 74,709 $ 70,336
- -----------------------------------------------------------------
</TABLE>
Certain events covered by IRC Section 593(e), which was not repealed, will
trigger a recapture of the base year reserve of acquired thrift institutions.
The base year reserve of acquired thrift institutions would be recaptured if an
entity ceases to qualify as a bank for federal income tax purposes. The base
year reserves of thrift institutions also remain subject to income tax penalty
provisions that, in general, require recapture upon certain stock redemptions
of, and excess distributions to, stockholders. At December 31, 1998, retained
earnings included approximately $101.8 million of base year reserves for which
no deferred federal income tax liability has been recognized.
Income tax expense as reported differs from the amounts computed by applying
the statutory U.S. Federal income tax rate to pre-tax income as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected"
tax expense $198,893 $136,219 $151,557
Increase (reduction) in
income taxes resulting
from:
Tax-exempt income (10,078) (10,839) (11,833)
State and local income
taxes, net of federal
income tax benefit 16,242 6,847 10,176
Amortization of goodwill 19,311 12,216 403
Liquidation of affiliate (25,000) -- --
Other, net (6,404) (2,067) (1,736)
- ------------------------------------------------------------
Total Tax Expense $192,964 $142,376 $148,567
- ------------------------------------------------------------
</TABLE>
NOTE N -- RETIREMENT PLANS
Pension Plans
The Corporation maintains both qualified and nonqualified noncontributory
pension plans that cover all employees meeting certain age and service
requirements.
For the qualified plan, the Corporation's funding policy is to contribute
annually at least the minimum amount required by government funding standards
but not more than is tax deductible. No contribution was required during 1998,
1997 or 1996. The nonqualified plans provide pension benefits that would have
been provided under the qualified plan in the absence of limits placed on
qualified plan benefits by the Internal Revenue Service. The Corporation's
funding policy is to fund benefits as they are paid.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Effective in 1998, Mercantile changed the type of formula used to determine
pension benefits for its qualified and nonqualified plans. Pension benefits
under this formula are calculated based upon compensation and age.This change is
first reflected in 1998 net periodic benefit cost. In 1997 and 1996, the
qualified and nonqualified plans provided pension benefits based on the
employee's length of service and the five highest consecutive years of
compensation.
The Corporation generally begins covering employees of acquired corporations
in its pension and life insurance plans within a year following the acquisition
date. The effect of acquisitions that are accounted for as purchases or
poolings-of-interests without restatement is first reflected in net periodic
cost reported below for the year the employees first become covered in the
plans. Changes in benefit obligations and plan assets attributable to these
acquisitions are illustrated below.
The net periodic pension expense related to the qualified and nonqualified
plans included in the Consolidated Statement of Income is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 9,216 $ 12,169 $ 11,361
Interest cost 15,937 15,770 14,219
Expected return on assets (18,834) (16,817) (15,138)
Amortization of:
Transition obligation (asset) (159) (679) (584)
Prior service cost (1,180) (126) 22
Actuarial loss 268 100 379
- ------------------------------------------------------------------------------------------------------------
FAS 87 cost 5,248 10,417 10,259
Curtailment charge -- 94 --
- ------------------------------------------------------------------------------------------------------------
Total Net Periodic
Pension Cost $ 5,248 $ 10,511 $ 10,259
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted average assumptions used as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate in determining
benefit obligations 6.75% 7.25% 7.50%
Expected long-term rate
on plan assets 9.50 9.50 9.50
Rate of increase in
compensation levels 5.00 5.00 5.00
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The table below sets forth the change in benefit obligation:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net benefit obligation at
beginning of year $232,266 $199,676 $178,677
Service cost 9,216 12,169 11,361
Interest cost 15,937 15,770 14,219
Plan amendments (11,213) (5,042) --
Actuarial loss 4,257 19,409 4,847
Acquisitions/divestitures 8,981 -- --
Gross benefits paid (10,455) (8,913) (9,428)
Curtailments -- (803) --
- ------------------------------------------------------------------------------------------------------------
Net Benefit Obligation at
End of Year $248,989 $232,266 $199,676
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The change in plan assets is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of plan assets at
beginning of year $218,155 $183,137 $170,446
Actual return on plan assets 25,526 35,100 17,476
Employer contributions 2,517 2,296 4,643
Acquisitions/divestitures 13,512 6,535 --
Gross benefits paid (10,455) (8,913) (9,428)
- ------------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at
End of Year $249,255 $218,155 $183,137
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of funded status is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Funded status at end of year $ 266 $(14,111) $(16,539)
Unrecognized net
actuarial loss 1,426 7,389 13,484
Unamortized prior
service cost (14,136) (4,226) 53
Unrecognized net transition
obligation (asset) (1,230) (881) (703)
- ------------------------------------------------------------------------------------------------------------
Net Amount Recognized at
End of Year $(13,674) $(11,829) $ (3,705)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The prepaid benefit cost on the Consolidated Balance Sheet was $7,235,000,
$4,906,000 and $11,528,000 at December 31, 1998, 1997 and 1996, respectively.
The accrued benefit cost on the Consolidated Balance Sheet was $20,909,000,
$16,735,000 and $11,528,000 at December 31, 1998, 1997 and 1996, respectively.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The projected benefit obligation and accumulated benefit obligation for
pension plans with accumulated benefit obligations in excess of plan assets were
$29,662,000 and $27,941,000, respectively, as of December 31, 1998 and
$22,239,000 and $20,761,000, respectively, as of December 31, 1997. The plans
referred to in this paragraph have no assets.
Other Postretirement Benefits:
The Corporation provides other postretirement benefits, largely medical benefits
and life insurance, to its retirees. Medical benefit contributions are adjusted
annually; the life insurance is noncontributory.
The net periodic postretirement expense included in the Consolidated Statement
of Income is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
(Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 832 $ 793 $ 820
Interest cost 2,719 2,790 2,748
Amortization of:
Transition obligation (asset) 1,581 1,581 1,581
Prior service cost 8 8 8
Actuarial loss 38 19 124
- ----------------------------------------------------------------------------------
Total Net Periodic
Postretirement Cost $ 5,178 $ 5,191 $ 5,281
- ----------------------------------------------------------------------------------
</TABLE>
Weighted average assumptions used as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate in determining 6.75% 7.25% 7.50%
benefit obligations
Health care cost trend:
First year 7.50 8.50 9.50
Ultimate (2001 and after) 5.50 5.50 5.50
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the change in benefit obligation:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net benefit obligation
at beginning of year $39,614 $38,210 $36,204
Service cost 832 793 820
Interest cost 2,719 2,790 2,748
Plan participants'
contributions 992 -- --
Actuarial loss 638 329 872
Gross benefits paid (3,515) (2,508) (2,434)
- --------------------------------------------------------------------------------------------------------------------
Net Benefit Obligation
at End of Year $41,280 $39,614 $38,210
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of funded status is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Funded status at end of year $(41,280) $(39,614) $(38,210)
Unrecognized net
actuarial loss 2,897 2,298 1,988
Unamortized
prior service cost 124 132 140
Unrecognized
transition obligation 22,146 23,727 25,308
- --------------------------------------------------------------------------------------------------------------------
Net Amount Recognized
at End of Year $(16,113) $(13,457) $(10,774)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The sensitivity of reported figures for postretirement welfare benefits to
changes in the assumed health care cost trend are set forth below:
<TABLE>
<CAPTION>
1 Percentage Point
Change in Health Care Cost
---------------------------
(Thousands) Increase Decrease
- -----------------------------------------------------------------
<S> <C> <C>
Effect on service and interest
cost components of net periodic cost $ 112 $ (99)
Effect on accumulated
postretirement benefit obligation 1,542 (1,365)
- -----------------------------------------------------------------
</TABLE>
NOTE O--SHAREHOLDERS' EQUITY
Common Stock
At Mercantile's Annual Meeting on April 24, 1997, the Corporation's shareholders
approved an amendment to its Restated Articles of Incorporation that reduced the
par value of the Corporation's common stock from $5.00 per share to $.01 per
share. The authorized common stock of the Corporation consisted of 400,000,000
shares in 1998 and 200,000,000 shares in 1997 and 1996, of which 157,404,038,
148,712,307 and 134,174,597 shares were outstanding at December 31, 1998, 1997
and 1996, respectively.
The Corporation's Shareholder Investment Plan ("Plan") allows new shareholders
a means to make an initial investment in Mercantile common stock or for
shareholders of record to purchase additional shares. Under the Plan,
participants have the option of reinvesting dividends.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Preferred Stock
The authorized preferred stock of the Corporation consists of 5,000,000 shares,
no par value, of which none were issued or outstanding at December 31, 1998,
1997 and 1996, although 2,000,000 shares were reserved for issuance pursuant to
the Preferred Share Purchase Rights Plan. The preferred stock, which is issuable
in series, shall have specific terms, preferences and other rights as determined
by the Board of Directors for each series.
Preferred Share Purchase Rights Plan
One preferred share purchase right ("MBI Right") is attached to each share of
common stock. The MBI Rights trade automatically with shares of common stock and
become exercisable and will trade separately from the common stock on the tenth
day after public announcement that a person or group has acquired, or has the
right to acquire, beneficial ownership of 20% or more of the outstanding shares
of common stock, or upon commencement or announcement of intent to make a tender
offer for 20% or more of the outstanding shares of common stock, in either case
without prior written consent of the Board. When exercisable, each MBI Right
will entitle the holder to buy 1/100 of a share of MBI Series B Junior
Participating Preferred Stock at an exercise price of $212 per MBI Right. In the
event a person or group acquires beneficial ownership of 20% or more of common
stock, holders of MBI Rights (other than the acquiring person or group) may
purchase common stock having a market value of twice the then current exercise
price of each MBI Right.If the Corporation is acquired by any person or group
after the rights become exercisable, each MBI Right will entitle its holder to
purchase stock of the acquiring company having a market value of twice the
current exercise price of each MBI Right. The MBI Rights are designed to protect
the interests of MBI and its shareholders against coercive takeover tactics. The
purpose of the MBI Rights is to encourage potential acquirors to negotiate with
Mercantile's Board of Directors prior to attempting a takeover and and to give
the Board leverage in negotiating on behalf of all shareholders the terms of any
proposed takeover. The MBI Rights may deter certain takeover proposals. The
MBI Rights, which can be redeemed by MBI's Board of Directors in certain
circumstances, expire by their terms on June 3, 2008.
Stock Options
The Corporation had stock options outstanding under various plans at December
31, 1998, including plans assumed in acquisitions. The original Mercantile plans
provide for the granting to employees of the Corporation and its subsidiaries of
options to purchase shares of common stock of the Corporation over periods of up
to 10 years at a price not less than the market value of the shares at the date
the options are granted. The plans provide for the granting of options that
either qualify or do not qualify as Incentive Stock Options as defined by
Section 422 of the Internal Revenue Code of 1986, as amended. As of December 31,
1998, there were 4,235,102 options available for grant. The per share price
range for options exercisable was $3.61 to $58.31 as of December 31, 1998.
The following table summarizes stock options outstanding as of December 31,
1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------
Weighted Average
Range of Remaining Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 3.61 - 21.18 1,471,023 2.36 yrs. $13.66
21.44 - 21.67 1,245,550 4.62 21.67
21.77 - 33.13 1,478,453 5.21 28.02
34.08 - 52.69 1,579,142 7.83 36.57
53.06 - 58.31 1,365,837 9.28 54.45
- ----------------------------------------------------------------------------------------------------------------------
3.61 - 58.31 7,140,005 5.88 30.90
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes in options outstanding were as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995 6,295,043 $17.36
Granted 1,066,576 28.90
Exercised (826,963) 10.74
Canceled (156,318) 24.79
Assumed 76,488 15.27
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 6,454,826 19.91
Granted 1,889,201 34.72
Exercised (1,407,609) 17.20
Canceled (108,121) 27.19
Assumed 610,536 17.72
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 7,438,833 23.90
Granted 1,580,662 53.64
Exercised (1,720,684) 19.57
Canceled (296,262) 37.18
Assumed 137,456 20.81
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 7,140,005 30.90
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The numbers of shares exercisable under stock options as of December 31, 1998,
1997 and 1996 were 4,271,291, 4,936,522 and 3,436,204, respectively, with a
weighted average exercise price of $22.84, $19.47 and $15.71, respectively.
The fair value of the option grants was estimated on the date of grant using
an option-pricing model based upon the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 2.69% 2.85% 3.30%
Expected volatility 29.52 29.80 31.70
Average risk-free
interest rate 5.36 6.13 5.15
Expected option life
from vesting date 1.55 yrs. 1.40 yrs. 1.26 yrs.
Weighted per share
average fair value of
stock options granted $16.01 $ 8.26 $ 7.15
- ---------------------------------------------------------------
</TABLE>
The Corporation applies Accounting Principles Board Opinion 25 in accounting
for its stock option plans. The compensation cost that has been charged against
income for stock-based compensation plans was $6,866,000, $5,984,000 and
$4,081,000 for 1998, 1997 and 1996, respectively. Had the Corporation adopted
FAS 123's optional accounting method, the Corporation's net income and earnings
per share would have been reduced to the pro forma amounts noted below:
<TABLE>
<CAPTION>
(Thousands except per share data) As Reported Pro Forma
- ------------------------------------------------------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net income $375,303 $370,840
Basic earnings per share 2.45 2.42
Diluted earnings per share 2.41 2.37
YEAR ENDED DECEMBER 31, 1997
Net income 246,822 240,132
Basic earnings per share 1.76 1.72
Diluted earnings per share 1.73 1.68
YEAR ENDED DECEMBER 31, 1996
Net income 284,453 280,514
Basic earnings per share 2.12 2.09
Diluted earnings per share 2.09 2.06
- ------------------------------------------------------------
</TABLE>
The effect of applying FAS 123 as presented above is not representative of the
effects on pro forma net income for future years.
Debt and Dividend Restrictions
Consolidated retained earnings at December 31, 1998 were not restricted under
any agreement as to payment of dividends or reacquisition of common stock.
The primary source of funds for dividends paid by the Corporation to its
shareholders is dividends received from bank subsidiaries. At December 31, 1998,
approximately $82,939,000 of the equity of bank subsidiaries was available for
distribution as dividends to the Parent Company without prior regulatory
approval or without reducing the capital of the respective subsidiary banks
below present minimum standards. An additional $311,578,000 would be available
for loans to the Parent Company under Federal Reserve regulations. The remaining
equity of bank subsidiaries approximating $2,495,319,000 was restricted as to
transfers to the Parent Company.
