<PAGE>
Filed pursuant to Rule 424(b)(3)
Registration No. 333-20415
HORIZON
BANCORP, INC.
February 6, 1997
Dear Shareholders:
A special meeting of shareholders (the "Meeting") of Horizon Bancorp, Inc.
("Horizon") will be held at the offices of Horizon Bank & Trust, SSB, 5800 MoPac
Expressway in Austin, Texas, on Tuesday, March 11, 1997 at 10:00 a.m.,
Central time. At the Meeting, Horizon's shareholders will consider and vote to
approve, ratify, confirm and adopt an Agreement and Plan of Merger pursuant to
which it is proposed that Horizon merge with and into Compass Texas Acquisition
Corp. ("Compass Acquisition"), a Delaware corporation and a wholly-owned
subsidiary of Compass Bancshares, Inc. ("Compass"). The enclosed Notice of
Special Meeting of Shareholders outlines the business to be transacted at the
Meeting, and the enclosed Proxy Statement/Prospectus explains the terms of the
proposed Merger and provides other information concerning Horizon, Compass
Acquisition and Compass. We urge you to read these materials carefully.
Your Board of Directors believes that the affiliation of Horizon with
Compass through the Merger will enable Horizon to serve its customers and
communities better and to compete more effectively with other financial
institutions. After the Merger, Horizon's shareholders will own publicly traded
stock in a much larger, more diversified financial institution with a history of
paying dividends on its common stock.
For the Merger to become effective, among other conditions described in the
Proxy Statement/Prospectus, the holders of at least 80% of the outstanding
shares of Horizon's common stock must vote in favor of the Merger. THE BOARD OF
DIRECTORS OF HORIZON RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER.
You are cordially invited to attend the Meeting. Your Board of Directors
cannot stress strongly enough that the vote of every shareholder, regardless of
the number of shares owned, is important. FAILURE TO VOTE BY PROXY OR IN PERSON
AT THE MEETING IS EQUIVALENT TO A VOTE AGAINST THE MERGER. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE REQUESTED TO COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. If you
need assistance in completing your Proxy, please call the undersigned or
our proxy solicitor, P.F. King & Co., Inc., at 800-848-3410.
Very truly yours,
/s/ Douglas B. Kadison
_________________________________
Chairman of the Board
5800 MoPac Expressway . Austin, Texas 78731 . Phone: 512-371-6700
<PAGE>
HORIZON BANCORP, INC.
5800 NORTH MOPAC EXPRESSWAY
AUSTIN, TEXAS 78731
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
-------------------------------
Notice is hereby given that a Special Meeting of Shareholders ("Meeting")
of Horizon Bancorp, Inc. ("Horizon") will be held at the offices of Horizon Bank
& Trust, SSB, 5800 MoPac Expressway in Austin, Texas, on Tuesday, March 11,
1997, at 10:00 a.m., Central time, for the following purposes:
1. To approve, ratify, confirm and adopt an Agreement and Plan of
Merger dated as of December 4, 1996 (including the exhibits thereto, the
"Merger Agreement"), as amended, providing for the merger ("Merger") of
Horizon with and into Compass Texas Acquisition Corp. ("Compass"), a Texas
corporation and a wholly-owned subsidiary of Compass. The terms of the
Merger Agreement are described in the attached Proxy Statement/Prospectus,
which the Board of Directors of Horizon encourages each Shareholder to
review carefully; and
2. To consider and transact such other business as may properly come
before the Meeting or any adjournments thereof.
The Board of Directors of Horizon has fixed February 5, 1997 as the record
date for the determination of the shareholders entitled to notice of and to vote
at the Meeting and any adjournment thereof. Only the holders of shares of
Horizon's common stock of record at the close of business on February 5, 1997,
are entitled to notice of, and to vote at, the Meeting or any adjournments
thereof. In the event there are not sufficient votes for a quorum or to approve
or ratify any of the foregoing proposals at the time of the Meeting, the Meeting
may be adjourned in order to permit further solicitation of proxies by Horizon.
IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THE MEETING REGARDLESS OF
THE NUMBER OF SHARES YOU OWN, SINCE FAILURE TO VOTE BY PROXY OR IN PERSON AT THE
MEETING IS EQUIVALENT TO A VOTE AGAINST THE MERGER. EVEN IF YOU PLAN TO ATTEND
THE MEETING, AND CERTAINLY IF YOU DO NOT, PLEASE COMPLETE, SIGN AND MAIL THE
ENCLOSED PROXY IN THE ENCLOSED RETURN ENVELOPE PROMPTLY. SUCH PROXY CAN BE
REVOKED AT ANY TIME PRIOR TO ITS EXERCISE BY FILING A DULY EXECUTED PROXY
BEARING A LATER DATE, BY FILING A WRITTEN NOTICE OF REVOCATION, OR BY APPEARING
IN PERSON AT THE MEETING AND VOTING BY WRITTEN BALLOT.
By Order of the Board of Directors
of Horizon Bancorp, Inc.
/s/ Douglas B. Kadison
___________________________________
Chairman of the Board
Austin, Texas
February 6, 1997
<PAGE>
PROXY STATEMENT PROSPECTUS
OF OF
HORIZON BANCORP, INC. COMPASS BANCSHARES, INC.
PROXY STATEMENT/PROSPECTUS
Compass Bancshares, Inc., a Delaware corporation ("Compass"), has filed this
Proxy Statement/Prospectus with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), with respect to 888,889 shares of Compass $2.00 par value
common stock ("Compass Common Stock") to be issued in the proposed merger (the
"Merger") of Horizon Bancorp, Inc., a Texas corporation ("Horizon"), with and
into Compass Texas Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of Compass ("Compass Acquisition"). Compass and Horizon presently
intend that following consummation of the Merger, Horizon Bank & Trust, SSB, a
Texas chartered savings bank and wholly-owned subsidiary of Horizon (the
"Bank"), will merge with and into Compass Bank ("Compass Bank-Houston"), a Texas
state bank and indirect wholly-owned subsidiary of Compass (the "Subsequent
Merger").
This Proxy Statement/Prospectus constitutes the proxy statement of Horizon
relating to the solicitation of proxies for use at the special meeting of
shareholders of Horizon (the "Meeting") scheduled to be held on Tuesday, March
11, 1997 at 10:00 a.m, Central time, at the offices of Horizon Bank &
Trust, SSB, 5800 MoPac Expressway in Austin, Texas, and any postponements or
adjournments thereof. At the Meeting, the shareholders of Horizon will consider
and vote upon a proposal to approve, ratify, confirm and adopt the Agreement and
Plan of Merger dated as of December 4, 1996, as amended, by and between Compass
and Horizon (the "Merger Agreement") providing for, among other things, the
merger of Horizon with and into Compass Acquisition and, in connection
therewith, the receipt by Horizon shareholders of Compass Common Stock. The
Horizon shareholders will not be asked to vote on the Subsequent Merger and
approval of the Subsequent Merger is not a condition to consummation of the
Merger. The outcome of the Subsequent Merger will not affect the consideration
to be received by the Horizon shareholders in the Merger or the timing or
consummation of the Merger. The effectiveness of the Subsequent Merger is
conditioned upon the consummation of the Merger.
The Merger Agreement provides for the holders of Horizon common stock, par
value $0.01 per share ("Horizon Common Stock"), at the effective time of the
Merger (the "Effective Time"), other than dissenting shareholders, to receive
aggregate merger consideration (the "Merger Consideration") of 888,889 shares of
Compass Common Stock (as adjusted due to the exercise of dissenter's rights).
Holders of Horizon Common Stock shall receive for each share of Horizon Common
Stock held at the Effective Time a number of shares of Compass Common Stock
equal to the quotient of 888,889 shares of Compass Common Stock divided by the
number of shares of Horizon Common Stock outstanding immediately prior to the
Effective Time (the "Per Share Merger Consideration"). In the event the average
closing sale price of the Compass Common Stock as reported by the NASDAQ
National Market System for the twenty days of trading preceding the tenth
business day prior to the Effective Time (the "Share Determination Market
Value") is less than $31.00 per share, Horizon may either (i) terminate the
Agreement (the "Pricing Termination Option"), or (ii) agree to accept an
aggregate of 888,889 shares of Compass Common Stock. In the event Horizon
exercises its Pricing Termination Option, the Merger Agreement shall be
terminated, but Compass shall have the right to reject such termination of the
Merger Agreement by Horizon (the "Termination Rejection") by agreeing to issue
an aggregate number of shares of Compass Common Stock equal to the quotient of
$27,555,559 divided by the Share Determination Market Value ("New Shares"). In
such event, each holder of Horizon Common Stock for each share so held shall
receive Merger Consideration equal to the quotient of the New Shares divided by
the number of shares of Horizon Common Stock outstanding immediately prior to
the Effective Time. Any decision by the Board of Directors of Horizon regarding
whether to terminate the Merger Agreement will be made in its sole discretion
and could result in either (i) Horizon shareholders receiving Merger
Consideration with an aggregate market value of less than $27,555,559, (ii) the
termination of the Merger Agreement, or (iii) Compass agreeing to increase the
number of shares of Compass Common Stock constituting the Merger Consideration.
If the Board of Directors of Horizon elects to terminate the Merger Agreement,
there can be no assurance that Compass will agree to increase the number of
shares of Compass Common Stock and that the Merger Agreement will not terminate,
in which event the Horizon shareholders would
<PAGE>
not receive any Merger Consideration but would retain their Horizon Common
Stock. Horizon's financial advisor, Alex Sheshunoff & Co. Investment Banking
("Sheshunoff & Co.) has rendered an opinion to the effect that as of December 4,
1996, the Per Share Merger Consideration is fair from a financial point of view
to the shareholders of Horizon.
On January 3, 1997, there were 1,388,757 shares of Horizon Common Stock
issued and outstanding. In addition to these issued and outstanding shares of
Horizon Common Stock, officers, directors, employees and a former director hold
options to purchase an aggregate of 190,408 shares of Horizon Common Stock which
Horizon expects to be exercised prior to the Effective Time.
Assuming that (i) there will be 1,579,165 shares of Horizon Common Stock
issued and outstanding immediately prior to the Effective Time and (ii) the
Share Determination Market Value will be $39.45 (the average closing sale price
of the Compass Common Stock as reported by the NASDAQ National Market System for
the twenty days of trading preceding the tenth business day prior to
February 4, 1997), Compass will be required to issue an aggregate of
888,889 shares of Compass Common Stock to the Horizon shareholders and each
shareholder of Horizon (except for shareholders choosing to exercise their
dissenters' rights) will be entitled to receive approximately .5629 shares of
Compass Common Stock for each share of Horizon Common Stock held.
Notwithstanding the foregoing, the Merger Consideration will be reduced by
the number of shares that would otherwise be issued to dissenting shareholders.
Compass will not issue fractional shares of Compass Common Stock, but instead
will pay cash to any shareholder otherwise entitled to receive a fractional
share. Such cash payment shall be based on the Share Determination Market Value.
SEE "SUMMARY--THE MERGER"; "SUMMARY--DISSENTERS' RIGHTS"; "THE MERGER--
GENERAL"; "THE MERGER--DISSENTERS' RIGHTS"; APPENDIX I; AND APPENDIX II.
Consummation of the Merger is subject to the receipt of required governmental
approvals, the approval of the holders of 80% of the outstanding Horizon Common
Stock on February 5, 1997 and certain other conditions, all as more fully
described in this Proxy Statement/Prospectus. SEE "SUMMARY--SHAREHOLDER VOTES
REQUIRED; CONDITIONS TO CONSUMMATION AND REGULATORY APPROVALS; TERMINATION FEE";
"THE MERGER--OTHER TERMS AND CONDITIONS"; AND "TERMINATION; TERMINATION FEE";
AND APPENDIX I.
This Proxy Statement/Prospectus also constitutes the prospectus of Compass
with respect to the shares of Compass Common Stock to be issued to the holders
of Horizon Common Stock in the Merger; however, it does not cover resales of
shares of Compass Common Stock upon consummation of the proposed reorganization,
and no person is authorized to use this Proxy Statement/Prospectus in connection
with any such resale. The securities offered hereunder may be traded without the
use of this Proxy Statement/Prospectus by those shareholders of Horizon not
deemed to be affiliates of Horizon or Compass. SEE "RESALE OF COMPASS STOCK".
This Proxy Statement/Prospectus is first being mailed or delivered to Horizon
shareholders on or about February 6, 1997.
Compass Common Stock is publicly traded in the over-the-counter market and
quoted on the NASDAQ National Market System. Horizon Common Stock is publicly
traded in the over-the-counter market and quoted on the NASDAQ Small-Cap Market
System. On February 4, 1997, the last reported sale price per share of Compass
Common Stock and the last reported bid price per share of Horizon Common Stock
were $41.00 and $27.25, respectively.
<PAGE>
THE SECURITIES OF COMPASS BANCSHARES, INC. OFFERED IN CONNECTION WITH THE
MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES AUTHORITY
NOR HAS THE COMMISSION NOR ANY STATE SECURITIES AUTHORITY
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
All information concerning Compass and Compass Acquisition has been furnished
by Compass, all information regarding Horizon and the Bank has been furnished by
Horizon, and all information with respect to Sheshunoff & Co. and its analyses
and opinion has been furnished by Sheshunoff & Co.
HORIZON SHAREHOLDERS ARE URGED TO REVIEW AND CAREFULLY
CONSIDER THE RISKS DESCRIBED UNDER "RISK FACTORS".
The date of this Proxy Statement/Prospectus is February 6, 1997.
<PAGE>
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
AVAILABLE INFORMATION.............................................. 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................... 1
INTRODUCTION....................................................... 3
SUMMARY............................................................ 5
Parties to the Merger........................................... 5
The Merger...................................................... 6
Reasons for the Merger; Recommendation of Boards of Directors... 8
The Meeting..................................................... 9
Record Date..................................................... 9
Shareholder Votes Required...................................... 9
Dissenters' Rights.............................................. 10
Conditions to Consummation and Regulatory Approvals;
Termination Fee................................................. 10
Federal Income Tax Consequences................................. 11
Accounting Treatment............................................ 11
RISK FACTORS....................................................... 12
RECENT DEVELOPMENTS................................................ 13
SELECTED FINANCIAL DATA............................................ 15
MARKET PRICES...................................................... 17
THE MERGER......................................................... 19
General......................................................... 19
Background of the Merger........................................ 20
Reasons for the Merger.......................................... 22
Opinion of Financial Advisor.................................... 23
General......................................................... 23
Analysis of Selected Transactions............................... 24
Discounted Cash Flow Analysis................................... 25
Comparable Company Analysis..................................... 25
Operations after the Mergers.................................... 26
Other Terms and Conditions...................................... 26
Additional Agreements........................................... 29
Business Pending Effective Time................................. 29
No Solicitation................................................. 29
Amendments...................................................... 30
Termination; Termination Fee.................................... 30
Exchange of Shares.............................................. 32
Dissenters' Rights.............................................. 32
Federal Income Tax Consequences................................. 34
Government Approvals............................................ 35
Accounting Treatment............................................ 36
SUPERVISION AND REGULATION......................................... 36
General......................................................... 36
Compass, Compass Texas and Compass Bancorporation............... 36
The Subsidiary Banks............................................ 38
Other........................................................... 39
DESCRIPTION OF COMPASS COMMON AND PREFERRED STOCK.................. 41
Compass Common Stock............................................ 41
Dividends....................................................... 41
Preemptive Rights............................................... 42
Voting Rights................................................... 42
Liquidation..................................................... 42
Compass Preferred Stock......................................... 42
COMPARISON OF RIGHTS OF SHAREHOLDERS OF
HORIZON AND COMPASS................................................ 43
Charter and Bylaw Provisions Affecting Compass Stock............ 43
Certain Differences Between the Corporation Laws of
Texas and Delaware and Corresponding Charter and
Bylaw Provisions................................................ 43
Mergers......................................................... 43
Appraisal Rights................................................ 44
Special Meetings................................................ 44
Actions Without a Meeting....................................... 45
Election of Directors........................................... 45
Voting on Other Matters......................................... 45
Preemptive Rights............................................... 46
Dividends....................................................... 46
Liquidation Rights.............................................. 46
Limitation of Liability and Indemnification..................... 46
Removal of Directors............................................ 47
Inspection of Books and Records................................. 48
Antitakeover Provisions......................................... 48
RESALE OF COMPASS STOCK............................................ 48
INFORMATION ABOUT COMPASS.......................................... 49
Incorporation of Certain Documents by Reference................. 49
Interests of Certain Persons.................................... 49
INFORMATION ABOUT HORIZON....................................... 49
Market Area..................................................... 49
Subsidiary Activities........................................... 50
Competition..................................................... 50
Employees....................................................... 51
Description of Properties....................................... 51
Main Office..................................................... 52
Additional Planned Branch Offices............................... 52
Legal Proceedings............................................... 53
HUD Allegations Against UAMC.................................... 53
HUD Allegation Against the Bank................................. 54
Beneficial Ownership of Horizon Common Stock
by Horizon Management and Principal Shareholders................ 54
Stock Option Plans.............................................. 56
Regulation...................................................... 59
Texas Law....................................................... 59
Federal Regulation of Texas Savings Banks....................... 60
Insurance of Accounts and Regulation by the FDIC................ 61
Restrictions on Transfers of Funds to Horizon by the Bank....... 61
Governmental Policies and Recent Legislation.................... 61
Regulatory Capital Requirements................................. 62
Safety and Soundness............................................ 62
Restrictions on Acquisitions.................................... 63
Potential Enforcement Actions................................... 63
Holding Company Regulation...................................... 64
Federal Reserve System.......................................... 64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF HORIZON........................................................ 65
General......................................................... 65
Operating Strategy.............................................. 65
Average Balance Sheet........................................... 67
Rate/Volume Analysis............................................ 69
Financial Condition............................................. 70
Results of Operations........................................... 71
Comparison of Operating Results for the Six Months
Ended October 31, 1996 and October 31, 1995..................... 72
Comparison of Operating Results for the Fiscal Years
Ended April 30, 1996 and April 30, 1995......................... 73
Comparison of Operating Results for the Fiscal Years
Ended April 30, 1995 and April 30, 1994......................... 74
Comparison of Operating Results for the Fiscal Years
Ended April 30, 1994 and April 30, 1993......................... 76
Asset/Liability Management...................................... 78
Interest Rate Spread............................................ 79
Liquidity and Capital Resources................................. 80
Impact of Inflation and Changing Prices......................... 81
Impact of New Accounting Standards.............................. 81
Lending Activities.............................................. 83
Loan Portfolio Composition...................................... 85
Construction and Development Lending............................ 89
Commercial and Multi-Family Real Estate Lending................. 90
One- to Four-Family Residential Mortgage Lending................ 91
Commercial Business Lending..................................... 92
Credit Card and Consumer Lending................................ 92
Originations, Purchases, Sales and Servicing of Loans........... 93
Non-Performing Assets and Classified Assets..................... 95
Other Assets of Concern......................................... 98
Classified Assets............................................... 99
Allowance for Loan Losses....................................... 99
Investment Activities........................................... 101
General......................................................... 101
Investment Securities........................................... 102
Sources of Funds................................................ 103
RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS......................... 108
EXPERTS............................................................ 108
LEGAL OPINIONS..................................................... 108
HORIZON SHAREHOLDER PROPOSALS...................................... 108
INDEMNIFICATION.................................................... 109
OTHER MATTERS...................................................... 109
</TABLE>
<PAGE>
AVAILABLE INFORMATION
Compass has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act for the registration
of the Compass Common Stock proposed to be issued and exchanged in the Merger.
This Proxy Statement/Prospectus was filed as a part of the Registration
Statement.
This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, as certain parts are
permitted to be omitted by the rules and regulations of the Commission. For
further information pertaining to Compass, the Compass Common Stock, and related
matters, reference is made to the Registration Statement, including the exhibits
filed as a part thereof, which may be inspected at, and copies of which may be
obtained by mail from, the Public Reference Branch of the Commission referred to
below.
Compass and Horizon are both subject to the information requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and,
accordingly, file reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the Commission's public reference rooms located at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and the public reference
facilities in the New York Regional Office, 13th Floor, Seven World Trade
Center, New York, New York 10048, and the Chicago Regional Office, Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-
2511. Copies of such materials can be obtained at prescribed rates by writing to
the Securities and Exchange Commission, Public Reference Branch, 450 Fifth
Street, N.W., Washington, D.C. 20549. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT INCLUDED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS CONCERNING
COMPASS (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) ARE AVAILABLE TO EACH
PERSON, INCLUDING ANY BENEFICIAL OWNER OF HORIZON COMMON STOCK, TO WHOM THIS
PROXY STATEMENT/PROSPECTUS IS DELIVERED WITHOUT CHARGE AND UPON REQUEST, FROM
THE CONTROLLER OF COMPASS AT 15 SOUTH 20TH STREET, BIRMINGHAM, ALABAMA 35233
(TELEPHONE NO. (205) 558-5740). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY MARCH 1, 1997.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by Compass with the
Commission are incorporated herein by reference:
(i) Compass' Annual Report on Form 10-K for the year ended December
31, 1995 (File No. 0-6032);
(ii) Compass' Proxy Statement dated March 6, 1996, relating to its
annual meeting of shareholders held on April 9, 1996 (File No. 0-6032);
(iii) Compass' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996 (File No. 0-6032);
(iv) Compass' Quarterly Report on Form 10-Q for the quarter ended June
30, 1996 (File No. 0-6032);
(v) Compass' Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 (File No. 0-6032);
(vi) The description of Compass Common Stock contained in its Proxy
Statement dated April 16, 1982, relating to its Annual Meeting held May 17,
1982 (File No. 0-6032).
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<PAGE>
All documents filed by Compass pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date hereof and prior to the date
of the Meeting are incorporated herein by reference, and shall be deemed a part
hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein, or contained in this Proxy
Statement/Prospectus, shall be deemed to be modified or superseded for purposes
of this Proxy Statement/Prospectus to the extent that a statement contained
herein or in any subsequently filed document which also is deemed to be
incorporated herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed to constitute a part of this Proxy
Statement/Prospectus, except as so modified or superseded.
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by Compass, Compass Acquisition, Horizon, the
Bank or their respective affiliates. This Proxy Statement/Prospectus does not
constitute an offer to exchange or sell, or a solicitation of an offer to
exchange or purchase, any securities other than the Compass Common Stock offered
hereby, nor does it constitute an offer to exchange or sell or a solicitation of
an offer to exchange or purchase such securities in any state or other
jurisdiction to any person to whom such an offer or solicitation would be
unlawful.
Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of securities made hereunder shall under any circumstances create
any implication that there has been no change in the affairs of Compass, Compass
Acquisition, Horizon, the Bank or their respective affiliates since the date of
this Proxy Statement/Prospectus.
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<PAGE>
PROXY STATEMENT/PROSPECTUS
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of Horizon Bancorp, Inc., a
Texas corporation ("Horizon"), for use at the special meeting of Horizon
shareholders to be held at the time and place set forth in the foregoing notice
and at any adjournments thereof (the "Meeting"). This Proxy Statement/Prospectus
is also a prospectus for the shares of Compass Bancshares, Inc. ("Compass")
$2.00 par value common stock ("Compass Common Stock") to be issued in connection
with the merger (the "Merger") of Horizon with and into Compass Texas
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Compass
("Compass Acquisition"). Compass and Horizon presently intend that following
consummation of the Merger, Horizon Bank & Trust, SSB, a Texas chartered savings
bank and wholly-owned subsidiary of Horizon (the "Bank"), will merge with and
into Compass Bank ("Compass Bank-Houston"), a Texas state bank and indirect
wholly-owned subsidiary of Compass (the "Subsequent Merger").
The following proposals will be considered and voted upon at the
Meeting:
(1) To approve, ratify, confirm and adopt an Agreement and Plan of
Merger, dated as of December 4, 1996, as amended, by and between Compass
and Horizon (including the exhibits thereto, the "Merger Agreement") and
the transactions contemplated thereby, pursuant to which Horizon will be
merged with and into Compass Acquisition; and
(2) To consider and transact such other business as may properly come
before the Meeting or any adjournments thereof.
The Horizon shareholders will not be asked to vote on the Subsequent
Merger, and approval of the Subsequent Merger is not a condition to consummation
of the Merger. The outcome of the Subsequent Merger will not affect the
consideration to be received by the Horizon shareholders in the Merger or the
timing or consummation of the Merger. The effectiveness of the Subsequent Merger
is conditioned upon the consummation of the Merger.
The Board of Directors of Horizon has fixed February 5, 1997 as the
record date for the determination of shareholders entitled to notice of and to
vote at the Meeting and any adjournments thereof (the "Record Date"). As of such
date, Horizon had 4,000,000 shares of common stock, $0.01 par value per share
("Horizon Common Stock"), authorized, 1,388,757 of which shares were issued and
outstanding. Horizon also has 1,000,000 shares of preferred stock authorized of
which none is issued or outstanding. As of January 3, 1997, the Horizon Common
Stock was held of record by 713 persons or entities. Each share of Horizon
Common Stock entitles the holder of record on the Record Date to one vote as to
the Merger and one vote as to any other proposal to be voted on at the Meeting.
The presence, in person or by proxy, of the holders of a one-third of the shares
of Horizon Common Stock entitled to vote at the Meeting is necessary to
constitute a quorum at the Meeting. The affirmative vote of the holders of at
least 80% of the outstanding shares of Horizon Common Stock is required for
approval of the Merger. HORIZON'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE FOR APPROVAL OF THE MERGER. SEE "SUMMARY--RECORD DATE"; "SUMMARY--
SHAREHOLDER VOTES REQUIRED"; "THE MERGER--GENERAL"; "THE MERGER--OTHER TERMS AND
CONDITIONS"; AND APPENDIX I.
If Horizon either (i) violates its obligations set forth in Section
6.5 of the Merger Agreement, (SEE "THE MERGER--NO SOLICITATION") and the Merger
Agreement is thereafter terminated, or (ii) prior to termination of the Merger
Agreement, receives any Acquisition Proposal (as defined below) and the Merger
Agreement is thereafter terminated as a result of receipt of such Acquisition
Proposal, then Horizon shall pay to Compass an aggregate fee of $2,000,000 in
cash at the time of such termination. In addition, Horizon has agreed in the
Merger Agreement to pay Compass 40,000 shares of Horizon Common Stock and use
its best efforts to promptly register such shares with the Commission or the
Office of Thrift Supervision ("OTS") as applicable, in the event that Horizon's
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<PAGE>
shareholders do not approve the Merger. SEE "THE MERGER--TERMINATION;
TERMINATION FEE"; "THE MERGER--NO SOLICITATION".
The directors and executive officers of Horizon control, with the
power to vote, an aggregate of 422,750 shares of Horizon Common Stock,
comprising approximately 30.4% of the total shares of Horizon Common Stock
issued and outstanding as of the Record Date. Officers, directors and certain
shareholders of Horizon owning 520,965 shares of Horizon Common Stock,
comprising approximately 37.5% of the total shares of Horizon Common Stock
issued and outstanding as of the Record Date, have agreed, pursuant to a Voting
Agreement and Irrevocable Proxy (the "Proxy"), to vote their shares in favor of
the Merger. SEE "SUMMARY--REASONS FOR THE MERGER; RECOMMENDATION OF BOARD OF
DIRECTORS"; "SUMMARY--SHAREHOLDER VOTES REQUIRED"; "THE MERGER--GENERAL"; "THE
MERGER--ADDITIONAL AGREEMENTS"; AND "INFORMATION ABOUT HORIZON--BENEFICIAL
OWNERSHIP OF HORIZON COMMON STOCK BY HORIZON MANAGEMENT AND PRINCIPAL
SHAREHOLDERS".
Proxies in the form enclosed are solicited by Horizon's Board of
Directors. Any such proxy, if received in time for voting and not revoked, will
be voted at the Meeting in accordance with the shareholder's instructions. If no
instructions are given on the proxy, the proxy will be voted in favor of the
Merger. Failure to submit a proxy or to vote at the Meeting will have the same
effect as a vote against the Merger. At present, Horizon's Board of Directors
knows of no other matters to be presented at the Meeting, but if other matters
are properly presented, the persons named in the proxy will vote or refrain from
voting in accordance with the recommendation of Horizon's Board of Directors
pursuant to the discretionary authority conferred by the proxy. SEE "OTHER
MATTERS"; "THE MERGER--DISSENTERS' RIGHTS"; AND APPENDIX II.
A proxy may be revoked at any time prior to its exercise by filing, at
Horizon's principal office, a duly executed proxy bearing a later date or a
written notice revoking such proxy. Any shareholder entitled to vote at the
Meeting may attend the Meeting and vote in person by written ballot on any
matter presented for a vote at such Meeting, whether or not such shareholder has
given a proxy previously, and such action will constitute a revocation of any
prior proxy.
Proxies will be solicited initially by mail, and may also be solicited
personally, by telephone, facsimile transmission or other means by the
directors, officers and employees of Horizon, with no special or extra
compensation therefor, although such officers, directors and employees may be
reimbursed for out-of-pocket expenses incurred in connection with the
solicitation. Horizon has also retained D.F. King & Co., Inc. to assist in the
solicitation of proxies. Arrangements will also be made with custodians,
nominees, and fiduciaries for the forwarding of soliciting materials to the
beneficial owners of Horizon Common Stock held of record by such persons, and
Horizon may reimburse such custodians, nominees, and fiduciaries for reasonable
out-of-pocket expenses that they incur in that connection. Expenses incurred in
connection with the Merger, including those attributable to the solicitation of
proxies, will be paid by the party to the Merger Agreement incurring the
expense, provided that Compass has agreed that it will permit Horizon to incur
up to $150,000 in expenses related to the Merger.
Brokerage firms, banks, nominees, fiduciaries and other custodians are
requested to forward these proxy materials to the beneficial owners of Horizon
Common Stock held of record by them, and Horizon will reimburse them, upon
request, for their reasonable expenses incurred in connection with such mailing
or other communications with such beneficial owners.
Compass' principal executive offices are located at 15 South 20th
Street, Birmingham, Alabama 35233, and its telephone number is (205) 933-3000.
Horizon's principal executive offices are located at 5800 North MoPac
Expressway, Austin, Texas 78731, and its telephone number is (512) 371-0700.
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SUMMARY
The following is a brief summary of certain information relating
to the Merger contained elsewhere in this Proxy Statement/Prospectus. This
summary is not intended to describe all material information relating to the
Merger and is qualified in its entirety by reference to the more detailed
information and financial statements contained elsewhere in this Proxy
Statement/Prospectus, including the Appendices hereto and the documents referred
to herein or incorporated by reference. Shareholders are urged to read carefully
the entire Proxy Statement/Prospectus and the related documents.
PARTIES TO THE MERGER
Compass is a Delaware corporation which was organized in 1970. It
is a bank holding company registered with the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the Bank Holding Company Act of
1956, as amended (the "BHC Act"). Substantially all of Compass' revenues are
derived from its subsidiaries, which are primarily banks located in Alabama,
Texas and Florida.
Compass owns Compass Bank ("Compass Bank"), a state bank
headquartered in Birmingham, Alabama, Central Bank of the South, a state bank
headquartered in Anniston, Alabama and Compass Bank ("Compass Bank-Florida"), a
Florida state member bank headquartered in Jacksonville, Florida. Compass Bank
and Compass Bank-Florida conduct a general, full-service commercial and consumer
banking business through 87 banking offices located in 45 communities in Alabama
and 33 banking offices in Florida. Compass Bank also is engaged in the
investment, trust and equipment leasing businesses, and other bank operating
activities. Central Bank of the South primarily serves as a controlled
disbursement facility for commercial deposit customers of Compass Bank.
Compass Acquisition is a Delaware corporation and wholly-owned
subsidiary of Compass.
Compass Banks of Texas, Inc., a Delaware corporation ("Compass
Texas"), is a wholly-owned subsidiary of Compass. Compass Texas and its wholly-
owned subsidiary, Compass Bancorporation of Texas, Inc., a Delaware corporation
("Compass Bancorporation"), are bank holding companies registered with the
Federal Reserve under the BHC Act. Compass Bancorporation owns Compass Bank-
Houston in Houston, Texas, River Oaks Trust Company, a trust company located in
Houston, Texas ("River Oaks Trust Company"), and Compass Texas Management, Inc.,
a Texas corporation ("Compass Management"). Compass Management provides
management services to its affiliated Texas banks. These wholly-owned commercial
bank subsidiaries conduct a general, full-service commercial and consumer
banking business through 42 banking offices in the Houston, Texas area, 24
banking offices in the Dallas-Ft. Worth area, 16 banking offices in San Antonio,
Texas and 6 banking offices in Central and East Texas.
During 1995, Compass acquired Southwest Bankers, Inc., and its
bank subsidiary, The Bank of San Antonio, located in San Antonio, Texas. In
1996, Compass acquired Flower Mound Bancshares, Inc. and its bank subsidiary,
Security Bank, located in Flower Mound, Texas; Equitable BankShares, Inc. and
its bank subsidiary, Equitable Bank, located in Dallas, Texas; Post Oak Bank
located in Houston, Texas; Peoples Bancshares, Inc. and its bank subsidiary, The
Peoples National Bank located in Belton, Texas; Royall Financial Corporation and
its bank subsidiary, The Royall National Bank of Palestine, located in
Palestine, Texas; Probank, located in The Woodlands, Texas; the San Antonio,
Texas branches of Coastal Banc ssb; Texas American
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Bank located in San Antonio, Texas; CFB Bancorp, Inc. and its subsidiary,
Community First Bank of Jacksonville, Florida; and Enterprise National Bank of
Jacksonville located in Jacksonville, Florida. Announced acquisitions which are
pending include the Merger; Greater Brazos Bancorp, Inc. and its subsidiary,
Commerce National Bank, of College Station, Texas; the Crosby, Texas branch of
Bank One, Texas, National Association; and Central Texas Bancorp, Inc. and its
subsidiary, Texas National Bank of Waco.
On September 30, 1996, Compass and its subsidiaries had
consolidated assets of $11.6 billion, consolidated deposits of $9.1 billion, and
total shareholders' equity of $777 million. Of Compass' $11.6 billion of
consolidated assets, approximately $5.8 billion are held in Alabama, $4.8
billion are held in Texas, and $1.0 billion are held in Florida. SEE "AVAILABLE
INFORMATION"; "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE"; "SELECTED
FINANCIAL DATA"; AND "INFORMATION ABOUT COMPASS".
Horizon is a Texas corporation which was incorporated in 1985 to
serve as a holding company for the Bank. It is a savings and loan holding
company registered with the OTS. Horizon does not have any substantial
operations other than its ownership and control of the Bank and the Bank's
subsidiaries.
The Bank is a Texas savings bank whose principal business
consists of attracting retail deposits form the general public and investing
those funds primarily in the origination of one- to four-family residential
construction and permanent mortgage loans, commercial real estate loans and
undeveloped land and residential lot loans. To a lesser extent, the Bank
originates credit card, multi-family real estate, commercial business,
automobile and consumer loans. The Bank has eight offices open in the Austin
area.
On October 31, 1996, Horizon had total assets of $148.9 million,
total deposits of $134.4 million, and total stockholders' equity of $11.8
million. SEE "SELECTED FINANCIAL DATA"; "INFORMATION ABOUT HORIZON";
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HORIZON"; AND FINANCIAL STATEMENTS OF HORIZON.
THE MERGER
The Merger Agreement provides for the holders of Horizon common
stock, par value $0.01 per share ("Horizon Common Stock"), at the effective time
of the Merger (the "Effective Time"), other than dissenting shareholders, to
receive aggregate merger consideration (the "Merger Consideration") of 888,889
shares of Compass Common Stock (as adjusted due to the exercise of dissenter's
rights). Holders of Horizon Common Stock shall receive for each share of Horizon
Common Stock held at the Effective Time a number of shares of Compass Common
Stock equal to the quotient of 888,889 shares of Compass Common Stock divided by
the number of shares of Horizon Common Stock outstanding immediately prior to
the Effective Time (the "Per Share Merger Consideration"). In the event the
average closing sale price of the Compass Common Stock as reported by the NASDAQ
National Market System for the twenty days of trading preceding the tenth
business day prior to the Effective Time (the "Share Determination Market
Value") is less than $31.00 per share, Horizon may either (i) terminate the
Agreement (the "Pricing Termination Option"), or (ii) agree to accept an
aggregate of 888,889 shares of Compass Common Stock. In the event Horizon
exercises its Pricing Termination Option, the Merger Agreement shall be
terminated, but Compass shall have the right to reject such termination of the
Merger Agreement by Horizon (the "Termination Rejection") by agreeing to issue
an aggregate number of shares of Compass Common Stock equal to the quotient of
$27,555,559 divided by the Share Determination Market Value ("New Shares"). In
such event, each holder of Horizon
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Common Stock for each share so held shall receive Merger Consideration equal to
the quotient of the New Shares divided by the number of shares of Horizon Common
Stock outstanding immediately prior to the Effective Time. Any decision by the
Board of Directors of Horizon regarding whether to terminate the Merger
Agreement will be made in its sole discretion and could result in either (i)
Horizon shareholders receiving Merger Consideration with an aggregate market
value of less than $27,555,559, (ii) the termination of the Merger Agreement, or
(iii) Compass agreeing to increase the number of shares of Compass Common Stock
constituting the Merger Consideration. If the Board of Directors of Horizon
elects to terminate the Merger Agreement, there can be no assurance that Compass
will agree to increase the number of shares of Compass Common Stock and that the
Merger Agreement will not terminate, in which event the Horizon shareholders
would not receive any Merger Consideration but would retain their Horizon Common
Stock.
On January 3, 1997, there were 1,388,757 shares of Horizon Common
Stock issued and outstanding. In addition to these issued and outstanding shares
of Horizon Common Stock, officers, directors, employees and a former director
hold options to purchase an aggregate of 190,408 shares of Horizon Common Stock
which Horizon expects to be exercised prior to the Effective Time.
Assuming that (i) there will be 1,579,165 shares of Horizon
Common Stock issued and outstanding immediately prior to the Effective Time and
(ii) the Share Determination Market Value will be $39.45 (the average closing
sale price of the Compass Common Stock as reported by the NASDAQ National Market
System for the twenty days of trading preceding the tenth business day prior to
February 4, 1997), Compass will be required to issue an aggregate of
888,889 shares of Compass Common Stock to the Horizon shareholders and each
shareholder of Horizon (except for shareholders choosing to exercise their
dissenters' rights) will be entitled to receive approximately .5629 shares of
Compass Common Stock for each share of Horizon Common Stock held.
Notwithstanding the foregoing, the Merger Consideration will be
reduced by the number of shares that would otherwise be issued to dissenting
shareholders.
Compass will not issue fractional shares of Compass Common Stock,
but instead will pay cash to any shareholder otherwise entitled to receive a
fractional share. Such cash payment shall be based on the Share Determination
Market Value.
Compass Acquisition will be the surviving entity in the Merger
(the "Surviving Corporation"), and the officers and directors of Compass
Acquisition at the Effective Time will remain as the officers and directors of
the Surviving Corporation. Compass intends that the Bank's personnel will remain
following the Merger. Compass and Horizon presently intend that immediately
following the completion of the Merger, the Bank will be merged with and into
Compass Bank-Houston, subject to the necessary regulatory approvals. Thereafter,
the separate existence of the Bank will cease, and the former branches of the
Bank will become branches of Compass Bank-Houston. SEE "THE MERGER--GENERAL";
AND "INFORMATION ABOUT HORIZON".
Prior to the Merger, the three executive officers of the Bank had
three year employment agreements with the Bank. Compass requested each of these
executive officers to terminate their three year employment agreement in
exchange for an agreement by the surviving bank to continue their employment on
an "at will" basis, be limited in their future activities pursuant to a non-
compete provision, and receive a retention bonus payable over an 18 month
period. Consequently, Paul A. Antrim, Charles S. Nichols, Jr. and Douglas B.
Kadison, have entered into
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such Retention Bonus, Employment and Confidentiality Agreements ("Retention
Agreements") dated December 4, 1996 with Compass Bank-Houston respecting their
employment with Compass after the Merger. The Employment Agreements provide that
Mr. Antrim, Mr. Nichols and Mr. Kadison will be employed as senior officers of
Compass and will receive annual base salaries of $110,537, $130,000 and $140,000
per year, respectively, with merit increases based on performance in accordance
with Compass' salary compensation program. Mr. Antrim, Mr. Nichols, and Mr.
Kadison will also be entitled under the Retention Agreements to retention
bonuses in the amounts of $331,601, $353,648 and $364,139, respectively, payable
over 18 months.