NOTE P--REGULATORY MATTERS
The Corporation and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's Consolidated Financial Statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Mercantile and its subsidiary banks must meet specific
capital guidelines that involve quantitative measures of the Corporation and its
subsidiary banks' assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Mercantile and subsidiary
banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Corporation and its subsidiary banks to maintain minimum amounts and
ratios, as set forth in the table on the next page, of Tier I and total capital
to risk-weighted assets, and of Tier I capital to average assets, the leverage
ratio. Management believes, as of December 31, 1998, the Corporation and its
subsidiary banks met all their capital adequacy requirements.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The actual and required capital amounts and ratios as of December 31, 1998,
1997 and 1996 for the Corporation and Mercantile Bank N.A. are listed in the
following table:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
-------------------------------------------------------------------------------------------------------
Minimum Capital Minimum Capital Minimum Capital
Actual Requirements Actual Requirements Actual Requirements
-------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Amount Ratio Amount Amount Ratio Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TIER I CAPITAL
(TO RISK-WEIGHTED ASSETS)
Corporation $2,451,449 9.84% $ 996,302 $2,104,078 9.40% $ 894,913 $2,049,795 11.50% $ 713,258
Mercantile Bank N.A. 1,731,390 10.82 639,898 1,210,872 10.86 446,178 499,602 9.51 210,225
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS)
Corporation 3,125,488 12.55 1,992,604 2,778,794 12.42 1,789,826 2,500,154 14.02 1,426,516
Mercantile Bank N.A. 1,974,542 12.34 1,279,795 1,406,983 12.61 892,356 620,308 11.80 420,450
LEVERAGE
(TO AVERAGE ASSETS)
Corporation 2,451,449 7.16 1,368,832 2,104,078 6.52 1,291,055 2,049,795 8.52 962,265
Mercantile Bank N.A. 1,731,390 7.99 866,856 1,210,872 7.33 660,542 499,602 6.97 286,873
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Minimum capital ratios are 4.00% for Tier I capital and leverage, and 8.00%
for total capital.
As of November 30, 1998, the date of the most recent notification from
regulatory agencies, the subsidiary banks were categorized as well capitalized
under the regulatory framework. There are no conditions or events since that
notification that management believes have changed the subsidiary banks'
category.
NOTE Q--CONCENTRATIONS OF CREDIT
The Corporation's primary market area is the state of Missouri and the lower
Midwest. At December 31, 1998, approximately 87% of the total loan portfolio,
and 86% of the commercial and commercial real estate loan portfolio, were to
borrowers within this region. The diversity of the region's economic base tends
to provide a stable lending environment.
Real estate constituted the only other area of significant concentration of
credit risk. Real estate-related financial instruments (loans, commitments and
standby letters of credit) composed 47% of all such instruments of the
Corporation. However, of this total, approximately 64% was consumer-related in
the form of residential real estate mortgages and home equity lines of credit.
The Corporation is, in general, a secured lender. At December 31, 1998,
approximately 93% of the loan portfolio was secured. Collateral is required in
accordance with the normal credit evaluation process based upon the
creditworthiness of the customer and the credit risk associated with the
particular transaction.
NOTE R--FINANCIAL INSTRUMENTS
Fair Values
Fair values for financial instruments are management's estimates of the values
at which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, certain financial
instruments and all non-financial instruments are excluded from the fair value
disclosure requirements of FAS 107, "Disclosures about Fair Value of Financial
Instruments." Therefore, the fair values presented below should not be construed
as the underlying value of the Corporation.
The following methods and assumptions were used in estimating fair values for
financial instruments.
Cash and Due from Banks, Short-term Investments and Short-term Borrowings: The
carrying values reported in the Consolidated Balance Sheet approximated fair
values.
Investments in Debt and Equity Securities: Fair values for held-to-maturity
securities were based upon quoted market prices where available. Fair values for
trading and available-for-sale securities, which also were the amounts reported
in the Consolidated Balance Sheet, were based on quoted market prices where
available. If quoted market prices were not available, fair values were based
upon quoted market prices of comparable instruments.
Loans and Leases: The fair values for most fixed-rate loans were estimated by
utilizing discounted cash flow analysis, applying interest rates currently being
offered
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
for similar loans to borrowers with similar risk profiles. The discount
rates used, therefore, include a credit risk premium. The fair values of
variable-rate loans and all residential mortgages were estimated by utilizing
the same type of discounted cash flows, but over a range of interest rate
scenarios, in order to incorporate the value of the options imbedded in these
assets. Loans with similar characteristics were aggregated for purposes of these
calculations.
Deposits: The fair values disclosed for deposits generally payable on demand
(i.e., interest bearing and non-interest bearing demand, savings and money
market accounts) were considered equal to their respective carrying amounts as
reported in the Consolidated Balance Sheet. Fair values for certificates of
deposit and foreign deposits were estimated using a discounted cash flow
calculation that applied interest rates generally offered on similar
certificates to a schedule of aggregated expected monthly maturities of time
deposits. The fair value estimate of the deposit portfolio has not been adjusted
for any value derived from the retention of those deposits for an expected
future period of time, and was neither considered in the fair value amounts
below nor recorded as an intangible asset on the Consolidated Balance Sheet.
Bank Notes and Long-term Debt: The fair value of publicly traded debt was
based upon quoted market prices, where available, or upon quoted market prices
of comparable instruments. The fair values of bank notes and long-term debt were
estimated using discounted cash flow analysis, based on the Corporation's
current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Instruments: Fair values of foreign exchange contracts,
interest rate contracts and when-issued securities were determined from quoted
market prices. Fair values of commitments to extend credit, standby letters of
credit and commercial letters of credit were based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standings.
The estimated fair values of the Corporation's financial instruments were as
follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
(Thousands) Value Value Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks, and
short-term investments $ 2,354,670 $ 2,354,670 $ 1,886,280 $ 1,886,280 $ 1,856,314 $ 1,856,314
Trading securities 126,540 126,540 70,536 70,536 31,361 31,361
Held-to-maturity securities 97,607 99,336 335,279 341,954 656,721 661,632
Available-for-sale securities 9,246,790 9,246,790 8,059,066 8,059,066 4,741,677 4,741,677
Net loans and leases 22,002,368 22,871,157 21,077,790 21,525,593 16,679,536 17,129,917
FINANCIAL LIABILITIES
Deposits 25,461,397 25,877,849 24,809,455 25,112,466 19,784,845 19,999,832
Short-term borrowings 3,002,660 3,002,660 3,678,540 3,678,540 2,132,674 2,132,674
Bank notes and long-term debt 3,748,334 3,904,190 1,693,171 1,709,813 502,675 506,954
OFF-BALANCE-SHEET
Foreign exchange contracts purchased 322 (5,880) (428)
Foreign exchange contracts sold 1,425 4,367 39
Interest rate contracts 34,164 17,244 (143)
When-issued securities purchased 647 (2,578) --
When-issued securities sold (6,702) 2,509 --
Commitments to extend credit (33,738) (37,790) (17,779)
Standby letters of credit (4,477) (3,862) (2,879)
Commercial letters of credit (2,100) (1,998) (5,406)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFF-BALANCE-SHEET RISK
The Corporation is, in the normal course of business, a party to certain off-
balance-sheet financial instruments. These instruments, which include
commitments to extend credit, standby letters of credit, interest rate options
written, interest rate swaps and foreign exchange contracts, are used by the
Corporation to meet the financing needs of its customers and to reduce its own
exposure to interest rate fluctuations. They involve varying degrees of credit,
interest rate and liquidity risk, but do not represent unusual risks for the
Corporation. Management does not anticipate any significant losses as a result
of these transactions.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The notional or contract amounts of financial instruments with off-balance-
sheet credit risk were as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------
(Thousands) 1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Commitments to
extend credit
Commercial $5,152,065 $4,175,423 $3,325,464
Consumer 4,056,684 2,270,781 6,176,412
- ---------------------------------------------------------------------
Total $9,208,749 $6,446,204 $9,501,876
- ---------------------------------------------------------------------
Standby letters of credit $ 514,300 $ 442,245 $ 462,082
- ---------------------------------------------------------------------
Interest rate contracts $ 978,666 $1,021,563 $ 391,000
- ---------------------------------------------------------------------
When-issued securities:
Commitments to purchase $ 213,895 $ 178,475 $ --
Commitments to sell 291,700 230,981 --
- ---------------------------------------------------------------------
</TABLE>
The Corporation's maximum exposure to credit loss under commitments to extend
credit and standby letters of credit is the equivalent of the contractual amount
of those instruments. The same credit policies are used by the Corporation in
granting commitments and conditional obligations as are used in the extension of
credit.
Commitments to extend credit are legally binding agreements to lend to a
borrower as long as the borrower performs in accordance with the terms of the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. As many of the commitments are
expected to expire without being drawn upon, the total commitment amount does
not necessarily represent future cash requirements. Included in consumer
commitments are the unused portions of lines of credit for credit card and home
equity credit loans.
Standby letters of credit are commitments issued by the Corporation to
guarantee specific performance of a customer to a third party.
Collateral is required for both commitments and standby letters of credit in
accordance with the normal credit evaluation process based upon the
creditworthiness of the customer and the credit risk associated with the
particular transaction. Collateral held varies but may include commercial real
estate, accounts receivable, inventory or equipment.
Included in interest rate contracts are interest rate swaps and floors.
Derivative Financial Instruments
Held or Issued for Trading Purposes: In the normal course of business, the
Corporation maintains minimal trading positions in a variety of derivative
financial instruments. Most of the Corporation's trading activities are customer
oriented, with trading positions established to meet the financing and foreign
exchange transaction needs of customers. This activity complements the
Corporation's traditional money and capital markets trading business, which also
exists to meet customers' demands.
Net revenue recognized on interest rate contracts and foreign exchange
contracts totaled $4,699,000, $4,615,000 and $3,916,000 in 1998, 1997 and 1996,
respectively. The notional amounts of interest rate options written, foreign
exchange contracts purchased and foreign exchange contracts sold were as
follows:
<TABLE>
<CAPTION>
December 31
------------------------------
(Thousands) 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Interest rate options written $ 5,475 $ 13,533 $ 16,456
Foreign exchange contracts
purchased 431,246 328,127 243,800
Foreign exchange
contracts sold 383,637 291,995 193,179
- ---------------------------------------------------------------
</TABLE>
These transactions are generally entered into on behalf of customers and are
simultaneously hedged by the Corporation. As a consequence, these matched
transactions do not represent exposure to market risk. The Corporation manages
the potential credit exposure through established credit approvals, risk control
limits and other monitoring procedures. Credit risk to the Corporation could
result from non-performance by a counterparty to a contract; however, currently
that credit risk is minimal.
Held or Issued for Purposes Other Than Trading: The Corporation uses off-
balance-sheet derivative financial instruments such as interest rate swaps and
floors to manage interest rate risk. The Corporation's exposure to interest rate
risk stems from the mismatch between the sensitivity to movements in interest
rates of the Corporation's assets and liabilities. The use of derivatives to
manage interest rate risk is primarily for interest sensitivity adjustments.
Interest rate swaps are generally used to lengthen the interest rate sensitivity
of short-term assets and to shorten the repricing characteristics of longer term
liabilities. Gains or losses are used to adjust the basis of the related asset
or liability, and interest differentials are adjustments of the related interest
income or expense.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
Of the commitments to extend credit discussed in the preceding paragraphs,
$587,796,000, $554,396,000 and $346,850,000 were entered into with fixed rates
for commercial loan customers at December 31, 1998, 1997 and 1996, respectively.
Fixed-rate commitments for consumer (residential mortgage) loan customers
totaled $233,256,000 at December 31, 1998, $231,204,000 at December 31, 1997 and
$77,727,000 at December 31, 1996. Fixed-rate commitments to extend credit are
defined as fixed-rate commercial loan commitments with remaining maturities
greater than one year, fixed-rate residential mortgage loan commitments, and
adjustable-rate residential mortgage loan commitments for loans with adjustment
periods greater than one year.
Fixed-rate mortgage loans held for resale are partially hedged with contracts
for forward delivery in the secondary mortgage market. This hedging activity is
designed to protect the Corporation from changes in interest rates. Gains and
losses from the hedging transactions on mortgage loans held for resale are
deferred and included in the cost of the loans for determining the gain or loss
when the loans are sold. Forward delivery contracts outstanding totaled
$265,691,000 as of December 31, 1998, $85,585,000 as of December 31, 1997 and
$62,823,000 as of December 31, 1996.
NOTE S--CONTINGENT LIABILITIES
In the ordinary course of business, there are various legal proceedings pending
against the Corporation and its subsidiaries. Management, after consultation
with legal counsel, is of the opinion that the ultimate resolution of these
proceedings will have no material adverse effect on the consolidated financial
condition or results of operations of the Corporation.
NOTE T--PARENT COMPANY FINANCIAL INFORMATION
Following are the condensed financial statements of Mercantile Bancorporation
Inc. (Parent Company Only) for the periods indicated.
For the Statement of Cash Flows (Parent Company Only), cash and short-term
investments were considered cash equivalents. Interest paid on commercial paper
and long-term debt was $52,568,000, $35,494,000 and $12,420,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
STATEMENT OF INCOME December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from
subsidiaries $ 402,026 $ 324,884 $ 444,136
Other interest and
dividends 8,678 11,386 4,359
Management fees 29,681 21,404 16,987
Other 6,225 6,602 5,159
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income 446,610 364,276 470,641
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSE
Interest on commercial
paper 94 951 987
Interest on long-term debt
and mandatorily redeem-
able preferred securities 52,929 38,243 11,681
Personnel expense 29,902 32,889 18,503
Intangible asset amortization 51,187 30,615 6,046
Other operating expenses 132,880 115,534 40,326
- -----------------------------------------------------------------------------------------------------------------------------------
Total Expense 266,992 218,232 77,543
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME
TAX BENEFIT AND EQUITY
IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 179,618 146,044 393,098
Income tax benefit 68,283 48,458 16,514
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY
IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 247,901 194,502 409,612
Equity in undistributed
income of subsidiaries 127,402 52,320 (125,159)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 375,303 $ 246,822 $ 284,453
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash $ 193 $ 15 $ 33
Short-term investments 264,145 224,230 128,480
Available-for-sale securities 18,836 28,578 30,167
Investment in subsidiaries 2,988,236 2,685,587 2,194,274
Intangible assets 672,742 723,785 126,239
Loans and advances
to subsidiaries 3,025 1,510 19,405
Other assets 80,288 36,929 9,316
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $4,027,465 $3,700,634 $2,507,914
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Commercial paper $ 3,025 $ 1,510 $ 19,405
Long-term debt 650,859 651,153 150,000
Company-obligated
mandatorily redeemable
preferred securities 150,000 150,000 --
Other liabilities 149,826 135,669 75,266
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 953,710 938,332 244,671
- -----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 3,073,755 2,762,302 2,263,243
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $4,027,465 $3,700,634 $2,507,914
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS Year Ended December 31
----------------------------------------------
(Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 375,303 $ 246,822 $ 284,453
Adjustments to reconcile net income to net cash provided by operating activities
Net income of subsidiaries (529,428) (377,204) (318,977)
Dividends from subsidiaries 402,026 312,072 421,299
Other, net 35,383 79,097 33,386
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 283,284 260,787 420,161
INVESTING ACTIVITIES
Investments in debt and equity securities
Purchases (10,626) (4,554) (8,339)
Proceeds from maturities 11,555 4,100 --
Acquisitions (130) (386,850) (33,082)
Other, net (2,456) 8,846 (2,943)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (1,657) (378,458) (44,364)
FINANCING ACTIVITIES
Cash dividends paid (171,813) (132,535) (101,907)
Net issuance of common stock for employee incentive plans 29,764 11,762 (327)
Purchase of treasury stock (101,000) (299,063) (175,036)
Redemption of preferred stock -- -- (12,684)
Issuance of long-term debt -- 501,859 --
Issuance of mandatorily redeemable preferred securities -- 150,000 --
Net change in commercial paper 1,515 (17,895) 2,455
Other, net -- (725) (164)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (241,534) 213,403 (287,663)
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 40,093 95,732 88,134
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 224,245 128,513 40,379
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 264,338 $ 224,245 $ 128,513
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE U--LINE OF BUSINESS RESULTS
The financial performance of Mercantile is monitored by an internal
profitability measurement system that produces line of business results and key
performance measures on a pre-tax basis. Mercantile's three major business units
in 1998 included general commercial and retail banking ("Banking"), private
banking and investments, and specialty retail banking. The reported results
reflect the underlying economics of the businesses which are match-funded for
interest rate risk. Expenses for centrally provided services are allocated based
on usage of those services, and loan loss provision is allocated based on credit
quality. The contribution of Mercantile's major business units to consolidated
results for 1998 is summarized in the table on page 79. Comparable financial
information for 1997 is not available due to the significant amount of
acquisition activity that occurred in that year and thus the lack of comparable
management accounting information.
Banking includes the Corporation's branch network and deposit gathering,
commercial lending, non-specialty retail lending, the investment portfolio and
the treasury function. It is by far the largest business unit, and it houses
most staff department functions.
Private Banking & Investments was structured to serve the investment
management needs of high net worth individuals. It includes private banking
offices, personal and institutional trust activities, institutional money
management and retail brokerage.
Specialty retail banking (Mercantile Credit Corp.) includes residential
mortgage origination and servicing, credit card, indirect lending, insurance
activities and consumer product management.
Parent Company and Other includes interest expense on Parent Company debt,
goodwill amortization, consolidation eliminations, provision for loan losses not
allocated to the business units and some general corporate expenses not
allocated to the business units.
<PAGE>
Mercantile Bancorporation Inc. and Subsidiaries
The "Adjusted Results" below exclude the financial impact of the conforming
adjustments that relate to the seven 1998 acquisitions and the fourth quarter
1998 restructuring charge. These adjustments would be allocated largely to the
Banking segment, but to show meaningful financial results, they are displayed
separately.
The management accounting system of Mercantile allows for double counting of
the results of certain product lines and business units because of the level of
cooperation necessary to generate favorable results. In the table below, this
double counting is eliminated.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
---------------------------------------------------------------------------------------------
Conforming
Private Parent Adjustments &
Mercantile Banking & Company Adjusted Restructuring
(Dollars in millions) Banking Credit Corp. Investments & Other Results Charges Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Taxable-equivalent net interest
income $ 1,087 $ 51 $ 13 $ (30) $ 1,121 $ -- $ 1,121
Provision for possible loan losses 13 13 -- 5 31 20 51
Other income 294 96 138 (32) 496 46 542
Other expense 704 73 94 22 893 134 1,027
- -----------------------------------------------------------------------------------------------------------------------------------
Taxable-equivalent Income Before
Income Taxes $ 664 $ 61 $ 57 $ (89) $ 693 $ (108) $ 585
- -----------------------------------------------------------------------------------------------------------------------------------
Percent of Adjusted
Taxable-equivalent
Income Before Income Taxes 95.82% 8.80% 8.22% (12.84)% 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans and leases $20,683 $ 1,005 $ 103 $ (11) $21,780 $ -- $21,780
Total assets 33,008 1,298 165 100 34,571 -- 34,571
Deposits 24,568 393 329 (509) 24,781 -- 24,781
- -----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Efficiency ratio 50.94% 49.52% 62.21% -- 55.21% 61.75%
Net interest rate margin 3.55 4.44 8.84 -- 3.56 3.56
Net charge-offs to average loans .14 1.26 (.01) -- .19 .19
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE V--RESTRUCTURING CHARGE
During the fourth quarter of 1998, Mercantile recorded a $45,130,000 charge
relating to cost management programs and customer service initiatives. The
charge will fund the costs related to 26 branch closings and severance for
approximately 1,400 staff reductions that will result from further
centralization, consolidation of back office functions, branch closures and a
wider span of control.
These programs are to be substantially completed by the first quarter of 1999.
Any additional costs that do not qualify for recognition in the charge will be
expensed as incurred, but are not expected to be material. Total payments
through December 31, 1998 were $2,287,000 and the remaining balance of
$42,843,000 represents the liability for the future cash outflows associated
with these specific actions.
<PAGE>
INDEPENDENT AUDITORS' REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS
MERCANTILE BANCORPORATION INC.:
We have audited the accompanying consolidated balance sheets of Mercantile
Bancorporation Inc. and subsidiaries as of December 31, 1998, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders' equity,
cash flows, and comprehensive income for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercantile
Bancorporation Inc. and subsidiaries as of December 31, 1998, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
January 20, 1999
<PAGE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
1999 DEC. 31 1998
(UNAUDITED) 1998 (UNAUDITED)
----------- ------- -----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,210,972 $ 1,760,636 $ 1,316,663
Due from banks--interest bearing 291,561 367,304 280,676
Federal funds sold and repurchase agreements 366,270 226,730 336,417
Investments in debt and equity securities
Trading 188,069 126,540 125,680
Available-for-sale (Amortized cost
of $9,319,603, $9,185,770 and $8,784,082,
respectively) 9,308,727 9,246,790 8,829,585
Held-to-maturity (Estimated fair
value of $83,512, $99,336 and
$314,356, respectively) 81,906 97,607 307,234
----------- ----------- -----------
Total Investments in Debt and Equity Securities 9,578,702 9,470,937 9,262,499
Loans held-for-sale 176,050 217,941 249,407
Loans and leases, net of unearned income 22,300,949 22,093,317 21,513,860
----------- ----------- -----------
Total Loans and Leases 22,476,999 22,311,258 21,763,267
Reserve for possible loan losses (309,048) (308,890) (293,565)
----------- ----------- -----------
Net Loans and Leases 22,167,951 22,002,368 21,469,702
Bank premises and equipment 533,807 545,559 542,774
Intangible assets 765,560 781,188 823,955
Other assets 663,996 645,455 1,116,631
----------- ----------- -----------
Total Assets $35,578,819 $35,800,177 $35,149,317
=========== =========== ===========
LIABILITIES
Deposits
Non-interest bearing $3,901,014 $ 4,453,048 $ 3,834,599
Interest bearing 20,398,177 20,526,576 20,935,126
Foreign 423,206 481,773 463,426
----------- ----------- -----------
Total Deposits 24,722,397 25,461,397 25,233,151
Federal funds purchased and repurchase agreements 2,353,079 2,087,373 2,142,440
Other short-term borrowings 377,296 915,287 1,656,666
Bank notes -- 25,000 25,000
Long-term Federal Home Loan Bank advances 3,475,038 2,790,336 1,447,362
Other long-term debt 781,032 782,998 789,588
Company-obligated mandatorily redeemable preferred
securities of Mercantile Capital Trust I 150,000 150,000 150,000
Other liabilities 618,514 514,031 861,944
----------- ----------- -----------
Total Liabilities 32,477,356 32,726,422 32,306,151
Commitments and contingent liabilities -- -- --
<CAPTION>
MARCH 31 DEC. 31 MARCH 31
1999 1998 1998
-------- ------- --------
SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Preferred stock--no par value
Shares authorized 5,000 5,000 5,000
Shares issued and outstanding -- -- -- -- -- --
Common stock--$.01 par value
Shares authorized 400,000 400,000 200,000
Shares issued 157,916 157,487 153,326 1,578 1,574 1,535
Capital surplus 1,009,106 999,595 1,065,295
Retained earnings 2,099,532 2,035,157 1,840,855
Accumulated other comprehensive income (6,600) 41,160 32,740
Treasury stock, at cost 47 83 1,845 (2,153) (3,731) (97,259)
----------- ----------- -----------
Total Shareholders' Equity 3,101,463 3,073,755 2,843,166
----------- ----------- -----------
Total Liabilities and
Shareholders' Equity $35,578,819 $35,800,177 $35,149,317
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $431,903 $442,332
Investments in debt and equity securities
Trading 2,579 2,065
Taxable 140,293 135,941
Tax-exempt 5,463 6,111
-------- --------
Total Investments in Debt and Equity Securities 148,335 144,117
Due from banks--interest bearing 3,691 3,093
Federal funds sold and repurchase agreements 3,009 3,638
-------- --------
Total Interest Income 586,938 593,180
INTEREST EXPENSE
Interest bearing deposits 210,757 229,803
Foreign deposits 5,881 7,617
Short-term borrowings 30,857 52,329
Bank notes 133 2,323
Long-term debt and mandatorily redeemable preferred securities 55,081 28,387
-------- --------
Total Interest Expense 302,709 320,459
-------- --------
NET INTEREST INCOME 284,229 272,721
PROVISION FOR POSSIBLE LOAN LOSSES 7,479 8,537
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 276,750 264,184
OTHER INCOME
Trust 29,142 28,128
Service charges 29,640 28,244
Investment banking and brokerage 11,082 11,066
Mortgage banking 6,199 5,943
Gain on sale of mortgage servicing rights -- 23,155
Securitization revenue 5,451 4,523
Securities gains 12,963 4,453
Miscellaneous 31,967 31,439
-------- --------
Total Other Income 126,444 136,951
OTHER EXPENSE
Salaries 101,687 102,631
Employee benefits 21,652 22,547
Net occupancy 17,191 16,184
Equipment 23,689 20,858
Intangible asset amortization 14,323 14,596
Postage and freight 7,604 7,305
Miscellaneous 39,208 36,417
-------- --------
Total Other Expense 225,354 220,538
-------- --------
INCOME BEFORE INCOME TAXES 177,840 180,597
INCOME TAXES 59,803 65,738
-------- --------
NET INCOME $118,037 $114,859
======== ========
PER SHARE DATA
Basic earnings per share $.75 $.76
Diluted earnings per share .74 .75
Dividends declared .34 .31
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME STOCK EQUITY
------ ------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $1,489 $1,016,844 $1,724,752 $ 25,222 $ (6,005) $2,762,302
Net income 114,859 114,859
Other comprehensive income:
Holding gains on available-for-sale
securities, net of tax of $4,956 9,204 9,204
Less: Reclassification adjustment for
securities gains included in net income
above, net of tax of $1,559 (2,894) (2,894)
-------- ----------
Other Comprehensive Income Net of Tax 6,310 6,310
----------
Total Comprehensive Income 121,169
Common dividends declared:
Mercantile Bancorporation Inc.--$.31 per
share (41,747) (41,747)
Pooled companies prior to acquisition (5,208) (5,208)
Issuance of common stock in acquisitions of:
HomeCorp, Inc. 9 6,727 13,765 27 20,528
Horizon Bancorp, Inc. 25 10,755 34,434 1,181 357 46,752
Issuance of common stock for:
Employee incentive plans 9 28,628 2,193 30,830
Convertible notes 1 86 87
Purchase of treasury stock (93,804) (93,804)
Pre-merger transactions of pooled companies and
other 2 2,255 2,257
------ ---------- ---------- -------- -------- ----------
BALANCE AT MARCH 31, 1998 $1,535 $1,065,295 $1,840,855 $ 32,740 $(97,259) $2,843,166
====== ========== ========== ======== ======== ==========
BALANCE AT DECEMBER 31, 1998 $1,574 $ 999,595 $2,035,157 $ 41,160 $ (3,731) $3,073,755
Net income 118,037 118,037
Other comprehensive income (loss):
Holding losses on available-for-sale
securities, net of tax benefit of $21,180 (39,334) (39,334)
Less: Reclassification adjustment for
securities gains included in net income
above, net of tax of $4,537 (8,426) (8,426)
-------- ----------
Other Comprehensive Loss Net of Tax
Benefit (47,760) (47,760)
----------
Total Comprehensive Income 70,277
Common dividends declared--$.34 per share (53,662) (53,662)
Issuance of common stock for:
Employee incentive plans 4 9,384 2,863 12,251
Convertible notes 127 127
Purchase of treasury stock (1,285) (1,285)
------ ---------- ---------- ------- -------- ----------
BALANCE AT MARCH 31, 1999 $1,578 $1,009,106 $2,099,532 $ (6,600) $ (2,153) $3,101,463
====== ========== ========== ======== ======== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 118,037 $ 114,859
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for possible loan losses 7,479 8,537
Depreciation and amortization 19,439 18,287
Provision for deferred income taxes (credits) 1,486 (2,305)
Net change in loans held-for-sale 41,891 (146,378)
Net change in trading securities 17,365 13,575
Net change in accrued interest receivable 5,911 14,722
Net change in accrued interest payable 11,465 8,449
Other, net 55,339 (41,856)
---------- -----------
Net Cash Provided (Used) by Operating Activities 278,412 (12,110)
INVESTING ACTIVITIES
Investments in debt and equity securities, other than
trading securities
Purchases (2,188,944) (2,474,948)
Proceeds from maturities 964,683 1,332,649
Proceeds from sales of available-for-sale securities 1,098,838 606,143
Net change in loans and leases (278,974) 243,072
Purchases of loans and leases (141,874) (127,651)
Proceeds from sale of mortgage servicing rights -- 26,330
Proceeds from sales of loans and leases 195,375 205,855
Purchases of premises and equipment (16,645) (20,392)
Proceeds from sales of premises and equipment 8,045 3,830
Proceeds from sales of foreclosed property 11,425 9,975
Net cash and cash equivalents received from (paid for)
acquisitions -- 34,448
Net cash and cash equivalents received from (paid for)
sale of banking offices -- (3,524)
Other, net 5,137 5,588
---------- -----------
Net Cash Used by Investing Activities (342,934) (158,625)
FINANCING ACTIVITIES
Net change in non-interest bearing, savings, interest
bearing demand and money market deposit accounts (563,103) (92,349)
Net change in time certificates of deposit under $100,000 (297,613) (308,440)
Net change in time certificates of deposit $100,000 and
over 189,885 95,093
Net change in other time deposits (9,602) 14,787
Net change in foreign deposits (58,567) (122,013)
Net change in short-term borrowings (296,867) 62,724
Principal payments on bank notes (25,000) (150,000)
Issuance of long-term FHLB advances and other long-term
debt 935,000 851,500
Principal payments on long-term debt (252,035) (5,275)
Cash dividends paid (49,789) (44,580)
Proceeds from issuance of common stock from employee
incentive plans 7,631 10,568
Purchase of treasury stock (1,285) (93,804)
---------- -----------
Net Cash Provided (Used) by Financing Activities (421,345) 218,211
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (485,867) 47,476
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,354,670 1,886,280
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,868,803 $ 1,933,756
========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
ACCOUNTING POLICIES
The consolidated financial statements include all adjustments which are, in the
opinion of management, necessary for the fair statement of the results of these
periods and are of a normal recurring nature. Certain reclassifications have
been made to the 1998 historical financial statements to conform to the 1999
presentation.
NOTE B
NEW ACCOUNTING STANDARDS
Financial Accounting Standard ("FAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," which was issued in June 1998, establishes
accounting and reporting standards for derivative instruments and hedging
activities. Under FAS 133, derivatives are recognized on the balance sheet at
fair value as an asset or liability. Changes in the fair value of derivatives
will be reported as a component of other comprehensive income or recognized as
earnings through the income statement depending on the nature of the instrument.