The Merger Agreement also provides that the number of shares of
Compass Common Stock to be received by Horizon shareholders in the Merger will
be adjusted to give effect to any stock dividends or splits with respect to
Compass Common Stock occurring between the date of execution of the Merger
Agreement and the Effective Time. SEE "INTRODUCTION"; "SUMMARY--DISSENTERS'
RIGHTS"; "THE MERGER--GENERAL"; "THE MERGER--DISSENTERS' RIGHTS"; APPENDIX I;
AND APPENDIX II.
Horizon's Board of Directors believes that the terms of the
Merger are fair to Horizon's shareholders. In addition, a fairness opinion has
been received from Alex Sheshunoff & Co. Investment Banking ("Sheshunoff & Co.")
with respect to the fairness, from a financial point of view, of the Merger to
its shareholders. The fairness opinion is attached to this Proxy
Statement/Prospectus as Appendix III. SEE "SUMMARY--REASONS FOR THE MERGER;
RECOMMENDATION OF BOARD OF DIRECTORS"; "THE MERGER--BACKGROUND AND REASONS FOR
THE MERGER"; "THE MERGER--OPINION OF FINANCIAL ADVISOR"; AND APPENDIX III.
REASONS FOR THE MERGER; RECOMMENDATION OF BOARDS OF DIRECTORS
Horizon's Board considered the Merger and the terms of the Merger
Agreement, including the consideration to be received by Horizon's shareholders
in the Merger, in light of economic, financial, legal and market factors and
concluded that the Merger is in the best interests of Horizon. The terms of the
Merger Agreement are the result of arms' length negotiations between Horizon and
Compass, as well as consultations between Horizon and its financial advisor,
Sheshunoff & Co., and special legal counsel. Among the factors considered by the
Horizon Board were the historical operating results, current financial
condition, business, management and future financial and other prospects of
Horizon and Compass and the advice of Sheshunoff & Co. as to the fairness to
Horizon's shareholders, from a financial point of view, of the consideration to
be received by them in the Merger. Also considered were the relative size and
geographic market areas of Horizon and Compass. The Horizon Board believes that
the Merger will afford Horizon's shareholders the benefit of Compass' larger
market capitalization and the more liquid market for Compass Common Stock and
will offer enhanced opportunities for the Bank to meet the needs of banking
customers and other members of the Austin area communities served by the Bank.
The Horizon Board believes that the Bank will be in an enhanced competitive
position with respect to other financial institutions in its market area after
the Merger.
The Merger Agreement was the result of arm's-length negotiations
between representatives of Horizon and Compass. Subject to satisfaction of
certain conditions contained in the Merger Agreement, Horizon's Board of
Directors believes the Merger to be in the best interests of Horizon's
shareholders. HORIZON'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HORIZON
SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER and has authorized consummation
thereof subject to approval of the Horizon shareholders and the satisfaction of
certain other conditions. SEE "INTRODUCTION";
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"SUMMARY--PARTIES TO THE MERGER"; "SUMMARY--THE MERGER"; "THE MERGER--BACKGROUND
AND REASONS FOR THE MERGER"; "THE MERGER--OTHER TERMS AND CONDITIONS";
"DESCRIPTION OF COMPASS COMMON AND PREFERRED STOCK"; "COMPARISON OF RIGHTS OF
SHAREHOLDERS OF HORIZON AND COMPASS"; "INFORMATION ABOUT COMPASS"; AND
"INFORMATION ABOUT HORIZON".
Sheshunoff & Co. has delivered an opinion to the Board of
Directors of Horizon to the effect that, based upon and subject to the
qualifications described in such opinion, the terms of the Merger, including the
consideration to be received by the holders of Horizon Common Stock, are fair
and equitable from a financial point of view. For additional information
concerning the matters considered by Sheshunoff & Co. in reaching its opinion,
the limitations on its review, and the fees received or to be received by it,
SEE "THE MERGER- OPINION OF FINANCIAL ADVISOR" AND APPENDIX III.
THE MEETING
The Meeting will be held on Tuesday, March 11, 1997 at 10:00
a.m., Central time, at the offices of Horizon Bank & Trust, SSB, located at 5800
MoPac Expressway, in Austin, Texas for the purposes of (i) approving, ratifying,
confirming and adopting the Merger Agreement and (ii) transacting such other
business as may properly come before the Meeting.
RECORD DATE
The Record Date has been set by Horizon's Board of Directors as
the close of business on February 5, 1997. Only holders of Horizon's Common
Stock as of such date will be entitled to vote at the Meeting. SEE
"INTRODUCTION".
SHAREHOLDER VOTES REQUIRED
The Merger must be approved by the affirmative vote of the
holders of at least 80% of the shares of the Horizon Common Stock issued and
outstanding and entitled to vote at the Meeting. Horizon has agreed in the
Merger Agreement to pay Compass 40,000 shares of Horizon Common Stock and use
its best efforts to promptly register such shares with the Commission or the OTS
as applicable, in the event that Horizon's shareholders do not approve the
Merger. SEE "INTRODUCTION"; "SUMMARY-CONDITION TO CONSUMMATION AND REGULATORY
APPROVALS; TERMINATION FEE"; AND "THE MERGER--TERMINATION; TERMINATION FEE".
Horizon has retained D.F. King & Co., Inc. ("King") to assist in
the solicitation of proxies, for which King will receive reasonable customary
compensation, which is not anticipated to exceed $10,000, plus out-of-pocket
expenses. Such expenses will be paid by Horizon. King will solicit shareholders
by mail and by telephone calls.
The directors and executive officers of Horizon control, with the
power to vote, an aggregate of 422,750 shares of Horizon Common Stock,
comprising approximately 30.4% of the total shares of Horizon Common Stock
issued and outstanding and entitled to vote at the Meeting. Officers, directors
and certain shareholders of Horizon owning 520,965 shares of Horizon Common
Stock, comprising approximately 37.5% of the total shares of Horizon Common
Stock
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issued and outstanding as of the Record Date, have agreed, pursuant to the
Proxy, to vote their shares in favor of the Merger.
Compass Acquisition has 1,000 shares of common stock, par value
$0.01 per share, issued and outstanding, all of which are owned and held by
Compass. Subject to the satisfaction or waiver of all of the conditions to the
parties' obligations to effect the Merger, Compass, as the sole shareholder of
Compass Acquisition, will approve the Merger Agreement in the manner prescribed
by Delaware General Corporation Law ("GCL"). SEE "THE MERGER--GENERAL".
DISSENTERS' RIGHTS
Holders of Horizon Common Stock who timely object to the Merger,
and who otherwise comply with the provisions of the Texas Business Corporation
Act ("TBCA"), will be entitled to exercise dissenters' rights. SEE "THE MERGER--
DISSENTERS' RIGHTS"; "COMPARISON OF RIGHTS OF SHAREHOLDERS OF HORIZON AND
COMPASS--DISSENTERS' RIGHTS"; AND APPENDIX II.
CONDITIONS TO CONSUMMATION AND REGULATORY APPROVALS; TERMINATION FEE
Consummation of the Merger is subject to approval by the
shareholders of Horizon and the receipt of certain required regulatory approvals
from the Federal Reserve under the BHC Act, the Federal Deposit Insurance
Corporation (the "FDIC"), the OTS, the Texas Savings and Loan Commissioner (the
"TSLD") and the Banking Commissioner of Texas (the "Commissioner"). The Merger
is also conditioned upon the satisfaction or waiver of a number of other
conditions. It is expected that the FDIC, the OTS, the TSLD and the Commissioner
will issue their respective approvals of the transaction. SEE "THE MERGER--
GOVERNMENTAL APPROVALS".
A formal application under the BHC Act was approved by the
Federal Reserve on January 30, 1997. Applications were filed with the FDIC, the
TSLD and the Commissioner on December 18, 1996. While the FDIC application is
pending, the United States Department of Justice ("Justice Department"),
pursuant to the Bank Merger Act, may bring an action opposing the Subsequent
Merger under the antitrust laws. No Justice Department objection or adverse
action is anticipated.
In addition, a notice of the Merger was filed with the OTS on
December 18, 1996 along with a request to deregister the Company as a savings
and loan holding company effective upon consummation of the Merger.
The respective boards of directors of Compass and Horizon may
terminate the Merger Agreement as a result of, among other things, the failure
of any of the several conditions to each of their respective obligations to
close, or if the Effective Time does not occur on or before April 1, 1997 or
such later date agreed to in writing by Compass and Horizon, provided, however,
that such April 1, 1997 date shall be extended by a period of time equal to the
number of days in which (i) a protest has been filed under the Community
Reinvestment Act and is not resolved (including regulatory approvals and any
waiting periods), or (ii) the SEC delays the effectiveness of the Proxy
Statement; provided, however, that any such extension shall not go beyond July
1, 1997.
If Horizon either (i) violates its obligations set forth in
Section 6.5 of the Merger Agreement, (SEE "THE MERGER--NO SOLICITATION") and the
Merger Agreement is thereafter
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terminated, or (ii) prior to termination of the Merger Agreement, receives any
Acquisition Proposal and the Merger Agreement is thereafter terminated as a
result of receipt of such Acquisition Proposal, then Horizon shall pay to
Compass an aggregate fee of $2,000,000 in cash at the time of such termination.
In addition, Horizon has agreed in the Merger Agreement to pay Compass 40,000
shares of Horizon Common Stock and use its best efforts to promptly register
such shares with the Commission or the OTS as applicable, in the event that
Horizon's shareholders do not approve the Merger.
SEE "THE MERGER--TERMINATION; TERMINATION FEE"; "THE MERGER--NO
SOLICITATION". SEE "THE MERGER--OTHER TERMS AND CONDITIONS"; "THE MERGER--
BUSINESS PENDING EFFECTIVE TIME"; "THE MERGER--NO SOLICITATION"; "THE MERGER--
TERMINATION; TERMINATION FEE"; "THE MERGER--GOVERNMENT APPROVALS"; AND APPENDIX
I.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
("Liddell, Sapp"), counsel to Compass and Compass Acquisition, and Silver,
Freedman & Taff, special tax counsel to Horizon based upon certain
representations and assumptions, the Merger, if consummated in accordance with
the Merger Agreement, will qualify as a "reorganization" under Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), and, as a result of
such qualification, no gain or loss will be recognized by holders of Horizon
Common Stock for federal income tax purposes upon receipt of Compass Common
Stock in accordance with the Merger Agreement. Any gain attributable to cash
received by holders of Horizon Common Stock in lieu of fractional shares of
Compass Common Stock or upon exercise of their dissenters' rights will be taxed
as ordinary income (loss) or capital gain (loss) depending upon each
shareholder's situation. No information is provided herein with respect to the
tax consequences, if any, of the Merger to shareholders under any state, local
or foreign tax laws. HORIZON SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISERS AS TO ALL TAX CONSEQUENCES OF THE MERGER AFFECTING THEM. SEE "THE
MERGER--FEDERAL INCOME TAX CONSEQUENCES".
Compass expects to receive an opinion from Liddell, Sapp and
Horizon has received an opinion from Silver, Freedman & Taff that the Merger
will qualify as a reorganization under Section 368(a) of the Code in
satisfaction of a condition to consummation of the Merger. SEE "THE MERGER--
OTHER TERMS AND CONDITIONS" AND "LEGAL OPINIONS".
ACCOUNTING TREATMENT
Compass will account for the Merger under the pooling-of-
interests method for financial reporting and all other purposes. Compass has
received a letter from KPMG Peat Marwick LLP which will be updated as of the
Effective Time, to the effect that the Merger will qualify for pooling-of-
interests accounting treatment. SEE "THE MERGER--ACCOUNTING TREATMENT".
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RISK FACTORS
Horizon shareholders currently control Horizon through their ability
to elect the Board of Directors of Horizon and vote on various matters affecting
Horizon. The Merger will transfer control of Horizon from Horizon's shareholders
to Compass. As of the Effective Time, the shareholders of Horizon will become
shareholders of Compass, a multi-bank holding company. As a result of the
Merger, the former shareholders of Horizon will no longer have the ability to
control or influence the management policies of Horizon's operations, and as
shareholders of Compass their ability to influence the management policies of
Compass will be limited due to the fact that they will hold a relatively small
percentage of the voting stock of Compass.
Compass' banking subsidiaries compete with other banking institutions
on the basis of service, convenience and, to some extent, price. Due in part to
both regulatory changes and consumer demands, banks have experienced increased
competition from other financial entities offering similar products. Competition
from both bank and non-bank organizations is expected to continue. SEE
"INFORMATION ABOUT HORIZON--COMPETITION".
In addition, general economic conditions impact the banking industry.
The credit quality of Compass' loan portfolio necessarily reflects, among other
matters, the general economic conditions in the areas in which it conducts its
business. The continued financial success of Compass and its subsidiaries
depends somewhat on factors which are beyond Compass' control, including
national and local economic conditions, the supply and demand for investable
funds, interest rates and federal, state and local laws affecting these matters.
Any substantial deterioration in any of the foregoing conditions could have a
material adverse effect on Compass' financial condition and results of
operations, which, in all likelihood, would adversely affect the market price of
Compass Common Stock. SEE "MARKET PRICES".
Compass' Restated Certificate of Incorporation, as amended (the
"Certificate"), and Bylaws contain several provisions which may make Compass a
less attractive target for acquisition by anyone who does not have the support
of Compass' Board of Directors. Such provisions include, among other things, the
requirement of a supermajority vote of shareholders or directors to approve
certain business combinations and other corporate actions, a minimum price
provision, several special procedural rules, a staggered Board of Directors, and
the limitation that shareholder actions without a meeting may only be taken by
unanimous written shareholder consent. Horizon's Articles of Incorporation and
Bylaws contain some but not all of these restrictions. SEE "COMPARISON OF RIGHTS
OF SHAREHOLDERS OF HORIZON AND COMPASS--CHARTER AND BYLAW PROVISIONS AFFECTING
COMPASS COMMON STOCK".
In the event the Share Determination Market Value is less than $31.00
per share, Horizon may either (i) terminate the Agreement, or (ii) agree to
accept an aggregate of 888,889 shares of Compass Common Stock. In the event
Horizon exercises its Pricing Termination Option, the Merger Agreement shall be
terminated, but Compass shall have the right to reject such termination of the
Merger Agreement by Horizon by agreeing to issue an aggregate number of shares
of Compass Common Stock equal to the quotient of $27,555,559 divided by the
Share Determination Market Value. In such event, each holder of Horizon Common
Stock for each share so held shall receive Merger Consideration equal to the
quotient of the New Shares divided by the number of shares of Horizon Common
Stock outstanding immediately prior to the Effective Time. Any decision by the
Board of Directors of Horizon regarding whether to terminate the Merger
Agreement will be made in its sole discretion and could result in either (i)
Horizon shareholders receiving Merger Consideration with an aggregate market
value of less than $27,555,559, (ii) the termination of the Merger Agreement, or
(iii) Compass agreeing to increase the number of shares of Compass Common Stock
constituting the Merger Consideration. If the Board of Directors of Horizon
elects to terminate the Merger Agreement, there can be no assurance that Compass
will agree to increase the number of shares of Compass Common Stock and that the
Merger Agreement will not terminate, in which event the Horizon shareholders
would not receive any Merger Consideration but would retain their Horizon Common
Stock.
In addition, since the market price of the shares of Compass Common
Stock to be delivered as the Merger Consideration is determined based on an
average of the closing prices of Compass Common Stock as reported by
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the NASDAQ National Market System over a period of time, it is possible for the
shareholders of Horizon to receive shares of Compass Common Stock with a market
value less than $27,555,559 at the Effective Time of the Merger.
If Horizon either (i) violates its obligations set forth in Section
6.5 of the Merger Agreement, (SEE "THE MERGER--NO SOLICITATION") and the Merger
Agreement is thereafter terminated, or (ii) prior to termination of the Merger
Agreement, receives any Acquisition Proposal (as defined below) and the Merger
Agreement is thereafter terminated as a result of receipt of such Acquisition
Proposal, then Horizon shall pay to Compass an aggregate fee of $2,000,000 in
cash at the time of such termination. In addition, Horizon has agreed in the
Merger Agreement to pay Compass 40,000 shares of Horizon Common Stock and use
its best efforts to promptly register such shares with the Commission or the OTS
as applicable, in the event that Horizon's shareholders do not approve the
Merger. SEE "THE MERGER--TERMINATION; TERMINATION FEE"; "THE MERGER--NO
SOLICITATION".
SEE "SUPERVISION AND REGULATION" for a description of the regulatory
considerations relating to the ownership of Compass Common Stock.
RECENT DEVELOPMENTS
On January 21, 1997, Compass Trust I, a statutory business trust
formed under the laws of the State of Delaware (the "Series A Issuer"), issued
100,000 Capital Securities (the "Capital Securities") in a securities offering
pursuant to a registration statement filed with the Commission thereby raising
$100 million. Compass is the owner of all of the beneficial interests
represented by common securities of the Series A Issuer ("Series A Common
Securities" and, collectively with the Capital Securities, the "Series A
Securities"). The Series A Issuer exists for the sole purpose of issuing the
Series A Securities and investing the proceeds thereof in Junior Subordinated
Deferrable Interest Debentures, Series A (the "Series A Subordinated
Debentures"), issued by Compass. The Capital Securities have a preference under
certain circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Series A Common Securities.
Holders of the Capital Securities are entitled to receive preferential
cumulative cash distributions accruing from the date of original issuance and
payable quarterly in arrears at an annual rate of 8.23% ("Distributions").
Subject to certain exceptions, as described herein, Compass has the right to
defer payment of interest on the Series A Subordinated Debentures at any time or
from time to time for a period not exceeding twenty consecutive quarters with
respect to each deferral period (each, an "Extension Period"), provided that no
Extension Period may extend beyond the stated maturity of the Series A
Subordinated Debentures. If interest payments on the Series A Subordinated
Debentures are so deferred, Distributions on the Capital Securities will also be
deferred and Compass will not be permitted, subject to certain exceptions, to
declare or pay any cash distributions with respect to the Compass Common Stock
or debt securities that rank pari passu with or junior to the Series A
Subordinated Debentures. During an Extension Period, interest on the Series A
Subordinated Debentures will continue to accrue (and the amount of Distributions
to which holders of the Series A Preferred Securities are entitled will
accumulate).
The Series A Subordinated Debentures are unsecured and subordinated to
all Compass senior debt and effectively subordinated to all existing and future
liabilities of Compass' subsidiaries.
Compass has fully, irrevocably and unconditionally guaranteed all of
the Series A Issuer's obligations under the Capital Securities, including but
not limited to the payment of Distributions and payments on liquidation or
redemption of the Capital Securities.
The Capital Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Series A Subordinated Debentures at maturity
or their earlier redemption and are redeemable prior to maturity at the option
of Compass in certain circumstances.
-13-
<PAGE>
Compass has the right at any time to terminate the Series A Issuer and
cause the Series A Subordinated Debentures to be distributed to the holders of
the Capital Securities in liquidation of the Series A Issuer. In the event of
the termination of the Series A Issuer, after satisfaction of liabilities to
creditors of the Series A Issuer as required by applicable law, the holders of
the Capital Securities will be entitled to receive a liquidation amount of
$1,000 per Capital Security plus accumulated and unpaid Distributions thereon to
the date of payment, which may be in the form of a distribution of such amount
in Series A Subordinated Debentures, subject to certain exceptions.
Compass, in a press release dated January 21, 1997, reported record
net income of $128.9 million for 1996, an increase of 13% over the $114.2
million for 1995. Net income per share was $3.19 as compared to $2.82 for 1995,
also a 13% increase. Net income for the fourth quarter of 1996 was $34.4
million, an increase in excess of 16% over the $29.5 million for the comparable
period in the previous year. Net income per share for the fourth quarter of 1996
increased 15% to $0.84 from $0.73 for the fourth quarter of 1995. Return on
average assets was 1.8% for the year 1996 and 1.19% for the fourth quarter.
Return on average shareholders' equity was 17.13% for the year 1996 and 17.26%
for the fourth quarter.
With respect to the balance sheet, Compass posted another year of
consistent growth. Year-end assets for 1996 increased nearly 11% to $11.8
billion from $10.7 billion at year-end 1995. The growth in assets was primarily
due to a 13% increase in loans from $6.5 billion at year-end 1995 to $7.5
billion at year-end 1996. Also of note was strong growth of nearly 14% in
deposits, which ended the year at $9.2 billion, up from $8.1 billion in 1995.
The growth in core funding was the result of both internal efforts as well as
growth through acquisition. Shareholders' equity increased nearly nine percent
to $803 million at year-end 1996 from $737 million at year-end 1995.
-14-
<PAGE>
SELECTED FINANCIAL DATA
The following table, except for the lines designated as pro
forma, summarizes certain unaudited consolidated historical financial data of
Compass, and certain unaudited historical financial data of Horizon. The table
also summarizes, where indicated, certain pro forma financial data for Compass,
giving effect to the acquisition of Horizon assuming that the Merger had been
effective at the beginning of 1991. Pro forma and pro forma equivalent
information has been prepared using historical information of Horizon as of and
for the years ended December 31, 1995, 1994, 1993, 1992, and 1991 and as of and
for the nine months ended September 30, 1996. The historical data for Compass is
presented as of and for the years ended December 31, 1995, 1994, 1993, 1992, and
1991 and has been restated to give effect to acquisitions accounted for under
the pooling-of-interest method which were consummated by Compass during 1996.
The historical data of Horizon is presented as of and for the years ended April
30, 1996, 1995, 1994 1993, and 1992 and is derived from audited financial
statements of Horizon. Historical information presented for Horizon for 1996 is
as of and for the six months ended October 31, 1996. The pro forma income
information is not necessarily indicative of the results of operations had the
proposed transaction occurred at the beginning of 1991, nor is it necessarily
indicative of the results of future operations. This information should be read
in conjunction with the historical consolidated financial statements and the
related notes included elsewhere or incorporated by reference in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
INTERIM ANNUAL PERIODS
PERIOD
----------- ----------- ---------- ---------- --------- ----------
1996 1995 1994 1993 1992 1991
----------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
TOTAL ASSETS
Compass $11,605,379 $10,678,369 $9,639,540 $7,808,063 $7,484,662 $7,122,202
Horizon 148,898 130,930 102,700 88,773 65,527 46,661
TOTAL DEPOSITS
Compass 9,119,124 8,090,818 7,511,470 6,047,131 5,776,902 5,425,146
Horizon 134,399 117,653 89,240 75,473 58,963 42,901
LONG-TERM DEBT
Compass 602,373 590,044 494,327 332,391 209,404 22,038
Horizon -- -- -- -- -- --
TOTAL SHAREHOLDERS' EQUITY
Compass 776,810 737,463 637,877 585,868 538,217 469,072
Horizon 11,816 11,195 9,747 5,968 3,389 1,108
NET INTEREST INCOME
Compass 296,057 368,954 353,208 347,725 334,585 271,934
Horizon 4,976 8,695 7,356 5,596 3,517 1,842
NET INCOME FROM
CONTINUING OPERATIONS
Compass 94,480 114,225 105,438 96,920 80,938 66,130
Horizon 679 1,689 1,694 1,634 232 35
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
INTERIM ANNUAL PERIODS
PERIOD
----------- ----------- ---------- ---------- --------- ----------
1996 1995 1994 1993 1992 1991
----------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME PER
COMMON SHARE FROM
CONTINUING OPERATIONS
Compass
Historical 2.35 2.82 2.62 2.37 1.97 1.68
Pro Forma/1/ 2.33 2.80 2.60 2.35 1.94 1.63
Horizon
Historical 0.47 1.22 1.48 1.59 0.24 0.05
Equivalent Pro Forma/2/ 1.31 1.58 1.46 1.32 1.09 0.92
CASH DIVIDENDS PER
COMMON SHARE
Compass
Historical 0.96 1.12 0.92 0.76 0.667 0.587
Pro Forma 0.92 1.04 0.83 0.67 0.54 0.48
Horizon
Historical 0.08 0.14 0.10 -- -- --
Equivalent Pro Forma/2/ 0.52 0.59 0.47 0.38 0.30 0.27
SHAREHOLDERS' EQUITY
(BOOK VALUE) PER COMMON
SHARE
Compass
Historical 19.18 18.29 15.91 14.63 12.88 11.37
Pro Forma 19.04 18.16 15.73 14.44 12.68 11.14
Horizon
Historical 8.10 7.69 6.69 5.42 3.86 1.45
Equivalent Pro Forma/2/ 10.72 10.22 8.85 8.13 7.14 6.27
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING
Compass
Historical 40,195 40,513 40,320 40,310 39,984 38,373
Pro Forma 41,184 41,402 41,209 41,199 40,873 39,262
Horizon
Historical/3/ 14,564/4/ 1,387/4/ 1,142/4/ 1,024/4/ 834 744
NUMBER OF COMMON
SHARES OUTSTANDING AT END
OF PERIOD
Compass
Historical 40,510 40,325 40,096 40,050 39,983 39,208
Pro Forma 41,399 41,214 40,985 40,939 40,872 40,097
Horizon
Historical/3/ 1,458/4/ 1,456/4/ 1,456/4/ 1,104/4/ 946 764
- --------------------
</TABLE>
(1) Net income per common share from continuing operations represents primary
earnings per share (i.e., the amount of earnings attributable to each share
of common stock outstanding, including common stock equivalents).
(2) Horizon's Equivalent Pro Forma per share amounts are computed by
multiplying Compass' Pro Forma amounts by the exchange ratio of .5629.
(3) Horizon's number of shares is adjusted for a two for one stock split.
(4) Includes 68,808 compensatory option shares which have not been exercised
but on which the expense was recognized when the options were issued.
-16-
<PAGE>
MARKET PRICES
Compass Common Stock is traded in the national over-the-counter
securities market and, since July 1984, it has been quoted under the symbol
"CBSS" on the NASDAQ National Market System. Horizon Common Stock is also traded
in the over-the-counter securities market. Since March 15, 1995, Horizon Common
Stock has been reported under the symbol "LOAN" on the NASDAQ Small-Cap Market
System.
The following table sets forth for the calendar periods indicated the
high and low sales prices for Compass Common Stock reported through the NASDAQ
National Market System published in The Wall Street Journal, and the high and
low bid prices for Horizon Common Stock as reported by NASDAQ. The prices shown
do not include retail mark-ups, mark-downs or commissions and, with respect to
Horizon Common Stock, reflect inter-dealer quotations which may not represent
actual transactions. All share values have been rounded to the nearest 1/8 of
one dollar.
<TABLE>
<CAPTION>
Compass Common Stock Horizon Common Stock
-------------------- -----------------------
Period High Low High Low
- ------ ------- ------- ----------- -----------
<S> <C> <C> <C> <C>
1995
- ----
First Quarter 28 21- 1/2 7- 3/4/(1)/ 7- 1/4/(1)/
Second Quarter 29- 1/4 25- 1/2 8 7- 1/4
Third Quarter 33- 3/4 28- 1/2 9- 1/2 7- 7/8
Fourth Quarter 33- 1/2 30- 1/8 9- 1/2 7- 7/8
1996
- ----
First Quarter 35 30- 3/4 11- 1/4 8- 3/4
Second Quarter 35- 5/8 32- 1/4 11- 1/2 9- 1/2
Third Quarter 35- 1/4 31- 1/2 18 8- 1/4
Fourth Quarter 39- 3/4 34- 3/8 21- 1/2 16
1997
- ----
First Quarter 43- 1/8 38- 15/16 22- 1/4 19- 1/2
(through February 4,
1997)
</TABLE>
_________________________
/(1)/ Reflects the period from March 15, 1995 through March 31, 1995.
There is no assurance that such transactions or those reflected in the
table of actual high and low sales prices represent all or a representative
sample of the actual transactions which occurred or that the high and low prices
shown reflect the full ranges at which transactions occurred during the period
indicated.
The following table sets forth (i) the closing price per share of
Compass Common Stock, (ii) the closing price per share of Horizon Common Stock
and (iii) the equivalent price per share of Horizon Common Stock determined as
if the Effective Time were (A) September 18, 1996, the business day immediately
preceding the announcement of the execution of the letter of intent, and (B)
February 4, 1997 the last day for which such information could be calculated
prior to the mailing of this Proxy Statement/Prospectus:
-17-
<PAGE>
<TABLE>
<CAPTION>
Compass Equivalent Price
Common Per
Stock Horizon Common Stock Share of Horizon
------------ -------------------- -----------------
<S> <C> <C> <C>
September 18, 1996 33.75 15.00 19.00 /(1)/
February 4, 1997 41.00 21.25 23.08 /(2)/
</TABLE>
(1) Determined by multiplying the conversion ratio of.5629 times the
closing price of Compass Common Stock on September 18, 1996.
(2) Determined by multiplying the conversion ratio of .5629 times the
closing price of Compass Common Stock on February 4, 1997.
No assurance can be given as to what the Share Determination Market
Value will be or as to what the actual trading price at Compass Common Stock
will be at the time the Merger is consummated. Horizon shareholders are
encouraged to obtain current market quotations for Compass Common Stock and
Horizon Common Stock. SEE, "RISK FACTORS" AND "THE MERGER."
The approximate number of record holders of Horizon Common Stock at
January 3, 1997 was 713.
Horizon paid its first cash dividend of $0.10 per share on July 1,
1994. Beginning in September 1995, Horizon has paid dividends each quarter as
follows:
<TABLE>
<CAPTION>
Dividend Date Amount Per Share
------------- ----------------
<S> <C>
September 7, 1995 $0.03
December 7, 1995 $0.04
March 6, 1996 $0.04
June 5, 1996 $0.04
September 5, 1996 $0.04
December 5, 1996 $0.04
</TABLE>
Horizon's Board of Directors anticipates continuing to pay a quarterly
cash dividend on the Horizon Common Stock at an annualized rate of approximately
$0.16 per share. Dividends, when and if paid, are subject to determination and
declaration by the Board of Directors in its discretion, which takes into
account Horizon's consolidated financial condition and results of operations,
tax considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other factors.
-18-
<PAGE>
THE MERGER
The following information relating to the Merger is not intended to be
a complete description of all information relating to the Merger and is
qualified in its entirety by reference to more detailed information contained
elsewhere in this Proxy Statement/Prospectus, including the Appendices hereto
and the documents referred to herein or incorporated herein by reference. A copy
of the Merger Agreement is included as Appendix I, and is incorporated herein by
reference. All shareholders of Horizon are urged to read the Merger Agreement in
its entirety.
GENERAL
The Merger Agreement provides for the holders of Horizon common stock,
par value $0.01 per share ("Horizon Common Stock"), at the effective time of the
Merger (the "Effective Time"), other than dissenting shareholders, to receive
aggregate merger consideration (the "Merger Consideration") of 888,889 shares of
Compass Common Stock (as adjusted due to the exercise of dissenter's rights).
Holders of Horizon Common Stock shall receive for each share of Horizon Common
Stock held at the Effective Time a number of shares of Compass Common Stock
equal to the quotient of 888,889 shares of Compass Common Stock divided by the
number of shares of Horizon Common Stock outstanding immediately prior to the
Effective Time (the "Per Share Merger Consideration"). In the event the average
closing sale price of the Compass Common Stock as reported by the NASDAQ
National Market System for the twenty days of trading preceding the tenth
business day prior to the Effective Time (the "Share Determination Market
Value") is less than $31.00 per share, Horizon may either (i) terminate the
Agreement (the "Pricing Termination Option"), or (ii) agree to accept an
aggregate of 888,889 shares of Compass Common Stock. In the event Horizon
exercises its Pricing Termination Option, the Merger Agreement shall be
terminated, but Compass shall have the right to reject such termination of the
Merger Agreement by Horizon (the "Termination Rejection") by agreeing to issue
an aggregate number of shares of Compass Common Stock equal to the quotient of
$27,555,559 divided by the Share Determination Market Value ("New Shares"). In
such event, each holder of Horizon Common Stock for each share so held shall
receive Merger Consideration equal to the quotient of the New Shares divided by
the number of shares of Horizon Common Stock outstanding immediately prior to
the Effective Time. Any decision by the Board of Directors of Horizon regarding
whether to terminate the Merger Agreement will be made in its sole discretion
and could result in either (i) Horizon shareholders receiving Merger
Consideration with an aggregate market value of less than $27,555,559, (ii) the
termination of the Merger Agreement, or (iii) Compass agreeing to increase the
number of shares of Compass Common Stock constituting the Merger Consideration.
If the Board of Directors of Horizon elects to terminate the Merger Agreement,
there can be no assurance that Compass will agree to increase the number of
shares of Compass Common Stock and that the Merger Agreement will not terminate,
in which event the Horizon shareholders would not receive any Merger
Consideration but would retain their Horizon Common Stock.
On January 3, 1997, there were 1,388,757 shares of Horizon Common
Stock issued and outstanding. In addition to these issued and outstanding shares
of Horizon Common Stock, officers, directors, employees and a former director
hold options to purchase an aggregate of 190,408 shares of Horizon Common Stock
which Horizon expects to be exercised prior to the Effective Time.
Assuming that (i) there will be 1,579,165 shares of Horizon Common
Stock issued and outstanding immediately prior to the Effective Time and (ii)
the Share Determination Market Value will be $39.45 (the average closing sale
price of the Compass Common Stock as reported by the NASDAQ National Market
System for the twenty days of trading preceding the tenth business day prior to
February 4, 1997), Compass will be required to issue an aggregate of
888,889 shares of Compass Common Stock to the Horizon shareholders and each
shareholder of Horizon (except for shareholders choosing to exercise their
dissenters' rights) will be entitled to receive approximately .5629 shares of
Compass Common Stock for each share of Horizon Common Stock held.
Notwithstanding the foregoing, the Merger Consideration will be
reduced by the number of shares that would otherwise be issued to dissenting
shareholders.
-19-
<PAGE>
Compass will not issue fractional shares of Compass Common Stock, but
instead will pay cash to any shareholder otherwise entitled to receive a
fractional share. Such cash payment shall be based on the Share Determination
Market Value.
The Merger Agreement also provides that the Merger Consideration,
consisting of shares of Compass Common Stock, shall be adjusted to give effect
to any stock dividends or splits with respect to Compass Common Stock occurring
between the date of execution of the Merger Agreement and the Effective Time.
SEE "SUMMARY--THE MERGER"; "SUMMARY--DISSENTERS' RIGHTS"; "THE MERGER--
DISSENTERS' RIGHTS"; APPENDIX I; AND APPENDIX II.
The Merger must be approved by the affirmative vote of the holders of
80% of the outstanding shares of Horizon Common Stock entitled to vote at the
Meeting. SEE "INTRODUCTION"; "SUMMARY--SHAREHOLDER VOTES REQUIRED"; "SUMMARY--
CONDITION TO CONSUMMATION AND REGULATORY APPROVALS; TERMINATION FEE"; "THE
MERGER--OTHER TERMS AND CONDITIONS"; "THE MERGER--TERMINATION; TERMINATION FEE";
AND APPENDIX I.
Officers, directors and certain shareholders of Horizon owning 520,965
shares of Horizon Common Stock, comprising approximately 37.5% of the total
shares of Horizon Common Stock issued and outstanding as of the Record Date,
have agreed, pursuant to the Proxy, to vote their shares in favor of the Merger.
Compass Acquisition has 1,000 shares of common stock, $0.01 par value
per share, issued and outstanding, all of which is owned and held by Compass.
Subject to the satisfaction or waiver of all of the conditions to the parties'
obligations to effect the Merger, Compass, as sole shareholder of Compass
Acquisition, will approve the Merger Agreement in the manner prescribed by the
GCL. SEE "SUMMARY--SHAREHOLDER VOTES REQUIRED".
The Merger will be effective as soon as practicable following the
receipt of all necessary regulatory approvals and the satisfaction of all
conditions to the consummation of the Merger. At the Effective Time, by
operation of law, holders of Horizon Common Stock (other than those shareholders
who perfect their dissenters' rights of appraisal) will become owners of Compass
Common Stock and will no longer be owners of Horizon Common Stock. After the
Effective Time, all certificates for Horizon Common Stock will represent the
right to receive Compass Common Stock pursuant to the Merger Agreement, but
otherwise will be null and void after such date. SEE "SUMMARY--DISSENTERS'
RIGHTS"; "THE MERGER--DISSENTERS' RIGHTS"; AND APPENDIX II.
BACKGROUND OF THE MERGER
Horizon through the Bank has operated since 1987 as a modestly sized
savings institution primarily serving the business and personal needs of
residents of Central Texas. The Bank has historically focused its principal
business on attracting retail deposits from the general public and investing
those funds primarily in the origination of one- to four-family residential
construction and permanent mortgage loans, commercial real estate loans and
undeveloped land and residential lot loans. To a lesser extent, the Bank has
originated credit card, multi-family real estate, commercial business,
automobile and consumer loans. In the last five years, Horizon and the Bank have
been a part of the growing Austin community and have experienced remarkable
growth, from $46.7 million in total assets on April 30, 1992 to $148.9 million
on October 31, 1996. In the meantime, however, the financial markets of which
Horizon and the Bank are a part, and especially the regulatory environment in
which the Bank operates, have become increasingly complex and, in recent years,
have been undergoing fundamental restructuring, including rapid consolidation
within the entire banking industry. A number of the Bank's competitors have been
acquired by larger and better capitalized financial institutions who add to the
competitive pressures in the Bank's marketplace.
The initial public stock offering by Horizon in March 1995
substantially increased the Bank's capitalization, thereby giving Horizon
additional capital from which to expand its lending and to build its franchise
through the opening of additional branch offices and the relocation of certain
offices. Horizon's success continued as deposits
-20-
<PAGE>
grew and, loan volume and income increased. SEE "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HORIZON."
Prior to proposals from Compass, Horizon had not been actively
soliciting interest for its sale, but had been pursuing its corporate plan for
expanding the business of the Bank, through adding additional branch offices and
building a strong franchise value in its market in order to enhance shareholder
value. From time to time, the Bank received informal inquiries from potential
acquirors, but there were no substantive discussions regarding a possible
acquisition. The Merger proposed by Compass caused the Board to evaluate its
long-term strategies and to determine if such a business combination was
appropriate.
In late 1995, Compass contacted Horizon and expressed an interest in a
possible business combination. Previously, Compass and the Bank had not had any
business relationship. Compass entered into a confidentiality letter agreement
with Horizon. Public and non-public information was provided to Compass. General
terms were discussed, but the Board of Horizon determined, after consulting with
legal counsel and others, that it was in the best interests of its shareholders
to continue its existing business plan to build the franchise of the Bank.
Horizon had recently made substantial investments in branch offices and
expanding its loan operations. The Board believed that the shareholders of
Horizon would attain better value for their investment in having Horizon
continue its business plan. As a result, Horizon advised Compass that it was not
for sale at that time.
In August 1996, Compass again contacted Horizon and expressed
additional interest in a business combination. After further discussion and
investigation, Compass' interest was set forth in a letter of intent between
Compass and Horizon dated September 18, 1996. That letter of intent included,
among other provisions, the number of Compass shares to be exchanged for the
Horizon shares, the limits on the closing date, the structure of the business
combination, the contemplated conditions and regulatory approvals required, and
other general terms. The letter of intent required Horizon not to negotiate with
any other party during its term, except as required by the fiduciary obligations
of the directors of Horizon.
The Board of Horizon actively considered and investigated the business
combination proposal submitted by Compass, first in the form of the letter of
intent and later in the form of the Merger Agreement. Horizon's management and
legal counsel conducted extensive discussions and negotiations with Compass and
its legal counsel regarding the terms of the proposed Merger and Merger
Agreement. Horizon's management and Sheshunoff & Co., its financial advisor,
performed a thorough review of Compass and Compass performed its own review of
Horizon and the Bank. Between August and November 1996, members of the Board of
Horizon held several meetings regarding the proposed Merger, in which Horizon's
legal counsel participated, at which the status and progress with respect to
various issues in connection with the discussions and negotiations with Compass
were considered.