FAS 133 is effective for all quarters of fiscal years beginning after June 15,
1999 with earlier adoption permitted. The Corporation has not adopted FAS 133
yet and is currently evaluating FAS 133's effect on its financial position and
results of operations, but it is not expected to have a material impact.
NOTE C
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share gives effect to the increase in the average shares
outstanding that would have resulted from the exercise of dilutive stock
options, the issuance of share equivalents under other employee incentive plans
and the conversion of the entire balance of outstanding convertible notes. Net
income is increased in the diluted earnings per share computation by interest
expense that would not be incurred on notes if they converted, net of taxes. The
components of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT PER SHARE DATA)
FIRST QUARTER
1999 1998
---- ----
<S> <C> <C>
BASIC
Net income $118,037 $114,859
Weighted average common shares outstanding 157,632,844 151,056,828
BASIC EARNINGS PER SHARE $.75 $.76
DILUTED
Net income $118,037 $114,859
Interest on convertible notes, net of taxes 8 12
-------- --------
Diluted Net Income $118,045 $114,871
======== ========
Weighted average common shares outstanding 157,632,844 151,056,828
Employee incentive plans 1,897,044 2,722,594
Convertible notes 71,807 98,140
----------- -----------
Diluted Average Shares Outstanding 159,601,695 153,877,562
=========== ===========
DILUTED EARNINGS PER SHARE $.74 $.75
</TABLE>
<PAGE>
NOTE D
ACQUISITIONS
On July 1, 1998, the Corporation acquired CBT Corporation ("CBT") of Paducah,
Kentucky, and Firstbank of Illinois Co. ("Firstbank"), headquartered in
Springfield, Illinois. The CBT and Firstbank acquisitions were accounted for
under the pooling-of-interests method. Net income, net interest income and basic
earnings per share in 1998 for the Corporation, CBT and Firstbank prior to this
restatement were as follows:
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT
PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30, 1998
----------------
<S> <C>
CORPORATION
Net income $198,902
Net interest income 482,912
Basic earnings per share 1.50
CBT
Net income 7,151
Net interest income 21,038
Basic earnings per share 1.40
FIRSTBANK
Net income 15,953
Net interest income 44,073
Basic earnings per share 1.21
</TABLE>
NOTE E
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MERCANTILE
CAPITAL TRUST I
Mercantile Capital Trust I is a subsidiary of which the Corporation owns all the
outstanding common securities; its sole assets are the $150,000,000 in
mandatorily redeemable preferred securities, and considered together, the
back-up undertakings constitute a full and unconditional guarantee by Mercantile
Bancorporation Inc. of the trust's obligations under the preferred securities.
NOTE F
PENDING MERGER
On April 30, 1999, a definitive Agreement and Plan of Merger by and between
Mercantile and Firstar Corporation ("Firstar") was signed. Pursuant to the terms
of the Merger Agreement, Mercantile will merge with and into Firstar in a
transaction structured as and intended to be a tax-free reorganization, with
Mercantile shareholders to receive Firstar common stock valued on that day at
approximately $10.6 billion. The parties at the same time also signed stock
option agreements granting each other options to purchase the other's stock,
which options become exercisable upon the occurrence of certain events. Firstar
is a $38 billion-asset bank holding company headquartered in Milwaukee. Under
terms of the agreement, Mercantile shareholders will receive 2.091 shares of
Firstar common stock for each share of Mercantile common stock owned. The
transaction will be accounted for as a pooling-of-interests, and is expected
to close in the fourth quarter of 1999, pending shareholder and regulatory
approvals.
<PAGE>
<PAGE>
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated April 30, 1999, between
Firstar Corporation, a Wisconsin corporation ("Issuer"), and Mercantile
Bancorporation Inc., a Missouri corporation ("Grantee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Grantee and Issuer have entered into an Agreement
and Plan of Merger of even date herewith (the "Merger Agreement"), which
agreement has been executed by the parties hereto immediately prior to
this Stock Option Agreement (this "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the
Merger Agreement and in consideration therefor and for Grantee's
entering into the Mercantile Option Agreement, Issuer has agreed to
grant Grantee the Option (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements set forth herein and in the Merger
Agreement, the parties hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms
hereof, up to 65,460,210 fully paid and nonassessable shares of Issuer's
common stock, par value $0.01 per share ("Common Stock"), at a price of
$31.56 per share (the "Option Price"); provided, however, that in no
-------- -------
event shall the number of shares of Common Stock for which this Option
is exercisable exceed 9.9% of the Issuer's issued and outstanding shares
of Common Stock without giving effect to any shares subject to or issued
pursuant to the Option. The number of shares of Common Stock that may be
received upon the exercise of the Option and the Option Price are
subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common
Stock are either (i) issued or otherwise become outstanding after the
date of this Agreement (other than pursuant to this Agreement) or (ii)
redeemed, repurchased, retired or otherwise cease to be outstanding
after the date of the Agreement, the number of shares of Common Stock
subject to the Option shall be increased or decreased, as appropriate,
so that, after such issuance, such number equals 9.9% of the number of
shares of Common Stock then issued and outstanding without giving effect
to any shares subject or issued pursuant to the Option. Nothing
contained in this
<PAGE>
<PAGE>
Section 1(b) or elsewhere in this Agreement shall be deemed to authorize
Issuer or Grantee to breach any provision of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise
the Option, in whole or part, and from time to time, if, but only if,
both an Initial Triggering Event (as hereinafter defined) and a
Subsequent Triggering Event (as hereinafter defined) shall have occurred
prior to the occurrence of an Exercise Termination Event (as hereinafter
defined), provided that the Holder shall have sent the written notice
--------
of such exercise (as provided in subsection (e) of this Section 2)
within 90 days following such Subsequent Triggering Event. Each of the
following shall be an "Exercise Termination Event": (i) the Effective
Time (as defined in the Merger Agreement) of the Merger; (ii)
termination of the Merger Agreement in accordance with the provisions
thereof if such termination occurs prior to the occurrence of an Initial
Triggering Event, except a termination by Grantee pursuant to Section
8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise
to such right of termination is non-volitional); or (iii) the passage of
12 months after termination of the Merger Agreement if such termination
follows the occurrence of an Initial Triggering Event or is a
termination by Grantee pursuant to Section 8.1(d) of the Merger
Agreement (unless the breach by Issuer giving rise to such right of
termination is non-volitional) (provided that if an Initial Triggering
--------
Event continues or occurs beyond such termination and prior to the
passage of such 12-month period, the Exercise Termination Event shall be
12 months from the expiration of the Last Triggering Event but in no
event more than 18 months after such termination). The "Last Triggering
Event" shall mean the last Initial Triggering Event to expire. The term
"Holder" shall mean the holder or holders of the Option.
(b) The term "Initial Triggering Event" shall mean any of
the following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an
"Issuer Subsidiary"), without having received Grantee's prior
written consent, shall have entered into an agreement to engage in
an Acquisition Transaction (as hereinafter defined) with any
person (the term "person" for purposes of this Agreement having
the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and the rules and regulations thereunder) other than Grantee or
any of its Subsidiaries (each a "Grantee Subsidiary") or the Board
of Directors of Issuer shall have recommended that the
shareholders of Issuer approve or accept any Acquisition
Transaction. For purposes of this Agreement, "Acquisition
Transaction" shall mean (w) a merger or consolidation, or any
similar transaction, involving Issuer or any Significant
Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated
by the Securities and Exchange Commission (the "SEC")) of Issuer,
(x) a purchase, lease or other acquisition or assumption of all or
a substantial portion of the assets or deposits of Issuer or any
Significant Subsidiary of Issuer, (y) a purchase or other
acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 10% or more of
the voting power of Issuer, or (z) any substantially similar
transaction; provided, however, that in no event shall any
-------- -------
merger, consolidation, purchase or similar transaction involving
only the Issuer and one or
2
<PAGE>
<PAGE>
more of its Subsidiaries or involving only any two or more of such
Subsidiaries, provided that any such transaction is not entered
--------
into in violation of the terms of the Merger Agreement, be deemed
to be an Acquisition Transaction;
(ii) Issuer or any Issuer Subsidiary, without having
received Grantee's prior written consent, shall have authorized,
recommended, proposed or publicly announced its intention to
authorize, recommend or propose, to engage in an Acquisition
Transaction with any person other than Grantee or a Grantee
Subsidiary, or the Board of Directors of Issuer shall have
publicly withdrawn or modified, or publicly announced its interest
to withdraw or modify, in any manner adverse to Grantee, its
recommendation that the shareholders of Issuer approve the
transactions contemplated by the Merger Agreement in anticipation
of engaging in an Acquisition Transaction;
(iii) Any person other than Grantee, any Grantee
Subsidiary or any Issuer Subsidiary acting in a fiduciary capacity
in the ordinary course of its business shall have acquired
beneficial ownership or the right to acquire beneficial ownership
of 10% or more of the outstanding shares of Common Stock (the term
"beneficial ownership" for purposes of this Agreement having the
meaning assigned thereto in Section 13(d) of the 1934 Act, and the
rules and regulations thereunder);
(iv) Any person other than Grantee or any Grantee
Subsidiary shall have made a bona fide proposal to Issuer or its
shareholders by public announcement or written communication that
is or becomes the subject of public disclosure to engage in an
Acquisition Transaction;
(v) After an overture is made by a third party to
Issuer or its shareholders to engage in an Acquisition
Transaction, Issuer shall have breached any covenant or obligation
contained in the Merger Agreement and such breach (x) would
entitle Grantee to terminate the Merger Agreement and (y) shall
not have been cured prior to the Notice Date (as hereinafter
defined); or
(vi) Any person other than Grantee or any Grantee
Subsidiary, other than in connection with a transaction to which
Grantee has given its prior written consent, shall have filed an
application or notice with the Federal Reserve Board, or other
federal or state bank regulatory authority, which application or
notice has been accepted for processing, for approval to engage in
an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean
either of the following events or transactions occurring after the date
hereof:
(i) The acquisition by any person of beneficial
ownership of 20% or more of the then-outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event
described in paragraph (i) of subsection (b) of this Section 2,
except that the percentage referred to in clause (y) shall be 20%.
3
<PAGE>
<PAGE>
(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event or Subsequent Triggering
Event of which it has notice (together, a "Triggering Event"), it being
understood that the giving of such notice by Issuer shall not be a
condition to the right of the Holder to exercise the Option.
(e) In the event the Holder is entitled to and wishes to
exercise the Option, it shall send to Issuer a written notice (the date
of which being herein referred to as the "Notice Date") specifying (i)
the total number of shares it will purchase pursuant to such exercise
and (ii) a place and date not earlier than three business days nor later
than 60 business days from the Notice Date for the closing of such
purchase (the "Closing Date"); provided that if prior notification to
--------
or approval of the Federal Reserve Board or any other regulatory agency
is required in connection with such purchase, the Holder shall promptly
file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on
which any required notification periods have expired or been terminated
or such approvals have been obtained and any requisite waiting period or
periods shall have passed. Any exercise of the Option shall be deemed to
occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this
Section 2, the Holder shall pay to Issuer the aggregate purchase price
for the shares of Common Stock purchased pursuant to the exercise of the
Option in immediately available funds by wire transfer to a bank account
designated by Issuer, provided that failure or refusal of Issuer to
--------
designate such a bank account shall not preclude the Holder from
exercising the Option.
(g) At such closing, simultaneously with the delivery of
immediately available funds as provided in subsection (f) of this
Section 2, Issuer shall deliver to the Holder a certificate or
certificates representing the number of shares of Common Stock purchased
by the Holder and, if the Option should be exercised in part only, a new
Option evidencing the rights of the Holder thereof to purchase the
balance of the shares purchasable hereunder, and the Holder shall
deliver to Issuer a copy of this Agreement and a letter agreeing that
the Holder will not offer to sell or otherwise dispose of such shares in
violation of applicable law or the provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate
is subject to certain provisions of an agreement between the
registered holder hereof and Issuer and to resale
restrictions arising under the Securities Act of 1933, as
amended. A copy of such agreement is on file at the
principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a
written request therefor."
It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "1933 Act"),
in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the Holder shall have delivered
to
4
<PAGE>
<PAGE>
Issuer a copy of a letter from the staff of the SEC, or an opinion of
counsel, in form and substance reasonably satisfactory to Issuer, to the
effect that such legend is not required for purposes of the 1933 Act;
(ii) the reference to the provisions of this Agreement in the above
legend shall be removed by delivery of substitute certificate(s) without
such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do
not require the retention of such reference; and (iii) the legend shall
be removed in its entirety if the conditions in the preceding clauses
(i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written
notice of exercise of the Option provided for under subsection (e) of
this Section 2 and the tender of the applicable purchase price in
immediately available funds, the Holder shall be deemed, subject to the
receipt of applicable regulatory approvals, to be the holder of record
of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be
closed or that certificates representing such shares of Common Stock
shall not then be actually delivered to the Holder. Issuer shall pay all
expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the
preparation, issue and delivery of stock certificates under this Section
2 in the name of the Holder or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times
maintain, free from preemptive rights, sufficient authorized but
unissued or treasury shares of Common Stock so that the Option may be
exercised without additional authorization of Common Stock after giving
effect to all other options, warrants, convertible securities and other
rights to purchase Common Stock; (ii) that it will not, by charter
amendment or through reorganization, consolidation, merger, dissolution
or sale of assets, or by any other voluntary act, avoid or seek to avoid
the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by Issuer; (iii)
promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and
waiting period requirements specified in 15 U.S.C. Section 18a and
regulations promulgated thereunder and (y) in the event, under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), or the Change in
Bank Control Act of 1978, as amended, or any state banking law, prior
approval of or notice to the Federal Reserve Board or to any state
regulatory authority is necessary before the Option may be exercised,
cooperating fully with the Holder in preparing such applications or
notices and providing such information to the Federal Reserve Board or
such state regulatory authority as they may require) in order to permit
the Holder to exercise the Option and Issuer duly and effectively to
issue shares of Common Stock pursuant hereto; and (iv) promptly to take
all action provided herein to protect the rights of the Holder against
dilution.
4. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon
presentation and surrender of this Agreement at the principal office of
Issuer, for other Agreements providing for Options of different
denominations entitling the holder thereof to purchase, on the same
terms and subject to the same conditions as are set forth herein, in the
aggregate the same number of shares of Com-
5
<PAGE>
<PAGE>
mon Stock purchasable hereunder. The terms "Agreement" and "Option" as
used herein include any Stock Option Agreements and related Options for
which this Agreement (and the Option granted hereby) may be exchanged.
Upon receipt by Issuer of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Agreement, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Agreement,
if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer,
whether or not the Agreement so lost, stolen, destroyed or mutilated
shall at any time be enforceable by anyone.