In mid November 1996, the Horizon Board held a special meeting for the
express purpose of considering the Compass proposal. At the meeting, the Horizon
Board discussed with its financial advisor and legal counsel the terms and
conditions of Compass's proposal, the historical results and future prospects of
the Bank and Compass and their respective stock prices, the extent of the
Board's fiduciary duties on behalf of Horizon and the process involved in the
negotiation of a merger. The Horizon Board directed management to continue
negotiations with Compass, the continuation of due diligence reviews of Compass
and the pursuit of improvements in various terms of the proposed merger. In
assessing such combination proposal, the Board considered, among other factors,
the adequacy of the terms of the combination proposal, its fairness and
feasibility, the Compass securities to be received as a part of the Merger
Agreement, the legality of the combination proposal, the impact of the
combination proposal and the proposed acquisition on other constituencies
(limited to those which bear a reasonable relationship to shareholders
interests), the risk of non-consummation, the basic shareholder interests at
stake, the identity and financial standing of Compass, Compass' background and
other banking experiences, and Compass' business plans for Horizon and the Bank,
and such business plans' effect on the Horizon's shareholder interests. The
Horizon Board specifically reviewed and discussed the terms of the Merger
Agreement which limits Horizon's ability to solicit other offers. The Board
believed that it possessed a body of reliable information with which to evaluate
the
-21-
<PAGE>
fairness of the combination proposal, without conducting an active survey of the
market for Horizon. The Horizon Board further believed that Horizon and its
shareholders would not do better by going to such an active survey of the
market. In particular, the Board found that such exclusivity provisions of the
Merger Agreement are acceptable because its members have had unsolicited
discussions with other potential parties and investment bankers, from time to
time, to ascertain the interests of such parties and investment bankers in a
transaction with Horizon and the Board believed that the combination proposal
was the best available transaction for the shareholders. The Horizon Board
considered other factors including, but not limited to, the following: (i) the
desirability of Horizon as a candidate, (ii) the unwillingness of Compass to
make the combination proposal in an auction environment, (iii) whether the
combination proposal would be considered a preemptive bid at the high range of
fairness, (iv) whether the market is generally aware that Horizon is for sale,
(v) the advice of Sheshunoff & Co., Horizon's financial advisors, (vi) whether
the combination proposal was within the same range of pricing that transactions
with similar companies have been effected and (vii) the investigation taken by
the Board and Horizon's officers of the combination proposal. At the meeting,
Horizon's financial advisor presented analyses of Horizon, Compass and the
financial terms of the proposed Merger, and the Bank's legal counsel thoroughly
reviewed the terms and conditions of the Merger Agreement. After discussion, the
Horizon Board unanimously approved the Merger and authorized the execution of
the Merger Agreement. Following the meeting, the Merger Agreement was executed
by the respective parties, and a joint press release was issued announcing the
Merger Agreement.
REASONS FOR THE MERGER
Horizon's Board considered the Merger and the terms of the Merger
Agreement, including the consideration to be received by Horizon's stockholders
in the Merger, in light of economic, financial, legal and market factors and
concluded that the Merger is in the best interests of Horizon. The terms of the
Merger Agreement are the result of arms' length negotiations between Horizon and
Compass, as well as consultations between Horizon and its financial advisor,
Sheshunoff & Co. and special legal counsel. Among the factors considered by the
Horizon Board were the historical operating results, current financial
condition, business and management and future financial and other prospects of
Horizon and Compass and the advice of Sheshunoff & Co. as to the fairness to
Horizon's stockholders, from a financial point of view, of the consideration to
be received by them in the Merger. Also considered were the relative size and
geographic market areas of Horizon and Compass. The Horizon Board believes that
the Merger will afford Horizon's stockholders the benefit of Compass' larger
market capitalization and the more liquid market for Compass Common Stock and
will offer enhanced opportunities for the Bank to meet the needs of banking
customers and other members of the Austin area communities served by the Bank.
The Horizon Board believes that the Bank will be in an enhanced competitive
position with respect to other financial institutions in its market area after
the Merger.
The Horizon Board unanimously recommends that the holders of Horizon
Common Stock vote FOR approval of the Merger Agreement and the Merger. SEE
"SUMMARY--THE MERGER"; "SUMMARY--REASONS FOR THE MERGER; RECOMMENDATION OF BOARD
OF DIRECTORS"; AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HORIZON".
Compass and Compass Acquisition have considered expansion
opportunities in the Austin, Texas area in order to enlarge their Texas-based
operations to a more economical size and to expand into additional market areas.
Acquiring Horizon will result in economies of scale and increase the markets
served by Compass' affiliates. It will also assist Compass' Texas affiliates in
providing the management and organizational flexibility needed to expand in the
Texas market by branching and other acquisitions.
Following arm's length negotiations between representatives of Compass
and Horizon, Compass and Horizon entered into the Merger Agreement dated as of
December 4, 1996. The aggregate price to be paid to holders of Horizon Common
Stock resulted from negotiations which considered the historical earnings and
dividends of Compass and Horizon, the earnings potential and deposit base of
Horizon, potential growth in Horizon's market,
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Horizon's asset quality and the effect of the Merger on the shareholders,
customers and employees of Compass and Horizon. SEE "SUMMARY--THE MERGER".
Subject to satisfaction of certain conditions contained in the Merger
Agreement, Horizon's Board of Directors believes the Merger to be fair and in
the best interest of Horizon's shareholders. In addition, a fairness opinion has
been received from Sheshunoff & Co. with respect to the fairness, from a
financial point of view, of the Merger to its shareholders. HORIZON'S BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT HORIZON'S SHAREHOLDERS VOTE FOR APPROVAL
OF THE MERGER and has authorized consummation thereof, subject to approval of
Horizon's shareholders, federal and state bank regulators and the satisfaction
of certain other conditions. SEE "SUMMARY--REASONS FOR THE MERGER;
RECOMMENDATION OF BOARD OF DIRECTORS"; "THE MERGER--OPINION OF FINANCIAL
ADVISOR"; AND APPENDIX III.
OPINION OF FINANCIAL ADVISOR
GENERAL
Horizon retained Sheshunoff & Co. based upon its qualifications,
expertise and reputation to provide its opinion of fairness of the Merger
Consideration to be received by Horizon's shareholders in connection with the
Merger and related matters. At the November 11, 1996 meeting of the Board of
Directors of Horizon, Sheshunoff & Co. rendered its preliminary oral opinion to
the Board that, as of such date, the consideration to be received in the Merger
Agreement was fair from a financial point of view to the holders of Horizon's
common stock, subject to further due diligence. Sheshunoff & Co. subsequently
confirmed its November 11, 1996 preliminary oral opinion by delivery to
Horizon's Board of a written opinion as of December 4, 1996 coincident with the
signing of the Merger Agreement.
The full text of Sheshunoff & Co.'s opinion, which sets forth, among
other things, assumptions made, procedures followed, matters considered, and
limitations on the review undertaken, is attached to this Proxy
Statement/Prospectus as Appendix III. Horizon's shareholders are urged to read
the Sheshunoff & Co. opinion carefully and in its entirety. Sheshunoff & Co.'s
opinion is addressed to Horizon's Board of Directors and does not constitute a
recommendation to any shareholder of Horizon as to how such shareholder should
vote at the Horizon meeting.
In connection with rendering its written opinion dated as of December
4, 1996, Sheshunoff & Co., among other things: (i) analyzed certain internal
financial statements and other financial and operating data concerning Horizon
prepared by the management of Horizon; (ii) analyzed certain publicly available
audited and unaudited financial statements of Horizon, including those contained
in their annual reports for the three years ended April 30, 1996 and quarterly
reports for the periods ended July 31, 1996 and October 31, 1996; (iii) analyzed
certain publicly available audited and unaudited financial statements of
Compass, including those contained in their annual reports for the three years
ended December 31, 1995 and their quarterly reports for the periods ended March
31, 1996, June 30, 1996 and September 30, 1996; (iv) analyzed certain internal
financial statements and other financial and operating data concerning Horizon
prepared by the management of Horizon; (v) analyzed certain financial
projections of Horizon prepared by Sheshunoff & Co. in coordination with the
management of Horizon; (vi) discussed certain aspects of past and current
business operations, financial condition and future prospects of Horizon with
certain members of its management; (vii) reviewed reported market prices and
historical trading activity of Horizon's and Compass' common stock; (viii)
compared the financial performance of Compass and the prices and trading
activity of Compass' common stock with that of certain other comparable publicly
traded companies and their securities; (ix) reviewed certain security analysts
reports of Compass' common stock prepared by various investment banking firms;
(x) reviewed the financial terms, to the extent publicly available, of certain
comparable precedent transactions; (xi) reviewed the Merger Agreement; and (xii)
performed such other analyses as deemed appropriate.
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In connection with its review, Sheshunoff & Co. relied upon and
assumed the accuracy and completeness of all of the foregoing information
provided to it or made publicly available, and Sheshunoff & Co. has not assumed
any responsibility for independent verification of such information. With
respect to the financial projections, Sheshunoff & Co. assumed that they have
been reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the future financial performance of Horizon. However,
the assumptions used to make projections of future performance are not certain
to become reality. If the projections do not become reality, actual performance
may vary substantially from the projected results. Sheshunoff & Co. has not made
any independent evaluation or appraisal of the assets or liabilities of Horizon
nor has been furnished with any such appraisals, and it has not examined any
individual loan files of Horizon. With respect to Compass, Sheshunoff & Co.
relied solely upon publicly available data regarding Compass' financial
condition and performance. Sheshunoff & Co. did not conduct any independent
evaluation or appraisal of the assets, liabilities or business prospects of
Compass and was not furnished with any evaluations or appraisals and Sheshunoff
has not reviewed any individual credit files. Sheshunoff & Co. is not an expert
in the evaluation of loan portfolios for the purposes of assessing the adequacy
of the allowance for losses with respect thereto and has assumed that such
allowances for each of the companies are in the aggregate adequate to cover such
losses. Sheshunoff & Co.'s opinion is necessarily based on economic, market and
other conditions as in effect on, and the information made available to
Sheshunoff & Co. as of, the date of the opinion.
In connection with rendering its opinion, Sheshunoff & Co. performed a
variety of financial analyses. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis of summary description. Moreover, the evaluation of the
fairness, from a financial point of view, of the consideration to be received by
the holders of Horizon is to some extent a subjective one based on the
experience and judgment of Sheshunoff & Co. and not merely the result of
mathematical analysis of financial data. Accordingly, notwithstanding the
separate factors summarized below, Sheshunoff & Co. believes that its analyses
must be considered as a whole and that selecting portions of these analyses and
of the factors considered by it, without considering all analyses and factors,
could create an incomplete view of the evaluation process underlying its
opinion. The ranges of valuations resulting from any particular analysis
described below should not be taken to be Sheshunoff & Co.'s view of the actual
value of Horizon.
In performing its analyses, Sheshunoff & Co. made numerous assumptions
with respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of Horizon. The analyses performed
by Sheshunoff & Co. are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. The analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold. In addition, Sheshunoff &
Co.'s analyses should not be viewed as determinative of the opinion of Horizon's
Board of Directors or Management with respect to the value of Horizon.
The following is a summary of the analyses performed by Sheshunoff &
Co. in connection with its opinion delivered to the Horizon Board of Directors
in a preliminary form on November 11, 1996 and in final form on December 4,
1996:
ANALYSIS OF SELECTED TRANSACTIONS
Sheshunoff & Co. analyzed premiums paid in selected pending or
recently completed acquisitions of banking organizations nationwide and in Texas
which had characteristics comparable to the proposed Merger. Two sets of
comparable transactions were analyzed to ensure a thorough comparison.
The first set of comparable transactions was comprised to reflect the
profitability, asset size and thrift status of Horizon. The guideline
transactions specifically consisted of 27 mergers and acquisitions of thrift
organizations nationwide from January 1, 1995 to December 4, 1996 with seller's
total assets between $100 million and $500
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million and sellers' return on average equity greater than 10.0%. The analysis
yielded multiples of the transactions' purchase price relative to: (i) book
value ranging from 1.10 times to 2.02 times with an average of 1.57 times and a
median of 1.51 times (compared with Horizon's deal of 2.88 times October 31,
1996 book value); (ii) last 12 months earnings ranging from 7.7 times to 19.6
times with an average of 13.7 times and a median of 13.3 times (compared with
Horizon's deal of 24.0 times last 12 months earnings as of October 31, 1996);
and (iii) total assets ranging between 6.3% and 24.7% with an average of 14.0%
and a median of 13.2% (compared with Horizon's deal of 22.9% of October 31, 1996
total assets).
The second set of comparable transactions was comprised to reflect the
profitability, asset size and location of Horizon. The guideline transactions
specifically consisted of nineteen mergers and acquisitions of banking and
thrift organizations in Texas from January 1, 1995 to December 4, 1996 with
sellers' total assets between $100 million and $200 million and sellers' return
on average equity greater than 10.0%. The analysis yielded multiples of the
transactions' purchase price relative to: (i) book value ranging from 0.98 times
to 2.87 times with an average of 1.85 times and a median of 1.74 times (compared
with Horizon's deal of 2.88 times October 31, 1996 book value); (ii) last 12
months earnings ranging from 6.9 times to 21.7 times with an average of 10.7
times and a median of 9.3 times (compared with Horizon's deal of 24.0 times last
12 months earnings as of October 31, 1996); and (iii) total assets ranging
between 7.2% and 18.6% with an average of 14.0% and a median of 15.1% (compared
with Horizon's deal of 22.9% of October 31, 1996 total assets).
DISCOUNTED CASH FLOW ANALYSIS
Using discounted cash flow analysis, Sheshunoff & Co. estimated the
present value of the future stream of after-tax cash flow that Horizon could
produce through the year 2001 under various circumstances, assuming that Horizon
performed in accordance with the earnings/return projections prepared by
Sheshunoff & Co. in coordination with management of Horizon. Sheshunoff & Co.
estimated the terminal value for Horizon at the end of the period by applying
multiples of earnings ranging from 8 times to 18 times and then discounting the
cash flow streams, dividends paid to the shareholders (assuming all earnings in
excess of that required to maintain a tangible equity to tangible asset
percentage of 8.0% are paid out in dividends) and the terminal value using
discount rates ranging from 14.0% to 18.0% chosen to reflect different
assumptions regarding the required rates of return of Horizon and the inherent
risk surrounding the underlying projections. This discounted cash flow analysis
indicated a range of $9.91 per share to $24.80 per share. This compares
favorably to the Horizon deal value of $21.54 per share.
Sheshunoff & Co. also performed a cash flow analysis using an
estimated terminal value for Horizon at the end of the period by applying
multiples of book value ranging from 1.0 times to 2.0 times and then discounting
the cash flow streams, dividends paid to the shareholders (assuming all earnings
in excess of that required to maintain a tangible equity to tangible asset
percentage of 8.0% are paid out in dividends) and terminal value using discount
rates ranging from 14.0% to 18.0% chosen to reflect different assumptions
regarding the required rates of return of Horizon and the inherent risk
surrounding the underlying projections. This discounted cash flow analysis
indicated a range of $8.75 per share to $19.41 per share. This compares
favorable to the Horizon deal value of $21.54 per share.
COMPARABLE COMPANY ANALYSIS
Sheshunoff & Co. compared selected balance sheet data, asset quality,
capitalization and profitability measures, and market statistics using financial
data at or for the twelve months ended September 30, 1996 and market data as of
December 4, 1996 for Compass to a group of selected southeastern bank holding
companies which Sheshunoff & Co. deemed to be relevant, including Central
Fidelity banks, Inc., First American Corporation, First Citizens Bancshares
Inc., First Virginia Banks, Inc., Signet Banking Corporation, Synovus Financial
Corporation, and Union Planters Corporation, all being bank holding companies
with assets between $7.5 billion and $12.5 billion (collectively, the
"Comparable Composite"). This comparison, among other things, showed that: (i)
Compass' equity to asset percentage was 6.7%, compared to an average of 8.6% and
a median of 8.4% for the Comparable
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Composite; (ii) for the nine months ended September 30, 1996, Compass' return on
average assets was 0.93%, compared to an average of 1.16% and a median of 1.12%
for the Comparable Composite; (iii) for the nine months ended September 30,
1996, Compass' return on average equity was 13.9%, compared to an average of
13.3% and a median of 13.3% for the Comparable Composite; (iv) as of September
30, 1996 Compass' nonperforming assets to total assets ratio was 0.27%, compared
to an average of 0.36% and a median of 0.38% for the Comparable Composite; (v)
as of December 1, 1996 Compass' price per share to book value per share as of
September 30, 1996 was 2.07 times, compared to an average of 2.32 times and
median of 1.94 times for the Comparable Composite; and (vi) as of December 1,
1996 Compass' price per share to last twelve months earnings per share as of
September 30, 1996 was 12.7 times, compared to an average of 17.0 times and
median of 15.0 times for the Comparable Composite.
Sheshunoff & Co. also compared selected stock market results of
Compass to the publicly available corresponding data of other composites which
Sheshunoff & Co. deemed to be relevant, including SNL's index of all publicly
traded banks and the S&P 500. Results from indexing the S&P 500, SNL's index of
all publicly traded banks, the Comparable Composite, and Compass' stock from
June 1, 1994 to September 10, 1996, revealed similar relationships in price
movements.
No company or transaction used in the comparable company and
comparable transaction analyses is identical to Horizon or the Merger.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of Horizon and other factors that could affect the
public trading value of the companies to which they are being compared.
Mathematical analysis (such as determining the average or median) is not in
itself a meaningful method of using comparable transaction data or comparable
company data.
As part of its investment banking business, Sheshunoff & Co. is
regularly engaged in the valuation of securities in connection with mergers and
acquisitions, private placements, and valuations for estate, corporate and other
purposes. Horizon's Board of Directors decided to retain Sheshunoff & Co. based
on its experience as a financial advisor in mergers and acquisitions of
financial institutions and its knowledge of financial institutions.
Pursuant to an engagement letter dated October 4, 1996 between Horizon
and Sheshunoff & Co., Horizon agreed to pay Sheshunoff & Co. a $15,000 fairness
opinion fee. Horizon has also agreed to indemnify and hold harmless Sheshunoff &
Co. and its officers and employees against certain liabilities in connection
with its services under the engagement letter, except for liabilities resulting
from the negligence of Sheshunoff & Co.
OPERATIONS AFTER THE MERGERS
Compass and Horizon intend that, following consummation of the Merger,
the Bank will merge with and into Compass Bank-Houston, such that the separate
existence of the Bank will cease, and Compass Bank-Houston will continue as the
surviving entity.
OTHER TERMS AND CONDITIONS
The Merger Agreement contains a number of terms, conditions,
representations and covenants which must be satisfied as of the Effective Time,
including, but not limited to, the following:
(i) The receipt of regulatory approvals, which approvals shall not
have imposed any condition or requirement which in the judgment of
the party on which it was imposed would adversely impact the
economic or business benefits of the transactions contemplated by
the Merger Agreement or otherwise would in the judgment of Compass
or Horizon be so burdensome as to render inadvisable the
consummation of the Merger,
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and the expiration of any applicable waiting periods with respect
thereto. SEE "THE MERGER--GOVERNMENT APPROVALS";
(ii) The consummation of the Merger will not violate any injunction,
order or decree of any court or governmental body having competent
jurisdiction;
(iii) The approval of the Merger Agreement by Horizon's shareholders
entitled to vote at the Meeting;
(iv) The Registration Statement relating to the Compass Common Stock
shall be effective under the Securities Act and any applicable
state securities or blue sky laws and no stop order suspending the
effectiveness of the Registration Statement shall be in effect and
no proceedings for such purpose, or any proceedings under the
Commission or applicable state securities authorities rules with
respect to the transaction contemplated hereby, shall be pending
before or threatened by the Commission or any applicable state
securities or blue sky authorities;
(v) All representations and warranties of Horizon and Compass shall be
true and correct in all material respects as of the date of the
Merger Agreement and at and as of the Effective Time;
(vi) Horizon, Compass and Compass Acquisition shall have performed in
all material respects all obligations and agreements and in all
material respects complied with all covenants and conditions
contained in the Merger Agreement to be performed or complied with
by them prior to the Effective Time;
(vii) There shall not have occurred a material adverse effect with
respect to Horizon or the Bank;
(viii) The directors of Horizon and the Bank shall have delivered to
Compass an instrument dated the Effective Time releasing Horizon
and the Bank from any and all claims of such directors (except as
to their deposits and accounts and as to rights of indemnification
pursuant to the Articles of Association or Incorporation of
Horizon or the Bank, which rights shall survive the Merger) and
shall have delivered to Compass their resignations as directors of
Horizon and the Bank;
(ix) The officers of Horizon and the Bank shall have delivered to
Compass an instrument dated the Effective Time releasing Horizon
and the Bank from any and all claims of such officers (except as
to deposits and accounts and accrued compensation permitted by
their respective agreements with Horizon or the Bank and as to the
rights of indemnification pursuant to the Articles of
Incorporation or Association of Horizon or the Bank, which rights
shall survive the Merger);
(x) Compass and Horizon shall have received the opinions of counsel to
Horizon and Compass acceptable to them as to certain matters;
(xi) The holders of no more than 5% of the Horizon Common Stock shall
have demanded or be entitled to demand payment of the fair value
of their shares as dissenting shareholders;
(xii) Compass shall have received a letter from KPMG Peat Marwick
LLP, dated as of the Effective Time, to the effect that the Merger
will qualify for pooling-of-interests
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accounting treatment if closed and consummated in accordance with
the Merger Agreement;
(xiii) Horizon shall have no indebtedness;
(xiv) Compass shall have received from holders of Horizon Common
Stock receiving at least 40% of the total Merger Consideration a
representation that they have no plan or intention to sell or
otherwise dispose of shares of Compass Common Stock received
pursuant to the Merger;
(xv) Compass shall have received an opinion of counsel satisfactory to
it that the Merger will qualify as a reorganization under Section
368(a) of the Code. Such opinion will require certain
representations in addition to those set forth herein. SEE
"SUMMARY-FEDERAL INCOME TAX CONSEQUENCES" AND "THE MERGER-FEDERAL
INCOME TAX CONSEQUENCES";
(xvi) Horizon shall have delivered to Compass a schedule of all
transactions in the capital stock (or instruments exercisable for
or convertible into capital stock) of Horizon of which Horizon has
knowledge from and including the date of the Merger Agreement
through the Effective Time;
(xvii) Compass shall have determined, in its sole judgment, that the
liabilities and obligations of Horizon and the Bank do not have a
material adverse effect;
(xviii) All warrants, options, rights, convertible debentures or
other securities entitling the holder thereof to acquire Horizon
Common Stock shall have been exercised or converted, prior to the
Effective Time;
(xix) Douglas B. Kadison, Paul A. Antrim and Charles S. Nichols, Jr.
shall have entered into Retention Agreements with Compass Bank-
Houston, or one of its affiliates and shall have terminated their
existing employment agreements with the Bank;
(xx) Horizon and the Bank shall have delivered to the directors of
Horizon and the Bank an instrument dated the Effective Time
releasing such directors from any and all claims of Horizon and
the Bank (except as to indebtedness or other contractual
liabilities, and as to rights of indemnification pursuant to the
Articles of Incorporation or Association of Horizon and the Bank);
provided, however, that such releases shall not release an action
against such directors by Compass or Compass Acquisition in
connection with the transactions contemplated by the Merger
Agreement; and
(xxi) Compass and Horizon shall have received certificates of the other
as to certain items described above.
Any condition to the consummation of the Merger, except the required shareholder
and regulatory approvals, may be waived in writing by the party to the Merger
Agreement entitled to the benefit of such condition. SEE APPENDIX I.
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ADDITIONAL AGREEMENTS
Prior to the Merger, the three executive officers of the Bank had
three year employment agreements with the Bank. Compass requested each of these
executive officers to terminate their three year employment agreement in
exchange for an agreement by the surviving bank to continue their employment on
an "at will" basis, be limited in their future activities pursuant to a non-
compete provision, and receive a retention bonus payable over an 18 month
period. Consequently, Paul A. Antrim, Charles S. Nichols, Jr. and Douglas B.
Kadison, have entered into such Retention Agreements dated December 4, 1996 with
Compass Bank-Houston respecting their employment with Compass after the Merger.
The Retention Agreements provide that Mr. Antrim, Mr. Nichols and Mr. Kadison
will be employed as senior officers of Compass and will receive annual base
salaries of $110,537, $130,000 and $140,000 per year, respectively, with merit
increases based on performance in accordance with Compass' salary compensation
program. Mr. Antrim, Mr. Nichols, and Mr. Kadison will also be entitled under
the Retention Agreements to retention bonuses in the amounts of $331,601,
$353,648 and $364,139, respectively, payable over 18 months.
Each of the directors and executive officers of Horizon has entered
into a Pooling Transfer Restrictions Agreement with Compass and Horizon pursuant
to which they have agreed, among other things, (i) not to transfer any of their
respective shares of Horizon Common Stock within 30 days prior to the Effective
Time, (ii) not to transfer any shares of Compass Common Stock acquired by them
in the Merger until the publication of financial results covering at least 30
days of post-Merger combined operations of Horizon and Compass, except for
shareholder pledges to secure loans, provided the lender agrees to be bound by
the terms of the Pooling Transfer Restrictions Agreement, and (iii) not
otherwise to transfer such Compass Common Stock except in compliance with the
applicable provisions of the Securities Act and the Exchange Act and the
respective rules and regulations thereunder.
Compass has agreed to purchase on behalf of each of the directors of
Horizon and the Bank a "peace of mind" policy which acts to extend the reporting
period under Horizon's existing director's and officer's liability policy. It is
estimated that the aggregate expense for such coverage is $29,400. In addition,
Compass has agreed that all rights to indemnification that the directors and
officers of Horizon and the Bank have pursuant to the Articles of Incorporation
or Association (and the respective Bylaws of Horizon and the Bank) shall survive
the Merger and shall continue in full force and effect.
Prior to December 31, 1996, the Bank with the consent of Compass Bank
transferred all of its interest in three Split Dollar Life Insurance Policies
each with a face amount of $500,000 to Douglas Kadison, Charles Nichols, and
Paul Antrim. The net cash values of those policies were $29,193, $22,372 and
$27,983, respectively. Prior to the transfer of such policies, the Bank paid the
premiums due in December 1996 and January 1997 on such policies.
Officers, directors and certain shareholders of Horizon owning 520,965
shares of Horizon Common Stock, comprising approximately 37.5% of the total
shares of Horizon Common Stock issued and outstanding as of the Record Date,
have agreed, pursuant to the Proxy, to vote their shares in favor of the Merger.
BUSINESS PENDING EFFECTIVE TIME
The Merger Agreement imposes certain limitations on the conduct of
Horizon's business pending consummation of the Merger. Among other things,
Horizon must conduct its businesses only in the ordinary course, consistent with
prudent banking practices. SEE "THE MERGER--OTHER TERMS AND CONDITIONS"; AND
APPENDIX I.
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NO SOLICITATION
Subject to certain exceptions as discussed below, Horizon and the Bank
have agreed under Section 6.5 of the Merger Agreement not to, and to use their
best efforts to cause their respective directors, officers, financial advisors,
legal counsel, accountants and other agents and representatives (for purposes of
this provision only, being referred to as "affiliates") not to, initiate,
solicit or encourage, directly or indirectly, or take any other action to
facilitate any inquiries or the making of any proposal with respect to, engage
or participate in negotiations concerning, provide any nonpublic information or
data to or have any discussions with any person other than a party hereto or
their affiliates relating to any acquisition, tender offer (including a self-
tender offer), exchange offer, merger, consolidation, acquisition of beneficial
ownership of or the right to vote securities of such entity or any of its
subsidiaries, dissolution, business combination, purchase of all or any
significant portion of the assets or any division of, or any equity interest in,
such entity or any subsidiary, or similar transaction other than the Merger
(such proposals, announcements, or transactions being referred to as
"Acquisition Proposals"). Notwithstanding the preceding sentence, to the extent
Horizon's Board of Directors determines it is required to do so in the exercise
of its fiduciary duties to Horizon's shareholders under applicable law as so
advised in writing by independent counsel, Horizon and the Bank, and their
affiliates, may engage and participate in negotiations concerning, provide
nonpublic information or data to and have discussions with any person or their
affiliates relating to an Acquisition Proposal may take or disclose to Horizon's
stockholders a position with respect to a tender offer by a third party pursuant
to Rules 14D-9 and 14e-2(a) promulgated under the Exchange Act and may make such
disclosures to Horizon's stockholders that, in the judgment of the Board of
Directors with the written advice of independent counsel, is required under
applicable law. Horizon and the Bank will promptly notify Compass orally and in
writing if any such Acquisition Proposal (including the terms thereof and
identity of the persons making such proposal) is received and furnish to Compass
a copy of any written proposal. SEE "THE MERGER--TERMINATION; TERMINATION FEE".
AMENDMENTS
The Merger Agreement may be amended or supplemented at any time,
before or after the Meeting, by an instrument in writing duly executed by all
the parties thereto. However, no change which reduces the Merger Consideration
or which materially and adversely affects the rights of Horizon's shareholders
can be made after the Meeting without the required approval of Horizon's
shareholders.
TERMINATION; TERMINATION FEE
In addition to termination due to pricing issues (SEE "SUMMARY--THE
MERGER"; AND "THE MERGER--GENERAL"), the Merger Agreement may be terminated and
the Merger abandoned, notwithstanding approval by Horizon shareholders, at any
time before the Effective Time by:
(i) Mutual written consent duly authorized by the Boards of Directors
of Compass and Horizon;
(ii) Compass (a) if Compass learns or becomes aware of a state of
facts or breach or inaccuracy of any representation or warranty of
Horizon which constitutes a material adverse effect which breach
has not been cured within 30 days of the notice of such breach by
Compass to Horizon, (b) if Compass learns or becomes aware of a
breach or material inaccuracy of any representation or warranty of
Horizon; (c) due to certain unacceptable environmental conditions
pursuant to Section 6.9 of the Merger Agreement if such condition
is discovered on or before February 2, 1997, but not thereafter;
(d) if Horizon or the Bank breach their duties respecting
Acquisition Proposals under Section 6.5 of the Merger Agreement;
or (e) if the conditions to the obligations of Compass and
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Compass Acquisition to effect the Merger contained in the Merger
Agreement are not satisfied or waived in writing by Compass;
(iii) Horizon (i) if Horizon learns or becomes aware of a state of
facts or breach or inaccuracy of facts or breach or inaccuracy of
any representation or warranty of Compass contained in the Merger
Agreement which constitutes a material adverse effect which breach
has not been cured within 30 days of the notice of such breach by
Horizon to Compass, or (ii) if Horizon's conditions to Closing
contained in the Merger Agreement are not satisfied or waived in
writing by Horizon;
(iv) Compass or Horizon if the Effective Time shall not have occurred
on or before April 1, 1997 or such later date agreed to in writing
by Compass and Horizon provided, however, that such April 1, 1997
date shall be extended by a period of time equal to the number of
days in which (i) a protest has been filed under the Community
Reinvestment Act and is not resolved (including regulatory
approvals and any waiting periods), or (ii) the SEC delays the
effectiveness of the Proxy Statement; provided, however, that any
such extension shall not go beyond July 1, 1997;
(v) Compass or Horizon if any court of competent jurisdiction in the
United States or other United States (federal or state)
governmental body shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other
action is final and nonappealable. SEE "SUMMARY--CONDITIONS TO
CONSUMMATION AND REGULATORY APPROVALS; TERMINATION"; "THE MERGER--
GOVERNMENT APPROVALS"; "THE MERGER--OTHER TERMS AND CONDITIONS";
AND APPENDIX I.
(vi) Compass or Horizon if (i) any regulatory authority denies approval
of the Merger, or (ii) the shareholders of Horizon do not approve
the Merger at the Shareholders' Meeting;
(vii) Compass if the Board of Directors of Horizon shall have withdrawn
or modified in any manner its approval or recommendation of the
Merger, or shall have resolved to do the same; or
(viii) Horizon if it shall receive any Acquisition Proposal after the
date of the Merger Agreement from a third party or parties and the
Board of Directors of Horizon shall have received a written
opinion from independent legal counsel to the effect that, and the
Board of Directors of Horizon shall have determined in good faith
in the exercise of its fiduciary duties that, Horizon is required
to pursue such Acquisition Proposal; provided, however that
simultaneously with such termination Horizon delivers to Compass
the termination fee provided for in the Merger Agreement.
If Horizon either (a) violates its obligations set forth in Section
6.5 of the Merger Agreement (SEE "THE MERGER--NO SOLICITATION") and the
Agreement is thereafter terminated pursuant to (ii)(d) in the preceding
paragraph, or (b) prior to termination of the Merger Agreement receives any
Acquisition Proposal and the Merger Agreement is thereafter terminated pursuant
to (vii) or (viii) in the preceding paragraph as a result of receipt of such
Acquisition Proposal, then Horizon shall pay to Compass an aggregate fee of
$2,000,000 in cash at the time of such termination.
In recognition of the significant expenditure of management time and
resources and substantial out-of-pocket expenses incurred by Compass and its
affiliates in connection with the negotiation of the Merger Agreement and the
investigation of the transactions contemplated thereby, and in light of
difficulty in calculating the value of such management time, resources and other
expenses and due to the fact that the Articles of Incorporation of Horizon
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require approval of the Merger by 80% of the shares entitled to vote, Horizon
has agreed in the Merger Agreement to pay Compass 40,000 shares of Horizon
Common Stock and use its best efforts to promptly register such shares with the
Commission or the OTS, as applicable, in the event that Horizon's shareholders
do not approve the Merger. SEE "THE MERGER--NO SOLICITATION".
EXCHANGE OF SHARES
Prior to the Effective Time, and pursuant to an exchange agreement in
the form attached as Exhibit B to the Merger Agreement (the "Exchange Agent
Agreement"), Compass shall deposit or cause to be deposited in trust with River
Oaks Trust Company, Houston, Texas (the "Exchange Agent"), cash in an aggregate
amount estimated to be sufficient to make cash payments to Horizon shareholders
in lieu of fractional shares of Compass Common Stock. Such cash payments shall
be made to dissenting shareholders in proportion to the number of shares
surrendered.
No later than five business days after the Effective Time, the
Exchange Agent will furnish each holder of record of Horizon Common Stock as of
the Effective Time with transmittal materials for use in exchanging certificates
representing Horizon Common Stock for certificates representing Compass Common
Stock in accordance with the Exchange Agent Agreement. The transmittal materials
will contain information and instructions with respect to the procedure for
exchanging such certificates. The certificates for Compass Common Stock will be
delivered to the persons entitled thereto within a reasonable time after good
delivery of Horizon Common Stock certificates for exchange accompanied by the
appropriate transmittal materials.
Under the terms of the Merger Agreement, Compass will not issue
certificates representing fractional shares of Compass Common Stock, and in lieu
thereof shall pay cash to any holder of Horizon Common Stock otherwise entitled
to receive such fractional share. Such cash payment shall be based on the Share
Determination Market Value. Any gain attributable to cash received by holders of
Horizon Common Stock in lieu of fractional shares of Compass Common Stock will
be taxed as ordinary income (loss) or capital gain (loss) pending upon each
shareholder's situation. SEE "SUMMARY--FEDERAL INCOME TAX CONSEQUENCES"; "THE
MERGER--FEDERAL INCOME TAX CONSEQUENCES"; AND APPENDIX I.
Persons who are entitled to receive Compass Common Stock pursuant to
the Merger will not be entitled to vote such Compass Common Stock or to receive
any dividends thereon until they have properly surrendered their Horizon Common
Stock certificates in exchange for Compass Common Stock.
Upon the Effective Time of the Merger, former Horizon shareholders
will cease to have any rights as shareholders of Horizon, and the Horizon
shareholders shall have only the right to receive the Merger Consideration
specified in the Merger Agreement or, in the case of dissenting shareholders, to
exercise their rights under Texas law. SEE "THE MERGER--DISSENTERS' RIGHTS".
DISSENTERS' RIGHTS
By following the specific procedures set forth in the Texas Business
Corporation Act ("TBCA"), Horizon shareholders have a statutory right to dissent
from the Merger. If the Merger is approved and consummated, any Horizon
shareholder who properly perfects his dissenters' rights will be entitled, upon
consummation of the Merger, to receive an amount of cash equal to the fair value
of his shares of Horizon Common Stock rather than receiving the consideration
set forth in the Merger Agreement. The following summary is not a complete
statement of statutory dissenters' rights of appraisal, and such summary is
qualified by reference to the applicable provisions of the TBCA, which are
reproduced in full in Appendix II to this Proxy Statement/Prospectus. A
shareholder must complete each step in the precise order prescribed by the
statute to perfect his dissenter's rights of appraisal.
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Any shareholder who desires to dissent from the Merger shall file a
written objection to the Merger with Horizon prior to the Meeting at which a
vote on the Merger shall be taken, stating that the shareholder will exercise
his right to dissent if the Merger is effective and giving the shareholder's
address to which notice thereof shall be sent. A vote against the Merger is not
sufficient to perfect a shareholder's dissenter's rights of appraisal. If the
Merger is effected, each shareholder who sent notice to Horizon as described
above and who did not vote in favor of the Merger will be deemed to have
dissented from the Merger ("Dissenting Shareholder"). Failure to vote against
the Merger will not constitute a waiver of the dissenters' rights of appraisal;
on the other hand, a vote in favor of the Merger will constitute such a waiver.
Compass Acquisition, as survivor of the Merger, will be liable for
discharging the rights of Dissenting Shareholders and shall, within 10 days of
the Effective Time, notify the Dissenting Shareholders in writing that the
Merger has been effected. Each Dissenting Shareholder so notified shall, within
10 days of the delivery or mailing of such notice, make a written demand on
Compass Acquisition at 15 South 20th Street, Birmingham, Alabama 35233, for
payment of the fair value of the Dissenting Shareholder's shares as estimated by
the Dissenting Shareholder. Such demand shall state the number and class of
shares owned by the Dissenting Shareholder. The fair value of the shares shall
be the value thereof as of the date immediately preceding the Meeting, excluding
any appreciation or depreciation in anticipation of the Merger. Dissenting
Shareholders who fail to make a written demand within the 10 day period will be
bound by the Merger and lose their rights to dissent. Within 20 days after
making a demand, the Dissenting Shareholder shall submit certificates
representing his shares of Horizon Common Stock to Compass for notation thereon
that such demand has been made. Dissenting Shareholders who fail to submit their
certificates within such 20 day period will be bound by the Merger and lose
their right to dissent.
Within 20 days after receipt of a Dissenting Shareholder's demand
letter as described above, Compass shall deliver or mail to the Dissenting
Shareholder written notice (i) stating that Compass accepts the amount claimed
in the demand letter and agrees to pay that amount within 90 days after the
Effective Time upon surrender of the relevant certificates of Horizon Common
Stock duly endorsed by the Dissenting Shareholder, or (ii) containing Compass'
written estimate of the fair value of the shares of Horizon Common Stock
together with an offer to pay such amount within 90 days after the Effective
Time if Compass receives notice, within 60 days after the Effective Time,
stating that the Dissenting Shareholder agrees to accept that amount and
surrender of the relevant certificates of Horizon Common Stock duly endorsed by
the Dissenting Shareholder. In either case, the Dissenting Shareholder shall
cease to have any ownership interest in Horizon or Compass following payment of
the agreed value.
If the Dissenting Shareholder and Compass cannot agree on the fair
value of the shares within 60 days after the Effective Time, the Dissenting
Shareholder or Compass may, within 60 days of the expiration of the initial 60
day period, file a petition in any court of competent jurisdiction in Travis
County, Texas requesting a finding and determination of the fair value of the
Dissenting Shareholder's shares. If no petition is filed within the appropriate
time period, then all Dissenting Shareholders who have not reached an agreement
with Compass on the value of their shares shall be bound by the Merger and lose
their rights to dissent. After a hearing concerning the petition, the court
shall determine which Dissenting Shareholders have complied with the provisions
of the TBCA and have become entitled to the valuation of, and payment for, their
shares, and shall appoint one or more qualified appraisers to determine the
value of the shares of Horizon Common Stock in question. The appraisers shall
determine such value and file a report with the court. The court shall then in
its judgment determine the fair value of the shares of Horizon Common Stock,
which judgment shall be binding on Compass and on all Dissenting Shareholders
receiving notice of the hearing. The court shall direct Compass to pay such
amount, together with interest thereon, beginning 91 days after the Effective
Time to the date of judgment, to the Dissenting Shareholders entitled thereto.
The judgment shall be payable upon the surrender to Compass of certificates
representing shares of Horizon Common Stock duly endorsed by the Dissenting
Shareholders. Upon payment of the judgment, the Dissenting Shareholders shall
cease to have any interest in Horizon, Compass or the Horizon Common Stock. All
court costs and fees of the appraisers shall be allotted between the parties in
the manner that the court determines is fair.
Any Dissenting Shareholder who has made a written demand on Compass
for payment of the fair value of his Horizon Common Stock shall not thereafter
be entitled to vote or exercise any other rights as a shareholder
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except the statutory right of appraisal as described herein and the right to
maintain an appropriate action to obtain relief on the ground that the Merger
would be or was fraudulent. In the absence of fraud in the transaction, a
Dissenting Shareholder's statutory right to appraisal is the exclusive remedy
for the recovery of the value of his shares or money damages to the shareholder
with respect to the Merger.
Any Dissenting Shareholder who has made a written demand on Compass
for payment of the fair value of his Horizon Common Stock may withdraw such
demand at any time before payment for his shares or before a petition has been
filed with an appropriate court for determination of the fair value of such
shares. If a Dissenting Shareholder withdraws his demand, or if he is otherwise
unsuccessful in asserting his dissenters' rights of appraisal, such Dissenting
Shareholder shall be bound by the Merger and his status as a shareholder shall
be restored without prejudice to any corporate proceedings, dividends, or
distributions which may have occurred during the interim. SEE "SUMMARY--
DISSENTERS' RIGHTS"; "COMPARISON OF RIGHTS OF SHAREHOLDERS OF HORIZON AND
COMPASS--APPRAISAL RIGHTS"; AND APPENDIX II.