5. In addition to the adjustment in the number of shares
of Common Stock that are purchasable upon exercise of the Option
pursuant to Section 1 of this Agreement, the number of shares of Common
Stock purchasable upon the exercise of the Option and the Option Price
shall be subject to adjustment from time to time as provided in this
Section 5. In the event of any change in, or distributions in respect
of, the Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of
shares, distributions on or in respect of the Common Stock, or the like,
the type and number of shares of Common Stock purchasable upon exercise
hereof and the Option Price shall be appropriately adjusted in such
manner as shall fully preserve the economic benefits provided hereunder
and proper provision shall be made in any agreement governing any such
transaction to provide for such proper adjustment and the full
satisfaction of the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event
that occurs prior to an Exercise Termination Event, Issuer shall, at the
request of Grantee delivered within 90 days of such Subsequent
Triggering Event (whether on its own behalf or on behalf of any
subsequent holder of this Option (or part thereof) or any of the shares
of Common Stock issued pursuant hereto), promptly prepare, file and keep
current a shelf registration statement under the 1933 Act covering this
Option and any shares issued and issuable pursuant to this Option and
shall use its reasonable best efforts to cause such registration
statement to become effective and remain current in order to permit the
sale or other disposition of this Option and any shares of Common Stock
issued upon total or partial exercise of this Option ("Option Shares")
in accordance with any plan of disposition requested by Grantee. Issuer
will use its reasonable best efforts to cause such registration
statement first to become effective and then to remain effective for
such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be
reasonably necessary to effect such sales or other dispositions. Grantee
shall have the right to demand two such registrations. The foregoing
notwithstanding, if, at the time of any request by Grantee for
registration of the Option or Option Shares as provided above, Issuer is
in registration with respect to an underwritten public offering of
shares of Common Stock, and if in the good faith judgment of the
managing underwriter or managing underwriters, or, if none, the sole
underwriter or underwriters, of such offering the inclusion of the
Holder's Option or Option Shares would interfere with the successful
marketing of the shares of Common Stock offered by Issuer, the number of
Option Shares otherwise to be covered in the registration statement
contemplated hereby may be reduced; and provided, however, that
-------- -------
after any such required reduction the number of Option
6
<PAGE>
<PAGE>
Shares to be included in such offering for the account of the Holder
shall constitute at least 25% of the total number of shares to be sold
by the Holder and Issuer in the aggregate; and provided further,
-------- -------
however, that if such reduction occurs, then the Issuer shall file a
- -------
registration statement for the balance as promptly as practical and no
reduction shall thereafter occur. Each such Holder shall provide all
information reasonably requested by Issuer for inclusion in any
registration statement to be filed hereunder. If requested by any such
Holder in connection with such registration, Issuer shall become a party
to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating itself in respect of representations,
warranties, indemnities and other agreements customarily included in
secondary offering underwriting agreements for the Issuer. Upon
receiving any request under this Section 6 from any Holder, Issuer
agrees to send a copy thereof to any other person known to Issuer to be
entitled to registration rights under this Section 6, in each case by
promptly mailing the same, postage prepaid, to the address of record of
the persons entitled to receive such copies. Notwithstanding anything to
the contrary contained herein, in no event shall Issuer be obligated to
effect more than two registrations pursuant to this Section 6 by reason
of the fact that there shall be more than one Grantee as a result of any
assignment or division of this Agreement.
7. (a) Immediately prior to the occurrence of a
Repurchase Event (as hereinafter defined), (i) following a request of
the Holder, delivered prior to an Exercise Termination Event, Issuer (or
any successor thereto) shall repurchase the Option from the Holder at a
price (the "Option Repurchase Price") equal to the amount by which (A)
the Market/Offer Price (as hereinafter defined) exceeds (B) the Option
Price, multiplied by the number of shares for which this Option may then
be exercised and (ii) at the request of the owner of Option Shares from
time to time (the "Owner"), delivered within 90 days of such occurrence
(or such later period as provided in Section 10), Issuer shall
repurchase such number of the Option Shares from the Owner as the Owner
shall designate at a price (the "Option Share Repurchase Price") equal
to the Market/Offer Price multiplied by the number of Option Shares so
designated. The term "Market/Offer Price" shall mean the highest of (i)
the price per share of Common Stock at which a tender offer or exchange
offer therefor has been made, (ii) the price per share of Common Stock
to be paid by any third party pursuant to an agreement with Issuer,
(iii) the highest closing price for shares of Common Stock within the
six-month period immediately preceding the date the Holder gives notice
of the required repurchase of this Option or the Owner gives notice of
the required repurchase of Option Shares, as the case may be, or (iv) in
the event of a sale of all or a substantial portion of Issuer's assets,
the sum of the price paid in such sale for such assets and the current
market value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by the Holder or
the Owner, as the case may be, and reasonably acceptable to the Issuer,
divided by the number of shares of Common Stock of Issuer outstanding at
the time of such sale. In determining the Market/Offer Price, the value
of consideration other than cash shall be determined by a nationally
recognized investment banking firm selected by the Holder or Owner, as
the case may be, and reasonably acceptable to the Issuer.
(b) The Holder and the Owner, as the case may be, may exercise
its right to require Issuer to repurchase the Option and any Option
Shares pursuant to this Section 7 by surrendering for such purpose to
Issuer, at its principal office, a copy of this Agreement or
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certificates for Option Shares, as applicable, accompanied by a written
notice or notices stating that the Holder or the Owner, as the case may
be, elects to require Issuer to repurchase this Option and/or the Option
Shares in accordance with the provisions of this Section 7. Within the
latter to occur of (x) five business days after the surrender of the
Option and/or certificates representing Option Shares and the receipt of
such notice or notices relating thereto and (y) the time that is
immediately prior to the occurrence of a Repurchase Event, Issuer shall
deliver or cause to be delivered to the Holder the Option Repurchase
Price and/or to the Owner the Option Share Repurchase Price therefor or
the portion thereof, if any, that Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under
applicable law or regulation from repurchasing the Option and/or the
Option Shares in full, Issuer shall immediately so notify the Holder
and/or the Owner and thereafter deliver or cause to be delivered, from
time to time, to the Holder and/or the Owner, as appropriate, the
portion of the Option Repurchase Price and the Option Share Repurchase
Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after
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delivery of a notice of repurchase pursuant to paragraph (b) of this
Section 7 is prohibited under applicable law or regulation from
delivering to the Holder and/or the Owner, as appropriate, the Option
Repurchase Price and the Option Share Repurchase Price, respectively, in
full (and Issuer hereby undertakes to use its best efforts to obtain all
required regulatory and legal approvals and to file any required
notices, in each case as promptly as practicable in order to accomplish
such repurchase), the Holder or Owner may revoke its notice of
repurchase of the Option or the Option Shares either in whole or to the
extent of the prohibition, whereupon, in the latter case, Issuer shall
promptly (i) deliver to the Holder and/or the Owner, as appropriate,
that portion of the Option Repurchase Price or the Option Share
Repurchase Price that Issuer is not prohibited from delivering; and (ii)
deliver, as appropriate, either (A) to the Holder, a new Stock Option
Agreement evidencing the right of the Holder to purchase that number of
shares of Common Stock obtained by multiplying the number of shares of
Common Stock for which the surrendered Stock Option Agreement was
exercisable at the time of delivery of the notice of repurchase by a
fraction, the numerator of which is the Option Repurchase Price less the
portion thereof theretofore delivered to the Holder and the denominator
of which is the Option Repurchase Price, or (B) to the Owner, a
certificate for the Option Shares it is then so prohibited from
repurchasing.
(d) For purposes of this Section 7, a Repurchase Event
shall be deemed to have occurred (i) upon the consummation of any
merger, consolidation or similar transaction involving Issuer or any
purchase, lease or other acquisition of all or a substantial portion of
the assets of Issuer, other than any such transaction which would not
constitute an Acquisition Transaction pursuant to the provisos to
Section 2(b)(i) hereof or (ii) upon the acquisition by any person of
beneficial ownership of 50% or more of the then outstanding shares of
Common Stock, provided that no such event shall constitute a
--------
Repurchase Event unless a Subsequent Triggering Event shall have
occurred prior to an Exercise Termination Event. The parties hereto
agree that Issuer's obligations to repurchase the Option or Option
Shares under this Section 7 shall not terminate upon the occurrence of
an Exercise Termination Event unless no
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Subsequent Triggering Event shall have occurred prior to the occurrence
of an Exercise Termination Event.
8. (a) In the event that prior to an Exercise Termination
Event, Issuer shall enter into an agreement (i) to consolidate with or
merge into any person, other than Grantee or one of its Subsidiaries,
and shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person, other than Grantee
or one of its Subsidiaries, to merge into Issuer and Issuer shall be the
continuing or surviving corporation, but, in connection with such
merger, the then outstanding shares of Common Stock shall be changed
into or exchanged for stock or other securities of any other person or
cash or any other property or the then outstanding shares of Common
Stock shall after such merger represent less than 50% of the outstanding
voting shares and voting share equivalents of the merged company, or
(iii) to sell or otherwise transfer all or substantially all of its
assets to any person, other than Grantee or one of its Subsidiaries,
then, and in each such case, the agreement governing such transaction
shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions
set forth herein, be converted into, or exchanged for, an option (the
"Substitute Option"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that
controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (A) the continuing
or surviving corporation of a consolidation or merger with Issuer
(if other than Issuer), (B) Issuer in a merger in which Issuer is
the continuing or surviving person, and (C) the transferee of all
or substantially all of Issuer's assets.
(ii) "Substitute Common Stock" shall mean the common stock
issued by the issuer of the Substitute Option upon exercise of the
Substitute Option.
(iii) "Assigned Value" shall mean the Market/Offer Price, as
defined in Section 7.
(iv) "Average Price" shall mean the average closing price
of a share of the Substitute Common Stock for the one year
immediately preceding the consolidation, merger or sale in
question, but in no event higher than the closing price of the
shares of Substitute Common Stock on the day preceding such
consolidation, merger or sale; provided that if Issuer is the
--------
issuer of the Substitute Option, the Average Price shall be
computed with respect to a share of common stock issued by the
person merging into Issuer or by any company that controls or is
controlled by such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot,
--------
for legal reasons, be the same as the Option, such terms shall be as
similar as possible and in no event less advantageous to the Holder. The
issuer of the Substitute Option shall also enter into an agreement with
the then Holder or
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Holders of the Substitute Option in substantially the same form as this
Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such
number of shares of Substitute Common Stock as is equal to the Assigned
Value multiplied by the number of shares of Common Stock for which the
Option is then exercisable, divided by the Average Price. The exercise
price of the Substitute Option per share of Substitute Common Stock
shall then be equal to the Option Price multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock for
which the Option is then exercisable and the denominator of which shall
be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing
paragraphs, shall the Substitute Option be exercisable for more than
9.9% of the shares of Substitute Common Stock outstanding prior to
exercise of the Substitute Option. In the event that the Substitute
Option would be exercisable for more than 9.9% of the shares of
Substitute Common Stock outstanding prior to exercise but for this
clause (e), the issuer of the Substitute Option (the "Substitute Option
Issuer") shall make a cash payment to Holder equal to the excess of
(i) the value of the Substitute Option without giving effect to the
limitation in this clause (e) over (ii) the value of the Substitute
Option after giving effect to the limitation in this clause (e). This
difference in value shall be determined by a nationally recognized
investment banking firm selected by the Holder or the Owner, as the case
may be, and reasonably acceptable to the Acquiring Corporation.
(f) Issuer shall not enter into any transaction described
in subsection (a) of this Section 8 unless the Acquiring Corporation and
any person that controls the Acquiring Corporation assume in writing all
the obligations of Issuer hereunder.
9. (a) At the request of the holder of the Substitute
Option (the "Substitute Option Holder"), the Substitute Option Issuer
shall repurchase the Substitute Option from the Substitute Option Holder
at a price (the "Substitute Option Repurchase Price") equal to the
amount by which (i) the Highest Closing Price (as hereinafter defined)
exceeds (ii) the exercise price of the Substitute Option, multiplied by
the number of shares of Substitute Common Stock for which the Substitute
Option may then be exercised, and at the request of the owner (the
"Substitute Share Owner") of shares of Substitute Common Stock (the
"Substitute Shares"), the Substitute Option Issuer shall repurchase the
Substitute Shares at a price (the "Substitute Share Repurchase Price")
equal to the Highest Closing Price multiplied by the number of
Substitute Shares so designated. The term "Highest Closing Price" shall
mean the highest closing price for shares of Substitute Common Stock
within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the
required repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share
Owner, as the case may be, may exercise its respective right to require
the Substitute Option Issuer to repur-
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chase the Substitute Option and the Substitute Shares pursuant to this
Section 9 by surrendering for such purpose to the Substitute Option
Issuer, at its principal office, the agreement for such Substitute
Option (or, in the absence of such an agreement, a copy of this
Agreement) and certificates for Substitute Shares accompanied by a
written notice or notices stating that the Substitute Option Holder or
the Substitute Share Owner, as the case may be, elects to require the
Substitute Option Issuer to repurchase the Substitute Option and/or the
Substitute Shares in accordance with the provisions of this Section 9.
As promptly as practicable, and in any event within five business days
after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to
be delivered to the Substitute Option Holder the Substitute Option
Repurchase Price and/or to the Substitute Share Owner the Substitute
Share Repurchase Price therefor or, in either case, the portion thereof
which the Substitute Option Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is
prohibited under applicable law or regulation from repurchasing the
Substitute Option and/or the Substitute Shares in part or in full, the
Substitute Option Issuer following a request for repurchase pursuant to
this Section 9 shall immediately so notify the Substitute Option Holder
and/or the Substitute Share Owner and thereafter deliver or cause to be
delivered, from time to time, to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the portion of the Substitute
Share Repurchase Price, respectively, which it is no longer prohibited
from delivering, within five business days after the date on which the
Substitute Option Issuer is no longer so prohibited; provided, however,
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that if the Substitute Option Issuer is at any time after delivery of a
notice of repurchase pursuant to subsection (b) of this Section 9
prohibited under applicable law or regulation from delivering to the
Substitute Option Holder and/or the Substitute Share Owner, as appropriate,
the Substitute Option Repurchase Price and the Substitute Share Repurchase
Price, respectively, in full (and the Substitute Option Issuer shall use
its best efforts to obtain all required regulatory and legal approvals,
in each case as promptly as practicable, in order to accomplish such
repurchase), the Substitute Option Holder or Substitute Share Owner may
revoke its notice of repurchase of the Substitute Option or the Substitute
Shares either in whole or to the extent of the prohibition, whereupon,
in the latter case, the Substitute Option Issuer shall promptly (i)
deliver to the Substitute Option Holder or Substitute Share Owner, as
appropriate, that portion of the Substitute Option Repurchase Price or the
Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A)
to the Substitute Option Holder, a new Substitute Option evidencing the
right of the Substitute Option Holder to purchase that number of shares
of the Substitute Common Stock obtained by multiplying the number of shares
of the Substitute Common Stock for which the surrendered Substitute Option
was exercisable at the time of delivery of the notice of repurchase by a
fraction, the numerator of which is the Substitute Option Repurchase Price
less the portion thereof theretofore delivered to the Substitute Option
Holder and the denominator of which is the Substitute Option Repurchase
Price, or (B) to the Substitute Share Owner, a certificate for the
Substitute Common Shares it is then so prohibited from repurchasing.