It is a condition to Compass' obligations under the Merger Agreement
that not more than 5% of the outstanding shares of Horizon Common Stock shall
have been determined to be held by dissenting or potentially dissenting
shareholders. If such condition is not met, Compass will be entitled to
terminate the Merger Agreement. SEE "THE MERGER AGREEMENT--OTHER TERMS AND
CONDITIONS".
SEE "THE MERGER--FEDERAL INCOME TAX CONSEQUENCES" for a description of
the tax consequences of exercising dissenters' rights.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Liddell, Sapp and Silver, Freedman & Taff, L.L.P.
the Merger, if consummated in accordance with the Merger Agreement, will qualify
as a "reorganization" within the meaning of Section 368(a) of the Code. An
opinion of counsel is not binding on the Internal Revenue Service ("IRS") or the
courts.
Liddell, Sapp and Silver, Freedman & Taff, L.L.P. have relied upon
certain assumptions and representations in issuing its opinion, including the
following:
1. The Merger and the Subsequent Merger will be respected as
separate transactions for federal income tax purposes. This matter is
discussed in greater detail below.
2. Horizon shareholders will receive only Compass Common Stock in the
Merger and they will not receive or be deemed by the IRS to receive any
cash (other than cash paid in lieu of fractional shares of Compass Common
Stock or cash paid to dissenters) or other property which would constitute
"boot" for federal income tax purposes.
3. Compass has received representations from certain historic
Horizon shareholders who will receive at least 40% of the Compass Common
Stock issued in exchange for Horizon Common Stock in the Merger stating
that they have no present intention to dispose of the Compass Common Stock
received.
In such counsel's opinion, the following federal income tax
consequences to Horizon shareholders will result from the qualification of
the Merger as a reorganization under Section 368(a) of the Code:
1. A Horizon shareholder will not recognize any gain or loss upon
the exchange of his or her Horizon Common Stock solely for Compass Common
Stock.
2. The aggregate tax basis of Compass Common Stock received by a
Horizon shareholder in the Merger will be the same as the aggregate basis
of the Horizon Common Stock surrendered in
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exchange therefor. For purposes of allocating this aggregate basis to
individual shares of Compass Common Stock received, the IRS position is
that each separate block of stock surrendered shall be treated separately.
Under this rule, for example, if a Horizon shareholder surrenders two
blocks of Horizon Common Stock in the Merger, having an adjusted basis of
$1.00 per share for the first block and $2.00 per share for the second
block, the Compass Common Stock which he or she receives in exchange for
each share of Horizon Common Stock in the first block will have a basis of
$1.00, and the Compass Common Stock which he receives in exchange for each
share of Horizon Common Stock in the second block will have a basis of
$2.00.
3. The holding period of Compass Common Stock to be received by each
Horizon shareholder will include the period during which he or she held the
Horizon Common Stock surrendered in exchange therefor, provided that the
Horizon Common Stock is held as a capital asset on the date of the
exchange.
4. The payment of cash in lieu of fractional shares of Compass
Common Stock will be treated as if the fractional shares were distributed
as part of the exchange and then redeemed by Compass. Such cash payment
will be treated as having been received as a distribution in full payment
in exchange for the stock redeemed as provided in Section 302 of the Code.
5. For a Horizon shareholder who dissents from the Merger and
receives solely cash in exchange for his or her Horizon Common Stock, such
cash will be treated as having been received by such shareholder as a
distribution in redemption of his or her stock, subject to the provisions
and limitations of Section 302 of the Code.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN
FOR GENERAL INFORMATION ONLY. HORIZON SHAREHOLDERS ARE URGED TO CONSULT WITH
THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM OF
THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN INCOME
OR OTHER TAX LAWS.
Compass expects to receive a legal opinion from Liddell, Sapp at the
Closing that the Merger will qualify as a reorganization under Section 368(a) of
the Code in satisfaction of a condition to consummation of the Merger. Horizon
has received a similar opinion from Silver, Freedman & Taff, L.L.P.. SEE "THE
MERGER--OTHER TERMS AND CONDITIONS".
GOVERNMENT APPROVALS
Consummation of the Merger is subject to receipt of certain required
regulatory approvals from the Federal Reserve under the BHC Act, the FDIC, the
OTS, the TSLD and the Commissioner, and the satisfaction or waiver of a number
of other conditions. It is expected that the FDIC, the OTS,
the TSLD and the Commissioner will issue their respective approvals of the
transaction. SEE "THE MERGER--GOVERNMENTAL APPROVALS".
A formal application under the BHC Act was approved by the Federal
Reserve on January 30, 1997. Applications were filed with the FDIC, the TSLD,
and the Commissioner on December 18, 1996. While the FDIC application is
pending, the United States Department of Justice ("Justice Department"),
pursuant to the Bank Merger Act, may bring an action opposing the Subsequent
Merger under the antitrust laws. No Justice Department objection or adverse
action is anticipated.
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In addition, a notice of the Merger was filed with OTS on December 18,
1996 along with a request to deregister the Company as a savings and loan
holding company effective upon consummation of the Merger.
The Commissioner must make a recommendation to the Federal Reserve as
to whether the transaction should be approved under the BHC Act. To date, the
parties are not aware of and do not expect any adverse recommendation from the
Commissioner. SEE "SUMMARY--CONDITIONS TO CONSUMMATION AND REGULATORY APPROVALS;
TERMINATION"; AND "SUPERVISION AND REGULATION".
ACCOUNTING TREATMENT
Compass expects to account for the Merger using the "pooling-of-
interests" method of accounting. Compass has received a letter from KPMG Peat
Marwick LLP, which will be updated as of the Effective Time, to the effect that
the Merger will qualify for pooling-of-interests accounting treatment. Under
this accounting method, at the Effective Time, Horizon's assets and liabilities
will be added at their recorded book values to those of Compass, and its
shareholders' equity will be added to Compass' consolidated balance sheet.
Income and other financial statements of Compass issued after consummation of
the Merger will be restated retroactively to reflect the consolidated operations
of Horizon and Compass as if the Merger had taken place prior to the periods
covered by such financial statements. SEE "SUMMARY--ACCOUNTING TREATMENT";
"SELECTED FINANCIAL DATA"; AND "THE MERGER--OTHER TERMS AND CONDITIONS".
SUPERVISION AND REGULATION
GENERAL
Bank holding companies and banks are regulated extensively under both
federal and state law. Compass, Compass Texas and Compass Bancorporation are
subject to regulation by the Federal Reserve and their respective bank
subsidiaries (the "Subsidiary Banks") are subject to regulation by the Federal
Reserve and/or the FDIC and the appropriate state banking departments. The
deposits of each of the Subsidiary Banks are insured by the FDIC, and Compass
Bank and Compass Bank-Florida are members of the Federal Reserve System.
Although the various laws and regulations which apply to Compass and its
Subsidiary Banks are intended to insure safe and sound banking practices, they
are mainly intended to benefit depositors and the federal deposit insurance
fund, not the shareholders of Compass. The following discussion highlights
certain laws and regulations affecting Compass and the Subsidiary Banks and
should be read in conjunction with the more detailed information incorporated by
reference herein. SEE "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE".
COMPASS, COMPASS TEXAS AND COMPASS BANCORPORATION
Compass, Compass Texas and Compass Bancorporation are bank holding
companies within the meaning of the BHC Act and are registered as such with the
Federal Reserve. As bank holding companies, Compass, Compass Texas and Compass
Bancorporation are required to file with the Federal Reserve an annual report
and such additional information as the Federal Reserve may require pursuant to
the BHC Act. The Board may also make examinations of the Compass and each of its
subsidiaries. Under the BHC Act, bank holding companies are prohibited, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than five percent of the voting shares of any company engaging in
activities other than banking or managing or controlling banks or furnishing
services to or performing services for their banking subsidiaries. However, the
BHC Act authorizes the Federal Reserve to permit bank holding companies to
engage in, and to acquire or retain shares of companies that engage in,
activities which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
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The BHC Act requires a bank holding company to obtain the prior
approval of the Federal Reserve before it may acquire substantially all of the
assets of any bank or ownership or control of any voting shares of any bank if,
after such acquisition, it would own or control, directly or indirectly, more
than five percent of the voting shares of any such bank. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act")
permits bank holding companies to acquire banks located in any state without
regard to whether the transaction is prohibited under any state law (except that
states may establish the minimum age of their local banks (up to a maximum of 5
years) subject to interstate acquisition of out-of-state bank holding
companies).
The Federal Reserve Act generally imposes certain limitations on
extensions of credit and other transactions by and between banks which are
members of the Federal Reserve System and other affiliates (which includes any
holding company of which such bank is a subsidiary and any other non-bank
subsidiary of such holding company). Banks which are not members of the Federal
Reserve System are also subject to these limitations. Further, federal law
prohibits a bank holding company and its subsidiaries from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or the furnishing of services.
The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") enacted major regulatory reforms, stronger capital standards for
savings associations and stronger civil and criminal enforcement provisions.
FIRREA allows the acquisition of healthy and failed savings associations by bank
holding companies and imposes no interstate barriers on such bank holding
company acquisitions. With certain qualifications, FIRREA also allows bank
holding companies to merge acquired savings and loans into their existing
commercial bank subsidiaries. FIRREA also provides that a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989 in connection with (i)
the default of a commonly controlled FDIC-insured depository institution or (ii)
any assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default.
In December of 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted. This act recapitalized the Bank
Insurance Fund ("BIF"), of which the Subsidiary Banks are members, substantially
revised statutory provisions, including capital standards, restricted certain
powers of state banks, gave regulators the authority to limit officer and
director compensation and required holding companies to guarantee the capital
compliance of their banks in certain instances. Among other things, FDICIA
requires the federal banking agencies to take "prompt corrective action" with
respect to banks that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized", as defined by regulations recently adopted by the Federal
Reserve, the FDIC and the other federal depository institution regulatory
agencies. A depository institution is well capitalized if it significantly
exceeds the minimum level required by regulation for each relevant capital
measure, adequately capitalized if it meets such measure, undercapitalized if it
fails to meet any such measure, significantly undercapitalized if it is
significantly below such measure and critically undercapitalized if it fails to
meet any critical capital level set forth in the regulations. The critical
capital level must be a level of tangible equity capital equal to not less than
2% of total tangible assets and not more than 65% of the minimum leverage ratio
to be prescribed by regulation (except to the extent that 2% would be higher
than such 65% level). An institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
If a depository institution fails to meet regulatory capital
requirements, the regulatory agencies can require submission and funding of a
capital restoration plan by the institution, place limits on its activities,
require the raising of additional capital and, ultimately, require the
appointment of a conservator or receiver for the institution. The obligation of
a controlling bank holding company under FDICIA to fund a capital restoration
plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets
or the amount required to meet regulatory capital requirements. If the
controlling bank holding company fails to fulfill its obligations under FDICIA
and files (or has filed against it) a petition under the Federal Bankruptcy
Code, the FDIC's claim may be entitled to a priority in such bankruptcy
proceeding over third party creditors of the bank holding company.
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An insured depository institution may not pay management fees to any
person having control of the institution nor may an institution, except under
certain circumstances and with prior regulatory approval, make any capital
distribution (including the payment of dividends) if, after making such payment
or distribution, the institution would be undercapitalized. FDICIA also
restricts the acceptance of brokered deposits by insured depository institutions
and contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit
accounts.
At September 30, 1996, the Subsidiary Banks were "well capitalized",
and were not subject to any of the foregoing restrictions, including, without
limitation, those relating to brokered deposits. The Subsidiary Banks do not
rely upon brokered deposits as a primary source of deposit funding, although
such deposits are sold through the Correspondent and Investment Services
Division of Compass Bank.
FDICIA contains numerous other provisions, including reporting
requirements, termination of the "too big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy. In addition, FDICIA required the FDIC to establish a system of
risk-based assessments for federal deposit insurance, by which banks that pose a
greater risk of loss to the FDIC (based on their capital levels and the FDIC's
level of supervisory concern) pay a higher insurance assessment.
The Deposit Insurance Funds of 1996 (the "Fund Act"), which became
effective October 8, 1996, required the FDIC to impose a special assessment on
institutions holding deposits subject to assessment by the Savings Association
Insurance Fund ("SAIF"). Although the Subsidiary Banks are members of BIF, they
hold deposits subject to assessment by SAIF as a result of acquisitions of SAIF
deposits or SAIF-insured institutions. Compass' deposit liability under the
Funds Act was $7.2 million based upon $1.1 billion of SAIF deposits, after
certain discounts and exemptions.
THE SUBSIDIARY BANKS
In general, federal and state banking laws and regulations govern all
areas of the operations of the Subsidiary Banks, including reserves, loans,
mortgages, capital, issuances of securities, payment of dividends and
establishment of branches. Federal and state bank regulatory agencies also have
the general authority to limit the dividends paid by insured banks and bank
holding companies if such payments may be deemed to constitute an unsafe and
unsound practice. Federal and state banking agencies also have authority to
impose penalties, initiate civil and administrative actions and take other steps
intended to prevent banks from engaging in unsafe or unsound practices.
Compass Bank and Central Bank of the South are both organized under
the laws of the State of Alabama. Compass Bank is a member of the Federal
Reserve System. Compass Bank and Central Bank of the South are supervised,
regulated and regularly examined by the Alabama State Banking Department and
Compass Bank is also regulated and examined by the Federal Reserve. Compass
Bank-Florida is organized under the laws of the State of Florida, is a member of
the Federal Reserve System and is subject to supervision, regulation and
examination by the Florida Department of Banking and Finance and the Federal
Reserve. Compass Bank-Houston is organized under the laws of the State of Texas,
and is not a member of the Federal Reserve System. Compass Bank-Houston is
supervised, regulated and regularly examined by the Texas Department of Banking
and the FDIC. The Subsidiary Banks, as participants in the BIF and the Savings
Association Insurance Fund of the FDIC, are subject to the provisions of the
Federal Deposit Insurance Act and to examination by and regulations of the FDIC.
The Alabama Subsidiary Banks are governed by Alabama laws restricting
the declaration and payment of dividends to 90% of annual net income until its
surplus funds equal at least 20% of capital stock. Compass Bank has surplus in
excess of this amount. Compass Bank-Houston which is governed by the laws of the
State of Texas, is restricted in the declaration and payment of dividends to
undivided profits; that is, the portion of equity capital of a state bank equal
to the balance of its net profits, income, gains and losses since the date of
its formation, less
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subsequent distributions to shareholders and transfers to surplus or capital
under share dividends or by board resolution. Compass Bank-Florida, which is
governed by the laws of the State of Florida, may declare and pay dividends not
to exceed the current period's net profits combined with the net retained
profits of the previous two years--after charging off bad debts, depreciation,
and other worthless assets and after making provision for reasonably anticipated
future losses on loans and other assets--and may, with the approval of the
Florida Department of Banking and Finance, declare and pay dividends from
retained net profits which accrued prior to the preceding two years; provided
that, prior to declaring any dividend, the bank shall carry 20% of its net
profits for such preceding period as is covered by the dividend to its surplus
fund until such surplus fund shall at least equal the amount of the bank's
common and preferred stock issued and outstanding. As members of the Federal
Reserve System, Compass Bank and Compass Bank-Florida are also subject to
dividend limitations imposed by the Federal Reserve that are similar to those
applicable to national banks.
Federal law further provides that no insured depository institution
may make any capital distribution (which would include a cash dividend) if,
after making the distribution, the institution would not satisfy one or more of
its minimum capital requirements. Moreover, the federal bank regulatory agencies
also have the general authority to limit the dividends paid by insured banks if
such payments may be deemed to constitute an unsafe and unsound practice.
Insured banks are prohibited from paying dividends on its capital stock while in
default in the payment of any assessment due to the FDIC except in those cases
where the amount of the assessment is in dispute and the insured bank has
deposited satisfactory security for the payment thereof.
The Community Reinvestment Act of 1977 ("CRA") and the regulations of
the Federal Reserve and the FDIC implementing that act are intended to encourage
regulated financial institutions to help meet the credit needs of their local
community or communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of such financial institutions. The
CRA and such regulations provide that the appropriate regulatory authority will
assess the records of regulated financial institutions in satisfying their
continuing and affirmative obligations to help meet the credit needs of their
local communities as part of their regulatory examination of the institution.
The results of such examinations are made public and are taken into account upon
the filing of any application to establish a domestic branch, to merge or to
acquire the assets or assume the liabilities of a bank. In the case of a bank
holding company, the CRA performance record of the banks involved in the
transaction are reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or to merge with any
other bank holding company. An unsatisfactory record can substantially delay or
block the transaction.
OTHER
Other legislative and regulatory proposals regarding changes in
banking, and the regulation of banks, thrifts and other financial institutions,
are being considered by the executive branch of the Federal government, Congress
and various state governments, including Alabama, Texas and Florida. Certain of
these proposals, if adopted, could significantly change the regulations of banks
and the financial services industry. It cannot be predicted whether any of these
proposals will be adopted or, if adopted, how these proposals will affect
Compass or the Subsidiary Banks.
The Correspondent and Investment Services Division of Compass Bank is
treated as a municipal securities dealer and a government securities dealer for
purposes of the federal securities laws and, therefore, is subject to certain
reporting requirements and regulatory controls by the Commission, the United
States Department of the Treasury and the Federal Reserve. Compass Brokerage,
Inc., a wholly-owned subsidiary of Compass Bank, offers discount brokerage
services and is registered with the Commission and the National Association of
Securities Dealers, Inc. The subsidiary is subject to certain reporting
requirements and regulatory control by these agencies.
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Compass Bancshares Insurance, Inc., a wholly-owned subsidiary of Compass Bank,
is a licensed insurance agent or broker for various insurance companies. Such
insurance subsidiary and its licensed agents are subject to reporting and
licensing regulations of the Alabama Insurance Commission and various other
states.
References under the heading "SUPERVISION AND REGULATION" to
applicable statutes are brief summaries of portions thereof, do not purport to
be complete and are qualified in their entirety by reference to such statutes.
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DESCRIPTION OF COMPASS COMMON AND PREFERRED STOCK
The following summary of the terms and provisions of the Compass
Common Stock and the Compass Preferred Stock ("Compass Preferred Stock") does
not purport to be complete and is qualified in its entirety by reference to
Compass' Restated Certificate of Incorporation and the Certificates of Amendment
thereto, which include the express terms of the Compass Common Stock and the
Compass Preferred Stock. Such Certificates are filed as exhibits to the
Registration Statement of which this Proxy Statement/Prospectus is a part. SEE
"RECENT DEVELOPMENTS".
COMPASS COMMON STOCK
Compass is incorporated under the GCL. Compass is authorized to issue
100,000,000 shares of Compass Common Stock, of which 40,524,717 shares were
issued and outstanding on December 31, 1996. Compass' Board of Directors may at
any time, without additional approval of the holders of Compass Common Stock,
issue additional authorized but previously unissued shares of Compass Common
Stock.
DIVIDENDS
Holders of Compass Common Stock are entitled to receive dividends
ratably when, as and if declared by Compass' Board of Directors from assets
legally available therefor, after payment of all dividends on preferred stock,
if any is outstanding. Under the GCL, Compass may pay dividends out of surplus
or net profits for the fiscal year in which declared and/or for the preceding
fiscal year, even if its surplus accounts are in a deficit position. Dividends
paid by its Subsidiary Banks, principally Compass Bank, are the primary source
of funds available to Compass for payment of dividends to its shareholders and
for other needs. Compass' Board of Directors intends to maintain its present
policy of paying regular quarterly cash dividends. The declaration and amount of
future dividends will depend on circumstances existing at the time, including
Compass' earnings, financial condition and capital requirements, as well as
regulatory limitations and such other factors as Compass' Board of Directors
deems relevant. SEE "COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF HORIZON AND
COMPASS--DIVIDENDS"; "SELECTED FINANCIAL DATA".
Compass' principal assets and sources of income consist of investments
in its operating subsidiaries, which are separate and distinct legal entities.
Federal and state banking regulations applicable to Compass and its banking
subsidiaries require minimum levels of capital which limit the amounts available
for payment of dividends. The Alabama Subsidiary Banks are governed by Alabama
laws restricting the declaration and payment of dividends to 90% of annual net
income until its surplus funds equal at least 20% of capital stock. Compass Bank
has surplus in excess of this amount. Compass Bank-Houston, which is governed by
the laws of the State of Texas, is restricted in the declaration and payment of
dividends to undivided profits; that is, the portion of equity capital of a
state bank equal to the balance of its net profits, income, gains and losses
since the date of its formation, less subsequent distributions to shareholders
and transfers to surplus or capital under share dividends or by board
resolution. Compass Bank-Florida, which is governed by the laws of the State of
Florida, may declare and pay dividends not to exceed the current period's net
profits combined with the net retained profits of the previous two years--after
charging off bad debts, depreciation, and other worthless assets and after
making provision for reasonably anticipated future losses on loans and other
assets--and may, with the approval of the Florida Department of Banking and
Finance, declare and pay dividends from retained net profits which accrued prior
to the preceding two years; provided that, prior to declaring any dividend, the
bank shall carry 20% of its net profits for such preceding period as is covered
by the dividend to its surplus fund until such surplus fund shall at least equal
the amount of the bank's common and preferred stock issued and outstanding. As
members of the Federal Reserve System, Compass Bank and Compass Bank-Florida are
also subject to dividend limitations imposed by the Federal Reserve that are
similar to those applicable to national banks. SEE "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE"; "SUMMARY--REASONS FOR THE MERGER; RECOMMENDATION OF
BOARD OF DIRECTORS"; "RISK FACTORS"; "RECENT
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DEVELOPMENTS"; "SELECTED FINANCIAL DATA"; "MARKET PRICES"; "COMPARISON OF RIGHTS
OF SHAREHOLDERS OF HORIZON AND COMPASS--DIVIDENDS"; AND "INFORMATION ABOUT
COMPASS".
PREEMPTIVE RIGHTS
The holders of Compass Common Stock do not have preemptive rights to
subscribe for a proportionate share of any additional securities issued by
Compass before such securities are offered to others. The absence of preemptive
rights increases Compass' flexibility to issue additional shares of Compass
Common Stock in connection with acquisitions, employee benefit plans and for
other purposes, without affording the holders of Compass Common Stock a right to
subscribe for their proportionate share of those additional securities. Any
further issuance of Compass Common Stock after the Effective Time may reduce
former Horizon shareholders' proportionate interest in Compass.
VOTING RIGHTS
The holders of Compass Common Stock are entitled to one vote per share
on all matters presented to shareholders. Holders of Compass Common Stock are
not entitled to cumulate their votes in the election of directors. Cumulative
voting rights, if provided for, entitle shareholders to a number of votes equal
to the product of the number of shares held and the number of directors to be
elected and allow shareholders to distribute such votes among any number of
nominees for director or cast such votes entirely for one director. Cumulative
voting rights tend to enhance the voting power of minority shareholders. SEE
"COMPARISON OF RIGHTS OF SHAREHOLDERS OF HORIZON AND COMPASS--ELECTION OF
DIRECTORS".
LIQUIDATION
Upon liquidation, dissolution or the winding up of the affairs of
Compass, holders of Compass Common Stock are entitled to receive their pro rata
portion of the remaining assets of Compass after the holders of Compass
Preferred Stock have been paid in full any sums to which they may be entitled.
SEE "RECENT DEVELOPMENTS".
COMPASS PREFERRED STOCK
Compass has authorized 25,000,000 shares of $.10 par value preferred
stock. The preferred stock is issuable in one or more series and Compass' Board
of Directors, subject to certain limitations, is authorized to fix the number of
shares, dividend rate, liquidation prices, redemption, conversion, voting
rights, and other terms. Compass' Board of Directors may issue preferred stock
without approval of the holders of Compass Common Stock. No shares of preferred
stock are outstanding as of the date hereof. SEE "RISK FACTORS"; "RECENT
DEVELOPMENTS"; AND "COMPARISON OF RIGHTS OF SHAREHOLDERS OF HORIZON AND
COMPASS--DIVIDENDS" AND "--LIQUIDATION RIGHTS".
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COMPARISON OF RIGHTS OF
SHAREHOLDERS OF HORIZON AND COMPASS
CHARTER AND BYLAW PROVISIONS AFFECTING COMPASS STOCK
Compass' Certificate and Bylaws contain several provisions which may
make Compass a less attractive target for an acquisition of control by anyone
who does not have the support of Compass' Board of Directors. Such provisions
include, among other things, the requirement of a supermajority vote of
shareholders or directors to approve certain business combinations and other
corporate actions, a minimum price provision, several special procedural rules,
a staggered Board of Directors, and the limitation that shareholder actions
without a meeting may only be taken by unanimous written shareholder consent.
Horizon's Articles of Incorporation and Bylaws contain some but not all similar
restrictions.
The foregoing summary is qualified in its entirety by reference to
Compass' Certificate and Bylaws, which are available upon written request from
Compass and which are on file with the Commission, and to the Articles of
Incorporation and Bylaws of Horizon, which are available upon request from
Horizon. SEE "AVAILABLE INFORMATION"; "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE"; "RISK FACTORS"; AND "INFORMATION ABOUT COMPASS".
In addition to the foregoing differences between Horizon's and
Compass' charters, as a result of the Merger, Horizon shareholders, whose rights
are governed by the TBCA, will become shareholders of Compass, and their rights
as shareholders will then be governed primarily by the GCL.
CERTAIN DIFFERENCES BETWEEN THE CORPORATION LAWS OF TEXAS AND DELAWARE
AND CORRESPONDING CHARTER AND BYLAW PROVISIONS
Certain differences between the Delaware and Texas corporation laws,
as well as a description of the corresponding provisions contained in Compass'
and Horizon's respective charter and By-Laws, as such differences may affect the
rights of shareholders, are set forth below. The following summary does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the TBCA and the GCL and applicable charter and bylaw provisions.
MERGERS
Both the TBCA and GCL generally permit a merger to become effective
without the approval of the surviving corporation's shareholders if the articles
or certificate of incorporation, as the case may be, of the surviving
corporation do not change following the merger, the amount of the surviving
corporation's common stock to be issued or delivered under the plan of merger
does not exceed 20% of the total shares of outstanding voting stock immediately
prior to the acquisition, and the board of directors of the surviving
corporation adopts a resolution approving the plan of merger.
Where shareholder approval is required under the TBCA, a merger must
be approved by the holders of two-thirds of the outstanding shares of the Texas
corporation entitled to vote thereon, unless there is a class of stock that is
entitled to vote as a class, in which event the merger must be approved by the
holders of two-thirds of the outstanding shares of stock of each class entitled
to vote as a class and by the holders of two-thirds of the outstanding shares
otherwise entitled to vote. If so provided in a Texas corporation's Articles of
Incorporation, the percentage required for approval of a merger may be increased
in excess of the two-thirds standard. Horizon's Articles of Incorporation
require the holders of 80% of the outstanding shares of stock to approve a
merger. Where shareholder approval is required under Delaware law, a merger can
be approved by a majority vote of the outstanding shares of capital stock of
each class entitled to vote thereon. Compass' Certificate requires supermajority
approval by its Board of Directors and shareholders in certain cases, as
described above. SEE "RISK
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FACTORS" AND "COMPARISON OF RIGHTS OF SHAREHOLDERS OF HORIZON AND COMPASS--
CHARTER AND BYLAW PROVISIONS AFFECTING COMPASS STOCK".
APPRAISAL RIGHTS
Shareholders of Texas corporations are entitled to exercise certain
dissenters' rights in the event of a sale, lease, exchange or other disposition
of all, or substantially all, of the property and assets of the corporation,
and, with the exceptions discussed below, a merger or consolidation.
Shareholders of a Delaware corporation shall have rights of appraisal in
connection with certain mergers or consolidations. In addition, a Delaware
corporation may, but is not required to, provide in its certificate of
incorporation that appraisal rights shall be available to shareholders in the
event of an amendment to the certificate of incorporation, the sale of all or
substantially all of the assets of the corporation, or the occurrence of any
merger or consolidation regarding which appraisal rights are not otherwise
available and in which that Delaware corporation is not the surviving or
resulting company. No such provision is included in Compass' Certificate. The
rights of a dissenting shareholder of a Texas corporation are set forth in
Appendix II. SEE "SUMMARY--DISSENTERS' RIGHTS"; "THE MERGER--DISSENTERS'
RIGHTS"; AND APPENDIX II.
No appraisal rights are available under either Texas or, except as
described below, Delaware law for the holders of any shares of a class or series
of stock of a Texas or Delaware corporation to a merger if that corporation
survives the merger and the merger did not require the vote of the holders of
that class or series of such corporation's stock; provided, however, that under
Delaware law appraisal rights will be available in any event to shareholders of
a Delaware corporation who are required to accept consideration for their shares
other than the consideration described below.
Both Texas and Delaware law have a provision which states that
shareholders do not have appraisal rights in connection with a merger where, on
the record date fixed to determine the shareholders entitled to vote on the
merger or consolidation, the stock of the corporation is listed on a national
securities exchange or is held of record by more than 2,000 shareholders, unless
any of the following exceptions concerning consideration paid to the shareholder
for his shares are met. Under Texas law, a shareholder will be entitled to
dissent and be paid for his shares if, notwithstanding the above, the
shareholder is required to accept for his shares any consideration other than
(a) shares of stock of a corporation which, immediately after the effective date
of the merger, are listed on a national securities exchange or are held of
record by not less than 2,000 shareholders, and (b) cash in lieu of fractional
shares otherwise entitled to be received. The Delaware statute contains a
similar consideration provision which is somewhat broader. Appraisal rights will
be available to shareholders of a Delaware corporation in the event of a merger
or consolidation if such shareholders are required by the terms of an agreement
of merger or consolidation to accept for their stock anything other than (a)
shares of stock of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof, (b) shares of stock of
any other corporation or depository receipts in respect thereof, which at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or held of record by more than 2,000 shareholders,
(c) cash in lieu of fractional shares or fractional depository receipts of a
corporation described in (a) and (b) above, or (d) any combination of the shares
of stock, depository receipts and cash in lieu of fractional shares or
fractional depositary receipts described in (a), (b) and (c) above.
SPECIAL MEETINGS
A special meeting of shareholders of a Texas corporation may be called
by the holders of shares entitled to cast not less than 10% of all shares
entitled to vote at the meeting, unless a different percentage, not to exceed
50%, is provided in the Articles of Incorporation. Horizon has set this
percentage as 35% under its Articles of Incorporation. Shareholders of Delaware
corporations do not have a right to call special meetings unless such right is
conferred upon the shareholders in the corporation's Certificate of
Incorporation or Bylaws. Horizon's Articles of Incorporation and Bylaws provide
that special meetings of shareholders may be called only by the President, the
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Board of Directors or one or more shareholders the aggregate of whose shares
comprise not less than 35% of all the shares entitled to vote at the meeting.
Compass' Certificate prohibits shareholders from calling special meetings. SEE
"RISK FACTORS".
ACTIONS WITHOUT A MEETING
Under Texas law, the shareholders may act without a meeting if a
consent in writing to such action is signed by all shareholders. Delaware law
provides that shareholders may take action without a meeting if a consent in
writing to such action is signed by the shareholders having the minimum number
of votes that would be necessary to take such action at a meeting, unless
prohibited in the Certificate of Incorporation. Compass' Certificate and
Horizon's Articles both prohibit shareholder action by written consent except
where such action is taken unanimously. SEE "RISK FACTORS".
ELECTION OF DIRECTORS
Pursuant to Texas law, unless otherwise provided in the Articles of
Incorporation, shareholders shall be entitled to cumulative voting in the
election of directors if they provide the secretary of the corporation with
written notice prior to the day of the election of their intent to cumulate
their votes. Absent such notice, the directors of a corporation shall be elected
by a plurality of the votes cast by the holders of shares entitled to vote in
the election of directors at a meeting of shareholders at which a quorum is
present. Holders of Compass Common Stock and Horizon's Common Stock are not
entitled to cumulate their votes in the election of directors. SEE "DESCRIPTION
OF COMPASS COMMON AND PREFERRED STOCK--VOTING RIGHTS".
VOTING ON OTHER MATTERS
Under Texas law, an amendment to the Articles of Incorporation
requires the approval of the holders of at least two-thirds of the outstanding
shares of the corporation entitled to vote thereon, and the holders of two-
thirds of the outstanding shares of each class or series entitled to vote
thereon as a class, unless a different number, not less than a majority, is
specified in the Articles of Incorporation. The Articles of Incorporation of
Horizon requires approval by the holders of at least 80% of the outstanding
shares of stock. Delaware law provides that amendments to the Certificate of
Incorporation must be approved by the holders of a majority of the corporation's
stock entitled to vote thereon, and the holders of a majority of the outstanding
stock entitled to vote thereon as a class, unless the Certificate of
Incorporation requires the vote of a larger portion of the outstanding stock or
any class thereof. Compass' Certificate does not provide for approval of an
amendment of the Certificate by more than a majority vote.
The sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the Articles of Incorporation) of all, or substantially all, the property and
assets, with or without the goodwill, of a Texas corporation, if not made in the
usual and regular course of its business, requires the approval of the holders
of at least two-thirds of the outstanding shares of the bank entitled to vote
thereon, and the holders of two-thirds of the outstanding shares of each class
or series entitled to vote thereon as a class, unless the Articles of
Incorporation require the vote of a different number, not less than a majority,
of the shares outstanding. Horizon's Articles of Incorporation requires approval
by the holders of at least 80% of the outstanding shares of stock. A Delaware
corporation may sell, lease or exchange all or substantially all of its property
and assets when and as authorized by the holders of a majority of the
outstanding stock of the corporation entitled to vote thereon, unless the
Certificate of Incorporation requires the vote of a larger portion of the
outstanding stock. Compass' Certificate does not so provide.
Under Texas law, the voluntary dissolution of a corporation requires
the approval of the holders of at least two-thirds of the total outstanding
shares of the corporation, and the holders of two-thirds of the outstanding
shares of each class or series entitled to vote thereon as a class, unless a
different amount, not less than a majority, is
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specified in the Articles of Incorporation. Each outstanding share of a Texas
corporation is entitled to vote on dissolution. The Articles of Incorporation of
Horizon provide for an 80% approval. Delaware law requires that dissolution must
be approved by the holders of a majority of the corporation's stock entitled to
vote thereon, unless the Certificate of Incorporation requires the vote of a
larger portion of the outstanding stock. Compass' Certificate does not provide
for approval by more than a majority vote.
PREEMPTIVE RIGHTS
Under Texas law, shareholders possess preemptive rights as to the
issuance of additional or treasury securities by the corporation, unless the
corporation's Articles of Incorporation provide otherwise. Horizon's Articles of
Incorporation deny preemptive rights and, therefore, Horizon's shareholders do
not have preemptive rights as to newly issued and treasury shares. Shareholders
of Compass also do not possess such preemptive rights.
DIVIDENDS
A Delaware corporation may pay dividends not only out of surplus (the
excess of net assets over capital) but also out of net profits for the current
or preceding fiscal year if it has no surplus; provided, however, that if the
capital of the corporation has been decreased to an amount less than the
aggregate amount of the capital represented by the issued and outstanding stock
having a preference upon the distribution of assets, no dividends may be
declared out of net profits. A Texas corporation may make distributions only out
of surplus.
Holders of Compass Common Stock are entitled to receive dividends
ratably when, as and if declared by Compass' Board of Directors from assets
legally available therefor, after payment of all dividends on Preferred Stock,
if any is outstanding. Horizon's Articles of Incorporation do not contain
restrictions as to the ability of the Horizon Board of Directors to declare
dividends. SEE "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE"; "SUMMARY--
PARTIES TO THE MERGER"; "SUMMARY---REASONS FOR THE MERGER; RECOMMENDATION OF
BOARD OF DIRECTORS"; "RECENT DEVELOPMENTS"; "SELECTED FINANCIAL DATA"; "MARKET
PRICES"; "DESCRIPTION OF COMPASS COMMON AND PREFERRED STOCK".
LIQUIDATION RIGHTS
Generally under Texas and Delaware corporate law, shareholders are
entitled to share ratably in the distribution of assets upon the dissolution of
their corporation. Preferred shareholders typically do not participate in the
distribution of assets of a dissolved corporation beyond their established
contractual preferences. Once the rights of preferred shareholders have been
fully satisfied, common shareholders are entitled to the distribution of any
remaining assets.
Upon liquidation, dissolution or the winding up of the affairs of
Compass, holders of Compass Common Stock are entitled to receive their pro rata
portion of the remaining assets of Compass after the holders of Compass
Preferred Stock have been paid in full any sums to which they may be entitled.
The Articles of Incorporation of Horizon provide that upon the voluntary
liquidation, dissolution or winding up of the affairs of Horizon, the
shareholders of Horizon Common Stock are entitled to receive, in proportion to
the number of shares held by them, all the assets that remain after any
preferential amounts have been distributed to the holders of Horizon Preferred
Stock and any other class or series of stock having a preference over the common
stock then outstanding. Horizon has never issued preferred stock. SEE "RECENT
DEVELOPMENTS".
LIMITATION OF LIABILITY AND INDEMNIFICATION
Both Texas and Delaware corporate law permit a corporation to set
limits on the extent of a director's liability. Both Texas and Delaware law
permit a corporation to indemnify its officers, directors, employees and agents
if such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best
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interests of the corporation. Indemnification is not allowed under either Texas
or Delaware law, absent a court order to the contrary, if an officer, director,
employee or agent of the bank or corporation is finally adjudged liable to the
corporation.
Under Compass' Certificate, a director will not be liable to Compass
or its shareholders for monetary damages for any breach of fiduciary duty as a
director, except (i) for breach of a director's duty of loyalty, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividend or unlawful stock purchase
or redemption, or (iv) any transaction from which the director derived an
improper personal benefit. Compass' Certificate authorizes indemnification of
officers, directors and others to the fullest extent permitted by Delaware law.
SEE "AVAILABLE INFORMATION"; "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE";
AND "INDEMNIFICATION".
Horizon's Articles of Incorporation provide that a director will not
be liabliable to Horizon or its shareholders for monetary damages for an act or
omission in the director's capacity as a director, except for (i) a breach of a
director's duty of loyalty to the corporation or its shareholders, (ii) an act
or omission not in good faith that constitutes a breach of the duty of the
director to the corporation or an act or omission that involves intentional
misconduct or a knowing violation of the law, (iii) a transaction from which a
director received an improper benefit, whether or not the benefit resulted from
an action taken within the scope of the director's office, or (iv) an act or
omission for which the liability of a director is expressly provided for by
statute.
In addition, Horizon shall indemnify and hold harmless any person who
was, is, or is threatened to be named a defendant or respondent in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative, or investigative, any appeal in such
action, suit, or proceeding, and any inquiry or investigation that could lead to
such an action, suit, or proceeding by reason of the fact that he is or was a
director or officer of the corporation or, while a director or officer of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent, or other
similar functionary of another foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan or other
enterprise, against judgments, penalties (including excise and similar taxes),
fines, and reasonable expenses (including attorney's fees) actually incurred;
provided that (i) he conducted himself in good faith, (ii) reasonably believed,
in the case of conduct in his official capacity as a director or officer of the
corporation, that his conduct was in the corporation's best interests, and (iii)
in the case of any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful; and provided further that (i) he was not found liable on
the basis that he improperly received a personal benefit, whether or not the
benefit resulted from an action taken in the person's official capacity, and
(ii) he was not found liable to the corporation. A person found liable either to
the corporation or on the basis that personal benefit was improperly received by
him may only be indemnified for reasonable expenses (including attorneys' fees)
actually incurred by the person in connection with the proceeding. However, if
that person was found liable for willful or intentional misconduct in the
performance of his duty to the corporation, the corporation shall not indemnify
him in any respect. The corporation shall indemnify a director or officer
against reasonable expenses incurred by him in connection with a proceeding in
which he is named defendant or respondent because he was wholly successful, on
the merits or otherwise, in the defense of the proceeding. The indemnification
of directors and officers by the corporation shall be to the fullest extent
authorized or permitted by applicable law, including any future amendments of
such law.
REMOVAL OF DIRECTORS
A Texas corporation may provide in its Articles of Incorporation or
Bylaws that a director can be removed with or without cause by a vote of the
holders of not less than a majority of the shares entitled to vote. Horizon's
Articles of Incorporation provide that a director may only be removed for cause
and only by the affirmative note of the holders of at least 80% of the voting
power of the outstanding shares. A majority of shareholders of a Delaware
corporation may remove a director with or without cause, unless the directors
are classified and elected for staggered terms, in which case, directors may be
removed only for cause. Compass' Certificate of Incorporation
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provides for a classified board, and any such removal must be for cause after a
supermajority vote (80%) of the shareholders.