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10. The 90-day, or 6-month periods for exercise of certain
rights under Sections 2, 6, 7, 13 and 15 shall be extended: (i) to the
extent necessary to obtain all regulatory approvals for the exercise of
such rights, for the expiration of all statutory waiting periods; (ii)
to the extent necessary to avoid liability under Section 16(b) of the
1934 Act by reason of such exercise; and (iii) during any period in
which Grantee is precluded from exercising such rights due to an
injunction or other legal restriction, plus in each case such additional
period as is reasonably necessary for the exercise of such rights
promptly following the obtaining of such approvals or the expiration of
such periods.
11. Issuer hereby represents and warrants to Grantee as
follows:
(a) Issuer has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
and validly authorized by the Board of Directors of Issuer and no other
corporate proceedings on the part of Issuer are necessary to authorize
this Agreement or to consummate the transactions so contemplated. This
Agreement has been duly and validly executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to
authorize and reserve and to permit it to issue, and at all times from
the date hereof through the termination of this Agreement in accordance
with its terms will have reserved for issuance upon the exercise of the
Option, that number of shares of Common Stock equal to the maximum
number of shares of Common Stock at any time and from time to time
issuable hereunder, and all such shares, upon issuance pursuant hereto,
will be duly authorized, validly issued, fully paid, nonassessable, and
will be delivered free and clear of all claims, liens, encumbrance and
security interests and not subject to any preemptive rights.
(c) Issuer has taken all action (including if required
redeeming all of the Firstar Shareholder Rights or amending or
terminating the Firstar Rights Agreement) so that the entering into of
this Option Agreement, the acquisition of shares of Common Stock
hereunder and the other transactions contemplated hereby do not and will
not result in the grant of any rights to any person under the Firstar
Rights Agreement or enable or require the Rights to be exercised,
distributed or triggered.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and
authority to enter into this Agreement and, subject to any approvals or
consents referred to herein, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Grantee.
This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common
Stock or other securities acquired by Grantee upon exercise of the
Option will not be, acquired with a view to
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the public distribution thereof and will not be transferred or otherwise
disposed of except in a transaction registered or exempt from
registration under the Securities Act.
13. Neither of the parties hereto may assign any of its
rights or obligations under this Option Agreement or the Option created
hereunder to any other person, without the express written consent of
the other party, except that in the event a Subsequent Triggering Event
shall have occurred prior to an Exercise Termination Event, Grantee,
subject to the express provisions hereof, may assign in whole or in part
its rights and obligations hereunder within 90 days following such
Subsequent Triggering Event (or such later period as provided in Section
10); provided, however, that until the date 15 days following the
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date on which the Federal Reserve Board approves an application by
Grantee under the BHCA to acquire the shares of Common Stock subject to
the Option, Grantee may not assign its rights under the Option except in
(i) a widely dispersed public distribution, (ii) a private placement in
which no one party acquires the right to purchase in excess of 2% of the
voting shares of Issuer, (iii) an assignment to a single party (e.g.,
----
a broker or investment banker) for the purpose of conducting a widely
dispersed public distribution on Grantee's behalf, or (iv) any other
manner approved by the Federal Reserve Board.
14. Each of Grantee and Issuer will use its best efforts
to make all filings with, and to obtain consents of, all third parties
and governmental authorities necessary to the consummation of the
transactions contemplated by this Agreement, including without
limitation making application to list the shares of Common Stock
issuable hereunder on the New York Stock Exchange upon official notice
of issuance and applying to the Federal Reserve Board under the BHCA for
approval to acquire the shares issuable hereunder, but Grantee shall not
be obligated to apply to state banking authorities for approval to
acquire the shares of Common Stock issuable hereunder until such time,
if ever, as it deems appropriate to do so.
15. (a) Grantee in its sole discretion may, at any time
during which Issuer would be required to repurchase the Option or any
Option Shares pursuant to Section 7, surrender the Option (together with
any Option Shares issued to and then owned by the Holder) to Issuer in
exchange for a cash payment equal to the Surrender Price (as hereinafter
defined); provided, however, that Grantee may not exercise its
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rights pursuant to this Section 15 if Issuer has previously repurchased
the Option (or any portion thereof) or any Option Shares pursuant to
Section 7. The "Surrender Price" shall be equal to (i) $250,000,000,
plus (ii) if applicable, the aggregate purchase price previously paid
pursuant hereto by Grantee with respect to any Option Shares, minus
(iii) if applicable, the excess of (A) the net cash, if any, received by
Grantee pursuant to the arm's-length sale of Option Shares (or any other
securities into which such Option Shares were converted or exchanged) to
any party not affiliated with Grantee, over (B) the purchase price paid
by Grantee with respect to such Option Shares.
(b) Grantee may exercise its right to surrender the Option
and any Option Shares pursuant to this Section 15 by surrendering for
such purchase to Issuer, at its principal office, a copy of this
Agreement, together with certificates for Option Shares, if any,
accompanied by a written notice stating (i) that Grantee elects to
surrender the Option and Option Shares, if any, in accordance with the
provisions of this Section 15 and (ii) the Surrender
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Price. Within two business days after the surrender of the Option and
the Option Shares, if applicable, Issuer shall deliver or cause to be
delivered to Grantee the Surrender Price.
(c) To the extent that the Issuer is prohibited under
applicable law or regulation from paying the Surrender Price to Grantee
in full, Issuer shall immediately so notify Grantee and thereafter
deliver, or cause to be delivered, from time to time, to Grantee, that
portion of the Surrender Price that Issuer is not or no longer
prohibited from paying, within two business days after the date on which
Issuer is no longer so prohibited; provided, however, that if Issuer
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at any time after delivery of a notice of Surrender pursuant to Section
15(b) is prohibited under applicable law or regulation from paying to
Grantee the Surrender Price in full, (i) Issuer shall (A) use its best
efforts to obtain all required regulatory and legal approvals and to
file any required notices as promptly as practicable in order to make
such payments, (B) within two business days of the submission or receipt
of any documents relating to any such regulatory and legal approvals,
provide Grantee with copies of the same, and (C) keep Grantee advised of
both the status of any such request for regulatory and legal approvals
and any discussions with any relevant regulatory or other third party
reasonably related to the same, and (ii) Grantee may revoke such notice
of surrender by delivery of a notice of revocation, the Exercise
Termination Event shall be extended to a date six months from the date
on which the Exercise Termination Event would have occurred if not for
the provisions of this Section 15(c) (during which period Grantee may
exercise any of its rights hereunder, including any and all rights
pursuant to this Section 15).
(d) Grantee shall have rights substantially identical to
those set forth in paragraphs (a), (b) and (c) of this Section 15 with
respect to the Substitute Option and the Substitute Option Issuer during
any period in which the Substitute Option Issuer would be required to
repurchase the Substitute Option pursuant to Section 9.
16. The parties hereto acknowledge that damages would be
an inadequate remedy for a breach of this Agreement by either party
hereto and that the obligations of the parties hereto shall be
enforceable by either party hereto through injunctive or other equitable
relief.
17. If any term, provision, covenant or restriction
contained in this Agreement is held by a court or a federal or state
regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Agreement shall remain in full force and
effect, and shall in no way be affected, impaired or invalidated. If for
any reason such court or regulatory agency determines that the Holder is
not permitted to acquire, or Issuer or Substitute Option Issuer, as the
case may be, is not permitted to repurchase pursuant to Section 7 or
Section 9, as the case may be, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or
5 hereof), or Issuer or Substitute Option Issuer is not permitted to pay
the full Surrender Price, it is the express intention of Issuer (which
shall be binding on the Substitute Option Issuer) to allow the Holder to
acquire or to require Issuer or the Substitute Option Issuer, as the
case may be, to repurchase such lesser number of shares, or to pay such
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portion of the Surrender Price, as may be permissible, without any
amendment or modification hereof.
18. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when
delivered in person, by cable, telegram, telecopy or telex, or by
registered or certified mail (postage prepaid, return receipt requested)
at the respective addresses of the parties set forth in the Merger
Agreement.
19. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, regardless of the
laws that might otherwise govern under applicable principles of
conflicts of laws thereof (except to the extent that mandatory
provisions of federal law apply).
20. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all
of which shall constitute one and the same agreement.
21. Except as otherwise expressly provided herein, each of
the parties hereto shall bear and pay all costs and expenses incurred by
it or on its behalf in connection with the transactions contemplated
hereunder, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
22. Except as otherwise expressly provided herein or in
the Merger Agreement, this Agreement contains the entire agreement
between the parties with respect to the transactions contemplated
hereunder and supersedes all prior arrangements or understandings with
respect thereof, written or oral. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns. Nothing in
this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors
except as assigns, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided
herein.
23. Capitalized terms used in this Agreement and not
defined herein shall have the meanings assigned thereto in the Merger
Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement
to be executed on its behalf by its officers thereunto duly authorized,
all as of the date first above written.
FIRSTAR CORPORATION
By: /s/ JERRY A. GRUNDHOFER
----------------------------------------
Jerry A. Grundhofer
President and Chief
Executive Officer
MERCANTILE BANCORPORATION INC.
By: /s/ THOMAS H. JACOBSEN
----------------------------------------
Thomas H. Jacobsen
Chairman of the Board, President and
Chief Executive Officer
[Firstar Stock Option]
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THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated April 30, 1999, between
Mercantile Bancorporation Inc., a Missouri corporation ("Issuer"), and
Firstar Corporation, a Wisconsin corporation ("Grantee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Grantee and Issuer have entered into an Agreement
and Plan of Merger of even date herewith (the "Merger Agreement"), which
agreement has been executed by the parties hereto immediately prior to
this Stock Option Agreement (this "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the
Merger Agreement and in consideration therefor and for Grantee's
entering into the Firstar Option Agreement, Issuer has agreed to grant
Grantee the Option (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements set forth herein and in the Merger
Agreement, the parties hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms
hereof, up to 31,415,840 fully paid and nonassessable shares of Issuer's
common stock, par value $0.01 per Share ("Common Stock"), at a price of
$51.25 per share (the "Option Price"); provided, however, that in no
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event shall the number of shares of Common Stock for which this Option
is exercisable exceed 19.9% of the Issuer's issued and outstanding
shares of Common Stock without giving effect to any shares subject to or
issued pursuant to the Option. The number of shares of Common Stock that
may be received upon the exercise of the Option and the Option Price are
subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common
Stock are either (i) issued or otherwise become outstanding after the
date of this Agreement (other than pursuant to this Agreement) or (ii)
redeemed, repurchased, retired or otherwise cease to be outstanding
after the date of the Agreement, the number of shares of Common Stock
subject to the Option shall be increased or decreased, as appropriate,
so that, after such issuance, such number equals 19.9% of the number of
shares of Common Stock then issued and outstanding without giving effect
to any shares subject or issued pursuant to the Option. Nothing
contained in this
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Section 1(b) or elsewhere in this Agreement shall be deemed to authorize
Issuer or Grantee to breach any provision of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise
the Option, in whole or part, and from time to time, if, but only if,
both an Initial Triggering Event (as hereinafter defined) and a
Subsequent Triggering Event (as hereinafter defined) shall have occurred
prior to the occurrence of an Exercise Termination Event (as hereinafter
defined), provided that the Holder shall have sent the written notice
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of such exercise (as provided in subsection (e) of this Section 2)
within 90 days following such Subsequent Triggering Event. Each of the
following shall be an "Exercise Termination Event": (i) the Effective
Time (as defined in the Merger Agreement) of the Merger; (ii)
termination of the Merger Agreement in accordance with the provisions
thereof if such termination occurs prior to the occurrence of an Initial
Triggering Event, except a termination by Grantee pursuant to Section
8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise
to such right of termination is non-volitional); or (iii) the passage of
12 months after termination of the Merger Agreement if such termination
follows the occurrence of an Initial Triggering Event or is a
termination by Grantee pursuant to Section 8.1(d) of the Merger
Agreement (unless the breach by Issuer giving rise to such right of
termination is non-volitional) (provided that if an Initial Triggering
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Event continues or occurs beyond such termination and prior to the
passage of such 12-month period, the Exercise Termination Event shall be
12 months from the expiration of the Last Triggering Event but in no
event more than 18 months after such termination). The "Last Triggering
Event" shall mean the last Initial Triggering Event to expire. The term
"Holder" shall mean the holder or holders of the Option.
(b) The term "Initial Triggering Event" shall mean any of
the following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an
"Issuer Subsidiary"), without having received Grantee's prior
written consent, shall have entered into an agreement to engage in
an Acquisition Transaction (as hereinafter defined) with any
person (the term "person" for purposes of this Agreement having
the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and the rules and regulations thereunder) other than Grantee or
any of its Subsidiaries (each a "Grantee Subsidiary") or the Board
of Directors of Issuer shall have recommended that the
shareholders of Issuer approve or accept any Acquisition
Transaction. For purposes of this Agreement, "Acquisition
Transaction" shall mean (w) a merger or consolidation, or any
similar transaction, involving Issuer or any Significant
Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated
by the Securities and Exchange Commission (the "SEC")) of Issuer,
(x) a purchase, lease or other acquisition or assumption of all or
a substantial portion of the assets or deposits of Issuer or any
Significant Subsidiary of Issuer, (y) a purchase or other
acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 10% or more of
the voting power of Issuer, or (z) any substantially similar
transaction; provided, however, that in no event shall any
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merger, consolidation, purchase or similar transaction involving
only the Issuer and one or
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more of its Subsidiaries or involving only any two or more of such
Subsidiaries, provided that any such transaction is not entered into
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in violation of the terms of the Merger Agreement, be deemed to be an
Acquisition Transaction;
(ii) Issuer or any Issuer Subsidiary, without having
received Grantee's prior written consent, shall have authorized,
recommended, proposed or publicly announced its intention to
authorize, recommend or propose, to engage in an Acquisition
Transaction with any person other than Grantee or a Grantee
Subsidiary, or the Board of Directors of Issuer shall have
publicly withdrawn or modified, or publicly announced its interest
to withdraw or modify, in any manner adverse to Grantee, its
recommendation that the shareholders of Issuer approve the
transactions contemplated by the Merger Agreement in anticipation
of engaging in an Acquisition Transaction;
(iii) Any person other than Grantee, any Grantee
Subsidiary or any Issuer Subsidiary acting in a fiduciary capacity
in the ordinary course of its business shall have acquired
beneficial ownership or the right to acquire beneficial ownership
of 10% or more of the outstanding shares of Common Stock (the term
"beneficial ownership" for purposes of this Agreement having the
meaning assigned thereto in Section 13(d) of the 1934 Act, and the
rules and regulations thereunder);
(iv) Any person other than Grantee or any Grantee
Subsidiary shall have made a bona fide proposal to Issuer or its
shareholders by public announcement or written communication that
is or becomes the subject of public disclosure to engage in an
Acquisition Transaction;
(v) After an overture is made by a third party to
Issuer or its shareholders to engage in an Acquisition
Transaction, Issuer shall have breached any covenant or obligation
contained in the Merger Agreement and such breach (x) would
entitle Grantee to terminate the Merger Agreement and (y) shall
not have been cured prior to the Notice Date (as hereinafter
defined); or
(vi) Any person other than Grantee or any Grantee
Subsidiary, other than in connection with a transaction to which
Grantee has given its prior written consent, shall have filed an
application or notice with the Federal Reserve Board, or other
federal or state bank regulatory authority, which application or
notice has been accepted for processing, for approval to engage in
an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean
either of the following events or transactions occurring after the date
hereof:
(i) The acquisition by any person of beneficial
ownership of 20% or more of the then-outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event
described in paragraph (i) of subsection (b) of this Section 2,
except that the percentage referred to in clause (y) shall be 20%.