INSPECTION OF BOOKS AND RECORDS
Under Texas law, any person who has been a shareholder of record for
at least six (6) months preceding his demand, or who is the holder of at least
5% of all of the outstanding shares of a corporation, is entitled to examine a
bank's relevant books and records for any proper purpose. Under Delaware law,
any shareholder has such a right.
ANTITAKEOVER PROVISIONS
Delaware has enacted antitakeover legislation. Compass has opted out
of such provisions as provided thereby. Certain provisions of Compass' charter
and Bylaws limiting a takeover without the support of its Board of Directors are
described in "COMPARISON OF RIGHTS OF SHAREHOLDERS OF HORIZON AND COMPASS--
CHARTER AND BYLAW PROVISIONS AFFECTING COMPASS STOCK". Texas has not enacted
similar legislation.
Although certain of the specific differences between the voting and
other rights of Horizon shareholders and Compass shareholders are discussed
above, the foregoing summary is not intended to be a complete statement of the
comparative rights of such shareholders under Texas and Delaware law, or the
rights of such persons under the respective charters and Bylaws of Compass and
Horizon. Nor is the identification of certain specific differences meant to
indicate that other differences do not exist. The foregoing summary is qualified
in its entirety by reference to the particular requirements of the TBCA and the
GCL, and the specific provisions of Compass' Certificate and Bylaws, and
Horizon's Articles of Incorporation and Bylaws.
RESALE OF COMPASS STOCK
The Compass Common Stock to be issued to holders of Horizon Common
Stock upon consummation of the Merger will be freely transferable under the
Securities Act, except for shares issued to any person who may be an "affiliate"
of Horizon within the meaning of Rule 145 under the Securities Act. The
directors and executive officers of Horizon, the beneficial owners of 10% or
more of Horizon Common Stock and certain of their related interests may be
deemed to be affiliates of Horizon. Such affiliates are not permitted to
transfer any Compass Common Stock except in compliance with the Securities Act
and the rules and regulations thereunder. Such affiliates have delivered to
Compass a written agreement in substantially the form of Exhibit A to the Merger
Agreement providing that each such affiliate will not (i) sell, pledge, transfer
or otherwise dispose of any of such affiliate's Horizon Common Stock within 30
days prior to the Effective Time, (ii) sell, pledge, transfer or otherwise
dispose of any shares of Compass Common Stock until the publication of financial
results covering at least 30 days of post-Merger combined operations of Horizon
and Compass, except for loans to any such affiliates secured by a pledge of all
or part of such Compass Common Stock, provided the lender agrees to be bound by
the terms of such written agreement, and (iii) to transfer any Compass Common
Stock except in compliance with the applicable provisions of the Securities Act
and the Exchange Act and the respective rules and regulations thereunder. SEE
"SUMMARY--ACCOUNTING TREATMENT"; "THE MERGER--ACCOUNTING TREATMENT"; AND
APPENDIX I.
Pursuant to the Merger Agreement, holders of shares of Horizon Common
Stock that will be entitled to receive more than 40% of the aggregate Merger
Consideration have represented to Compass their intention not to sell or
otherwise dispose of the shares of Compass Common Stock received in the Merger.
As a condition to consummation of the Merger, the representation from Horizon
shareholders receiving at least 40% of the aggregate Merger Consideration that
they have no current plan or present intention to sell or otherwise dispose of
the shares of Compass Common Stock received pursuant to the Merger must remain
true as of the Effective Time. SEE "THE MERGER--OTHER TERMS AND CONDITIONS".
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<PAGE>
INFORMATION ABOUT COMPASS
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Certain documents filed by and relating to Compass, including Compass'
Annual Report on Form 10-K for the year ended December 31, 1995 and its
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996, June 30,
1996 and September 30, 1996, are incorporated herein by reference. SEE
"AVAILABLE INFORMATION"; "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE".
INTERESTS OF CERTAIN PERSONS
No director or executive officer of Compass has any material direct or
indirect financial interest in Horizon or the Merger, except as a director,
executive officer or shareholder of Compass or its subsidiaries.
INFORMATION ABOUT HORIZON
Since its incorporation in 1985 as a Texas corporation, Horizon's primary
business has been to serve as a savings and loan holding company to the Bank.
Other than with respect to the Merger, Horizon does not presently have plans for
any business operations other than its ownership and control of the Bank and the
Bank's subsidiaries.
The principal business of the Bank historically has consisted of attracting
retail deposits from the general public and investing those funds primarily in
the origination of one- to four-family residential construction and permanent
mortgage loans, commercial real estate loans and undeveloped land and
residential lot loans and, to a lesser extent, credit card, multi-family real
estate, commercial business, automobile and consumer loans. The Bank also
invests in mortgage-backed securities, U.S. Government and agency obligations
and other permissible investments. At October 31, 1996, substantially all of the
Bank's real estate mortgage loans (excluding mortgage-backed securities and
Small Business Administration ("SBA") loan participations) were secured by
properties located in Texas. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HORIZON--ORIGINATIONS,
PURCHASES, SALES AND SERVICING OF LOANS".
Horizon's revenues are derived primarily from interest on its loan and
investment portfolio and, to a lesser extent, gain on sale of loans and
servicing rights, income from service charges, loan originations and loan
servicing fee income. The Bank is actively engaged in the origination and sale
of residential mortgage and SBA guaranteed loans. From time to time, these loans
originated by the Bank are sold, generally without recourse, in the secondary
market with the Bank generally retaining the servicing rights. The Bank does not
make loans to fund leveraged buyouts, loans to foreign corporations or
governments, and is not engaged in land development or construction activities
through joint ventures or subsidiaries.
The Bank currently offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits include commercial demand
deposit accounts, money market accounts, NOW checking accounts, savings accounts
and certificate accounts with terms primarily from 91 days to one year. The Bank
primarily solicits deposits in its market area and does not generally accept
brokered deposits.
MARKET AREA
The Bank's main office is located at 5800 North MoPac Expressway, Austin,
Texas. The Bank currently has six branch offices in Austin and one in nearby
Round Rock, Texas. In order to better serve its customers, the Bank plans to
relocate its medical center branch office and open a new branch office in Barton
Creek Mall and in South Austin. The Bank's primary market area includes Travis,
Williamson and Hays Counties, Texas.
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<PAGE>
SUBSIDIARY ACTIVITIES
As a Texas chartered savings bank, the Bank is permitted by federal
regulations to engage only in those subsidiary activities which are permissible
for a subsidiary of a national bank. Such activities would include the providing
of clerical, bookkeeping, accounting and other data processing services for
banks. The FDIC may approve other activities for a subsidiary provided that the
Bank is meeting its applicable minimum capital standards and the FDIC determines
that the conduct of the activity of the subsidiary will not pose a significant
risk to the SAIF. The amount which savings banks may invest cannot exceed 10% of
their paid-in and unimpaired capital and surplus. As of October 31, 1996, the
net book value of the Bank's investment in its service corporations was
approximately $128,000.
The Bank has made investments in five corporations, of which three have the
following activities and the other two are inactive:
United Austin Mortgage Company ("UAMC"), a Texas corporation and subsidiary
of the Bank, was a full service mortgage banking company for several years. On
July 1, 1991, all operations and employees of UAMC were transferred to the Bank.
With the exception of its two subsidiaries described below and a pending
litigation matter, UAMC is expected to remain inactive. SEE "INFORMATION ABOUT
HORIZON--LEGAL PROCEEDINGS".
TBM Finance Corp. ("TBM"), a Texas corporation and subsidiary of UAMC, is a
single-purpose finance company that was formed to participate in the Builder
Bond Program of the American Southwest Finance Company, a program designed to
provide an outlet for non-conforming large mortgage loans. TBM is currently
collecting residual payments on prior loan sales, and it is anticipated that
there will be no further activity in this program.
Austin Community Development Corporation ("Austin CDC"), a Texas
corporation, is a community development corporation organized to stimulate
economic development by financing small business and small commercial
development projects in an effort to create jobs for low and moderate income
persons. The Austin CDC is administered by the City of Austin pursuant to an
agreement among the participants. The Bank has made a commitment to invest up to
$25,000 in Austin CDC as a part of a commitment by 13 financial institutions
with offices in Austin to contribute to the project. As of October 31, 1996,
$25,000 had been invested under that commitment.
COMPETITION
Horizon faces strong competition, both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from other
commercial banks, savings institutions, credit unions and mortgage bankers
making loans secured by real estate located in Horizon's market area. Commercial
banks, savings institutions, credit unions and finance companies provide
vigorous competition in consumer lending. Competition for the credit card
business being pursued by Horizon comes from a variety of financial and non-
financial businesses from across the nation. Horizon competes for commercial,
real estate and other loans principally on the basis of the quality of services
it provides to borrowers, interest rates and loan fees it charges and the types
of loans it originates.
Horizon attracts substantially all of its deposits through its retail
banking offices, primarily from the communities in which those retail banking
offices are located. Accordingly, competition for these deposits is principally
from other commercial banks, savings institutions, credit unions and brokerage
houses located in the same communities. Horizon competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours, and convenient branch locations with interbranch deposit and withdrawal
privileges at each.
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<PAGE>
Horizon serves Travis, Williamson and Hays Counties in Texas as its primary
market area. There are 22 commercial banks, five thrifts, other than Horizon,
and 23 credit unions which compete for deposits and loans in Horizon's primary
market area.
EMPLOYEES
Other than its three executive officers, Horizon has no employees. At
October 31, 1996, the Bank had a total of 123 employees, including seven part-
time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
DESCRIPTION OF PROPERTIES.
Horizon conducts its business at its main office, branch offices and remote
service units (or "ATMs") in its market area. Except for the main office which
is owned by Horizon, all other offices are leased. The following table sets
forth information relating to each of the Company's offices as of October 31,
1996. The total net book value of Horizon's premises and equipment (including
land, building and leasehold improvements) at October 31, 1996 was $7.1 million.
See Note 6 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Date Total Approximate Net Book Value
Location Acquired Square Footage at October 31, 1996
- -------- -------- ----------------- -------------------
<S> <C> <C> <C>
(Dollars in Thousands)
Main Office:
- ------------
5800 North MoPac Expressway/3/
Austin, Texas 78759 1994 20,000 $4,600
Branch Offices:
- ---------------
Downtown Branch Office
321 W. Sixth Street
Austin, Texas 78704 1996 2,114 1,013
Medical Center Branch Office/2/
1509 West 38th Street
Austin, Texas 78731 1992 1,160 44
Westlake Branch Office/2/
1250 Capital of
Texas Highway South
Austin, Texas 78746 1993 4,136 86
Anderson Mill Branch Office/2/
13497 Anderson Mill Road
Austin, Texas 78750 1995 2,000 272
Minibank Facility/1/
8610 North MoPac Expressway
Austin, Texas 78759 1991 615 208
Round Rock Branch Office/2/
201A West Taylor Avenue
Round Rock, Texas 78664 1995 1,635 347
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Parmer Lane Branch Office/2/
2514 West Parmer Lane
Austin, Texas 78729 1995 2,500 252
Medical Center Branch Office/4/
4100 N. Lamar Blvd.
Austin, Texas 78756 1996 2,000 7
South Austin Branch Office/5/
2401 S. Congress Avenue
Austin, Texas 78704 1996 2,000 5
Barton Creek Square Mall/6/
2901 Capital of Texas Highway
Austin, Texas 78746 1994 550 52
Centralized Operations/2/
- --------------------------
314 Highland Mall Boulevard
Austin, Texas 78752 1993 6,680 204
</TABLE>
_______________
/1/ The Bank owns this building but leases the real property on which the
branch is located.
/2/ Unamortized leasehold improvements and furniture, fixtures and
equipment.
/3/ Includes approximately 177,000 square feet of land of which the Bank
is using 93,000 square feet. The additional 84,000 square feet is
available for future expansion. Of the 20,000 square feet in the Main
Office, 18,000 square feet is being used by the Bank, with the balance
being leased as office space to tenants.
/4/ New location for Medical Center Branch to be constructed.
/5/ New branch to be constructed.
/6/ New remote service unit plus branch location to be constructed.
MAIN OFFICE
When the Bank originally acquired its interest in the real property for
the Main Office in 1992, it acquired a single seven-acre tract that was larger
than Horizon's needs for its Main Office. The Bank subsequently divided the
tract into three lots. One of the lots is the location of the Bank's Main
Office. Originally the two other lots were under a purchase option to a
developer who planned to develop retail space on one lot and sell the other lot.
In March 1993, the Bank negotiated with the developer and reached an agreement
whereby for a reduction in the price on the lot on which he was to develop a
shopping center he gave up his option to purchase the other lot. Subsequently
the Bank's Board of Directors made a decision to keep the other lot for future
expansion needs and the developer closed on the one lot. As a result, the Bank
has a real estate lot adjacent to its Main Office with approximately 84,000
square feet of land.
ADDITIONAL PLANNED BRANCH OFFICES
The Bank has leased real property at 2401 South Congress Avenue in Austin,
Texas to construct a new branch office at that location. The branch facility to
be built will have approximately 2,000 square feet of office space and is
planned to have three drive-in's. The Bank plans to spend approximately $400,000
in improving the real property for the branch office.
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<PAGE>
In mid-1997 the Bank plans to relocate its Medical Center Branch Office to
a new site at 4100 North Lamar in Austin, Texas. The Bank has leased real
property to construct a new branch office at that location. The new branch
facility will have approximately 2,000 square feet of office space and three
drive-in's. The Bank plans to spend approximately $400,000 in building the
branch office.
The Bank has entered into a lease for approximately 500 square feet of
retail space in Barton Creek Mall for a new branch office. This mall is located
in the southwestern part of the City of Austin and is a regional mall drawing
customers from throughout Central Texas. As a part of the Bank's negotiations,
it obtained the exclusive rights to all ATMs to be located in the mall. The Bank
currently has an existing unit and plans to add two more ATM units in the mall.
Horizon believes that its current and proposed facilities are adequate to
meet the present and foreseeable needs of the Bank and Horizon.
Horizon maintains an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing and computer
equipment utilized by Horizon at October 31, 1996 was $248,000, including
computer software.
LEGAL PROCEEDINGS
Horizon is not aware of any legal proceeding to which it is a party. The
Bank is involved from time to time as plaintiff or defendant in various legal
actions arising in the normal course of its business. While the ultimate outcome
of these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing the Bank in the
proceedings, that the resolution of these proceedings should not have a material
effect on Horizon's consolidated financial condition or results of operations.
In addition to the legal actions arising in the normal course of the Bank's
business, the Bank and its subsidiary UAMC have both been involved in a legal
proceeding with a federal agency.
HUD ALLEGATIONS AGAINST UAMC
On July 2, 1990, the Department of Housing and Urban Development ("HUD")
concluded an audit of certain FHA insured loans originated by UAMC and
underwritten pursuant to a HUD/FHA direct endorsement program (Office of
Inspector General Audit Report 90-TS-221-1013). This report cited various
violations of HUD regulations which UAMC was alleged to have committed in the
origination and underwriting of over 30 loans. The allegations include knowingly
permitting loan amounts to be extended which exceed HUD's maximum insurance
limits; knowingly allowing mortgagors to not make required cash investments;
failing to review closing documents prior to the direct endorsement
underwriter's certification; and allowing appraised values to be inflated
improperly by UAMC's staff appraiser, which allegations UAMC denies. On
September 21, 1990, the Mortgagee Review Board of the Department of Housing and
Urban Development (the "MRB") placed UAMC on probation for a period of six
months, and as conditions of probation, the Board required that UAMC fully
comply with all rules, regulations and other requirements of HUD-FHA in the
origination of HUD-FHA insured mortgages and continue its implementation of the
corrective action set forth in its July 2, 1990 response to the recommendations
in the Audit Report.
HUD also requested that UAMC reimburse HUD in the amount of $1.1 million
for the losses HUD alleges it sustained on the UAMC loans. UAMC disagreed and
refused to reimburse HUD this amount. As a result, on November 19, 1990, the MRB
withdrew UAMC's mortgage authority for six years. UAMC decided not to appeal
this action because UAMC did not intend to originate any more FHA insured loans
and therefore an appeal was not economically justified.
-53-
<PAGE>
By letter dated February 1, 1993, the Justice Department notified UAMC that
it was investigating the same matters that were raised by HUD in the July 2,
1990 audit to determine if the alleged violations of the HUD regula tions
constituted false statements to the government in violation of the False Claims
Act, 31 U.S.C. (S)3729-3731 (the "False Claims Act") and that the Justice
Department might file suit against UAMC, certain of its officers, directors and
agents and its parent entities, the Bank and Horizon, to recover $5.9 million
under this Act. UAMC became inactive in July 1991 and has an insubstantial
amount of assets. On March 4, 1993, the Justice Department wrote to the
attorneys for UAMC, the Bank and Horizon contending that the Bank and Horizon
could be held accountable for UAMC on certain legal theories known as piercing
the corporate veil and the alter ego theory. Neither the Bank nor Horizon were
involved in the transactions on which these allegations are based, and substan
tially all the loans were originated prior to the formation of Horizon and the
Bank, and therefore, Horizon believes neither should be implicated if an action
pursues. The allegations of the two letters including the alter ego theory of
the Justice Department have been vehemently denied by UAMC, the Bank and
Horizon. Notwithstanding, UAMC, the Bank and Horizon will vigorously defend an
action by the Justice Department, if any. In April 1994, the attorneys for the
Justice Department advised the attorneys for UAMC, the Bank and Horizon that the
Justice Department had entered into settlements with third parties who had some
responsibility for the errors in the 30 loans which caused the HUD loss. No
details were provided.
HUD ALLEGATION AGAINST THE BANK
The office of Inspector General also conducted an audit of the Bank on
January 30, 1991 and issued Audit Report 91-TS-221-1002. This audit alleges that
a former employee of the Bank knowingly accepted false tax returns from loan
applicants and/or instructed the loan applicants to obtain either false tax
returns or false verifications of employment to qualify for a loan. The alleged
fraud occurred with respect to 15 to 30 loans, all of which arose out of the
sales of HUD repossessed property to minorities, and originated out of the
Houston, Texas branch office, which is no longer in existence.
On June 6, 1991, the MRB, after the Bank submitted a written response to
the audit report, suspended the Bank's mortgage authority and issued an order
withdrawing the Bank's mortgage authority for three years. This action was
appealed and a hearing was held during which HUD called substantially all
Bank/HUD borrowers to testify by deposition prior to the administrative hearing
or at the administrative hearing. The Administrative Judge's ruling in November
1992 found no evidence of fraud by the Bank as an FHA approved lender and
reinstated the Bank's authority to originate FHA insured loans in December 1992.
HUD did not appeal this decision, and in December 1992, the Bank was reinstated
to originate FHA insured loans.
By letter dated February 1, 1993, the Justice Department notified the Bank
that it was investigating the same matters that were raised by HUD in the
January 30, 1991 audit to determine if the allegations set out in the audit
constitute a violation of the False Claims Act and that the Justice Department
might file suit against the Bank and certain of its agents to recover $500,768
under this Act. These alleged claims arise from the same facts which were
entered into evidence before the Administrative Law Judge, and upon which the
findings were based. Accordingly, the Bank vehemently denied the allegations in
writing to the Justice Department and will vigorously defend an action by the
Justice Department, if any.
Although management of Horizon believes that these legal actions and
threats of legal actions will not have a material adverse effect on the
business, results of operations or financial condition of Horizon, both actions
seek substantial damages and no assurance can be given that these lawsuits will
be decided in Horizon's favor.
BENEFICIAL OWNERSHIP OF HORIZON COMMON STOCK BY HORIZON MANAGEMENT AND
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
as of February 4, 1997 by (i) each shareholder known to Horizon to beneficially
own more than five percent of the shares of Common Stock
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<PAGE>
outstanding, (ii) each director of Horizon, (iii) the executive officers of
Horizon appearing in the Summary Compensation Table below and (iv) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
Number of Common Percent
Name and Address Relationship With Horizon Shares Beneficially Owned of Class/10/
- ---------------- ------------------------- --------------------------- -----------
<S> <C> <C> <C>
William B. Rhodes Shareholder 98,215 /1/ 7.08%
1602 FM 1460
Round Rock, Texas 78664
Laifer Capital Management /6/ Shareholder 115,800 8.34
45 West 45th Street
New York, New York 10036
Wellington Management Company /7/ Shareholder 106,000 7.63
75 State Street
Boston, Massachusetts 02107
John Hancock Mutual /8/ Shareholder 107,000 7.70
Life Insurance Company
101 Huntington Avenue
Boston, Massachusetts 02199
Douglas B. Kadison Chairman of the Board, 169,066/2,/9/ 14.61
7706 Stoneywood Drive President and Chief Executive
Austin, Texas 78731 Officer
Charles S. Nichols, Jr. Vice Chairman of the Board and 147,028/2/ 13.07
3324 Perry Lane Executive Vice President
Austin, Texas 78731
Paul A. Antrim Executive Vice President, 74,806/2/ 8.01
4309 Sendero Drive Chief Financial Officer,
Austin, Texas 78735 Secretary, Treasurer
and Director
Robert J. Ellis Director 1,400/3/ 0.64
7107 Brodie Lane
Austin, Texas 78731
Michael Rotman, M.D. Director 30,450/4/ 2.28
311 Addie Roy Road
Austin, Texas 78746
All Directors and Executive 422,750/5/ 36.30
Officers as a Group (5 persons)
including those named above
</TABLE>
- ------------------
/1/ As reported in a Schedule 13D dated August 3, 1996, Mr. Rhodes
reported sole voting and dispositive power with respect to 98,215 shares
beneficially owned by him. Does not include options granted to Mr.
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<PAGE>
Rhodes to acquire 200 shares of Common Stock of Horizon which are
immediately exercisable, but does include a total of 500 shares of Common
Stock held by Mr. Rhodes as trustee for five family members.
/2/ Excludes options granted to Messrs. Kadison, Antrim and Nichols to
acquire 39,688 shares each of Common Stock of Horizon, immediately
exercisable.
/3/ Excludes options granted to Mr. Ellis to acquire 7,600 shares of
Common Stock of Horizon, immediately exercisable, but includes 500 shares
held by A. G. Edwards as Trustee for the Individual Retirement Account of
Mr. Ellis' spouse.
/4/ Excludes options granted to Dr. Rotman to acquire 1,200 shares of
Common Stock of Horizon, immediately exercisable.
/5/ Excludes the options and shares referred to in footnotes 2, 3, 4 and
11 herein.
/6/ As reported by Laifer Capital Management, Inc. in a Schedule 13G dated
February 7, 1996, a registered investment adviser, reported sole voting and
investment power with respect to the 115,800 shares of the Common Stock.
/7/ As reported by Wellington Management Company in a Schedule 13G dated
February 9, 1996, a registered investment adviser, reported sole voting and
investment power with respect to the 106,000 shares of the Common Stock.
/8/ As reported by John Hancock Mutual Life Insurance Company ("John
Hancock") and certain of John Hancock's subsidiaries, including John
Hancock Advisors, Inc. ("JHA"), John Hancock Subsidiaries, Inc., John
Hancock Asset Management and The Berkley Financial Group in a Schedule 13G
dated January 26, 1996. JHA reported sole voting and investment power with
respect to the 107,000 shares.
/9/ Includes 2,000 shares of Common Stock held by Mr. Kadison and his
spouse as trustees for their minor children.
/10/ The calculation of the percentages include the stock options each
person has the right to acquire within 60 days.
The persons listed above will receive the same Merger Consideration
described in "THE MERGER--GENERAL" as the other Horizon shareholders for each
share of Horizon Common Stock held at the Effective Time.
The directors and officers of Horizon control, with the power to vote, an
aggregate of 422,750 shares of Horizon Common Stock, representing approximately
30.4% of the total shares of Horizon Common Stock issued and outstanding as of
the Record Date. SEE "INTRODUCTION"; "SUMMARY--SHAREHOLDER VOTES REQUIRED"; AND
"THE MERGER--GENERAL".
Officers, directors and certain shareholders of Horizon owning 520,965
shares of Horizon Common Stock, comprising approximately 37.5% of the total
shares of Horizon Common Stock issued and outstanding as of the Record Date,
have agreed, pursuant to the Proxy, to vote their shares in favor of the Merger.
STOCK OPTION PLANS
1992 AND 1993 EMPLOYEE STOCK OPTIONS. As a reward for past services and to
encourage ownership of the common stock of Horizon, the Shareholders of Horizon
at their annual meetings held in 1992 and 1993 approved a plan to grant stock
options to members of the Boards of Directors, officers and employees of Horizon
and the Bank, based on a formula that considers full years of service and the
position held by the employee, officer or director.
These options were granted for the duration of the participants' employment
with Horizon and/or the Bank or membership on the Board of Directors of Horizon
and/or the Bank or for a period of ten years beginning from their respective
grant dates in 1992 and 1993, whichever is shorter. The exercise price was set
at $7.00 per share at the Shareholders' June 1993 meeting. Also, at the December
1992 meeting, the Board of Directors allocated 57,000 shares of the Horizon
Common Stock for 1992 and 37,800 shares for the 1993 options. The number of
shares subject to these options adjusts proportionately for any division in the
number of shares outstanding or a stock
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<PAGE>
dividend issuance occurring while these options are outstanding. The price and
number of optioned shares give effect to the two-for-one stock split approved by
the Board of Directors at its October 1992 meeting. The names and number of
optioned shares granted and still outstanding to individuals who currently own
at least five percent of the outstanding Common Stock, members of the Board of
Directors and executive officers of Horizon and the Bank and all others as a
group are:
Number of
Name Optioned Shares
---- ---------------
Douglas B. Kadison 14,400
Charles S. Nichols, Jr. 14,400
Paul A. Antrim 14,400
Robert J. Ellis 5,200
Michael Rotman, M.D. 400
Howard Owen 1,600
Nancy Nichols 4,400
Mark M. Monroe 1,600
Douglass W. Kuenstler 400
12 Other Individuals 23,700
------
Total 80,500
======
Only 2,000 shares of these options have been exercised by the above persons
and 12,300 option shares have expired due to termination of employment.
COMPENSATORY STOCK OPTIONS. As compensation for personally guaranteeing the
debt of Horizon, the shareholders of Horizon at their annual meeting held in
September 1992 approved a plan to issue stock options for Horizon Common Stock
to three of the directors and one non-director based on a formula that considers
the amount of debt guaranteed by each and the amount of time the debt was
outstanding. These options were granted for a period of ten years beginning
September 30, 1992. The number of shares subject to these options and the net
book value condition adjusts proportionately to any division in the number of
shares outstanding or a stock dividend issuance occurring while these options
are outstanding.
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<PAGE>
At the December 1992 meeting of Horizon's Board of Directors, the Board
authorized the issuance of options to purchase 68,808 shares of Horizon Common
Stock under this program after giving effect to the two-for-one split approved
at the meeting. The exercise price per share is $0.50 except for the options
granted to William M. Waxman (a former director of Horizon and the Bank), which
options do not require a payment of any consideration for exercise. The director
and other persons granted these options and the number of option shares granted
are:
Number of
Name Optioned Shares
---- ---------------
Douglas B. Kadison 18,988
Charles S. Nichols, Jr. 18,988
Paul A. Antrim 18,988
Other person not a director 11,844
------
Total 68,808
======
None of these options have been exercised by the above persons.
1994 STOCK OPTION PROGRAM. At the annual meeting of the shareholders held
in August 1994, the shareholders adopted the 1994 Stock Option Program. This
Program is virtually identical in structure to the 1992 and 1993 Employee Stock
Options described above. These options are to be granted for the duration of the
participants' employment with Horizon or the Bank or membership on the Board of
Directors of either entity or for a period of ten years beginning from July 27,
1994, whichever is shorter. The exercise price was set by the Board of Directors
at $9.00 per share at its July 27, 1994 meeting. The Board has allocated 46,600
shares of Horizon Common Stock for these options. The names and number of
optioned shares granted to individuals who currently own at least five percent
of the outstanding shares of Horizon Common Stock, members of the Board of
Directors and executive officers of Horizon and the Bank and all others as a
group are:
Number of
Name Optioned Shares
---- ---------------
Douglas B. Kadison 6,300
Charles S. Nichols, Jr. 6,300
Paul A. Antrim 6,300
Robert J. Ellis 2,400
Michael Rotman, M.D. 800
William B. Rhodes /1/ 200
Howard Owen 1,200
Nancy Nichols 2,800
Mark M. Monroe 1,200
Douglass W. Kuenstler 800
21 Other Individuals 12,800
------
Total 41,100
======
_________________
/1/ Mr. William Rhodes is an advisory director of the Bank and holds more
than five percent of the issued and outstanding shares of Horizon Common
Stock.
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<PAGE>
None of these options have been exercised by the above persons, and 5,500
option shares have expired due to termination of employment.
REGULATION
The Bank is subject to regulation, supervision and examination by the TSLD
and, as an insured depository institution, by the FDIC. The Bank is not directly
regulated or supervised by the OTS, which regulates savings institutions.
Horizon is directly regulated by the TSLD and the OTS as a savings and loan
holding company. Horizon is not directly regulated or supervised by the FDIC,
the Federal Reserve or any other bank regulatory authority, except with respect
to the general regulatory and enforcement authority of the FDIC over
transactions and dealings between Horizon and the Bank, and except with respect
to both the specific limitations regarding ownership of the capital stock of the
parent corporation of any savings bank, and the specific limitations regarding
the payment of dividends from the Bank.
TEXAS LAW
General. As a state chartered savings bank, the Bank derives its authority
from, and is governed by, the provisions of the Texas Savings Bank Act (the
"Texas Act") and rules and regulations of the TSLD. The Texas Act and
regulations of the TSLD are administered by the TSLD Commissioner (the "TSLD
Commissioner").
Investments and Deposit Accounts. The Texas Act imposes restrictions on the
amounts and types of loans that may be made by a state savings bank, generally
bringing these restrictions into parity with the regulation of federally
chartered institutions. The manner of establishing deposit accounts and
evidencing the same is prescribed, as are the obligations of the Bank with
respect to withdrawals from deposit accounts and redemptions of deposit
accounts. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF HORIZON-LENDING ACTIVITIES" AND "- SOURCES OF FUNDS -
DEPOSITS."
Branch Offices. Pursuant to the Texas Act and the regulations issued
thereunder, the TSLD Commissioner may permit the Bank to establish branch
offices after giving consideration to, among other things, the promotion of
public need, market conditions and financial and managerial capability of the
Bank to establish and maintain each branch office sought. Interested parties,
which include any savings and loan association or branch thereof, together with
any others deemed to be interested parties by the TSLD Commissioner, are
permitted to protest the establishment of such branches and may request a
hearing before the TSLD Commissioner regarding this matter.
Consolidation or Merger. The Texas Act provides that savings banks may
consolidate or merge, subject to approval of the TSLD Commissioner, when the
TSLD Commissioner finds, among other things, that such merger or consolidation
is not in restraint of trade, would not significantly curtail competition or
impair other financial institutions and would be in the best interests of the
financial institutions that are parties to the plan.
Examination. The TSLD conducts and supervises the examination of state
chartered savings banks. An insured association such as the Bank will also be
examined periodically by the FDIC.
Supervision. The TSLD Commissioner has general supervisory authority over
savings banks and their holding companies. Upon his finding that a savings bank,
its holding company, or any of its directors, officers or agents is in violation
of the articles of incorporation or bylaws of the savings bank or any provision
of the Texas Act or its regulations, or is engaging in unsafe or unsound
practices, or is failing to maintain adequate documentary or accounting records,
he may order the savings bank, its holding company or the individual to
discontinue the violation or practice or to establish necessary records. Upon
failure of any savings bank, its holding company or any participating person
to comply with his order, the TSLD Commissioner may issue upon the violating
party (i)
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an order to cease and desist from continuing such a particular action, (ii) a
removal or prohibition order suspending or prohibiting the person engaging in
such violation from participating in the affairs of the savings bank, (iii) an
order requiring divestiture of control of the savings bank, (iv) an order
requiring the forfeiture and payment of a civil penalty in an amount of not more
than $25,000, or (v) an order placing the affairs of the savings bank under the
control of a conservator who will manage the savings bank under the direction of
the TSLD Commissioner. Furthermore, if it appears doubtful to the TSLD
Commissioner that a savings bank subject to such a conservatorship order can be
successfully rehabilitated, the TSLD Commissioner may close the savings bank and
liquidate it.
Change of Control. A change of control of a savings bank (and therefore
the holding company) may not occur unless an application is made and approved
by the TSLD Commissioner. For the purposes of Texas law, control shall be
deemed to exist if any person owns or controls 25% or more of the voting
securities of a savings bank. Similar to federal law, there is a presumption of
control if any person owns or controls 10% or more of the voting securities
of the savings bank
Holding Companies. The TSLD Commissioner also has the authority to regulate
and examine the holding companies of Texas chartered savings banks. Each holding
company is required by Texas law to register with the TSLD Commissioner within
90 days after becoming a holding company. Such holding companies, like that of
the Bank, must file with the TSLD Commissioner reports concerning its
operations. The TSLD Commissioner also has enforcement powers over such holding
companies similar to those applicable to savings banks. SEE "- TEXAS LAW -
SUPERVISION."
FEDERAL REGULATION OF TEXAS SAVINGS BANKS
The FDIC has extensive authority over the operations of Texas chartered
savings banks. As part of this authority, the Bank is required to file periodic
reports with the FDIC and is subject to periodic examinations by the FDIC. The
FDIC and the TSLD have both examined the Bank as of September 30, 1994 and
November 13, 1995. Under FDIC scheduling guidelines, it is likely that another
examination will be initiated within one year from the date of the last
examination. When these examinations are conducted by the FDIC, the examiners
may require the Bank to provide for higher general or specific loan loss
reserves. Financial institutions in various regions of the United States have
been called upon by examiners to write down assets and to establish increased
levels of reserves, primarily as a result of perceived weaknesses in real estate
values and a more restrictive regulatory climate.
The Bank's deposits are insured by the FDIC through the SAIF to the full
extent permissible by law. As an insurer of deposits, the FDIC issues
regulations, conducts examinations, requires the filing of reports and generally
supervises the operations of institutions for which it provides deposit
insurance. Among the numerous applicable regulations are those issued under the
Community Reinvestment Act ("CRA") to encourage insured state non-member banks,
such as the Bank, to meet the credit needs of local communities, including low
and moderate income neighborhoods, in a manner consistent with the Bank's safety
and soundness and a rating system measuring performance. Inadequacies of
performance may result in regulatory action by the FDIC. As of November 9, 1995,
the date of its most recent regulatory compliance examination, the Bank was
rated outstanding with respect to its CRA compliance. In 1995, the FDIC and
other federal banking agencies promulgated revisions to their regulations
concerning the CRA. The revised regulations generally are intended to provide
clearer guidance to financial institutions on the nature and extent of their
obligations under the CRA and the methods by which the obligations will be
assessed and enforced. Among other things, the revised regulations substitute
for the current process-based assessment factors a new evaluation system that
would rate institutions based on their actual performance in meeting community
credit needs. In particular, the revised system will evaluate the degree to
which an institution is performing under tests and standards judged in the
context of information about the institution, its community, its competitors and
its peers with respect to (i) lending, (ii) service delivery systems and (iii)
community development. The revised regulations also specify that an
institution's CRA performance will be considered in an institution's expansion
proposals and may be the basis for approving, denying or conditioning the
approval of an application. Management of the Bank currently is unable to
predict the effects of the revised regulations under the CRA as
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recently adopted. Due to the heightened attention being given to the CRA in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community.
The Bank is subject to the rules and regulations of the FDIC to the same
extent as all other state banks that are not members of the Federal Reserve
System. The approval of the FDIC is required prior to any merger, consolidation
or change in control, or the establishment or relocation of any branch office of
the Bank. This supervision and regulation is intended primarily for the
protection of the deposit insurance fund.
The Bank is subject to certain capital adequacy guidelines issued by the
FDIC. SEE "- GOVERNMENTAL POLICIES AND RECENT LEGISLATION".
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Savings deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions-
against savings banks and may terminate the deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or unsound practice,
or is in an unsafe or unsound condition.
RESTRICTIONS ON TRANSFERS OF FUNDS TO HORIZON BY THE BANK
Horizon is a legal entity separate and distinct from the Bank.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to Horizon by the Bank. Under Texas law, a savings bank may
declare and pay dividends out of current and retained income so long as the
savings bank meets its capital requirements. In addition, the Bank is required
to provide to the OTS not less than 30 days' advance notice of the proposed
declaration by its board of directors of any dividend on its capital stock. The
OTS may object to the payment of the dividend on safety and soundness grounds.
Federal law prohibits an insured depository institution from paying dividends on
its capital stock or distributing any of its capital assets while it remains in
default in the payment of any assessment due the FDIC.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, Horizon or other affiliates; the purchase of or investments in stock
or other securities thereof; the taking of such securities as collateral for
loans; and the purchase of assets of Horizon or other affiliates. Such
restrictions prevent Horizon and such other affiliates from borrowing from the
Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in
Horizon or to any other affiliate is limited to 10% of the Bank's capital and
surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). In addition, any transaction with
an affiliate of the Bank must be on terms and under circumstances that are
substantially the same as a comparable transaction with a non-affiliate.
Additional restrictions on transactions with affiliates may be imposed on the
Bank under the prompt corrective action provisions of the FDIC Improvement Act.
SEE "-GOVERNMENTAL POLICIES AND RECENT LEGISLATION."
GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by Horizon on its
deposits and other borrowings and the interest rate received by Horizon on loans
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extended to its customers and securities held in Horizon's portfolio will
comprise the major portion of Horizon's earnings. These rates are sensitive to
many factors that are beyond the control of Horizon. Accordingly, the earnings
and growth of Horizon will be subject to the influence of local, domestic and
foreign economic conditions, including recession, unemployment and inflation.
Horizon's business is not only affected by general economic conditions but
is also influenced by the monetary and fiscal policies of the federal government
and the policies of regulatory agencies, particularly the Federal Reserve. The
Federal Reserve implements national monetary policies (with objectives such as
curbing inflation and combating recession) by its open-market operations in
United States government securities, by adjusting the required level of reserves
for financial intermediaries subject to its reserve requirements and by varying
the discount rates applicable to borrowings by depository institutions. The
actions of the Federal Reserve in these areas influence the growth of bank
loans, investments and deposits and also affect interest rates charged on loans
and paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between savings banks and other
financial intermediaries. Proposals to change the laws and regulations governing
the operations and taxation of savings banks, their holding companies and other
financial intermediaries are frequently made in Congress, in the Texas
Legislature and before various bank regulatory and other professional agencies.
The likelihood of any major changes and the impact such changes might have on
Horizon is impossible to predict. Certain of the potentially significant changes
which have been enacted and proposals which have been made recently are
discussed herein.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. These standards generally must be as stringent as
the comparable capital requirements imposed on national banks. The FDIC also is
authorized to impose capital requirements in excess of these standards on
individual banks on a case-by-case basis. The Bank is in compliance with these
requirements. SEE "SUPERVISION AND REGULATION--GENERAL."
SAFETY AND SOUNDNESS
FDICIA requires each federal banking regulatory agency to prescribe, by
regulation or guideline, standards for all insured depository institutions and
depository institution holding companies relating to (i) internal controls,
information systems and audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi)
compensation, fees and benefits; and (vii) such other operational and managerial
standards as the agency determines to be appropriate. The compensation standards
would prohibit employment contracts or other compensatory arrangements that
provide excess compensation, fees or benefits or could lead to material
financial loss. In addition, each federal banking regulatory agency must
prescribe, by regulation or guideline, standards relating to asset quality,
earnings and stock valuation as the agency determines to be appropriate. In
1995, the federal banking agencies, including the FDIC, adopted final rules and
proposed guidelines concerning standards for safety and soundness required to be
prescribed by regulation pursuant to Section 39 of the FDIA. In general, the
standards relate to (1) operational and managerial matters; (2) asset quality
and earnings; and (3) compensation. The operational and managerial standards
cover (a) internal controls and information systems, (b) internal audit systems,
(c) loan documentation, (d) credit underwriting, (e) interest rate exposure, (f)
asset growth and (g) compensation, fees and benefits. Under the proposed asset
quality and earning standards, the Bank would be required to establish and
maintain systems to (i) identify problem assets and prevent deterioration in
those assets and (ii) evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital reserves. Finally, the proposed
compensation standard states that compensation will be considered excessive if
it is unreasonable or disproportionate to the services actually performed by the
individual being compensated. If a savings bank fails to meet any of the
standards promulgated by regulation, then such institution will be required
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to submit a plan within 30 days to the FDIC specifying the steps it will take to
correct the deficiency. In the event that a savings bank fails to submit or
fails in any material respect to implement a compliance plan within the time
allowed by the federal banking agency, Section 39 of the FDIA provides that the
FDIC must order the institution to correct the deficiency and may (1) restrict
asset growth; (2) require the savings institution to increase its ratio of
tangible equity to assets; (3) restrict the rates of interest that the savings
institution may pay; or (4) take any other action that would better carry out
the purpose of prompt corrective action. The Bank believes that it has been and
will continue to be in compliance with each of the standards as they have been
adopted by the FDIC.
RESTRICTIONS ON ACQUISITIONS
There are restrictions under federal and Texas law regarding the
acquisition of control of Horizon. Federal and Texas laws generally provide that
no company, directly or indirectly or acting in concert with one or more
persons, or through one or more subsidiaries, or through one or more
transactions, may acquire control of a savings bank at any time without prior
approval of the appropriate regulatory agencies. The concept of acting in
concert is very broad under these laws. In addition, federal and state
regulations require that, prior to obtaining control of a savings bank, a
person, other than a company, must give prior notice and/or make an application
to the appropriate regulatory agencies and have received no objection to such
acquisition of control. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and regu
lation as a savings and loan holding company. Under federal and Texas law (as
well as the regulations referred to below) these restrictions include the
holding companies of a savings bank.
POTENTIAL ENFORCEMENT ACTIONS
Insured depository institutions, such as the Bank, and their institution-
affiliated parties, which include Horizon, may be subject to potential
enforcement actions by the FDIC and the TSLD for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. SEE "- TEXAS LAW - SUPERVISION." The OTS may also bring enforcement
actions due to their supervision of Horizon. Enforcement actions may include the
appointment of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of deposits
(in the case of the Bank), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against institution-
affiliated parties and the imposition of restrictions and sanctions under the
PCA provisions of the FDIC Improvement Act. Management knows of no pending or
threatened enforcement actions against the Bank or Horizon.
HOLDING COMPANY REGULATION
Horizon is a unitary savings and loan holding company subject to regulatory
oversight by the OTS. As such, Horizon is required to register and file reports
with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over Horizon and its non-savings
bank subsidiaries which also permits the OTS to restrict or prohibit certain
activities. This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist or removal orders and
to initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
As a unitary savings and loan holding company, Horizon generally is not
subject to activity restrictions. If Horizon acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company, and the activities of Horizon and any of its subsidiaries
(other than the Bank
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or any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
FEDERAL RESERVE SYSTEM
The Federal Reserve requires all depository institutions to maintain non-
interest bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At October 31, 1996,
the Bank was in compliance with these reserve requirements.
Savings banks are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HORIZON
The following discussion provides certain information regarding the
financial condition and results of operations of Horizon. This discussion should
be read in conjunction with Horizon's Financial Statements and Notes to
Financial Statements presented elsewhere in this Proxy Statement/Prospectus. SEE
"SELECTED FINANCIAL DATA"; "MARKET PRICES--HORIZON"; "INFORMATION ABOUT
HORIZON"; "INDEX TO HORIZON FINANCIAL STATEMENTS".
GENERAL
Horizon is a savings and loan holding company which owns all of the capital
stock of the Bank and has no other material operations. The principal business
of Horizon has historically consisted of attracting deposits from the general
public and originating construction and permanent mortgage loans secured by
residential one- to four-family real estate and commercial real estate and, to a
lesser extent, multi-family real estate, commercial business and consumer loans.
In addition, Horizon also originates SBA guaranteed business loans and permanent
single-family residential loans for sale in the secondary market. Horizon
invests in mortgage-backed securities and other investment securities. The
operations of Horizon are significantly affected by prevailing economic
conditions as well as by government policies and regulations relating to
monetary and fiscal affairs, and competition from other financial institutions.
Horizon's results of operations are primarily dependent on the difference
or "spread" between the average yield earned on loans, investment securities,
and the average rate paid on deposits and borrowed funds. The interest rate
spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. Horizon, like other
financial institutions, is subject to interest rate risk to the degree that its
interest earning assets mature or reprice at different times, or on a different
basis, than its interest bearing liabilities.
Horizon's net income is significantly affected by its gain on the sale of
loans and also, to a lesser extent, gain on the sale of servicing rights.
Horizon's net income is also affected by the level of fee income received.
Horizon's operating expenses principally consist of employee compensation and
benefits, occupancy expenses, legal and professional expenses, data processing
expenses, federal deposit insurance premiums and other general and
administrative expenses. Horizon has in the last several years increased its
branching network and its loan origination capacity resulting in higher
operating expenses. However, the addition of branches and additional loan
capacity, particularly in the area of SBA guaranteed lending, has resulted in
additional non-interest income. This income has been generated primarily from
deposit fees on transaction accounts and gain from the sale of loans. The
failure of Horizon to continue to record gains on the sale of loans would reduce
income.
OPERATING STRATEGY
HISTORY OF HORIZON
Since the Bank's opening in 1987, Horizon has operated the Bank under a
business strategy similar to that of a community-oriented commercial bank.
Instead of focusing primarily on permanent single-family residential loans, like
a traditional thrift institution, Horizon developed a strategy of diversifying
its lending programs into such areas as commercial loans guaranteed by the SBA
and credit card programs. When many of the banks and thrifts in Austin, Texas
failed in the late 1980's due in part to the depressed economy in the
southwestern part of the nation, Horizon was left as one of the few locally-
owned financial institutions. Horizon seized the opportunity and made loans and
provided financial services to its community. Horizon has developed a loyal
customer base, particularly among its builder customers who borrow money for the
construction of single-family residential properties.
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<PAGE>
OPERATING STRATEGY
Prior to the Merger, the strategic plan of Horizon was to (i) maintain the
Bank's capital in excess of regulatory ratios, (ii) achieve stable and improved
operating income by increasing Horizon's interest rate spread, (iii) continue an
asset/liability management program designed to limit Horizon's exposure to
fluctuations in interest rates and (iv) manage credit risk in its loan
portfolio. Among the steps taken to implement this strategy have been (a)
aggressive competition for both commercial and personal non-interest bearing
transaction deposit accounts, (b) to minimize exposure to fluctuation in
interest rates through the origination of residential construction loans,
commercial loans and other loans which have adjustable rates of interest and
short-term maturities, (c) to generate fee income from the sale of loans and
loan servicing and (d) to identify and fill market lending niches, including SBA
loans and small business lending. Although Horizon incurred significant non-
operating expenses in taking such steps, the Boards of Directors of Horizon and
the Bank believed that the infrastructure currently in place would allow
continued managed growth in deposits and assets for Horizon with relatively
modest additional costs.
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<PAGE>
AVERAGE BALANCE SHEET
The following table presents for the periods indicated the total dollar
amount of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Six Months Ended October 31,
-----------------------------------------------------------------------------------
1995 1996
---------------------------------------- ----------------------------------------
Average Average
Outstanding Interest Outstanding Interest
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
------------ ----------- ---------- ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable/1/ .......... $ 77,098 $ 4,827 12.45% $ 101,739 $ 5,741 11.19%
Investment securities/2/ .... 5,663 183 6.43 10,839 327 5.98
FHLB stock ................... 443 15 6.73 472 14 5.88
Other interest earning
assets/4/ .................. 9,330 293 6.25 7,209 193 5.31
------------ ----------- ---------- ----------- ----------- ----------
Total interest earning
assets/1/3/ .............. 92,534 5,318 11.43 120,259 6,275 10.35
------------ ----------- ---------- ----------- ----------- ----------
Interest bearing liabilities:
Certificates of deposit ...... 18,503 464 4.99 23,986 631 5.22
NOW, money market, statements
and passbook savings ......... 44,361 598 2.68 55,440 667 2.39
Borrowings ................... -- -- -- 1 5.45
------------ ----------- ---------- ----------- ----------- ----------
Total interest bearing 22
-----------
liabilities .................. 62,864 1,062 3.36 79,448 1,299 3.24
------------ ----------- ---------- ----------- ----------- ----------
Net interest income ............ $ 4,256 $ 4,976
=========== ===========
Net interest rate spread/1/5/ .. 8.07% 7.11%
========== ==========
Net earning assets/1/ .......... $ 29,670 $ 40,811
============ ===========
Net yield on average interest
earning assets ............... 9.15% 8.21%
========== ==========
Average interest earning
assets to average interest
bearing liabilities .......... 1.47x 1.51x
=========== ===========
- -----------------
</TABLE>
/1/ Calculated net of deferred loan fees, loan discounts, loans in process,
loss reserves.
/2/ All classified as available for sale.
/3/ Annualized.
/4/ Interest earning balances in the FHLB and federal funds sold.
/5/ Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate of interest-bearing
liabilities.
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<TABLE>
<CAPTION>
Year Ended April 30,
------------------------------------------------------------------------------------------
1994 1995
----------------------------------------- ---------------------------------------
Average Average
Outstanding Interest Outstanding Interest
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
----------- ----------- ----------- ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable/1/ .......... $ 63,075 $ 6,729 10.67% $ 72,877 $ 8,691 11.93%
Investment securities/2/ ..... 1,547 90 5.82 1,701 96 5.64
FHLB stock ................... 332 12 3.61 425 23 5.41
Other interest earning
assets/4/ .................. 1,493 56 3.75 3,564 219 6.14
----------- ----------- ----------- -----------
Total interest earning
assets /1/3/ .............. $ 66,447 $ 6,887 10.36 $ 78,564 $ 9,029 11.49
----------- ----------- ----------- ----------- ----------- ----------
Interest bearing liabilities:
Certificates of deposit ...... $ 16,739 $ 589 3.52 18,422 737 4.00
NOW, money market, statements
and passbook savings ....... 27,198 623 2.29 33,491 829 2.48
Borrowings ................... 2,161 79 3.66 2,349 107 4.56
----------- ----------- ----------- ----------
Total interest bearing
liabilities .............. $ 46,098 1,291 2.80 $ 54,262 1,673 3.08
----------- ----------- ----------- ----------- ---------- ----------
Net interest income ............ $ 5,596 $ 7,356
=========== ==========
Net interest rate spread/1/5/ .. 7.56% 8.41%
=========== ==========
Net earning assets/1/ .......... $ 20,349 $ 24,305
=========== ===========
Net yield on average
interest earning assets ....... 8.42% 9.36%
=========== ==========
Average interest earning
assets to average interest
bearing liabilities .......... 1.44x 1.45x
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30,
1996
-----------------------------------------
Average
Outstanding Interest
Balance Earned/Paid Yield/Rate
----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest earning assets:
Loans receivable/1/ .......... $ 81,392 $ 9,840 12.09%
Investment securities/2/ ..... 7,163 457 6.38
FHLB stock ................... 451 29 6.43
Other interest earning
assets/4/ .................. 9,699 552 5.69
----------- -----------
Total interest earning
assets /1/3/ .............. $ 98,705 $ 10,878 11.02
----------- ----------- -----------
Interest bearing liabilities:
Certificates of deposit ...... $ 19,559 $ 990 5.06
NOW, money market, statements
and passbook savings ....... 46,771 1,191 2.55
Borrowings ................... 44 2 4.55
----------- -----------
Total interest bearing
liabilities .............. $ 66,374 2,183 3.29
----------- ----------- -----------
Net interest income ............ $ 8,695
===========
Net interest rate spread/1/5/ .. 7.73%
===========
Net earning assets/1/ .......... $ 32,331
===========
Net yield on average
interest earning assets ....... 8.81%
===========
Average interest earning
assets to average interest
bearing liabilities .......... 1.49x
===========
</TABLE>
__________________
/1/ Calculated net of deferred loan fees, loan discounts, loans in process,
loss reserves.
/2/ All classified as available for sale.
/3/ Annualized.
/4/ Interest earning balances in the FHLB and federal funds sold.
/5/ Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate of interest-bearing
liabilities.
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RATE/VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest earning assets and
interest bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels of interest rates. For
each category of interest earning assets and interest bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume which cannot be segregated have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
(In Thousands)
Year Ended April 30, Year Ended April 30, Six Months Ended October 31,
-------------------- -------------------- -----------------------------
1994 vs. 1995 1995 vs. 1996 1995 vs. 1996
-------------------- -------------------- -----------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Due to Due to
-------------------- -------------------- -----------------------------
Total Total Total
Increase Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ----- ---------- ------ ----- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable $ 1,169 $793 $ 1,962 $ 1,033 $ 116 $ 1,149 $1,403 $ (490) $ 913
Investment securities 9 (3) 6 348 13 361 67 (13) 154
FHLB stock 5 6 11 2 4 6 1 (2) (1)
Other interest bearing
assets 127 36 163 349 (16) 333 (66) (43) (109)
------- ---- -------- ------- ----- --------- ------ ----------- ---------
Total interest earning
assets 1,310 832 2,142 1,732 117 1,849 1,505 (548) 957
------- ---- ------- ------- ----- --------- ------ ----------- ---------
Interest bearing liabilities:
Certificates of deposit 80 68 148 48 205 253 137 21 158
NOW, money market,
statement and passbook
savings 156 50 206 339 23 362 145 (67) 78
Borrowings 9 19 28 (105) -- (105) 1 -- 1
------- ---- -------- ------- ----- --------- ------ ----------- ---------
Total interest bearing
liabilities 245 137 382 282 228 510 283 (46) 237
------- ---- -------- ------- ----- --------- ------ ----------- ---------
Change in net interest
income $ 1,065 $695 $ 1,760 $ 1,450 $(111) $ 1,339 $1,222 $ (502) $ 720
======= ==== ======== ======= ===== ========= ====== =========== =========
</TABLE>
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FINANCIAL CONDITION
OCTOBER 31, 1996 COMPARED TO APRIL 30, 1996
Horizon's total assets at October 31, 1996 of $148.9 million increased by
$18.0 million, or 13.8%, from $130.9 million at April 30, 1996. This increase
was due primarily to increases in investment securities of $2.7 million and
loans receivable, including loans held for sale of $14.9 million.
Horizon's total liabilities at October 31, 1996 of $137.1 million increased
$17.4 million, or 14.5%, from $119.7 million at April 30, 1996. This increase
was due primarily to an increase of $16.7 million in total deposits. The
increase in deposits reflects Horizon's ongoing efforts to attract non-interest
bearing commercial checking accounts, NOW accounts, and money market accounts as
a significant source of deposits. In addition, Horizon instituted a certificate
of deposit promotion which resulted in a $6.8 million increase in certificates
of deposit.
Horizon's retained earnings at October 31, 1996 of $4.8 million increased
$568,000, or 11.7%, from $4.3 million at April 30, 1996. This resulted from
earnings of $679,000 and the payment of $111,000 in dividends to shareholders.
APRIL 30, 1996 COMPARED TO APRIL 30, 1995
Horizon's total assets at April 30, 1996 of $130.9 million increased by
$28.2 million, or 27.5%, from $102.7 million at April 30, 1995.
Investment securities increased $6.7 million, or 319.1%, from $2.1 million
at April 30, 1995 to $8.8 million at April 30, 1996. This increase was due
primarily to Horizon's desire to have U.S. Government and U.S. Government agency
securities available for the purpose of pledging them for future borrowings, if
this was necessary.
Loans receivable increased $20.2 million, or 27.6%, from $73.3 million at
April 30, 1995 to $93.5 million at April 30, 1996. The increase was primarily
attributable to significant increases in commercial real estate loans, mortgage
loans originated for resale, credit card loans and commercial business loans.
Total deposits increased $28.5 million, or 32.0%, from $89.2 million at
April 30, 1995 to $117.7 million at April 30, 1996. This increase was due to
Horizon's continuing efforts to attract non-interest bearing commercial checking
accounts, which increased $15.3 million, or 47.2%, and NOW accounts, which
increased $5.8 million, or 50%, as a significant source of deposits. This effort
was aided by the opening of two new branch offices and the relocation of another
branch office.
APRIL 30, 1995 COMPARED TO APRIL 30, 1994
Horizon's total assets at April 30, 1995 of $102.7 million increased by
$13.9 million, or 15.7%, from $88.8 million at April 30, 1994.
Cash due from banks increased $9.6 million, or 107%, from $9.0 million at
April 30, 1994 to $18.6 million at April 30, 1995. This increase was due to an
increase in deposits coupled with a decreased loan demand and higher minimum
liquidity requirement as the result of the conversion to a Texas savings bank
versus the requirements imposed previously by the OTS.
Premises and equipment increased $2.3 million, or 63.9%, from $3.6 million
at April 30, 1994 to $5.9 million at April 30, 1995. This increase was due
primarily to the completion of the Bank's new home office facility and the
preparation for the opening of a new branch location on May 1, 1995.
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Total deposits increased $13.7 million, or 18.2%, from $75.5 million at
April 30, 1994 to $89.2 million at April 30, 1995. This increase was due to
Horizon's continuing efforts to attract non-interest bearing commercial checking
accounts, which increased $7.3 million, or 29.1%, and NOW accounts, which
increased $3.9 million, or 50.7%, as a significant source of deposits.
Total borrowed funds decreased $3.9 million, or 66.1%, from $5.9 million at
April 30, 1994 to $2.0 million at April 30, 1995. The borrowed funds are all
advances from the FHLB, are all variable rate line of credit types of advances
and have no fixed maturities. Horizon uses the available lines of credit to
manage short-term liquidity needs.
Stockholders' equity increased $3.7 million, or 61.6%, from $6.0 million at
April 30, 1994 to $9.7 million at April 30, 1995. This increase was due
primarily to the sale of 526,316 shares common stock in conjunction with its
public offering (less the offset by the repurchase of 175,020 shares from its
largest shareholder as a part of the public offering) and net income from the
fiscal year ended April 30, 1995.
APRIL 30, 1994 COMPARED TO APRIL 30, 1993
Horizon's total assets at April 30, 1994 of $88.8 million
increased by $23.2 million, or 35.4%, from $65.6 million at April 30, 1993.
Net loans receivable, including loans held for sale but excluding deferred
loan fees and valuation allowances, increased $18.7 million, or 35.1%, from
$53.2 million at April 30, 1993 to $71.9 million at April 30, 1994. This
increase was due primarily to an increase in one- to four-family construction
loans of $10.3 million, or 54.5%, to $29.2 million in net advanced funds. The
gross amount of one- to four-family construction loans increased $19.1 million,
or 51.2%, to $56.4 million, exclusive of loans-in-process. There was also an
increase in commercial real estate loans, including SBA guaranteed loans, of
$6.0 million, or 67.3%, to $15.0 million. This increase was attributed to a
continuing emphasis on the origination of SBA guaranteed loans.
Cash and cash equivalents increased $3.0 million, or 50.0%, from $6.0
million at April 30, 1993 to $9.0 million at April 30, 1994. This increase was
due to management's intent to maintain adequate liquidity to meet loan funding
demands.
Total deposits increased $16.5 million, or 28.0%, from $59.0 million at
April 30, 1993 to $75.5 million at April 30, 1994. This increase was due to
Horizon's continuing efforts to attract non-interest bearing commercial checking
accounts and NOW accounts as a significant source of deposits.
Total borrowed funds increased $4.4 million, or 293%, from $1.5 million at
April 30, 1993 to $5.9 million at April 30, 1994. The borrowed funds are all
advances from the FHLB, are all variable rate line of credit type of advances
and have no fixed maturities. Horizon uses the available lines of credit from
the FHLB to manage short-term liquidity needs.
RESULTS OF OPERATIONS
Horizon's results of operations depend primarily on the amount of net
interest income and non-interest income and the amount of operating expenses.
Net interest income depends upon the volume of and interest rates earned or paid
on interest earning assets and interest bearing liabilities.
Horizon's non-interest income consists primarily of loan fees, deposit
fees, gain on sale of loans and the gain on sale of mortgage loan servicing
rights.
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COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED OCTOBER 31, 1996
AND OCTOBER 31, 1995
GENERAL. Horizon had net income of $679,000 for the six month period ended
October 31, 1996 as compared to $949,000 for the six month period ended October
31, 1995. This decrease is discussed in more detail in the following analysis.
INTEREST INCOME. Interest income from loans increased $913,000, or 18.9%,
from $4.8 million for the six months ended October 31, 1995 to $5.7 million for
the six months ended October 31, 1996. The increase was due to an increase in
the average loan portfolio balance of $24.6 million which was partially offset
by a decrease in the average yield from 12.4% to 11.2% for the same respective
periods. The decrease in the average yield related primarily to a .75% decrease
in Horizon's base lending rate which is tied to the WSJ Prime Rate. A
substantial portion of Horizon's loan portfolio is indexed to Horizon's base
lending rate as it changes. Horizon was also subjected to interest rate
competition from other lending institutions in its market which resulted in
reduced rates on new loan originations in order to stay competitive.
INTEREST EXPENSE. Interest expense on deposit liabilities increased
$236,000, or 22.2%, from $1.1 million for the six months ended October 31, 1995
to $1.3 million for the six months ended October 31, 1996. The increase was due
primarily to an increase in the average amount of interest bearing deposits from
$62.9 million for the six months ended October 31, 1995 to $77.8 million for the
six months ended October 31, 1996.
PROVISION FOR LOAN LOSSES. The provision for losses on $120,000 loans was
$240,000 for the six months ended October 31, 1996 and $120,000 for the six
months ended October 31, 1995. Horizon's allowance for loan losses was based on
management's analysis of historic loan losses, current economic conditions, the
level of non-performing loans and management's current belief that the allowance
for loan losses reflect an adequate reserve against potential losses. Although
Horizon maintains its allowance for loan losses at a level which it considers to
be adequate to provide for potential losses, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods. In addition, Horizon's
determination as to the amount of the allowance for loan losses is subject to
review by the regulatory agencies which can order the establishment of
additional general and specific allowances.
NON-INTEREST INCOME. Non-interest income increased $598,000 to a total of
$1.8 million for the six months ended October 31, 1996 compared to $1.2 million
for the six months ended October 31, 1995. Fees and charges related to loans and
deposits increased $389,000. Most of the increase was due to an overall increase
in deposit fees which was the result of a substantial increase in the number of
transaction accounts and an increase in the amount of some fees. Gain on the
sale of loans increased $226,000 to a total of $492,000 for the six months ended
October 31, 1996 compared to $266,000 for the six months ended October 31, 1995.
This increase resulted primarily from an increased volume of originations and
sales of SBA guaranteed loans.
NON-INTEREST EXPENSE. Non-interest expense increased $1.6 million to a
total of $5.5 million for the six months ended October 31, 1996 compared to $3.9
million for the six months ended October 31, 1995. Compensation and benefits
increased $558,000 to a total of $2.3 million for the six months ended October
31, 1996 compared to $1.8 million for the six months ended October 31, 1995.
This increase resulted primarily from a general increase in employee salary
levels, both for merit and as a response to a competitive job market in the
Central Texas area, and an increase in the average number of full time
equivalent employees from 106 to 120. In addition, incentive compensation
associated with origination of SBA loans increased approximately 17.0%.
Occupancy expense increased $75,000 primarily as the result of relocation of two
branches and the opening of another branch. Depreciation and amortization
expense increased $72,000 primarily due to the aforementioned opening and
relocation of branches. Equipment rental and maintenance expense increased
$64,000 due to the opening and relocation of branches and the leasing of
additional automated teller machines. FDIC insurance premiums increased $604,000
due primarily to the payment of a one-time premium of $571,000 to recapitalize
the
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SAIF fund. Credit card operations expense increased $89,000 (expenses uniquely
associated with credit card program not included in other line items) due to a
significant growth in credit card accounts and balances.
INCOME TAX EXPENSE. Income tax expense decreased $124,000, or 23.1%, from
$537,000 for the six months ended October 31, 1995 to $413,000 for the six
months ended October 31, 1996. The decrease was due to a decrease in taxable
income, primarily as the result of the one-time FDIC premium, in the current
period versus the prior period.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED APRIL 30, 1996
AND APRIL 30, 1995
GENERAL. Horizon had net income of $1.7 million for the year ended April
30, 1996 compared to $1.7 million for the year ended April 30, 1995. Although
there was no change, details of various items are discussed below.
NET INTEREST INCOME. Net interest income increased to $8.7 million at April
30, 1996 as compared to $7.4 million at April 30, 1995. Horizon's average spread
decreased to 7.7% for the fiscal year ended April 30, 1996 from 8.4% for the
fiscal year ended April 30, 1995. Horizon's net interest margin decreased to
8.8% at April 30, 1996 from 9.4% at April 30, 1995. These decreases were
primarily the result of decreases in Horizon's base lending rate which is tied
to the WSJ Prime Rate and rate competition from other lenders in Horizon's
market which forced Horizon to lower rates on new originations.
INTEREST INCOME. Interest income for the fiscal year ended April 30, 1996
increased $1.9 million to $10.9 million from $9.0 million for the fiscal year
ended April 30, 1995. This increase was due primarily to a significant growth in
average loans receivable, investment securities and interest earning cash
balances. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF HORIZON--RATE/VOLUME ANALYSIS" AND "--AVERAGE BALANCE
SHEET." The average yield on interest earning assets decreased to 9.7% at April
30, 1996 from 11.1% at April 30, 1995. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HORIZON--INTEREST RATE
SPREAD."
INTEREST EXPENSE. Interest expense increased by $500,000 to $2.2 million
for the fiscal year ended April 30, 1996 compared to $1.7 million for the fiscal
year ended April 30, 1995. The increase in interest expense resulted primarily
from an increase in average interest bearing deposits of $14.4 million, or
27.8%, from $51.9 million at April 30, 1995 to $66.3 million for the fiscal year
ended April 30, 1996 and an increase in the average interest rates paid from
3.0% in the fiscal year ended April 30, 1995 to 3.3% for the fiscal year ended
April 30, 1996. The interest bearing deposit cost increases were partially
offset by an increase in non-interest bearing deposits from $32.4 million at
April 30, 1995 to $47.7 million at April 30, 1996. This reduced the overall cost
of funds from 2.3% at April 30, 1995 to 1.9% at April 30, 1996. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HORIZON--RATE/VOLUME ANALYSIS," "--AVERAGE BALANCE SHEET" AND
"--INTEREST RATE SPREAD."
PROVISIONS FOR LOAN LOSSES. The provision for losses on loans was $260,000
for the fiscal year ended April 30, 1996 and $103,000 for the fiscal year ended
April 30, 1995. Horizon's allowance for loan losses was based on management's
analysis of historic loan losses, current economic conditions, the level of non-
performing loans and management's current belief that the allowance for loan
losses reflects an adequate reserve against potential losses. Although Horizon
maintains its allowance for loan losses at a level which it considers to be
adequate to provide for potential losses, there can be no assurance that future
losses will not exceed estimated amounts or that additional provision for loan
losses will not be required in future periods. In addition, Horizon's
determination as to the amount of the allowance for loan losses is subject to
review by the regulatory agencies which can order the establishment of
additional general or specific allowances. "SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HORIZON--NON-
PERFORMING ASSETS AND CLASSIFIED ASSETS."
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NON-INTEREST INCOME. Non-interest income increased $600,000 to a total of
$2.6 million for the fiscal year ended April 30, 1996 compared to $2.0 million
for the fiscal year ended April 30, 1995. Fees and charges related to loans and
deposits increased $696,000. Most of the increase was due to an increase in
overall deposit fees of $650,000 which was the result of an increase in the
number of personal transaction accounts of approximately 2,700 and an increase
in the number of commercial transaction accounts of approximately 800. Loan
origination fees increased $77,000 due to significant increases in one- to four-
family loans originated for resale and credit cards fees increased $78,000 due
to an increase in the outstanding advanced credit card loans of approximately
$5.0 million. The increases were partially offset by a reduction in the gain on
sale of servicing rights of $309,000. This decrease was the result of no
servicing rights being sold in the current year. Due to a strong decline in
mortgage loan rates, the premiums on loan servicing sales declined dramatically,
and as a result, management chose not to sell during the current year.
NON-INTEREST EXPENSE. Non-interest expense increased $1.7 million to a
total of $8.3 million for the fiscal year ended April 30, 1996 compared to $6.6
million for the fiscal year ended April 30, 1995. Compensation and benefits
increased $800,000 from $3.1 million for the fiscal year ended April 30, 1995 to
$3.9 million for the fiscal year ended April 30, 1996. This increase resulted
primarily from a general increase in employee salary levels both for merit and
as a response to a competitive job market in the Central Texas area and an
increase in the average number of full-time equivalent employees from 89 to 109.
Occupancy expense increased $203,000 due to a $95,000 increase in lease
payments, a $38,000 increase in leasehold improvements amortization and a
$35,000 increase in utilities expense which was primarily the result of opening
two new branches in May and October 1995 and the relocation of another branch to
a larger facility in November 1995. Depreciation and amortization expense
increased $166,000 due primarily to the addition of furniture, fixtures and
equipment at the aforementioned locations plus a full year of depreciation on
all of the furniture, fixtures and equipment associated with the opening of the
new home office facility in September 1994. Credit card operations expense
increased $156,000 (expenses uniquely associated with the credit card program
not included in other line items) due to significant growth in credit card
accounts and balances. Office supplies and printing expense increased $120,000
also as a result of the new and relocated branches as well as the increase in
the number of full-time equivalent employees and the continued growth in deposit
accounts and loans.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED APRIL 30, 1995
AND APRIL 30, 1994
GENERAL. Horizon had net income of $1.7 million for the year ended April
30, 1995, compared to $1.6 million for the year ended at April 30, 1994.
Although the change was modest, further details of the change are discussed
below.
NET INTEREST INCOME. Net interest income increased to $7.4 million at April
30, 1995 as compared to $5.6 million at April 30, 1994. Horizon's average spread
increased to 8.4% for the fiscal year ended April 30, 1995 from 7.6% for the
fiscal year ended April 30, 1994. Horizon's net interest margin increased to
9.4% at April 30, 1995 from 8.4% at April 30, 1994. These increases were
primarily the result of an increase in Horizon's base lending rate which is tied
to the WSJ Prime Rate, a larger percentage of deposits in non-interest bearing
accounts and an overall cost of deposits which had much smaller increases than
the loan rates.
INTEREST INCOME. Interest income for the fiscal year ended April 30, 1995
increased $2.1 million to $9.0 million from $6.9 million for the fiscal year
ended April 30, 1994. This increase was primarily due to a significant growth in
average loans receivable. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF HORIZON--RATE/VOLUME ANALYSIS" AND "--
AVERAGE BALANCE SHEET." The average yield on interest earning assets increased
to 11.1% at April 30, 1995 from 10.6% at April 30, 1994. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
HORIZON--INTEREST RATE SPREAD."
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INTEREST EXPENSE. Interest expense increased by $400,000 to $1.7 million
for the fiscal year ended April 30, 1995 compared to $1.3 million for the fiscal
year ended April 30, 1995 compared to $1.3 million for the fiscal year ended
April 30, 1994. The increase in interest expense resulted primarily from an
increase in average interest bearing deposits of $8.0 million or 18.2% from
$43.9 million for the fiscal year ended April 30, 1994 to $51.9 million for the
fiscal year ended April 30, 1995 and an increase in the average interest rates
paid from 2.8% in the fiscal year ended April 30, 1994 to 3% for the fiscal year
ended April 30, 1995. The interest bearing deposit cost increases were partially
offset by an increase in non-interest bearing deposits from $25.1 million at
April 30, 1994 to $32.4 million at April 30, 1995. At April 30, 1995, this
reduced Horizon's overall weight average cost of funds to 2.3%. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HORIZON--RATE/VOLUME ANALYSIS, "--AVERAGE BALANCE SHEET" AND
"--INTEREST RATE SPREAD."
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans was
$103,000 for the fiscal year ended April 30, 1995 and $120,000 for the fiscal
year ended April 30, 1994. Horizon's allowance for loan losses was based on
management's analysis of historic loan losses, current economic condition, the
level of non-performing loans and management's current belief that the allowance
for loan losses reflects an adequate reserve against potential losses. Although
Horizon maintains its allowance for loan losses at a level which it considers to
be adequate to provide for potential losses, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods. In addition, Horizon's
determination as to the amount of the allowance for loan losses is subject to
review by the regulatory agencies which can order the establishment of
additional general or specific allowances. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HORIZON--NON-
PERFORMING ASSETS AND CLASSIFIED ASSETS."
NON-INTEREST INCOME. Non-interest income remained relatively unchanged at
$2.0 million for the fiscal year ended April 30, 1995 compared to $1.9 million
for the fiscal year ended April 30, 1994. The composition of non-interest
income, however, changed. Fees and charges related to loans and deposits
increased $80,000. Most of the increase was due to a $208,000 increase in
deposit fees which was primarily the result of an increase of approximately
1,300 in the number of personal transaction accounts with an increase in
associated service charges including not sufficient funds and chargeback fees.
This was offset by a decrease in loan origination fees of $119,000, which was
directly related to a decrease in the amount of mortgage loans originated for
resale. Also, the gain from the sale of loans in the fiscal year ended April 30,
1995 compared to the fiscal year ended April 30, 1994 decreased by $110,000 due
primarily to a reduced volume of sales of SBA guaranteed loans.
NON-INTEREST EXPENSE. Non-interest expense increased $1.8 million to a
total of $6.6 million for the fiscal year ended April 30, 1995 compared to $4.8
million for the fiscal year ended April 30, 1994. Compensation and benefits
increased $900,000 from $2.2 million for the fiscal year ended April 30, 1994 to
$3.1 million for the fiscal year ended April 30, 1995. This increase resulted
primarily from a general increase in employee salary levels, an increase in the
average number of full-time equivalent employees from 68 to 89 and an increase
in health insurance premiums. Advertising and business promotion costs increased
$372,000, due almost entirely to the grand opening of the new home office
facility and the concurrent/related advertising campaign. Increases of $95,000
for depreciation and amortization (due primarily to the move to the new home
office), $92,000 for equipment rental and maintenance (primarily related to the
new home office), $86,000 for credit card operations (expenses uniquely
associated with the start up of the credit card program not included in other
line items), $69,000 for occupancy (related primarily to building operations
expenses at the new home office), $57,000 for postage and courier costs
(reflecting the increased number of accounts and the higher frequency of cash
pick ups and deliveries required at the branch locations), and $84,000 for
office supplies (related to increases in employees, facilities and the Bank's
name change), accounted for most of the increase in non-interest expense for the
fiscal year ended April 30, 1995.
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COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED APRIL 30, 1994
AND APRIL 30, 1993
GENERAL. Horizon's net income increased by $604,000 to $1.6 million for the
fiscal year ended April 30, 1994 from net income of $1.0 million for the fiscal
year ended April 30, 1993. The primary reason for this increase was a $2.1
million increase in net interest income, partially offset by a $399,000 increase
in non-interest expense and a related increase in income tax expense of
$452,000.
NET INTEREST INCOME. Net interest income increased to $5.6 million at April
30, 1994 as compared to $3.5 million at April 30, 1993. Horizon's average spread
increased to 7.6% for the fiscal year ended April 30, 1994 from 6.4% for the
fiscal year ended April 30, 1993. Horizon's net interest margin increased to
8.4% at April 30, 1994 from 7.3% at April 30, 1993. These increases were
primarily the result of an increase in the average balance of the loan portfolio
combined with an emphasis on higher yielding one- to four-family construction
loans and an overall decrease in the cost of deposits due to an increase in non-
interest bearing commercial demand deposit accounts.
INTEREST INCOME. Interest income for the fiscal year ended April 30, 1994
increased $2.1 million to $6.9 million from $4.8 million for the fiscal year
ended April 30, 1993. This increase was primarily due to a significant growth in
loans receivable. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF HORIZON--RATE/VOLUME ANALYSIS" AND
"--AVERAGE BALANCE SHEET." The weighted average yield on interest earning assets
increased to 10.6% at April 30, 1994 from 9.9% at April 30, 1993.
SEE "--INTEREST RATE SPREAD."
INTEREST EXPENSE. Interest expense increased by $52,000 to $1.3 million for
the fiscal year ended April 30, 1994 compared to $1.2 million for the fiscal
year ended April 30, 1993. The increase in interest expense resulted primarily
from an increase in interest bearing deposits coupled with a general decline in
interest rates paid on interest bearing deposits, from 3.4% at April 30, 1993 to
2.8% at April 30, 1994. Additionally, Horizon had non-interest bearing
commercial deposits of $25.1 million at April 30, 1994 compared with $17.9
million in non-interest bearing commercial deposits at April 30, 1993. At April
30, 1994, this reduced Horizon's overall weighted cost of funds to 2.0%. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HORIZON--RATE/VOLUME ANALYSIS," "--AVERAGE BALANCE SHEET" AND
"--INTEREST RATE SPREAD."
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans was
$120,000 for the fiscal year ended April 30, 1994 and $307,000 for the fiscal
year ended April 30, 1993. The fiscal 1993 amount reflects additions to offset a
$285,000 write down on two consumer loans due to the bankruptcy of the
borrowers. Horizon's allowance for loan losses was based on management's
analysis of historic loan losses, current economic conditions, the level of non-
performing loans and management's current belief that the allowance for loan
losses reflects an adequate reserve against potential losses. Although Horizon
maintains its allowance for loan losses at a level which it considers to be
adequate to provide for potential losses, there can be no assurance that future
losses will not exceed estimated amounts or that additional provisions for loan
losses will not be required in future periods. In addition, Horizon's
determination as to the amount of the allowance for loan losses is subject to
review by the regulatory agencies which can order the establishment of
additional general or specific allowances. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HORIZON--NON-
PERFORMING ASSETS AND CLASSIFIED ASSETS."
NON-INTEREST INCOME. Non-interest income remained relatively unchanged at
$1.9 million for the fiscal year ended April 30, 1994 compared to the fiscal
year ended April 30, 1993. The composition of non-interest income however
changed. Fees and charges including loan or origination fees and loan servicing
fees increased by $154,000 due to an increased volume of deposits and loan
generation; a gain in sale of servicing rights of $305,000 occurred in fiscal
year 1994 due to the sale of $19.2 million in mortgage loans serviced for the
FNMA; and a gain in fiscal year 1994 occurred from a sale of premises and
equipment of $42,000. Offsetting these increases, the gain from the sale of
loans in the fiscal year ended April 30, 1994 compared with the fiscal year
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ended April 30, 1993 decreased by $528,000 due primarily to a reduction in the
amount of premium the SBA allows to be realized on the guaranteed portion of
loans sold and a reduction in the amount sold due in part to an elongated
processing/funding period for several loans.
NON-INTEREST EXPENSE. Non-interest expense increased $399,000 to a total of
$4.8 million for the fiscal year ended April 30, 1994 compared to $4.4 million
for the fiscal year ended April 30, 1993. The increase was primarily due to an
increase in employee compensation and benefits of $471,000 during the fiscal
year ended April 30, 1994. This increase resulted primarily from a general
increase in employee salary levels, an increase in the average number of full-
time equivalent employees from 54 to 68 and a significant increase in health
insurance premiums. Occupancy expense increased $89,000 which was primarily the
result of opening a new operations center in January 1994, increased leasehold
amortization relative to some improvements made at the former home office
location and increased utilities cost. The increase in other non-interest
expense was due primarily to increases in personal property and franchise taxes.
FDIC insurance premiums increased $61,000 due to larger average deposits in the
fiscal year ended April 30, 1994 versus the fiscal year ended April 30, 1993. In
the fiscal year ended April 30, 1993, Horizon incurred an expense of $453,000
for compensatory stock options associated with the guaranty of debt by certain
individuals, primarily Horizon directors.
INCOME TAX EXPENSE. Income tax expense for the fiscal year ended April 30,
1994 was $929,000 compared to $477,000 for the fiscal year ended April 30, 1993.
This increase was the result of Horizon earning $1.9 million more in taxable
income in fiscal year ended April 30, 1994 as compared to the same period ended
April 30, 1993 and the use of the balance available of net operating loss
carryforwards in the fiscal year ended April 30, 1993.
NON-OPERATING EXPENSE AND EXTRAORDINARY CREDITS. Horizon had extraordinary
income on the extinguishment of debt of $537,000 net of income taxes and a
reduction of income taxes arising from utilization of net operating loss
carryforwards of $260,000. There were no extraordinary items in the fiscal year
ended April 30, 1994.
Effective May 1, 1993, Horizon adopted the provisions of SFAS 109,
accounting for income taxes. There was no cumulative effect of adopting SFAS 109
and adoption did not have a material effect on net earnings for the fiscal year
ended April 30, 1994. See Note 9 to the Consolidated Financial Statements.
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<PAGE>
ASSET/LIABILITY MANAGEMENT
Institutions such as Horizon are subject to interest rate risk to the
extent their interest bearing liabilities mature or reprice more rapidly, or on
a different basis, than their interest earning assets. The following table sets
forth the distribution of repricing opportunities of Horizon's interest earning
assets and interest bearing liabilities, the interest rate sensitivity gap (i.e.
interest rate sensitive assets less interest rate sensitive liabilities), the
cumulative interest rate sensitivity gap and the cumulative gap as a percentage
of total assets as of October 31, 1996. The table also sets forth the time
periods during which interest earning assets and interest bearing liabilities
will mature or reprice in accordance with their contractual terms. The interest
rate relationships between the repriceable assets and repriceable liabilities
are not necessarily constant and may be affected by many factors, including the
behavior of customers in response to changes in interest rates. This table
should, therefore, be used only as a guide as to the possible effect changes in
interest rates might have on the net margins of Horizon.