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(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event and/or Subsequent Triggering
Event of which it has notice (together, a "Triggering Event"), it being
understood that the giving of such notice by Issuer shall not be a
condition to the right of the Holder to exercise the Option.
(e) In the event the Holder is entitled to and wishes to
exercise the Option, it shall send to Issuer a written notice (the date
of which being herein referred to as the "Notice Date") specifying (i)
the total number of shares it will purchase pursuant to such exercise
and (ii) a place and date not earlier than three business days nor later
than 60 business days from the Notice Date for the closing of such
purchase (the "Closing Date"); provided that if prior notification to
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or approval of the Federal Reserve Board or any other regulatory agency
is required in connection with such purchase, the Holder shall promptly
file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on
which any required notification periods have expired or been terminated
or such approvals have been obtained and any requisite waiting period or
periods shall have passed. Any exercise of the Option shall be deemed to
occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this
Section 2, the Holder shall pay to Issuer the aggregate purchase price
for the shares of Common Stock purchased pursuant to the exercise of the
Option in immediately available funds by wire transfer to a bank account
designated by Issuer, provided that failure or refusal of Issuer to
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designate such a bank account shall not preclude the Holder from
exercising the Option.
(g) At such closing, simultaneously with the delivery of
immediately available funds as provided in subsection (f) of this
Section 2, Issuer shall deliver to the Holder a certificate or
certificates representing the number of shares of Common Stock purchased
by the Holder and, if the Option should be exercised in part only, a new
Option evidencing the rights of the Holder thereof to purchase the
balance of the shares purchasable hereunder, and the Holder shall
deliver to Issuer a copy of this Agreement and a letter agreeing that
the Holder will not offer to sell or otherwise dispose of such shares in
violation of applicable law or the provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate
is subject to certain provisions of an agreement between the
registered holder hereof and Issuer and to resale
restrictions arising under the Securities Act of 1933, as
amended. A copy of such agreement is on file at the
principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a
written request therefor."
It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "1933 Act"),
in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the Holder shall have delivered
to
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Issuer a copy of a letter from the staff of the SEC, or an opinion of
counsel, in form and substance reasonably satisfactory to Issuer, to the
effect that such legend is not required for purposes of the 1933 Act;
(ii) the reference to the provisions of this Agreement in the above
legend shall be removed by delivery of substitute certificate(s) without
such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do
not require the retention of such reference; and (iii) the legend shall
be removed in its entirety if the conditions in the preceding clauses
(i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written
notice of exercise of the Option provided for under subsection (e) of
this Section 2 and the tender of the applicable purchase price in
immediately available funds, the Holder shall be deemed, subject to the
receipt of applicable regulatory approvals, to be the holder of record
of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be
closed or that certificates representing such shares of Common Stock
shall not then be actually delivered to the Holder. Issuer shall pay all
expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the
preparation, issue and delivery of stock certificates under this Section
2 in the name of the Holder or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times
maintain, free from preemptive rights, sufficient authorized but
unissued or treasury shares of Common Stock so that the Option may be
exercised without additional authorization of Common Stock after giving
effect to all other options, warrants, convertible securities and other
rights to purchase Common Stock; (ii) that it will not, by charter
amendment or through reorganization, consolidation, merger, dissolution
or sale of assets, or by any other voluntary act, avoid or seek to avoid
the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by Issuer; (iii)
promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and
waiting period requirements specified in 15 U.S.C. Section 18a and
regulations promulgated thereunder and (y) in the event, under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), or the Change in
Bank Control Act of 1978, as amended, or any state banking law, prior
approval of or notice to the Federal Reserve Board or to any state
regulatory authority is necessary before the Option may be exercised,
cooperating fully with the Holder in preparing such applications or
notices and providing such information to the Federal Reserve Board or
such state regulatory authority as they may require) in order to permit
the Holder to exercise the Option and Issuer duly and effectively to
issue shares of Common Stock pursuant hereto; and (iv) promptly to take
all action provided herein to protect the rights of the Holder against
dilution.
4. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon
presentation and surrender of this Agreement at the principal office of
Issuer, for other Agreements providing for Options of different
denominations entitling the holder thereof to purchase, on the same
terms and subject to the same conditions as are set forth herein, in the
aggregate the same number of shares of Com-
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mon Stock purchasable hereunder. The terms "Agreement" and "Option" as
used herein include any Stock Option Agreements and related Options for
which this Agreement (and the Option granted hereby) may be exchanged.
Upon receipt by Issuer of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Agreement, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Agreement,
if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer,
whether or not the Agreement so lost, stolen, destroyed or mutilated
shall at any time be enforceable by anyone.
5. In addition to the adjustment in the number of shares
of Common Stock that are purchasable upon exercise of the Option
pursuant to Section 1 of this Agreement, the number of shares of Common
Stock purchasable upon the exercise of the Option and the Option Price
shall be subject to adjustment from time to time as provided in this
Section 5. In the event of any change in, or distributions in respect
of, the Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of
shares, distributions on or in respect of the Common Stock, or the like,
the type and number of shares of Common Stock purchasable upon exercise
hereof and the Option Price shall be appropriately adjusted in such
manner as shall fully preserve the economic benefits provided hereunder
and proper provision shall be made in any agreement governing any such
transaction to provide for such proper adjustment and the full
satisfaction of the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event
that occurs prior to an Exercise Termination Event, Issuer shall, at the
request of Grantee delivered within 90 days of such Subsequent
Triggering Event (whether on its own behalf or on behalf of any
subsequent holder of this Option (or part thereof) or any of the shares
of Common Stock issued pursuant hereto), promptly prepare, file and keep
current a shelf registration statement under the 1933 Act covering this
Option and any shares issued and issuable pursuant to this Option and
shall use its reasonable best efforts to cause such registration
statement to become effective and remain current in order to permit the
sale or other disposition of this Option and any shares of Common Stock
issued upon total or partial exercise of this Option ("Option Shares")
in accordance with any plan of disposition requested by Grantee. Issuer
will use its reasonable best efforts to cause such registration
statement first to become effective and then to remain effective for
such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be
reasonably necessary to effect such sales or other dispositions. Grantee
shall have the right to demand two such registrations. The foregoing
notwithstanding, if, at the time of any request by Grantee for
registration of the Option or Option Shares as provided above, Issuer is
in registration with respect to an underwritten public offering of
shares of Common Stock, and if in the good faith judgment of the
managing underwriter or managing underwriters, or, if none, the sole
underwriter or underwriters, of such offering the inclusion of the
Holder's Option or Option Shares would interfere with the successful
marketing of the shares of Common Stock offered by Issuer, the number of
Option Shares otherwise to be covered in the registration statement
contemplated hereby may be reduced; and provided, however, that
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after any such required reduction the number of Option
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Shares to be included in such offering for the account of the Holder
shall constitute at least 25% of the total number of shares to be sold
by the Holder and Issuer in the aggregate; and provided further,
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however, that if such reduction occurs, then the Issuer shall file a
- -------
registration statement for the balance as promptly as practical and no
reduction shall thereafter occur. Each such Holder shall provide all
information reasonably requested by Issuer for inclusion in any
registration statement to be filed hereunder. If requested by any such
Holder in connection with such registration, Issuer shall become a party
to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating itself in respect of representations,
warranties, indemnities and other agreements customarily included in
secondary offering underwriting agreements for the Issuer. Upon
receiving any request under this Section 6 from any Holder, Issuer
agrees to send a copy thereof to any other person known to Issuer to be
entitled to registration rights under this Section 6, in each case by
promptly mailing the same, postage prepaid, to the address of record of
the persons entitled to receive such copies. Notwithstanding anything to
the contrary contained herein, in no event shall Issuer be obligated to
effect more than two registrations pursuant to this Section 6 by reason
of the fact that there shall be more than one Grantee as a result of any
assignment or division of this Agreement.
7. (a) Immediately prior to the occurrence of a
Repurchase Event (as hereinafter defined), (i) following a request of
the Holder, delivered prior to an Exercise Termination Event, Issuer (or
any successor thereto) shall repurchase the Option from the Holder at a
price (the "Option Repurchase Price") equal to the amount by which (A)
the Market/Offer Price (as hereinafter defined) exceeds (B) the Option
Price, multiplied by the number of shares for which this Option may then
be exercised and (ii) at the request of the owner of Option Shares from
time to time (the "Owner"), delivered within 90 days of such occurrence
(or such later period as provided in Section 10), Issuer shall
repurchase such number of the Option Shares from the Owner as the Owner
shall designate at a price (the "Option Share Repurchase Price") equal
to the Market/Offer Price multiplied by the number of Option Shares so
designated. The term "Market/Offer Price" shall mean the highest of (i)
the price per share of Common Stock at which a tender offer or exchange
offer therefor has been made, (ii) the price per share of Common Stock
to be paid by any third party pursuant to an agreement with Issuer,
(iii) the highest closing price for shares of Common Stock within the
six-month period immediately preceding the date the Holder gives notice
of the required repurchase of this Option or the Owner gives notice of
the required repurchase of Option Shares, as the case may be, or (iv) in
the event of a sale of all or a substantial portion of Issuer's assets,
the sum of the price paid in such sale for such assets and the current
market value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by the Holder or
the Owner, as the case may be, and reasonably acceptable to the Issuer,
divided by the number of shares of Common Stock of Issuer outstanding at
the time of such sale. In determining the Market/Offer Price, the value
of consideration other than cash shall be determined by a nationally
recognized investment banking firm selected by the Holder or Owner, as
the case may be, and reasonably acceptable to the Issuer.
(b) The Holder and the Owner, as the case may be, may
exercise its right to require Issuer to repurchase the Option and any
Option Shares pursuant to this Section 7 by surrendering for such
purpose to Issuer, at its principal office, a copy of this Agreement or
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certificates for Option Shares, as applicable, accompanied by a written
notice or notices stating that the Holder or the Owner, as the case may
be, elects to require Issuer to repurchase this Option and/or the Option
Shares in accordance with the provisions of this Section 7. Within the
latter to occur of (x) five business days after the surrender of the
Option and/or certificates representing Option Shares and the receipt of
such notice or notices relating thereto and (y) the time that is
immediately prior to the occurrence of a Repurchase Event, Issuer shall
deliver or cause to be delivered to the Holder the Option Repurchase
Price and/or to the Owner the Option Share Repurchase Price therefor or
the portion thereof, if any, that Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under
applicable law or regulation from repurchasing the Option and/or the
Option Shares in full, Issuer shall immediately so notify the Holder
and/or the Owner and thereafter deliver or cause to be delivered, from
time to time, to the Holder and/or the Owner, as appropriate, the
portion of the Option Repurchase Price and the Option Share Repurchase
Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after
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delivery of a notice of repurchase pursuant to paragraph (b) of this
Section 7 is prohibited under applicable law or regulation from
delivering to the Holder and/or the Owner, as appropriate, the Option
Repurchase Price and the Option Share Repurchase Price, respectively, in
full (and Issuer hereby undertakes to use its best efforts to obtain all
required regulatory and legal approvals and to file any required
notices, in each case as promptly as practicable in order to accomplish
such repurchase), the Holder or Owner may revoke its notice of
repurchase of the Option or the Option Shares either in whole or to the
extent of the prohibition, whereupon, in the latter case, Issuer shall
promptly (i) deliver to the Holder and/or the Owner, as appropriate,
that portion of the Option Repurchase Price or the Option Share
Repurchase Price that Issuer is not prohibited from delivering; and (ii)
deliver, as appropriate, either (A) to the Holder, a new Stock Option
Agreement evidencing the right of the Holder to purchase that number of
shares of Common Stock obtained by multiplying the number of shares of
Common Stock for which the surrendered Stock Option Agreement was
exercisable at the time of delivery of the notice of repurchase by a
fraction, the numerator of which is the Option Repurchase Price less the
portion thereof theretofore delivered to the Holder and the denominator
of which is the Option Repurchase Price, or (B) to the Owner, a
certificate for the Option Shares it is then so prohibited from
repurchasing.
(d) For purposes of this Section 7, a Repurchase Event
shall be deemed to have occurred (i) upon the consummation of any
merger, consolidation or similar transaction involving Issuer or any
purchase, lease or other acquisition of all or a substantial portion of
the assets of Issuer, other than any such transaction which would not
constitute an Acquisition Transaction pursuant to the provisos to
Section 2(b)(i) hereof or (ii) upon the acquisition by any person of
beneficial ownership of 50% or more of the then outstanding shares of
Common Stock, provided that no such event shall constitute a
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Repurchase Event unless a Subsequent Triggering Event shall have
occurred prior to an Exercise Termination Event. The parties hereto
agree that Issuer's obligations to repurchase the Option or Option
Shares under this Section 7 shall not terminate upon the occurrence of
an Exercise Termination Event unless no
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Subsequent Triggering Event shall have occurred prior to the occurrence
of an Exercise Termination Event.
8. (a) In the event that prior to an Exercise Termination
Event, Issuer shall enter into an agreement (i) to consolidate with or
merge into any person, other than Grantee or one of its Subsidiaries,
and shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person, other than Grantee
or one of its Subsidiaries, to merge into Issuer and Issuer shall be the
continuing or surviving corporation, but, in connection with such
merger, the then outstanding shares of Common Stock shall be changed
into or exchanged for stock or other securities of any other person or
cash or any other property or the then outstanding shares of Common
Stock shall after such merger represent less than 50% of the outstanding
voting shares and voting share equivalents of the merged company, or
(iii) to sell or otherwise transfer all or substantially all of its
assets to any person, other than Grantee or one of its Subsidiaries,
then, and in each such case, the agreement governing such transaction
shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions
set forth herein, be converted into, or exchanged for, an option (the
"Substitute Option"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that
controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (A) the
continuing or surviving corporation of a consolidation or
merger with Issuer (if other than Issuer), (B) Issuer in a
merger in which Issuer is the continuing or surviving
person, and (C) the transferee of all or substantially all
of Issuer's assets.
(ii) "Substitute Common Stock" shall mean the common
stock issued by the issuer of the Substitute Option upon
exercise of the Substitute Option.
(iii) "Assigned Value" shall mean the Market/Offer
Price, as defined in Section 7.
(iv) "Average Price" shall mean the average closing
price of a share of the Substitute Common Stock for the one
year immediately preceding the consolidation, merger or sale
in question, but in no event higher than the closing price
of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided
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that if Issuer is the issuer of the Substitute Option, the
Average Price shall be computed with respect to a share of
common stock issued by the person merging into Issuer or by
any company that controls or is controlled by such person,
as the Holder may elect.