<TABLE>
<CAPTION>
Maturing or Repricing
----------------------
Next Day Over Three One Year
to Three Months to to Over Five
Immediately Months One Year Five Years Tears Total
----------- --------- ---------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (Dollars in Thousands)
- ------------------------
Real estate loans..................... $ 78,094 $16,404 $ 5,307 $ 8,256 $ 3,596 $111,657
Commercial loans...................... 6,400 259 307 2,511 -- 9,477
Consumer loans........................ 6,243 415 817 3,027 492 10,994
Investments/1/........................ 14,766 2,183 1,751 4,332 3,716 26,748
Loans in process...................... (23,261) (351) (873) (158) (10) (24,653)
-------- ------- --------- ------- ------- --------
Total interest-earning assets....... 82,242 18,910 7,309 17,968 7,794 134,223
-------- ------- --------- ------- ------- --------
Interest-bearing liabilities:
- -----------------------------
Money market accounts................. 31,426 -- -- -- -- 31,426
Statement savings..................... 7,526 -- -- -- -- 7,526
NOW accounts.......................... 20,081 -- -- -- -- 20,081
Certificates.......................... 781 5,733 17,573 3,163 1 27,251
FHLB advances......................... -- -- -- -- -- --
-------- ------- --------- ------- ------- --------
Total interest-bearing liabilities.. 59,814 5,733 17,573 3,163 1 86,284
-------- ------- --------- ------- ------- --------
Interest-earning assets less
interest-bearing liabilities......... $ 22,428 $13,177 ($10,264) $14,805 $ 7,793 $ 47,939
======== ======= ========= ======= ======= ========
Cumulative interest-rate
sensitivity gap...................... $ 22,428 $35,605 $ 25,341 $40,146 $47,939 $ 47,939
======== ======= ========= ======= ======= ========
Cumulative interest-rate
sensitivity gap as a percentage of
total assets at October 31, 1996..... 15.1% 23.9% 17.0% 27.0% 32.2% 32.2%
======== ======= ========= ======= ======= ========
</TABLE>
__________________
/1/ Includes investment securities, FHLB stock, cash equivalents and
certificates of deposit in other financial institutions.
/2/ Includes loans and certificates which matured on or prior to October 31,
1996.
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<PAGE>
At October 31, 1996, Horizon had $108.5 million in assets and $83.1 million
in liabilities repricing within one year. This means that $25.4 million more in
interest rate sensitive assets than interest rate sensitive liabilities will
change to the then current rate (changes occur due to the interest earning asset
being at a variable rate or because the maturity of the asset requires its
replacement at the then current rate for equivalent assets). Interest income is
likely to be affected to a greater extent than interest expense for any changes
in interest rates during the first 12-month period. If rates were to fall during
this period, interest income would decline by a greater amount than interest
expense and net income would be reduced. Conversely, if rates were to rise, the
opposite would apply.
In order to monitor interest rate risk, the Board of Directors of the Bank
created an Interest Rate Risk Committee, which is composed of three executive
officers of the Bank. The Bank's compliance officer also attends committee
meetings as an advisory member. This Committee meets at least quarterly and
usually monthly to review the Bank's interest rate risk position. The principal
responsibilities of this Committee are to assess the Bank's asset/liability mix
and recommend strategies to the Board that will enhance income, while managing
the Bank's sensitivity to changes in interest rates.
INTEREST RATE SPREAD
Horizon's results of operations are determined primarily by net interest
income and, to a lesser extent, fee income, miscellaneous income and operating
expenses. Net interest income is determined by the interest rate spread between
the yields earned on its interest earning assets and the rates paid on interest
bearing deposits and by the relative amounts of interest earning assets and
interest bearing deposits.
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<PAGE>
The following table sets forth the weighted average effective interest
rates earned by Horizon on its loan and investment portfolios, the weighted
average effective cost of Horizon's deposits, the interest rate spread and the
net yield on weighted average interest earning assets as of the dates shown.
<TABLE>
<CAPTION>
At April 30, At October 31,
------------------------------ --------------
1994 1995 1996 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average yield on:
- --------------------------
Loans receivable 10.86% 11.59% 10.67% 10.49%
Investment securities 4.61 6.51 6.24 6.03
FHLB stock 3.25 6.71 5.35 5.89
Other interest earning assets 3.66 5.97 5.23 5.61
Combined weighted average yield
on interest earning assets 10.56 11.08 9.74 9.55
Weighted average rate paid on:
- ------------------------------
Passbook and statement savings 2.53 2.51 2.51 2.29
NOW and money market accounts 2.29 2.91 2.99 2.33
Certificates of deposit 3.63 4.70 5.06 5.25
Borrowings 3.66 6.18 -- --
Combined weighted average cost on
interest bearing liabilities 2.94 3.48 3.19 3.25
Combined weighted average cost of liabilities
including non-interest bearing commercial 1.96 2.25 1.90 2.09
deposits
Spread 8.60 8.83 7.84 7.46
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Horizon's primary sources of funds are deposits, principal payments on
loans, amortization and prepayment of loans and funds from operations. While
scheduled loan repayments are relatively predictable, deposit flows and loan
prepayments are influenced by the level of interest rates, general economic
conditions and competition.
The primary investing activity of Horizon is the origination of loans.
During fiscal years ended April 30, 1994, 1995 and 1996, Horizon's loan
originations totaled $138.9 million, $144.6 million and $167.8 million
respectively, and totaled $99.8 million for the six months ended October 31,
1996. Horizon did not materially engage in the purchase of loans or loan
participations in fiscal years 1994, 1995 or 1996 or in the six months ended
October 31, 1996.
Texas law specifically requires that the Bank maintain a minimum of 10.0%
of its assets in cash, balances in a Federal Reserve Bank or passed through the
FHLB or another depository institution to a Federal Reserve Bank, or other
readily marketable investments, including unencumbered federal government
sponsored enterprise securities. At October 31, 1996, the Bank's regulatory
liquidity ratio was 22.34%.
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<PAGE>
Horizon's most liquid assets are cash, cash held in accounts with other
banks and highly liquid daily investments. The levels of these assets are
dependent on Horizon's operating, financing, lending and investing activities
during any given period. At October 31, 1996, these liquid assets totaled $20.8
million.
Liquidity management is both a daily and long-term function of Horizon's
management strategy. Horizon monitors its investments in liquid assets based
upon management's assessment of (i) expected loan demand in Horizon's market
area, (ii) expected deposit flows and (iii) the objectives of its
asset/liability management program. Excess liquidity is generally invested in
interest earning overnight deposits.
If Horizon requires liquidity beyond its ability to generate funds
internally, it has additional borrowing capacity with the FHLB. At October 31,
1996, the Bank had no funds borrowed from the FHLB out of an available credit
line of approximately $9.5 million. The credit line is secured by a blanket
pledge of the Bank's qualifying first mortgage loans and FHLB stock. In
addition, the Bank has approximately $8.6 million in available credit against
investment securities and SBA participation certificates held in safekeeping at
the FHLB.
At October 31, 1996, Horizon had outstanding commitments to originate loans
in the amount of $24.1 million. Horizon did not have any commitments to purchase
loans at October 31, 1996. Horizon anticipates that it will have sufficient
funds available to meet current loan commitments.
Certificates of deposit scheduled to mature in one year or less from
October 31, 1996 totaled $23.5 million. Based on Horizon's historical
experience, management believes that a significant portion of such deposits will
remain with Horizon; however, there can be no assurance that Horizon will retain
all such deposits.
Management believes that loan repayments and other sources of funds will be
adequate to meet Horizon's foreseeable short- and long-term liquidity needs.
Horizon's capital consists of common stock, additional paid-in capital and
retained earnings. At October 31, 1996, the Bank was in compliance with all
regulatory capital requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of Horizon's operations. Unlike most industrial
companies, nearly all the assets and liabilities of Horizon are monetary in
nature. As a result, interest rates have a greater impact on Horizon's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires that
debt securities be categorized and accounted for as follows: securities held to
maturity-reported at amortized cost; trading securities-reported at fair value
with unrealized gains and losses included in earnings; securities available for
sale-reported at fair market value with unrealized gains and losses excluded
from earnings and reported as a separate component of shareholders' equity. This
standard is effective for Horizon for its fiscal year ending April 30, 1995 and
was adopted therewith. Based on Horizon's current portfolio, this accounting
change was implemented in fiscal 1995 and is not expected to have a material
impact on the financial condition or the results of operations of Horizon.
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS 107"). SFAS 107 was issued for the
purpose of requiring financial statement disclosure about
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<PAGE>
the fair value of all financial instruments. Financial instruments include both
assets and liabilities recognized and not recognized on the balance sheet. The
objective of disclosing information about the fair value of financial
instruments is to provide investors, creditors and other users of financial
statements sufficient data to assess the consequences and performance of a
company's investment and financing strategies. Horizon has adopted the
provisions of this statement for the fiscal year ending April 30, 1996. This
statement requires only disclosure of the fair value of financial instruments
and does not require adjustments to Horizon's basis in the financial
instruments. Therefore, the provisions of SFAS 107 do not affect Horizon's
financial position.
Effective May 1, 1995, Horizon adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" (as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures"). The
effect of adopting these new accounting standards did not have a material impact
on the financial condition or results of operations of Horizon.
In March 1995, the FASB issued its SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"). SFAS 121 requires that long-lived assets and certain intangibles
to be held and used by an entity be reviewed for impairment when events or
changes in circumstances indicate that the carrying amount may not be
recoverable. In addition, SFAS 121 requires that long-lived assets and certain
intangibles to be held and used by an entity be reviewed for impairment when
events or changes in circumstances indicate that the carrying amount may not be
recoverable. In addition, SFAS 121 requires long-lived assets and certain
intangibles to be disposed of to be reported at the lower of carrying amount or
fair value less costs to sell. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of the Bank.
SFAS No. 122, "Accounting for Mortgage Servicing Rights," was effective for
the Bank for the year beginning May 1, 1996 and generally requires entities that
sell or securitize loans and retain the mortgage servicing rights to allocate
the total cost of the mortgage loans to the mortgage servicing right and the
loan based on their relative fair value. Costs allocated to mortgage servicing
rights should be recognized as a separate asset and amortized over the period of
estimated net servicing income and evaluated for impairment based on fair value.
The adoption of this statement is not expected to have a material effect on the
Consolidated Financial Statements of Horizon.
Statement of Financial Accounting Standards Board No. 123 ("SFAS 123"). In
October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation." SFAS 123 encourages entities to use a
fair value based method to account for stock based compensation plans. If such a
fair value method is not adopted, entities must disclose the pro forma effect on
net income and on earnings per share had the accounting method been adopted.
This statement applies to years beginning after December 15, 1995. Management
does not believe that this statement will have a material effect on earnings or
the financial position of Horizon.
In June 1996 the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This standard
is based on consistent application of a "financial-components" approach that
focuses on control. Under that approach, after a transfer of financial assets,
an entity recognizes the assets it controls and the liabilities it has incurred,
and derecognizes liabilities when extinguished. This statement provides a
consistent standard for distinguishing transfers of financial assets that are
secured borrowings and requires such transfers to be measured at fair market
value. SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996.
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<PAGE>
LENDING ACTIVITIES
GENERAL
Since the Bank opened in 1987, it has been the strategy of Horizon's
management to operate the Bank more like a community-oriented commercial bank
than a traditional thrift. Horizon has emphasized its lending activities
primarily on those loans with frequent repricing characteristics, such as
residential construction loans, commercial real estate loans, commercial loans
guaranteed by the SBA, adjustable-rate mortgage ("ARM") loans, commercial
business loans and consumer loans. Horizon also invests in mortgage-backed and
other securities and SBA loans. Horizon also originates for sale fixed-rate,
first-lien, single-family mortgages and the guaranteed portion of SBA insured
loans in the secondary market.
The Bank focuses its lending activities primarily on the origination of
construction loans secured by first mortgages on one- to four-family residences
and real estate and non-real estate related commercial lending, a portion of
which are substantially guaranteed by various SBA programs. The Bank is approved
by the SBA as a "SBA Preferred Lender" which permits the Bank to underwrite SBA
loans without the prior approval of the SBA. Other important lending activities
of the Bank include the origination of one- to four-family permanent mortgage
loans, undeveloped land and residential lot loans and credit card lending. To a
lesser extent, the Bank originates loans secured by multi-family real estate,
automobiles and consumer loans. The Bank typically does not purchase whole loans
or loan participation interests originated by other lenders. At October 31,
1996, Horizon's net loan portfolio totaled $106.5 million, which constituted
71.5% of Horizon's total assets.
All loan applications above certain minimum amounts must be reviewed and
approved by the Bank's loan committee in accordance with the Bank's underwriting
guidelines. The loan committee consists of three executive officers and three
outside directors of the Bank. The Board of Directors has the sole authority to
approve loans in net amounts equal to or above its general loan to one borrower
limit, when permitted by law. In addition, the Board must approve all interim
construction builder lines that exceed the general loan to one borrower limit,
as permitted by law.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project is generally the greater of 15% of unimpaired capital and surplus of the
Bank or $500,000. At October 31, 1996, the maximum amount which the Bank could
have lent to any one borrower and the borrower's related entities was
approximately $1.7 million. At October 31, 1996, the Bank had no loan or group
of related loans with outstanding balances in excess of this amount, except
under the exception rules as explained below.
At October 31, 1996, Horizon had four borrowers or related borrowers
(excluding the borrowers described under the exception rules in the following
paragraph), each with total loans in excess of $1.0 million. Two of the loans
are secured by commercial real estate with loan amounts of $1.6 million and $1.4
million. One loan in the amount of $1.1 million is for residential lot
development. The other borrower has a one- to four-family construction loan in
the amount of $1.2 million. All of these loans are in Horizon's market area.
In addition to the above loan to one borrower limitation, federal
regulations also permit a savings bank to make loans in excess of the above
limit when such loans are made to construct domestic residential housing units,
not to exceed the lesser of $30.0 million or 30% of the savings bank's
unimpaired capital and surplus, provided that (i) the final purchase price of
each single-family dwelling unit does not exceed $500,000, (ii) such loans under
this exception to all borrowers do not, in the aggregate, exceed 150% of the
savings bank's unimpaired capital and surplus and (iii) the savings bank
continues to be in compliance with its fully phased-in capital standards of its
federal regulatory authority. At October 31, 1996, the maximum amount of loans
that the Bank could make under this exception was $17.4 million, of which the
Bank had used $9.7 million. The maximum amount of such excepted loans that the
Bank could make at October 31, 1996 to any one borrower was $3.5 million. On
that date, the
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<PAGE>
Bank's largest commitment to fund such construction loans was $2.0 million. The
Bank had five construction loan commitments at October 31, 1996 in amounts
ranging from $1.7 million to $2.0 million which relied upon the above exception
from the loan to one borrower requirements. All of these loans were current at
October 31, 1996.
Management reserves the right to change its lending programs as
circumstances dictate.
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<PAGE>
LOAN PORTFOLIO COMPOSITION. The following information presents the
composition of Horizon's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At April 30,
--------------------------------------------------------------------------------------
1992 1993 1994 1995
------------------- ------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
Construction and
development/1/ $ 23,421 53.99% $ 44,782 62.05% $ 63,945 63.79% $ 49,644 53.55%
Commercial 7,351 16.95 10,026 13.89 14,200 14.17 17,079 18.42
One- to four-family 5,395 12.44 7,826 10.84 10,875 10.85 13,800 14.89
Multi-family 2,902 6.69 4,053 5.61 4,056 4.05 2,859 3.09
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 39,069 90.07 66,687 92.39 93,076 92.86 83,382 89.95
-------- ------ -------- ------ -------- ------ -------- ------
Other Loans:
- ------------
Consumer Loans:
Deposit account 661 1.52 811 1.12 910 0.91 612 0.66
Automobile 555 1.28 976 1.36 872 0.87 1,433 1.55
Credit Card -- -- -- -- -- -- 899 0.97
Other 950 2.19 711 0.98 551 0.55 616 0.66
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 2,166 4.99 2,498 3.46 2,333 2.33 3,560 3.84
-------- ------ -------- ------ -------- ------ -------- ------
Commercial business 2,140 4.94 2,998 4.15 4,821 4.81 5,758 6.21
-------- ------ -------- ------ -------- ------ -------- ------
Total loans 43,375 100.00% 72,183 100.00% 100,230 100.00% 92,700 100.00%
-------- ====== -------- ====== -------- ====== -------- ======
Less:
- -----
Loans in process (10,196) (18,932) (28,289) (19,120)
Deferred fees and discounts (193) (306) (332) (261)
Allowance for losses (451) (456) (503) (734)
-------- -------- -------- --------
Total loans receivable, net $ 32,535 $ 52,489 $ 71,106 $ 72,585
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At April 30, At October 31,
-----------------------------------------
1996 1996
------------------- -------------------
Amount Percent Amount Percent
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
Construction and
development/1/ $ 55,634 47.18% $ 58,386 44.19%
Commercial 26,652 22.61 35,744 27.05
One- to four-family 13,972 1.85 14,368 10.87
Multi-family 2,530 2.16 3,159 2.40
-------- ------ -------- ------
Total real estate loans 98,788 83.80 111,657 84.51
-------- ------ -------- ------
Other Loans:
- ------------
Consumer Loans:
Deposit account 989 0.84 979 0.74
Automobile 2,133 1.81 2,492 1.89
Credit Card 5,848 4.96 6,023 4.56
Other 1,065 0.90 1,500 1.13
-------- ------ -------- ------
Total consumer loans 10,035 8.51 10,994 8.32
-------- ------ -------- ------
Commercial business 9,069 7.69 9,477 7.17
-------- ------ -------- ------
Total loans 117,892 100.00% 132,128 100.00%
-------- ====== -------- ======
Less:
- -----
Loans in process (25,554) (24,653)
Deferred fees and discounts (270) (270)
Allowance for losses (672) (780)
-------- --------
Total loans receivable, net $ 91,396 $106,425
======== ========
</TABLE>
- ---------------
/1/ Includes loans on undeveloped land and residential lots.
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<PAGE>
The following table shows the composition of Horizon's loan portfolio by
fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
At April 30,
--------------------------------------------------------------------------------------------------
1994 1995 1996
--------------------------------- -------------------------------- -------------------------------
Amount Percent Amount Percent Amount Percent
------------------ -------------- ----------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
Construction and development..... $ 168 0.17% $ 2,714 2.93% $ 8,547 7.25%
Commercial....................... 484 0.48 860 0.93 5,894 5.00
One-to-four family............... 1,035 1.03 1,381 1.48 4,055 3.44
Multi-family..................... 205 0.21 206 0.22 1,400 1.19
-------- ------ -------- ------ -------- ------
Total real estate loans........ 1,892 1.89 5,161 5.56 19,896 16.88
Consumer......................... 2,141 2.13 2,238 2.41 3,736 3.17
Commercial....................... 480 0.48 890 0.97 2,557 2.16
-------- ------ -------- ------ -------- ------
Total fixed-rate loans......... 4,513 4.50 8,289 8.94 26,189 22.21
-------- ------ -------- ------ -------- ------
Adjustable Rate Loans:
Real estate:
Construction and development..... 63,777 63.63 46,930 50.63 45,946 38.97
Commercial....................... 13,716 13.68 16,219 17.50 21,899 18.58
One-to four-family............... 9,840 9.82 12,419 13.40 9,917 8.41
Multi-family..................... 3,851 3.84 2,653 2.86 1,130 0.96
-------- ------ -------- ------ -------- ------
Total real estate loans........ 91,184 90.97 78,221 84.39 78,892 6.92
Consumer......................... 192 0.19 1,322 1.42 6,299 5.35
Commercial....................... 4,341 4.34 4,868 5.25 6,512 5.52
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans.... 95,717 95.50 84,411 91.06 91,703 77.79
-------- ------ -------- ------ -------- ------
Total loans.................... 100,230 100.00% 92,700 100.00% 117,892 100.00%
-------- ====== -------- ====== -------- ======
Less:
Loans in process................. (28,929) (19,120) (25,554)
Deferred fees and discounts...... (332) (261) (270)
Allowance for loan losses........ (503) (734) (672)
-------- -------- --------
Total loans receivable, net.... $ 71,106 $ 72,585 $ 91,396
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At October 31,
---------------------------------
1996
---------------------------------
Amount Percent
------------------ --------------
<S> <C> <C>
Fixed Rate Loans:
Real estate:
Construction and development..... $ 11,994 9.08%
Commercial....................... 10,110 7.65
One-to-four family............... 3,930 2.97
Multi-family..................... 441 0.34
-------- ------
Total real estate loans........ 26,475 20.04
Consumer......................... 4,459 3.37
Commercial....................... 3,202 2.43
-------- ------
Total fixed-rate loans......... 34,136 25.84
-------- ------
Adjustable Rate Loans:
Real estate:
Construction and development..... 43,227 32.72
Commercial....................... 28,799 21.80
One-to four-family............... 10,438 7.90
Multi-family..................... 2,718 2.05
-------- ------
Total real estate loans........ 85,182 64.47
Consumer......................... 6,535 4.94
Commercial....................... 6,275 4.75
-------- ------
Total adjustable-rate loans.... 97,992 74.16
-------- ------
Total loans.................... 132,128 100.00%
-------- ======
Less:
Loans in process................. (24,653)
Deferred fees and discounts...... (270)
Allowance for loan losses........ (780)
--------
Total loans receivable, net.... $106,425
========
</TABLE>
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<PAGE>
The following schedule illustrates the interest rate sensitivity of
Horizon's gross loan portfolio at October 31, 1996. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the interest rate can be changed. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses or the
effect of deferred fee amortization on yield/rate.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------------------------------
Multi-Family Construction
One- to and Commercial and
Four-Family Real Estate Development
--------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
--------- ------- -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due During Periods Ending
October 31,
- -------------------------
1997/1/ $12,332 10.15% $33,236 10.60% $54,237 10.39%
1998 and 1999 563 9.23 2,961 10.57 674 9.20
2000 to 2001 945 9.22 2,929 7.73 184 9.56
2002 to 2006 351 9.11 948 10.57 126 9.75
2007 to 2016 12 9.50 1,994 9.54 -- --
2017 and thereafter 165 10.26 -- -- -- --
------- ----- ------- ----- ------- -----
Total $14,368 10.33% $42,068 10.37% $55,221 10.37%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Commercial
Consumer Business Total
--------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
--------- ------- -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due During Periods Ending
October 31,
- -------------------------
1997/1/ $ 7,475 12.25% $ 6,966 11.37% $114,246 10.61%
1998 and 1999 1,762 10.24 1,348 10.64 7,308 10.27
2000 to 2001 1,265 9.81 1,163 9.83 6,486 8.78
2002 to 2006 492 8.57 -- -- 1,917 9.74
2007 to 2016 -- -- -- -- 2,006 9.94
2017 and thereafter -- -- -- -- 165 10.26
------- ----- ------- ----- -------- -----
Total $10,994 11.48% $ 9,477 11.08% $132,128 10.49%
======= ======= ========
</TABLE>
- ------------
/1/ Includes demand loans, loans having no stated maturity and overdraft loans.
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<PAGE>
At October 31, 1996 the total amount of gross loans due after October 31,
1997 which have fixed interest rates was $18.6 million while the total amount of
loans due after such dates which have floating or adjustable interest rates was
$41.9 million.
The following schedule illustrates the contractual maturities of Horizon's
loan portfolio at October 31, 1996.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------------
Multi-Family
and Construction
One- to Four- Commercial and Commercial
Family Real Estate Development Consumer Business Total
-------------- ---------------- ------------ -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Due During Periods
Ending October 31,
- ------------------
1997 /1/ $ 9,603 $ 4,148 $52,539 $ 1,416 $3,950 $ 71,656
1998 and 1999 1,504 5,840 1,513 7,821 2,538 19,216
2000 to 2001 1,372 5,319 203 1,265 1,741 9,900
2002 to 2006 457 3,427 144 492 1,225 5,745
2007 to 2016 659 12,009 822 -- 23 13,513
2017 and thereafter 773 11,325 -- -- -- 12,098
------- ------- ------- ------- ------ --------
Total $14,368 $42,068 $55,221 $10,994 $9,477 $132,128
======= ======= ======= ======= ====== ========
</TABLE>
/1/ Includes demand loans, loans having no stated maturity and overdraft loans.
CONSTRUCTION AND DEVELOPMENT LENDING
Horizon makes construction loans to individuals for the construction of
their residences as well as to builders for the construction of one- to four-
family residences and, to a much lesser extent, commercial and multi-family real
estate. At October 31, 1996, Horizon's construction and development loan
portfolio totaled $55.2 million, or 41.8% of its gross loan portfolio. Of that
amount, $41.7 million or 31.6% of its gross loan portfolio were in construction
loans and $13.5 million or 10.2% of its gross loan portfolio were in development
loans secured primarily by residential lots in the process of development and
completed residential lots. As of that date, all of these loans were secured by
real property located within the Bank's market area.
Construction loans to individuals for their residences may be, but are not
required to be, structured to be converted to permanent loans with the Bank at
the end of the construction phase. Most individual construction borrowers have
arranged for permanent financing with a lender other than the Bank. The Bank
requires a permanent loan commitment in order to make a construction loan. Such
residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
HORIZON--LENDING ACTIVITIES--ONE-TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING."
The Bank's construction loans typically have terms of up to nine months and have
rates higher than permanent one- to four-family loans then offered by the Bank.
During the construction phase, the borrower pays interest only. Generally, the
maximum loan-to-value ratio of owner occupied single-family construction loans
is 80.0%. At October 31, 1996, Horizon had $20.1 million of gross construction
loans to borrowers intending to live in the properties upon completion of
construction.
The Bank initiated a construction lending program with local builders in
1988. Loans to this group has grown considerably since this program began. At
the initiation of the program, the Bank surveyed the members of the residential
construction industry in its market area and targeted those builders which
management, based upon its research, considered to be financially sound and
reputable within the construction community. These loans are
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<PAGE>
made primarily to fund residential construction but may also be made from time
to time for lot acquisition and/or development. The Bank also makes construction
loans to certain of these builders, based on their demonstrated performance on
these or other loans with the Bank, for speculative residential homes. The
application for this program generally requires the builder to provide
information to the Bank, including his financial condition, experience and other
background information. The application is reviewed by the Bank's Loan Committee
which also conducts its own investigation of the applying builder. Subject to
the Bank's loan to one borrower limitation, the builder can generally borrow up
to $500,000 per house upon the approval by the Executive Vice President in
charge of construction lending for conforming pre-sold or owner occupied
residential construction. Non-conforming and speculative residential
construction loans require the approval of two members of the Loan Committee and
may not be in excess of a loan to value ratio of 70%. The Bank has granted
residential construction lines of credit to seven builders. The largest line of
credit Horizon had outstanding to one builder at October 31, 1996 was $2.0
million.
Construction loans to builders of one- to four-family residences require
the payment of interest only for up to nine months and have terms of up to nine
months. These loans may provide for the payment of interest and loan fees from
loan proceeds and generally carry adjustable rates of interest. Loan fees
typically charged in connection with the origination of such loans range from 1%
to 2%. At October 31, 1996, Horizon had 135 construction loans to builders of
one- to four-family residences in the aggregate of $21.6 million, of which $6.5
million were presold by the builder.
The Bank may from time to time make construction loans on commercial and
multi-family real estate projects secured by apartments, churches, shopping
centers, small office buildings, medical facilities or other property. Such
loans are generally structured to be converted to permanent loans at the end of
the construction phase, which generally runs nine to 12 months. These
construction loans have rates and terms which match any permanent multi-family
or commercial real estate loan then offered by the Bank, except that during the
construction phase, the borrower pays interest only. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
HORIZON--LENDING ACTIVITIES--COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING."
These loans generally provide for the payment of interest and loan fees from
loan proceeds. At October 31, 1996, the Bank had only $3.2 million of loans for
the construction of commercial and multi-family real estate.
Construction loans are obtained principally through continued business from
builders who have previously borrowed from the Bank, as well as referrals from
existing customers, mortgage companies and walk-in customers. The application
process includes a submission to the Bank of accurate plans, specifications and
costs of the project to be constructed. These items are also used as a basis to
determine the appraised value of the subject property. Loans are based on the
lesser of current appraised value and/or the cost of construction (land plus
building). Draws on construction loans are made by the Bank only after an
inspection of the property and the project is made by an experienced outside
inspector engaged by the Bank. The Bank does not use in-house inspectors or
appraisers to approve construction loan draws.
In addition to construction loans, the Bank originates loans secured by
residential lots and land for the development of single-family lots. These loans
are made to individuals acquiring a residential lot for future construction of
their residence, builders acquiring lots to build residences for future sale and
developers who use the proceeds to acquire land and make site improvements
necessary to develop the land into saleable lots. Generally, the maximum loan-
to-value ratio of a lot loan to an individual customer is the lesser of 75% of
the lot's sales price or its appraised value. The maximum loan-to-value ratio of
a lot loan to a builder acquiring lots to build residences for sale is 70% of
the sales price or its appraised value, whichever is less. In making loans to
developers, the Bank has a maximum loan-to-value ratio of 75% of the appraised
value of the developed lots. The Bank lends to developers in its market area
with good credit histories, performance experience and strong financial capacity
and on property where substantially all of the lots to be developed are pre-
sold. The term of these loans to individuals, builders and developers are
generally 12 to 24 months at a spread over the WSJ Prime Rate, plus an
origination fee. Repayment on the loans to developers are generally made as the
lots are sold to builders. Land
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<PAGE>
acquisition and development loans involve substantial risks when compared to
loans on existing residential properties. These loans typically involve
relatively large loan balances to single borrowers, and the repayment experience
is dependent upon the successful development of the land and the resale of the
lots. These risks can be significantly impacted by supply and demand conditions,
the general economic conditions in the local market area and local, state and
federal land use and environmental restrictions. As of October 31, 1996, Horizon
had loans totaling $13.5 million or 10.3% of Horizon's gross loan portfolio in
these lot and lot development loans.
Because of the uncertainties inherent in estimating construction costs and
the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction loans to borrowers other than owner occupants also involve
many of the same risks discussed below regarding multi-family and commercial
real estate loans and tend to be more sensitive to general economic conditions
than many other types of loans. Also, the funding of loan fees and interest
during the construction phase makes the monitoring of the progress of the
project particularly important, as customary early warning signals of project
difficulties may not be present. At October 31, 1996, Horizon had four
construction loans which were delinquent with an aggregate principal balance of
$496,000.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING
The Bank also engages in commercial and multi-family real estate lending.
At October 31, 1996, Horizon had $38.9 million of commercial and $3.2 million
multi-family real estate loans, which represented 29.5% and 2.4%, respectively,
of Horizon's total gross loan portfolio. At October 31, 1996, all of Horizon's
multi-family real estate portfolio was performing in accordance with their
repayment terms, and only eight commercial real estate loans with an aggregate
principal balance of $367,000 were delinquent.
The Bank is currently an approved SBA lender having loan guaranty
agreements with the SBA. The Bank has been approved by the SBA as a "SBA
Preferred Lender" and a "SBA Certified Lender." It is one of the few insured
depository institutions in its market area designated by the SBA as an SBA
Preferred Lender. This designation allows the Bank to underwrite SBA loans
without the prior approval of the SBA. The SBA Certified Lender designation
allows the Bank to receive priority underwriting from the SBA when loans are
submitted to the SBA for its approval. SBA lending has been one of the Bank's
targeted lending areas because of the benefits it provides to small businesses
and the attractive features the program offers to the Bank as a lender.
The SBA guarantees up to 90% of the loan amount, which is backed by the
full faith and credit of the United States Government. The guaranty generally
ranges from 75% to 90% up to a maximum guaranteed loan amount of $750,000
subject to the type and term of the loan. In December 1994, the SBA announced a
temporary ruling that beginning January 1, 1995 reduced the maximum loan amount
that may be made under the SBA 7(a) program to $500,000. Additionally, effective
May 15, 1995, a temporary ruling eliminated guarantees for refinanced debt with
limited exceptions. Effective October 12, 1995, these temporary restrictions
were removed. The SBA established new guarantee percentages of 80% for loans of
$100,000 or less and 75% for all other loans, subject to a maximum guaranteed
amount of $750,000.
Generally, the term for these real property secured loans is up to 25
years. Interest rates for loans with maturities of seven years or more cannot
exceed 2.75% over the WSJ Prime Rate, as defined by the SBA, and loans with
maturities less than seven years cannot exceed 2.25% over the WSJ Prime. These
loans are attractive to borrowers because of the extended loan maturities and to
the Bank, as lender, because the interest rates adjust either monthly or
quarterly based on the WSJ Prime and because the SBA guaranteed portion of the
loan can be sold in the national secondary market at premiums above the
guaranteed loan amount. As a general rule, the Bank sells all but the
unguaranteed portion of these SBA loans. The Bank, as the loan originator,
continues to service the entire loan amount (including the portion sold) usually
for a 1% annual servicing fee on the average unpaid principal
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<PAGE>
balance sold. At October 31, 1996, the SBA loans were $16.0 million, of which
$7.8 million was unguaranteed, representing 12.1% and 5.9%, respectively, of the
total gross loan portfolio.
The Bank's commercial and multi-family real estate loan portfolio is
secured primarily by small business facilities and office buildings, apartment
houses, restaurants, hotels/motels, and commercial buildings and real property
in Austin and in Travis, Williamson, Hays and Bexar Counties, Texas.
Commercial and multi-family real estate loans generally have terms of up to
20 years. On rare occasions, the Bank may also make such loans with a balloon
term of five to seven years. Generally, the loans have been made in amounts of
up to 70% of the appraised value of the property. In making these loans, the
Bank analyzes the financial condition of the borrower, the borrower's credit
history and the reliability and predictability of the cash flow generated by the
property securing the loan. These loans have interest rates slightly higher than
do those of SBA loans. The Bank generally requires personal guaranties of
certain key individuals associated with the borrowers.
Appraisals on properties securing commercial and multi-family real estate
property loans originated by the Bank are performed by an independent appraiser
designated by the Bank. All such appraisers are approved by the Loan Committee.
All appraisals on multi-family and commercial real estate loans are reviewed by
the Bank's management. While the Bank continues to monitor multi-
family/commercial real estate loans on a regular basis after origination,
updated appraisals are not normally obtained after closing unless the Bank
believes that there are questions regarding the progress of the loan or the
value of the collateral.
Multi-family and commercial real estate loans generally present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effect of general economic conditions
on income producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
multi-family and commercial real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed, or a
bankruptcy court modifies a lease term, or a major tenant is unable to fulfill
its lease obligations), the borrower's ability to repay the loan may be
impaired.
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING
Residential loan originations of this type are generated by the Bank's
marketing efforts, its present customers, walk-in customers, and referrals from
real estate agents and builders, and involvement by the Bank's directors,
officers and employees in various community organizations. The Bank focuses its
lending efforts primarily on the origination of loans secured by first mortgages
on owner occupied, one- to four-family residences in its market area. At October
31, 1996, Horizon's one- to four-family residential mortgage loans totaled $14.4
million, or approximately 10.9% of Horizon's total gross loan portfolio. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HORIZON--ORIGINATIONS, PURCHASES, SALES AND SERVICING OF LOANS."
The Bank currently offers fixed-rate and ARM loans. During the six months
ended October 31, 1996, Horizon originated $0.9 million of adjustable-rate real
estate loans, which were secured by one- to four-family residential real estate
(excluding construction loans). During the same period, Horizon originated $14.1
million of fixed-rate real estate loans which were secured by one- to four-
family residential real estate. The Bank's one- to four-family residential
mortgage originations are primarily in its market area.
The Bank currently originates one- to four-family residential mortgage
loans in amounts of up to 95% of the appraised value of the secured property and
generally requires that private mortgage insurance is obtained in an amount
sufficient to reduce the Bank's exposure to at or below 80%. The terms of such
loans are generally for 30 years. Interest charged on these mortgage loans is
competitively priced according to local market conditions.
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<PAGE>
The fixed-rate loans are originated for sale in the secondary market, and all of
the Bank's fixed-rate residential mortgage loans are originated to conform to
secondary market standards, i.e., Federal National Mortgage Association
("FNMA"), Government National Mortgage Association and Federal Home Loan
Mortgage Corporation ("FHLMC").
In underwriting one- to four-family residential real estate loans, the Bank
evaluates the borrower's ability to make monthly payments, employment history
and the value of the property securing the loan. Most properties securing real
estate loans made by the Bank are appraised by an independent appraiser who is
licensed by the State of Texas. The Bank generally requires borrowers to obtain
title insurance and hazard insurance (including flood insurance, if necessary)
in an amount not less than the amount of the loan. Real estate loans originated
by the Bank generally contain a "due on sale" clause allowing the Bank to
declare the unpaid principal balance due and payable upon the sale of the
security property.
COMMERCIAL BUSINESS LENDING
The Bank also originates commercial business loans. Approximately 9.8% of
these commercial loans are guaranteed by the SBA. At October 31, 1996,
approximately $9.5 million, or 7.2% of Horizon's gross loan portfolio, was
comprised of commercial business loans of which four, for a gross dollar amount
of $50,000, were non-performing at that date. The largest unguaranteed
commercial business loan is an $800,000 revolving line of credit secured by
accounts receivable.
Some of the commercial business loans the Bank originates are guaranteed by
the SBA. The SBA guarantees up to 90% of the loan amount, which is backed by the
full faith and credit of the U.S. Government. This guaranty generally ranges
from 75% to 90% of the loan amount up to a maximum guaranteed loan amount of
$750,000 subject to the type and term of the loan. The term of these loans
generally range from five to seven years for working capital loans and up to 25
years for loans secured by fixed assets. Interest rates for loans with
maturities less than seven years cannot exceed 2.25% over WSJ Prime, and for
those over seven years, 2.75% of WSJ Prime. As described in "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
HORIZON--LENDING ACTIVITIES--COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING,"
these loans are attractive to borrowers because of the extended loan maturities
and to the Bank, as lender, the interest rates adjust and because the guaranteed
portion of the loan can be sold in the secondary market.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the viability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Bank's commercial business loans usually but not always are
secured by business assets. However, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
The Bank's commercial business lending policy includes credit file
documentation and analysis of the borrower's character, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of conditions affecting the borrower. Analysis of the borrower's
past, present and future cash flows is also an important aspect of the Bank's
current credit analysis. Nonetheless, such loans are believed to carry higher
credit risk than more traditional thrift investments.
CREDIT CARD AND CONSUMER LENDING
The Bank offers its own credit cards and a variety of secured and unsecured
consumer loans, including automobile loans, home improvement loans, federally
guaranteed student loans, loans secured by savings deposits
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and a limited amount of unsecured signature loans. The Bank currently originates
substantially all of its consumer loans in its primary market area, except that
credit card loans may be made outside of the Bank's current market area. Except
for its credit card loans, the Bank originates consumer loans on a direct basis.
At October 31, 1996, Horizon's consumer loan portfolio other than credit cards
totaled $5.0 million, or 3.8% of its total gross loan portfolio.
Beginning in 1994, the Bank offered VISA/Mastercard credit card accounts.
This program is a return to the credit card business for the Bank. From 1988
until 1990, the Bank offered credit cards throughout the nation. Before selling
its credit card business in 1990, the Bank had over 30,000 cards issued with
loans thereon in the amount of $19.2 million. The Bank has now established a new
program to offer credit cards directly from the Bank and through other financial
institutions that are members of the Texas Savings and Community Bankers
Association. The program currently provides for a 12.9% interest rate with no
annual fee. At October 31, 1996, approximately 10,900 credit card accounts had
been opened, with an outstanding committed balance of $31.9 million, of which
$6.0 million was advanced. The amount advanced on the credit cards represents
approximately 4.6% of the Bank's total gross loan portfolio. For the year ended
April 30, 1996, the operating loss attributable to the credit card operation was
approximately $238,000 including chargeoffs of accounts. The credit card
operation of the Bank may continue to have a negative impact on earnings in the
near future as the Bank continues in this line of business. Several items cause
this negative effect including the time lag between the time the cards are
issued and the payments are received, cardholder outstanding balances not being
at a high enough level to cover operating costs and loan losses, lower than
projected utilization and activation levels and loan losses associated with a
new program. At this time, loss and delinquency ratios of the Bank are better
than published industry statistics that are currently available to the Bank. As
a result, the credit card operation may have a negative impact on earnings until
such items are corrected.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Bank for consumer loans and credit cards include an
application, a determination of the applicant's payment history on other debts,
employment stability and an assessment of ability to meet existing obligations
and payments on the proposed loan. Although creditworthiness of the applicant is
a primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
Consumer loans (including credit cards) may entail greater credit risk than
do residential mortgage loans. In addition, consumer loan and credit card
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At October 31, 1996, there were 51 non-performing consumer loans
(including credit card advances) for a total amount of $122,000.