(c) The Substitute Option shall have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot,
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for legal reasons, be the same as the Option, such terms shall be as
similar as possible and in no event less advantageous to the Holder. The
issuer of the Substitute Option shall also enter into an agreement with
the then Holder or
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Holders of the Substitute Option in substantially the same form as this
Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such
number of shares of Substitute Common Stock as is equal to the Assigned
Value multiplied by the number of shares of Common Stock for which the
Option is then exercisable, divided by the Average Price. The exercise
price of the Substitute Option per share of Substitute Common Stock
shall then be equal to the Option Price multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock for
which the Option is then exercisable and the denominator of which shall
be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing
paragraphs, shall the Substitute Option be exercisable for more than
19.9% of the shares of Substitute Common Stock outstanding prior to
exercise of the Substitute Option. In the event that the Substitute
Option would be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise but for this
clause (e), the issuer of the Substitute Option (the "Substitute Option
Issuer") shall make a cash payment to Holder equal to the excess of
(i) the value of the Substitute Option without giving effect to the
limitation in this clause (e) over (ii) the value of the Substitute
Option after giving effect to the limitation in this clause (e). This
difference in value shall be determined by a nationally recognized
investment banking firm selected by the Holder or the Owner, as the case
may be, and reasonably acceptable to the Acquiring Corporation.
(f) Issuer shall not enter into any transaction described
in subsection (a) of this Section 8 unless the Acquiring Corporation and
any person that controls the Acquiring Corporation assume in writing all
the obligations of Issuer hereunder.
9. (a) At the request of the holder of the Substitute
Option (the "Substitute Option Holder"), the Substitute Option Issuer
shall repurchase the Substitute Option from the Substitute Option Holder
at a price (the "Substitute Option Repurchase Price") equal to the
amount by which (i) the Highest Closing Price (as hereinafter defined)
exceeds (ii) the exercise price of the Substitute Option, multiplied by
the number of shares of Substitute Common Stock for which the Substitute
Option may then be exercised, and at the request of the owner (the
"Substitute Share Owner") of shares of Substitute Common Stock (the
"Substitute Shares"), the Substitute Option Issuer shall repurchase the
Substitute Shares at a price (the "Substitute Share Repurchase Price")
equal to the Highest Closing Price multiplied by the number of
Substitute Shares so designated. The term "Highest Closing Price" shall
mean the highest closing price for shares of Substitute Common Stock
within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the
required repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share
Owner, as the case may be, may exercise its respective right to require
the Substitute Option Issuer to repur-
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chase the Substitute Option and the Substitute Shares pursuant to this
Section 9 by surrendering for such purpose to the Substitute Option
Issuer, at its principal office, the agreement for such Substitute
Option (or, in the absence of such an agreement, a copy of this
Agreement) and certificates for Substitute Shares accompanied by a
written notice or notices stating that the Substitute Option Holder or
the Substitute Share Owner, as the case may be, elects to require the
Substitute Option Issuer to repurchase the Substitute Option and/or the
Substitute Shares in accordance with the provisions of this Section 9.
As promptly as practicable, and in any event within five business days
after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to
be delivered to the Substitute Option Holder the Substitute Option
Repurchase Price and/or to the Substitute Share Owner the Substitute
Share Repurchase Price therefor or, in either case, the portion thereof
which the Substitute Option Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is
prohibited under applicable law or regulation from repurchasing the
Substitute Option and/or the Substitute Shares in part or in full, the
Substitute Option Issuer following a request for repurchase pursuant to
this Section 9 shall immediately so notify the Substitute Option Holder
and/or the Substitute Share Owner and thereafter deliver or cause to be
delivered, from time to time, to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the portion of the Substitute
Share Repurchase Price, respectively, which it is no longer prohibited
from delivering, within five business days after the date on which the
Substitute Option Issuer is no longer so prohibited; provided, however,
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that if the Substitute Option Issuer is at any time after delivery of
a notice of repurchase pursuant to subsection (b) of this Section 9
prohibited under applicable law or regulation from delivering to the
Substitute Option Holder and/or the Substitute Share Owner, as appropriate,
the Substitute Option Repurchase Price and the Substitute Share Repurchase
Price, respectively, in full (and the Substitute Option Issuer shall use
its best efforts to obtain all required regulatory and legal approvals,
in each case as promptly as practicable, in order to accomplish such
repurchase), the Substitute Option Holder or Substitute Share Owner may
revoke its notice of repurchase of the Substitute Option or the Substitute
Shares either in whole or to the extent of the prohibition, whereupon,
in the latter case, the Substitute Option Issuer shall promptly (i)
deliver to the Substitute Option Holder or Substitute Share Owner, as
appropriate, that portion of the Substitute Option Repurchase Price or
the Substitute Share Repurchase Price that the Substitute Option Issuer
is not prohibited from delivering; and (ii) deliver, as appropriate,
either (A) to the Substitute Option Holder, a new Substitute Option
evidencing the right of the Substitute Option Holder to purchase that
number of shares of the Substitute Common Stock obtained by multiplying
the number of shares of the Substitute Common Stock for which the
surrendered Substitute Option was exercisable at the time of delivery of
the notice of repurchase by a fraction, the numerator of which is the
Substitute Option Repurchase Price less the portion thereof theretofore
delivered to the Substitute Option Holder and the denominator of which
is the Substitute Option Repurchase Price, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so
prohibited from repurchasing.
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10. The 90-day or 6-month periods for exercise of certain
rights under Sections 2, 6, 7, 13 and 15 shall be extended: (i) to
the extent necessary to obtain all regulatory approvals for the
exercise of such rights, and for the expiration of all statutory waiting
periods; (ii) to the extent necessary to avoid liability under Section
16(b) of the 1934 Act by reason of such exercise and (iii) during any
period in which Grantee is precluded from exercising such rights due to
an injunction or other legal restriction, plus in each case such
additional period as is reasonably necessary for the exercise of such
rights promptly following the obtaining of such approvals or the
expiration of such periods.
11. Issuer hereby represents and warrants to Grantee as
follows:
(a) Issuer has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
and validly authorized by the Board of Directors of Issuer and no other
corporate proceedings on the part of Issuer are necessary to authorize
this Agreement or to consummate the transactions so contemplated. This
Agreement has been duly and validly executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to
authorize and reserve and to permit it to issue, and at all times from
the date hereof through the termination of this Agreement in accordance
with its terms will have reserved for issuance upon the exercise of the
Option, that number of shares of Common Stock equal to the maximum
number of shares of Common Stock at any time and from time to time
issuable hereunder, and all such shares, upon issuance pursuant hereto,
will be duly authorized, validly issued, fully paid, nonassessable, and
will be delivered free and clear of all claims, liens, encumbrance and
security interests and not subject to any preemptive rights.
(c) Issuer has taken all action (including if required
redeeming all of the Mercantile Shareholder Rights or amending or
terminating the Mercantile Rights Agreement) so that the entering into
of this Option Agreement, the acquisition of shares of Common Stock
hereunder and the other transactions contemplated hereby do not and will
not result in the grant of any rights to any person under the Mercantile
Rights Agreement or enable or require the Rights to be exercised,
distributed or triggered.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and
authority to enter into this Agreement and, subject to any approvals or
consents referred to herein, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Grantee.
This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common
Stock or other securities acquired by Grantee upon exercise of the
Option will not be, acquired with a view to
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the public distribution thereof and will not be transferred or otherwise
disposed of except in a transaction registered or exempt from
registration under the Securities Act.
13. Neither of the parties hereto may assign any of its
rights or obligations under this Option Agreement or the Option created
hereunder to any other person, without the express written consent of
the other party, except that in the event a Subsequent Triggering Event
shall have occurred prior to an Exercise Termination Event, Grantee,
subject to the express provisions hereof, may assign in whole or in part
its rights and obligations hereunder within 90 days following such
Subsequent Triggering Event (or such later period as provided in Section
10); provided, however, that until the date 15 days following the
-------- -------
date on which the Federal Reserve Board approves an application by
Grantee under the BHCA to acquire the shares of Common Stock subject to
the Option, Grantee may not assign its rights under the Option except in
(i) a widely dispersed public distribution, (ii) a private placement in
which no one party acquires the right to purchase in excess of 2% of the
voting shares of Issuer, (iii) an assignment to a single party (e.g.,
----
a broker or investment banker) for the purpose of conducting a widely
dispersed public distribution on Grantee's behalf, or (iv) any other
manner approved by the Federal Reserve Board.
14. Each of Grantee and Issuer will use its best efforts
to make all filings with, and to obtain consents of, all third parties
and governmental authorities necessary to the consummation of the
transactions contemplated by this Agreement, including without
limitation making application to list the shares of Common Stock
issuable hereunder on the New York Stock Exchange upon official notice
of issuance and applying to the Federal Reserve Board under the BHCA for
approval to acquire the shares issuable hereunder, but Grantee shall not
be obligated to apply to state banking authorities for approval to
acquire the shares of Common Stock issuable hereunder until such time,
if ever, as it deems appropriate to do so.
15. (a) Grantee may in its sole discretion, at any time
during which Issuer would be required to repurchase the Option or any
Option Shares pursuant to Section 7, surrender the Option (together with
any Option Shares issued to and then owned by the Holder) to Issuer in
exchange for a cash payment equal to the Surrender Price (as hereinafter
defined); provided, however, the Grantee may not exercise its rights
-------- -------
pursuant to this Section 15 if Issuer has previously repurchased the
Option (or any portion thereof) or any Option Shares pursuant to Section
7. The "Surrender Price" shall be equal to (i) $250,000,000, plus (ii)
if applicable, the aggregate purchase price previously paid pursuant
hereto by Grantee with respect to any Option Shares, minus (iii) if
applicable, the excess of (A) the net cash, if any, received by Grantee
pursuant to the arm's-length sale of Option Shares (or any other
securities into which such Option Shares were converted or exchanged) to
any party not affiliated with Grantee, over (B) the purchase price paid
by Grantee with respect to such Option Shares.
(b) Grantee may exercise its right to surrender the Option
and any Option Shares pursuant to this Section 15 by surrendering for
such purpose to Issuer, at its principal office, a copy of this
Agreement, together with certificates for Option Shares, if any,
accompanied by a written notice stating (i) that Grantee elects to
surrender the Option and Option Shares, if any, in accordance with the
provisions of this Section 15 and (ii) the Surrender
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Price. Within two business days after the surrender of the Option and
the Option Shares, if applicable, Issuer shall deliver or cause to be
delivered to Grantee the Surrender Price.
(c) To the extent that the Issuer is prohibited under
applicable law or regulation from paying the Surrender Price to Grantee
in full, Issuer shall immediately so notify Grantee and thereafter
deliver, or cause to be delivered, from time to time, to Grantee, that
portion of the Surrender Price that Issuer is not or no longer
prohibited from paying, within two business days after the date on which
Issuer is no longer so prohibited; provided, however, that if Issuer
-------- -------
at any time after delivery of a notice of surrender pursuant to Section
15(b) is prohibited under applicable law or regulation from paying to
Grantee the Surrender Price in full, (i) Issuer shall (A) use its best
efforts to obtain all required regulatory and legal approvals and to
file any required notices as promptly as practicable in order to make
such payments, (B) within two business days of the submission or receipt
of any documents relating to any such regulatory and legal approvals,
provide Grantee with copies of the same, and (C) keep Grantee advised of
both the status of any such request for regulatory and legal approvals
and any discussions with any relevant regulatory or other third party
reasonably related to the same, and (ii) Grantee may revoke such notice
or surrender by delivery of a notice of revocation to Issuer and, upon
delivery of such notice of revocation, the Exercise Termination Event
shall be extended to a date six months from the date on which the
Exercise Termination Event would have occurred if not for the provisions
of this Section 15(c) (during which period Grantee may exercise any of
its rights hereunder, including any and all rights pursuant to this
Section 15).
(d) Grantee shall have rights substantially identical to
those set forth in paragraphs (a), (b) and (c) of this Section 15 with
respect to the Substitute Option and the Substitute Option Issuer during
any period in which the Substitute Option Issuer would be required to
repurchase the Substitute Option pursuant to Section 9.
16. The parties hereto acknowledge that damages would be
an inadequate remedy for a breach of this Agreement by either party
hereto and that the obligations of the parties hereto shall be
enforceable by either party hereto through injunctive or other equitable
relief.
17. If any term, provision, covenant or restriction
contained in this Agreement is held by a court or a federal or state
regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Agreement shall remain in full force and
effect, and shall in no way be affected, impaired or invalidated. If for
any reason such court or regulatory agency determines that the Holder is
not permitted to acquire, or Issuer or Substitute Option Issuer, as the
case may be, is not permitted to repurchase pursuant to Section 7 or
Section 9, as the case may be, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or
5 hereof), or Issuer or Substitute Option Issuer is not permitted to pay
the full amount of the Surrender Price pursuant to Section 15, it is the
express intention of Issuer (which shall be binding on the Substitute
Option Issuer) to allow the Holder to acquire or to require Issuer or
Substitute Option Issuer to repurchase such lesser number of shares, or
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to require Issuer or Substitute Option Issuer to pay such portion of the
Surrender Price, as may be permissible, without any amendment or
modification hereof.
18. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when
delivered in person, by cable, telegram, telecopy or telex, or by
registered or certified mail (postage prepaid, return receipt requested)
at the respective addresses of the parties set forth in the Merger
Agreement.
19. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, regardless of the
laws that might otherwise govern under applicable principles of
conflicts of laws thereof (except to the extent that mandatory
provisions of federal law apply).
20. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all
of which shall constitute one and the same agreement.
21. Except as otherwise expressly provided herein, each of
the parties hereto shall bear and pay all costs and expenses incurred by
it or on its behalf in connection with the transactions contemplated
hereunder, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
22. Except as otherwise expressly provided herein or in
the Merger Agreement, this Agreement contains the entire agreement
between the parties with respect to the transactions contemplated
hereunder and supersedes all prior arrangements or understandings with
respect thereof, written or oral. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns. Nothing in
this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors
except as assigns, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided
herein.
23. Capitalized terms used in this Agreement and not
defined herein shall have the meanings assigned thereto in the Merger
Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement
to be executed on its behalf by its officers thereunto duly authorized,
all as of the date first above written.
MERCANTILE BANCORPORATION INC.
By: /s/ THOMAS H. JACOBSEN
----------------------------------
Thomas H. Jacobsen
Chairman of the Board, President
and Chief Executive Officer
FIRSTAR CORPORATION
By: /s/ JERRY A. GRUNDHOFER
----------------------------------
Jerry A. Grundhofer
President and Chief
Executive Officer
[Mercantile Stock Option]
<PAGE>
Independent Auditors' Consent
The Board of Directors
Mercantile Bancorporation Inc.:
We consent to the inclusion of our report dated January 20, 1999, with
respect to the consolidated balance sheets of Mercantile Bancorporation
Inc. and subsidiaries as of December 31, 1998, 1997, and 1996, and the
related consolidated statements of income, changes in shareholders' equity,
Cash flows, and comprehensive income for each of the years in the three-
year period ended December 31, 1998, which report appears in the Form 8-K
of Firstar Corporation dated May 18, 1999.
KPMG LLP
St. Louis, Missouri
May 18, 1999