ORIGINATIONS, PURCHASES, SALES AND SERVICING OF LOANS
Loans are generally originated by the Bank's staff of salaried loan
officers. Loan applications are taken at all locations, except the minibank and
two of the branch offices, and are generally processed at the main office of the
Bank.
Although the Bank originates a variety of loan products, including fixed-
rate mortgage loans and SBA guaranteed commercial loans, Horizon's ability to
originate loans is dependent upon the relative customer demand for loans in its
market. In the past three fiscal years Horizon has experienced a substantial
demand for single-family residential construction loans from both individuals
and builders. While interest rates were still historically low, there has also
been an increase in demand for single-family residential permanent loans as
borrowers were trying to refinance their current mortgages. There is no
assurance that such demand for these loan products will continue in the future.
In fiscal 1996, Horizon originated $167.8 million of loans, compared to $144.6
million and $138.9 million in fiscal 1995 and 1994, respectively. In fiscal
1996, $115.7 million of loans and mortgage-backed
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securities were repaid, compared to $113.1 million and $86.4 million in fiscal
1995 and 1994, respectively. For the six months ended October 31, 1996, Horizon
originated $99.8 million of loans and $67.2 million were repaid.
During fiscal 1995, Horizon chose to reduce the gross dollar amount of
residential construction loans held in its portfolio and as a result it sold
more of its construction and development loans than in prior years. In 1996
Horizon chose to increase its gross construction loan portfolio. The Bank sells
whole real estate loans, primarily with fixed-rates, without recourse, to FNMA
and from time to other secondary market purchasers. From time to time, Horizon
also sells all or a part of its commercial business loans guaranteed by the SBA
to buyers in the secondary market. Horizon sold whole loans and participations
in aggregate amounts of $18.4 million for the six months ended October 31, 1996
and $31.7 million for the fiscal year ended April 30, 1996 compared to $30.2
million and $35.3 million during fiscal 1995 and 1994, respectively. Sales of
loans generally are beneficial to Horizon since these sales may generate income
at the time of sale, produce future servicing income, provide funds for
additional lending and other investments and increase liquidity. The following
table provides information about Horizon's net gains on the sale of mortgage and
SBA guaranteed loans, in the periods indicated:
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended April 30, October 31,
----------------------- -------------
1994 1995 1996 1996
------ ----- ----- ----
(In Thousands)
<S> <C> <C> <C> <C>
Gain on sale of residential mortgage loans, net $ 189 $ 57 $ 146 $ 61
Gain on sale of SBA guaranteed loans, net 430 452 373 429
----- ----- ----- -----
Total $ 619 $ 509 $ 519 $ 490
===== ===== ===== =====
</TABLE>
When loans are sold, Horizon typically retains the responsibility for
servicing the loans. Horizon receives a servicing fee for performing these
services. Horizon serviced loans for others (including whole mortgages, SBA and
other participations sold) amounting to $30.2 million at April 30, 1996 compared
to $30.2 million and $41.9 million at April 30, 1995 and 1994, respectively.
During fiscal years 1996, 1995 and 1994 and the six months ended October
31, 1996, Horizon did not make any material purchases of loans or loan
participations originated by other lenders. At October 31, 1996, Horizon had
$2.8 million of purchased loans or loan participations in its current loan
portfolio.
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The following table shows the loan origination, purchase, sales and
repayment activities of Horizon for the periods indicated.
<TABLE>
<CAPTION>
At
Year Ended at April 30, October 31,
------------------------- -----------
1994 1995 1996 1996
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Originations by type:
- ---------------------
Adjustable-rate:
- -----------------
Real estate
- one- to four-family $ 3,952 $ 2,212 $ 1,287 $ 894
- multi-family/commercial 16,087 16,562 16,293 18,131
- construction and development 86,174 99,320 84,532 38,267
Non-real estate
- consumer -- 875 5,555 751
- commercial 3,310 6,764 8,724 9,489
-------- -------- -------- --------
Total adjustable-rate 109,558 127,373 123,170 67,532
-------- -------- -------- --------
Fixed-rate:
- ------------
Real estate 26,990 11,381 27,787 14,064
- one- to four-family
- multi-family/commercial 12 206 6,601 3,360
- construction and development 220 2,740 4,219 10,235
Non-real estate
- consumer 1,887 2,235 4,040 2,670
- commercial 226 660 2,553 1,927
-------- -------- -------- --------
Total fixed-rate 29,335 17,222 45,200 32,256
-------- -------- -------- --------
Total loans originated 138,893 144,595 168,370 99,788
-------- -------- -------- --------
Purchases:
- ----------
Mortgage-backed securities
- Fixed-rate -- -- 577 --
- Adjustable-rate 214 847 -- --
-------- -------- -------- --------
Total purchased 214 847 577 --
-------- -------- -------- --------
Sales and Repayments:
- ---------------------
Real estate 23,142 10,547 24,721 14,084
- One-to-four family
- Multi-family/commercial 8,349 5,963 4,572 3,204
- Construction or development 2,596 12,509 487 --
- Other loans 1,191 1,228 1,953 1,163
Mortgage-backed securities -- -- -- --
-------- -------- -------- --------
Total sales 35,278 30,247 31,733 18,451
-------- -------- -------- --------
Principal loan repayments 86,427 113,078 115,723 67,241
-------- -------- -------- --------
Total reductions 121,705 143,325 144,756 85,692
-------- -------- -------- --------
Net increase (decrease) $ 17,402 $ 2,117 $ 24,191 $ 14,096
-------- -------- -------- --------
</TABLE>
NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
Payments on first mortgage loans at Horizon are due on the first day of the
month and if payment is not received by the 15th day of the month the collection
process ordinarily begins. Bank collection personnel will contact the borrower
by telephone or in writing to cure the default. If the account becomes 60 days
delinquent (or
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sooner if warranted by the facts), Horizon will send a notice of right to cure
default. In most cases, delinquencies are cured promptly. Foreclosure
proceedings will be instituted once Horizon decides that the loan is
uncollectible.
Generally, when a loan becomes delinquent 90 days or more, or when the
collection of principal or interest becomes doubtful, Horizon will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. Each account is handled on a
individual basis. The loan will be transferred back to an accrual status if the
borrower brings the loan current.
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The following table sets forth Horizon's loan delinquencies by type, by
amount and by percentage of type at October 31, 1996. The amounts presented
represent the total remaining principal balances of the elapsed loans, rather
than the actual payment amounts which are overdue./1/
<TABLE>
<CAPTION>
Loans Delinquent For:
-----------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
------------------------------ -------------------------------- -------------------------------
% of % of % of
Number Amount Category/2/ Number Amount Category/2/ Number Amount Category/2/
------ ------ ----------- ------ ------ ----------- ------ ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family real estate:
Permanent mortgage loans......... 7 $ 981 6.87% -- -- --% -- $ -- --%
Construction loans............... 4 496 2.14 -- -- -- -- -- --
Lot and lot development loans.... 5 464 3.92 -- -- -- -- -- --
Commercial real estate............. 5 290 0.76 -- -- -- 3 77 0.20
Consumer........................... 12 107 2.15 -- -- -- 1 25 0.50
Commercial......................... 7 426 4.61 2 34 0.37 4 50 0.54
Credit Cards....................... 31 38 0.63 32 99 1.64 50 97 1.61
-- ------ ---- -- ---- ---- -- ---- ----
Total.......................... 71 $2,802 2.61% 34 $133 0.12% 58 $249 0.23%
== ====== ==== == ==== ==== == ==== ====
</TABLE>
<TABLE>
<CAPTION>
Total Delinquent Loans
------------------------------
% of
Number Amount Category/2/
------ ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C>
One- to four-family real estate:
Permanent mortgage loans......... 7 $ 981 6.87%
Construction loans............... 4 496 2.14
Lot and lot development loans.... 5 464 3.92
Commercial real estate............. 8 367 0.96
Consumer........................... 13 132 2.65
Commercial......................... 13 510 5.52
Credit Cards....................... 113 234 3.88
--- ------ ----
Total.......................... 163 $3,184 2.96%
=== ====== ====
</TABLE>
_____________________
/1/ Does not include loans in non-accrual status.
/2/ Based on outstanding advanced loan amounts and does not consider deferred
loan fees or valuation allowances.
-97-
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets in Horizon's loan portfolio. For all periods presented, Horizon has had
no troubled debt restructurings (which involve forgiving a portion of interest
or principal on any loans or making loans at a rate materially less than that of
market rates). Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
April 30, October 31,
----------------------- -----------
1994 1995 1996 1996
------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family /1/............... $ -- $ -- $ -- $ --
Commercial real estate................ -- -- -- --
Commercial business................... 21 17 13 11
Consumer.............................. -- -- -- --
----- ------ ----- -----
Total............................... 21 17 13 11
----- ------ ----- -----
Accruing loans delinquent
more than 90 days: 113 668/2/ 81 --
One- to four-family /1/...............
Commercial real estate................ 4 98 -- 77
Commercial business................... -- 97 95 50
Consumer.............................. 5 3 73 122
----- ------ ----- -----
Total /2/........................... 122 866 249 249
----- ------ ----- -----
Foreclosed assets:
One- to four-family /1/............... 309 -- -- --
Commercial real estate................ 64 33 -- --
Commercial business................... -- -- -- --
----- ------ ----- -----
Total............................... 373 33 -- --
----- ------ ----- -----
Total non-performing assets /2/........... $ 516 $ 916 $ 262 $ 260
===== ====== ===== =====
Total as a percentage of total assets 0.58% 0.89% 0.20% 0.17%
===== ====== ===== =====
Total as a percentage of total loans /3/ 0.72% 1.25% 0.28% 0.24%
===== ====== ===== =====
</TABLE>
- --------------
/1/ Includes one- to four-family construction loans and lot loans at April
30, 1995.
/2/ Includes a one- to four-family loan in the amount of $668,000 which
was paid off in May 1995.
/3/ Does not include deferred fees and discounts or general valuation
allowances, or loans held for sale.
For the period ended October 31, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms was immaterial. The amounts that were included in interest
income on such loans were also immaterial.
OTHER ASSETS OF CONCERN
As of October 31, 1996, there was approximately $606,000 in net book value
of other assets of concern to Horizon (other than those non-performing assets
reflected in the above table) because of known information about the possible
credit problems of the borrowers or the cash flows of the security property has
caused management to have some doubts as to the ability of the borrowers to
comply with present loan repayment terms and which may result in the future
inclusion of such item in the non-performing asset categories. SEE "- ALLOWANCE
FOR LOAN LOSSES." Of these loans of concern, management does not believe that
such loans represent any material trends in any particular type of loans of
Horizon or uncertainties which management reasonably expects will materially
-98-
<PAGE>
impact future operating results, liquidity or capital resources. There are no
particular concentrations of these loans of concern among any loan category of
Horizon.
CLASSIFIED ASSETS
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered by the regulators to be of
lesser quality as "substandard," "doubtful" or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obliger or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings bank will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When a savings bank classifies problem assets as either substandard or
doubtful, it may establish specific allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings bank classifies problem assets as
"loss," it is required either to establish a specific allowance for losses equal
to 100% of that portion of the asset so classified or to charge-off such amount.
A savings bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the savings bank's
regulators, who may order the establishment of additional general or specific
loss allowances.
In connection with the filing of its periodic reports with its federal
regulators and in accordance with its classification of assets policy, the Bank
regularly reviews the loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations. On the basis
of management's review of its assets, at August 31, 1996 (the latest date such
information was available), the Bank had classified a total of $222,000 of its
assets as substandard, $9,000 as doubtful and $80,000 as loss.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and changes in the nature and volume of its loan activity, including
those loans which are being specifically monitored by management. Such
evaluation, which includes a review of loans for which full collectibility may
not be reasonably assured, considers among other factors, the estimated fair
value of the underlying collateral, economic conditions, historical loan loss
experience and other factors that warrant recognition in providing for an
adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at lower
of cost or fair value, less estimated disposition costs. If fair value at the
date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations.
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments, and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to Horizon's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. At October 31, 1996, Horizon had a total allowance for loan losses of
$780,000, or 0.73% of net loans before deduction for the valuation allowances.
SEE NOTE 3 OF THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-99-
<PAGE>
The following table sets forth an analysis of Horizon's allowance for loan
losses.
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended April 30, October 31,
-------------------------- -----------
1994 1995 1996 1996
------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 456 $ 503 $ 734 $ 672
Charge-offs: --
One- to four-family (60) -- (157)
Commercial real estate (2) -- -- --
Consumer -- -- (109) (143)
Commercial (13) -- (63) --
------ ------- ------ ------
Total Charge-offs (75) (329) (143)
Recoveries 2 128 7 11
Net Charge-offs (73) 128 (322) (143)
Additions charged to operations 120 103 260 (240)
------ ------- ------ ------
Balance at end of period $ 503 $ 734 $ 672 $ 780
====== ======= ====== ======
Ratio of net charge-offs (recoveries) during
the period to average loans outstanding
during the period 0.12% (0.18)% 0.40% 0.13%
====== ======= ====== ======
Ratio of net charge-offs (recoveries) during the
period to average non-performing assets 31.06% (27.00)% 56.20% 35.68%
====== ======== ====== ======
</TABLE>
The distribution of Horizon's allowance for losses on loans at the
dates indicated is summarized as follows /1/:
<TABLE>
<CAPTION>
At April 30, At October 31,
-------------------------------------------------------------- -----------------
1994 1995 1996 1996
-------------------------------------------------------------- -----------------
Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Residential Real
Estate:
Permanent $ 40 10.85% $ 80 14.89% $ 50 15.04% $ 60 13.29%
Construction and
development 40 63.79 154 53.55 150 34.01 150 32.60
Multi-family -- 4.05 -- 3.08 -- 2.31 -- 2.57
Commercial real
estate 140 14.17 150 18.42 150 28.43 175 32.71
Commercial 203 4.81 250 6.21 150 9.35 150 8.60
Consumer 80 2.33 100 3.85 172 10.86 256 10.23
---- ------ ---- ------ ---- ------ ----- ------
Total $503 100.00% $734 100.00% $672 100.00% $ 780 100.00%
==== ====== ==== ====== ==== ====== ===== ======
</TABLE>
- --------------
/1/ Excludes deferred fees and discounts, valuation allowances and loans
in process.
For information concerning valuation allowances on foreclosed real estate,
see Note 5 of Notes to Consolidated Financial Statements.
-100-
<PAGE>
INVESTMENT ACTIVITIES
GENERAL
The Bank must maintain minimum levels of investments that qualify as liquid
assets under federal and state regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has generally
maintained its liquid assets above the minimum requirements imposed by the
federal and state regulations and at a level believed adequate to meet
requirements of normal daily activities and potential deposit outflows. As of
October 31, 1996, the Bank's regulatory liquidity ratio (liquid assets as a
percentage of assets) was 23.34%.
Texas chartered savings banks have the authority to invest in various types
of liquid assets, including United States Treasury obligations, securities of
various federal agencies, demand, time or savings deposits of insured banks and
savings institutions, repurchase agreements and federal funds.
Generally, the investment policy of Horizon is to invest funds among
various categories of investments and maturities based upon Horizon's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, to provide collateral for public funds and borrowings, if any,
and to fulfill Horizon's asset/liability management policies.
INVESTMENT SECURITIES
At October 31, 1996, Horizon's cash and interest bearing deposits in other
financial institutions, including the FHLB, totaled $14.8 million, or 9.9% of
its total assets, and investment securities (including a $480,000 investment in
the common stock of the FHLB) totaled $12.0 million, or 8.0% of its total
assets. It is Horizon's general policy to purchase investment securities which
are U.S. Government securities and federal agency obligations. At October 31,
1996, the weighted average term to maturity or repricing of the investment
securities portfolio, excluding the FHLB stock, was 20 months.
Horizon's investment securities portfolio is managed in accordance with a
written investment policy adopted and supervised by the Board of Directors. At
October 31, 1996, all debt securities of Horizon were classified as available
for sale. See NOTE 1 OF THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for
additional information regarding Horizon's investment securities.
-101-
<PAGE>
The following table sets forth the composition of Horizon's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At April 30
---------------------------------------------------------------------
1994 1995 1996 At October 31, 1996
---------------------- ----------------------- --------------------- ---------------------
Book Value % of Total Book Value % of Total Book Value % of Total Book Value % of Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government
securities/1/ $ -- --% $ -- --% $2,490 26.51% $ 3,292 27.48%
Federal and State agency
obligations/1/ 1,523 78.59% 2,124 92.90% 6,437 68.53% 6,737 56.25%
Municipal securities/1/ -- -- -- -- -- -- 1,468 12.26%
------ ------ ------ ------ ------ ------ ------- ------
Subtotal 1,523 78.59% 2,124 82.90% 8,927 95.04% 11,497 95.99%
------ ------ ------ ------ ------ ------ ------- ------
FHLB stock 415 21.41% 438 17.10% 466 4.96% 480 4.01%
------ ------ ------ ------ ------ ------ ------- ------
Total investment
securities and
FHLB stock $1,938 100.00% $2,562 100.00% $9,393 100.00% $11,977 100.00%
====== ====== ====== ====== ====== ====== ======= ======
Weighted average remaining
life of investment
securities (excluding
FHLB stock) 31.5 years 29.8 years 9.8 years 7.9 years
Interest Earning Assets:
Interest bearing deposits
with banks (including
federal funds sold) $1,998 $5,106 $12,077 $14,766
====== ====== ======= =======
Weighted average remaining
life or term to repricing
of investment securities
and other interest earning
assets (excluding FHLB stock) 1 month 1 month 20 months 20 months
</TABLE>
- --------------
/1/ Management has classified these debt securities as available for sale.
-102-
<PAGE>
The composition and maturities at October 31, 1996 of the investment
securities portfolio, excluding FHLB stock, are indicated in the following
table.
<TABLE>
<CAPTION>
Less than Over 10 Total Investment
10 Years Years Securities
----------- ----------- -------------------------
Book Value Book Value Book Value Market Value
----------- ----------- ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government securities $3,292 $ -- $ 3,292 $ 3,292
Federal and State
agency obligations 4,573 2,164 6,737 6,737
Municipal securities 1,306 162 1,468 1,468
------ ------ ------- -------
Total investment securities $9,171 $2,326 $11,497 $11,497
====== ====== ======= =======
Weighted average yield 5.93% 6.43% 6.03%
</TABLE>
Horizon's investment securities portfolio at October 31, 1996 contained
$1.5 million in AAA rated tax exempt securities which have an aggregate book
value representing approximately 30% of retained earnings. All other securities
are issued by the United States Government or its agencies.
SOURCES OF FUNDS
GENERAL
Horizon's sources of funds are primarily deposits, amortization and
repayment of loan principal and mortgage-backed securities, interest earned on
or maturation of investment securities and short-term investments, and funds
provided from operations. Horizon does not currently offer personal or corporate
trust services.
DEPOSITS
Horizon offers a variety of deposit accounts having a wide range of
interest rates and terms. Horizon's deposits consist of demand deposit accounts,
money market accounts, NOW accounts, savings accounts and certificate accounts
currently ranging in terms from 91 days to one year generally, but in some cases
terms on certificate accounts could be as long as five years. Horizon solicits
deposits primarily from its market area and does not pay brokers to obtain
deposits. Horizon relies primarily on competitive pricing policies, advertising
and customer service (including location) to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market and prevailing interest rates and competition.
The variety of deposit accounts offered by Horizon has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. Horizon has become more susceptible to short-term fluctuations
in deposit flows, as customers have become more interest rate conscious. Horizon
endeavors to manage the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, Horizon believes that its demand deposit accounts, including its
non-interest bearing commercial deposit accounts, and its savings accounts,
money market and NOW accounts are relatively stable sources of deposits.
However, the ability of Horizon to attract and retain certificate accounts and
the rates paid on these deposits has been and will continue to be significantly
affected by market conditions.
-103-
<PAGE>
The following table sets forth the deposit flows at Horizon during the
periods indicated: /1/
<TABLE>
<CAPTION>
Year Ended April 30, Six Months Ended
------------------------------------ -----------------
1994 1995 1996 October 31, 1996
---------- ---------- ---------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Opening balance $ 58,963 $ 75,473 $ 89,240 $ 117,653
Deposits 1,372,836 1,496,714 2,135,730 1,313,714
Withdrawals 1,357,237 1,484,134 2,109,159 1,298,264
Interest Credited 911 1,187 1,842 1,296
---------- ---------- ---------- ----------
Ending balance $ 75,473 $ 89,240 $ 117,653 $ 134,399
========== ========== ========== ==========
Net increase $ 16,510 $ 13,767 $ 28,413 $ 16,746
========== ========== ========== ==========
Percent increase 28.00% 18.24% 31.84% 14.23%
========== ========== ========== ==========
</TABLE>
- --------------
/1/ Includes all deposit accounts.
-104-
<PAGE>
The following table sets forth the distribution of Horizon's deposit
accounts in the various types of deposit programs offered by Horizon for the
periods indicated.
<TABLE>
<CAPTION>
At Year Ended April 30,
--------------------------------------------------------------------------------------------
1994 1995 1996
------------------------------ -------------------------------- --------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------- --------------- -------------- ---------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Transactions and
Savings Deposits:
-----------------
Commercial demand/1/ $25,144 33.31% $32,420 36.33% $ 47,728 40.57%
Savings Accounts (2.29%)/2/ 4,843 6.42% 5,730 6.42 6,746 5.73
NOW Accounts (1.40%)/2/ 7,729 10.24% 11,612 13.02 17,361 14.75
Money Market (1.40% - 5.10%)/2/ 17,299 22.92% 23,125 25.91 25,375 21.57
------- ------ ------- ------ -------- ------
Total Non-Certificates 55,015 72.89% 72,887 81.68 97,210 82.62
------- ------ ------- ------ -------- ------
Certificates:
-------------
0.00% - 2.99% 4,412 5.85% 792 0.89 1,123 0.95
3.00% - 3.99% 7,618 10.09% 1,207 1.35 -- --
4.00% - 4.99% 7,965 10.55% 7,931 8.89 7,594 6.45
5.00% - 5.99% -- -- 3,773 4.23 7,822 6.65
6.00% - 6.99% 463 0.62% 2,464 2.76 3,609 3.07
7.00% and over -- -- 186 0.20 295 0.26
------- ------ ------- ------ -------- ------
Total Certificates 20,458 27.11% 16,353 18.32 20,443 17.38
------- ------ ------- ------ -------- ------
Total Deposits $75,473 100.00% $89,240 100.00% $117,653 100.00%
======= ====== ======= ====== ======== ======
</TABLE>
_______________________
/1/ Non-interest bearing.
/2/ At October 31, 1996.
<TABLE>
<CAPTION>
At October 31,
-------------------------------
1996
-------------------------------
Percent
Amount of Total
------------- ----------------
<S> <C> <C>
Transactions and
Savings Deposits:
-----------------
Commercial demand/1/ $ 48,115 35.80%
Savings Accounts (2.29%)/2/ 7,526 5.60
NOW Accounts (1.40%)/2/ 20,081 14.94
Money Market (1.40% - 5.10%)/2/ 31,426 23.38
-------- ------
Total Non-Certificates 107,148 79.72%
-------- ------
Certificates:
-------------
0.00% - 2.99% 548 0.41
3.00% - 3.99% --
4.00% - 4.99% 6,104 4.54
5.00% - 5.99% 17,551 13.06
6.00% - 6.99% 2,645 1.97
7.00% and over 403 0.30
-------- ------
Total Certificates 27,251 20.28
-------- ------
Total Deposits $134,399 100.00%
======== ======
</TABLE>
_______________________
/1/ Non-interest bearing.
/2/ At October 31, 1996.
-105-
<PAGE>
The following table shows rate and maturity information for Horizon's
certificates of deposit as of October 31, 1996.
<TABLE>
<CAPTION>
0.00 - 4.00 - 6.00% and Percent
3.99% 5.99% Over Total of Total
------- ------- --------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts
maturing in quarter ending:
- ---------------------------
December 31, 1996........... $ 404 $ 3,222 $ 244 $ 3,870 14.20%
March 31, 1997.............. 126 7,454 393 7,973 29.26
June 30, 1997............... 8 5,292 1,813 7,113 26.10
September 30, 1997.......... 10 3,614 67 3,691 13.54
December 31, 1997........... -- 1,342 35 1,377 5.05
March 31, 1998.............. -- 1,766 98 1,864 6.84
June 30, 1998............... -- 670 155 825 3.03
September 30, 1998.......... -- 203 -- 203 0.74
December 31, 1998........... -- 92 -- 92 0.34
March 31, 1999.............. -- -- -- -- --
June 30, 1999............... -- -- 4 4 0.01
September 30, 1999.......... -- -- 10 10 0.05
Thereafter.................. -- -- 229 229 0.84
------- ------- ------ ------- ------
Total.................. $ 548 $23,655 $3,048 $27,251 100.00%
======= ======= ====== ======= ======
Percent of total....... 2.01% 86.80% 11.19% 100.00%
======= ======= ====== =======
</TABLE>
The following table indicates the amount of Horizon's certificates of
deposit and other deposits by time remaining until maturity as of October 31,
1996:
<TABLE>
<CAPTION>
Maturity
-------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------ ------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000............................... $4,102 $6,053 $6,440 $2,867 $19,462
Certificates of deposit of $100,000 or more.. 1,719 2,709 2,525 836 7,789
------ ------ ------ ------ -------
Total certificates of deposit................ $5,821 $8,762 $8,965 $3,703 $27,251
====== ====== ====== ====== =======
</TABLE>
-106-
<PAGE>
BORROWINGS
From time to time Horizon has used advances from the FHLB to supplement its
deposits when the rates are favorable. As a member of the FHLB, the Bank is
required to own capital stock of the FHLB and is authorized to apply for
advances. Each FHLB credit program has its own interest rate, which may be fixed
or variable, and includes a range of maturities. The FHLB may prescribe the
acceptable uses to which these advances may be put, as well as limitations on
the size of the advances and repayment provisions.
Horizon had no outstanding advances at October 31, 1996.
The following table sets forth the maximum month-end balances, average
balances and weighted average interest rates of FHLB advances for the periods
indicated. There were no securities sold under agreements to repurchase or other
borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended April 30, Six Months Ended
---------------------- ----------------
1994 1995 1996 October 31, 1996
------ ------ ------ ----------------
(In Thousands)
<S> <C> <C> <C> <C>
Maximum Balance:
- ----------------
FHLB advances $8,140 $6,000 $2,000 --
Other borrowings 250 100 -- --
Average Balance:
- ----------------
FHLB advances $2,015 $2,324 $ 44 --
Other borrowings 146 25 -- --
</TABLE>
The following table sets forth certain information as to Horizon's FHLB
advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
At April 30, At October 31,
-------------------------- --------------
1994 1995 1996 1996
-------- -------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
FHLB advances $5,900 $2,000 $ -- $ --
Other borrowings -- -- -- --
------ ------ ----- -----
Total borrowings $5,900 $2,000 $ -- $ --
====== ====== ===== =====
Weighted average interest
rate of FHLB advances-
and other borrowings 3.66% 6.18% 5.37% --%
====== ====== ===== =====
</TABLE>
-107-
<PAGE>
RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS
Compass' Board of Directors appointed KPMG Peat Marwick LLP as independent
auditors for Compass for the year ending December 31, 1996. KPMG Peat Marwick
LLP has served as Compass' independent auditors continuously since 1971.
Horizon's Board of Directors appointed BDO Seidman, LLP, as independent
auditors for Horizon for the year ending April 30, 1996. BDO Seidman, LLP has
served as Horizon's independent auditors continuously since 1992.
Compass and Horizon have been advised by KPMG Peat Marwick LLP and BDO
Seidman, LLP, that neither KPMG Peat Marwick LLP nor BDO Seidman, LLP, has any
direct financial interest or any material indirect financial interest in
Compass, Horizon, or their affiliates other than arising from that firm's
employment as auditors for Compass and Horizon, respectively.
EXPERTS
The consolidated financial statements of Compass as of December 31, 1995
and 1994 and for each of the years in the three-year period ended December 31,
1995 have been incorporated herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein and in the Registration Statement,
and upon the authority of said firm as experts in accounting and auditing. KPMG
Peat Marwick LLP's report refers to changes in the method of accounting for
income taxes and in the method of accounting for certain investments in debt and
equity securities.
The consolidated financial statements of Horizon as of April 30, 1996 and
1995 and for each of the years in the three-year period ended April 30, 1996
have been incorporated herein and in the Registration Statement in reliance upon
the report of BDO Seidman, LLP, independent certified public accountants, and
upon the authority of said firm as experts in accounting and auditing.
LEGAL OPINIONS
Jerry W. Powell, Esquire, General Counsel, Secretary and an employee of
Compass, has rendered an opinion concerning the validity of the securities being
offered pursuant to this Proxy Statement/Prospectus and certain other matters.
As of September 30, 1996, Mr. Powell was the beneficial owner of an aggregate of
approximately 55,494 shares of Compass Common Stock. Liddell, Sapp has passed
upon, among other things, certain federal income tax consequences of the Merger,
and the receipt by Compass of its opinion as to such federal income tax
consequences of the Merger is a condition to the Closing of the Merger. Selman &
Munson, P.C. of Austin, Texas, and Liddell, Sapp are also expected to render
legal opinions as to certain matters acceptable to Horizon and Compass,
respectively. Silver, Freedman & Taff, L.L.P. of Washington, D.C. has passed
upon certain federal income tax consequences of the Merger on behalf of Horizon.
HORIZON SHAREHOLDER PROPOSALS
Horizon will hold a 1997 Annual Meeting of Shareholders only if the Merger
is not consummated before the time of such annual meeting, which it is presently
expected would be held in late-September, 1997. In such event, as disclosed in
the proxy materials for Horizon's 1996 Annual Meeting of Shareholders, in order
to be eligible for inclusion in Horizon's proxy materials for the 1997 Annual
Meeting of Shareholders, any shareholder proposal to take action at such meeting
must be received at the main office of Horizon, 5800 North Mopac Expressway,
Austin, Texas 78731 no later than April 14, 1997. Any such proposal shall be
subject to the requirements of the proxy rules adopted under the Exchange Act.
-108-
<PAGE>
INDEMNIFICATION
Compass' By-Laws contain provisions similar to those of Section 145 of the
GCL, which authorize Compass to indemnify its officers, directors, employees and
agents to the full extent permitted by law. SEE "COMPARISON OF RIGHTS OF
SHAREHOLDERS OF HORIZON AND COMPASS--CERTAIN DIFFERENCES BETWEEN THE CORPORATION
LAWS OF TEXAS AND DELAWARE AND CORRESPONDING CHARTER AND BY-LAW PROVISIONS--
LIMITATION OF LIABILITY AND INDEMNIFICATION".
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Compass, Compass
has been informed that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
OTHER MATTERS
Horizon's Board of Directors does not know of any matters to be presented
at the Meeting other than those set forth above. If any other matters are
properly brought before the Meeting or any adjournment thereof, the enclosed
proxy will be voted in accordance with the recommendations of Horizon's Board of
Directors unless "Authority Withheld" is indicated in the appropriate box on the
proxy. SEE "INTRODUCTION".
-109-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
HORIZON BANCORP, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Independent Auditors' Report 3
2. Consolidated Statements of Financial Condition as of
April 30, 1996 and 1995 and as of October 31, 1996
(unaudited) 4
3. Consolidated Statements of Operations for the Three Years Ended
April 30, 1996 and for the Six Months Ended October 31, 1996
and 1995 (unaudited) 5-7
4. Consolidated Statements of Stockholders' Equity for the Three Years
Ended April 30, 1996 and for the Six Months Ended October 31, 1996
and 1995 (unaudited) 8-9
5. Consolidated Statements of Cash Flows for the Three Years
Ended April 30, 1996 and for the Six Months Ended October 31, 1996
and 1995 (unaudited) 10-12
6. Summary of Significant Accounting Policies 13-20
7. Notes to Consolidated Financial Statements 21-46
</TABLE>
F-1
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1995 AND 1995 AND 1994
F-2
<PAGE>
[LETTERHEAD OF BDO SEIDMAN APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Horizon Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated statements of financial condition
of Horizon Bancorp, Inc. and Subsidiary (the "Company") as of April 30, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended April 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Horizon Bancorp,
Inc. and Subsidiary at April 30, 1996 and 1995 and the consolidated results of
operations and cash flows for each of the three years in the period ended April
30, 1996 in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
Certified Public Accountants
July 12, 1996
Austin, Texas
F-3
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 31,
April 30, April 30, 1996
1996 1995 (Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and due from banks (Note 2) $ 19,204,098 $ 18,382,782 $ 19,041,042
Federal funds sold 250,000 250,000 250,000
Investment securities, available
for sale at market value
(Notes 1 and 2) 8,826,658 2,103,438 11,497,106
Residential mortgage loans held for
sale (Market value approximates
cost) (Notes 2 and 9) 2,066,897 762,417 1,859,415
Loans receivable, net (Notes 2
and 3) 91,396,372 72,584,979 106,425,080
Accrued interest receivable (Note 4) 940,197 783,504 1,063,510
Foreclosed real estate (Note 5) -- 33,000 --
Accounts receivable 136,079 329,829 267,913
Federal Home Loan Bank of Dallas
stock (Note 9) 466,300 437,700 480,100
Premises and equipment, net (Note 6) 6,140,247 5,869,256 7,089,824
Goodwill, net of amortization of
$298,467, $264,310 and $315,046 364,925 398,082 348,346
Other assets 1,137,922 764,752 575,702
- --------------------------------------------------------------------------------
Total assets $130,929,695 $102,699,739 $148,898,038
================================================================================
Liabilities and Stockholders' Equity
Liabilities
Deposits (Notes 2 and 8) $117,652,564 $ 89,239,752 $134,398,605
Advances from Federal Home Loan
Bank (Note 9) -- 2,000,000 --
Advance payments by borrowers for
taxes and insurance 482,397 617,316 1,111,866
Accrued interest payable 45,439 28,017 46,946
Other liabilities (Note 10) 1,554,072 1,067,429 1,525,081
- --------------------------------------------------------------------------------
Total liabilities 119,734,472 92,952,514 137,082,498
Commitments and contingencies
(Notes 9, 11, 13 and 15)
Stockholders' equity
(Notes 13, 14 and 16)
Serial preferred stock, par value
$.01 per share; 1,000,000 shares
authorized; no shares issued or
outstanding -- -- --
Common stock, par value $.01 per
share; 4,000,000 shares authorized;
1,386,757 and 1,388,757 shares issued
and outstanding at April 30, 1996 and
October 31, 1996, respectively 13,868 13,868 13,888
Paid-in capital 6,963,670 6,963,670 6,977,650
Retained earnings 4,279,707 2,785,167 4,847,630
Unrealized loss on securities
available for sale (62,022) (15,480) (23,628)
- --------------------------------------------------------------------------------
Total stockholders' equity 11,195,223 9,747,225 11,815,540
- --------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $130,929,695 $102,699,739 $148,898,038
================================================================================
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-4
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended April 30, 6 Mos. Ended October 31,
----------------------------------------- --------------------------
1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest on loans $ 9,840,272 $8,691,833 $6,729,716 $5,740,434 $4,826,789
Interest and dividends
on investments 1,038,296 337,484 157,159 534,430 490,843
- -------------------------------------------------------------------------------------------------------
Total interest income 10,878,568 9,029,317 6,886,875 6,274,864 5,317,632
Interest expense:
Interest on deposits
(Note 8) 2,180,763 1,565,755 1,197,568 1,298,223 1,061,929
Interest on borrowed
money (Note 9) 2,345 107,077 93,782 597 --
- -------------------------------------------------------------------------------------------------------
Total interest expense 2,183,108 1,672,832 1,291,350 1,298,820 1,061,929
- -------------------------------------------------------------------------------------------------------
Net interest income 8,695,460 7,356,485 5,595,525 4,976,044 4,255,703
Provision for possible loan
losses (Note 3) 260,000 102,823 120,000 240,000 120,000
- --------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible loan
losses 8,435,460 7,253,662 5,475,525 4,736,044 4,135,703
- --------------------------------------------------------------------------------------------------------
Non-interest income (expense):
Other deposit and loan fees 1,486,372 789,686 581,661 1,042,991 653,648
Gain on sale of loans 518,761 508,585 619,494 491,954 265,514
Loan servicing 251,778 251,762 77,164 128,556 121,346
Loan origination, net 192,679 116,069 235,353 94,948 92,963
Credit card fees 92,631 15,098 -- 68,116 32,328
Gain on sale of foreclosed
real estate 60,751 33,334 -- -- 62,777
Gain on sale of servicing
rights (Note 7) -- 308,834 305,718 -- --
Gain on sale of premises and
equipment -- 52,651 42,403 -- --
Provision for losses on other
assets (Note 5) -- (37,177) -- -- --
Other -- 7,134 15,025 -- --
- --------------------------------------------------------------------------------------------------------
Net non-interest income 2,602,972 2,045,976 1,876,818 1,826,565 1,228,576
- --------------------------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended April 30, 6 Mos. Ended October 31,
-------------------------------------- ---------------------------
1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-interest expenses:
Compensation and benefits 3,945,000 3,146,230 2,233,008 2,343,148 1,784,546
Occupancy (Note 11) 751,996 549,150 480,074 410,976 335,562
Advertising and business
promotion 510,225 488,223 116,090 224,631 259,610
Depreciation and amortization 460,218 293,946 199,060 279,394 206,962
Equipment rental and maintenance 373,723 370,201 278,175 216,620 153,312
Legal and professional 351,945 316,567 311,730 260,647 225,074
Office supplies and printing 351,486 231,254 146,959 161,725 165,496
Service bureau and
processing costs 328,431 254,479 280,920 176,178 144,655
Credit card operations 249,639 94,463 8,562 194,783 106,142
FDIC insurance 213,276 184,771 169,654 700,711 97,009
Postage and courier costs 203,220 160,884 103,908 116,843 99,429
Telephone 120,496 96,543 57,366 67,567 59,512
Property and franchise tax 117,719 67,506 47,128 111,152 71,378
General insurance 86,002 88,132 84,111 44,519 44,540
Regulatory 31,195 60,610 34,672 10,984 11,829
Other 240,678 201,955 237,674 150,850 113,287
- -----------------------------------------------------------------------------------------------------------
Total non-interest expenses 8,335,249 6,604,914 4,789,091 5,470,728 3,878,343
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 2,703,183 2,694,724 2,563,252 1,091,881 1,485,936
Income tax expense (Note 10)
Federal 903,223 908,137 856,610 355,395 506,707
State 111,274 92,417 72,610 57,623 30,300
- -----------------------------------------------------------------------------------------------------------
Total income tax expense 1,014,497 1,000,554 929,220 413,018 537,007
- -----------------------------------------------------------------------------------------------------------
Net income $ 1,688,686 $ 1,694,170 $ 1,634,032 $ 678,863 $ 948,929
===========================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-6
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Years Ended April 30, 6 Mos. Ended October 31,
--------------------------------------- ----------------------------
1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings per common share:
Primary:
Net income per common share $ 1.22 $ 1.48 $ 1.59 $ 0.47 $ 0.65
============================================================================================================
Weighted average
number of shares 1,386,757 1,142,346 1,024,978 1,456,204 1,455,565
============================================================================================================
Fully diluted:
Net income per common share $ 1.07 $ 1.34 $ 1.49 0.43 0.60
============================================================================================================
Weighted average
number of shares 1,585,298 1,266,136 1,098,778 1,581,216 1,587,582
============================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-7
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- --------------------
Unrealized
Loss on
Number Number Retained Securities Total
of Shares of Shares Paid-In Earnings Available Stockholders'
Outstanding Amount Outstanding Amount Capital (Deficit) for Sale Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1993 -- $ -- 877,600 $ 8,766 $3,819,656 $ (439,489) $ -- $ 3,388,943
Net income -- -- -- -- -- 1,634,032 -- 1,634,032
Sale of 157,861 shares of
common stock -- -- 157,861 1,579 961,121 -- -- 962,700
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1994 -- -- 1,035,461 10,355 4,780,777 1,194,543 -- 5,985,675
Net income -- -- -- -- -- 1,694,170 -- 1,694,170
Sale of 526,316 shares of common
stock (Note 17) -- -- 526,316 5,263 3,056,243 -- -- 3,061,506
Dividends paid on common stock -- -- -- -- -- (103,546) -- (103,546)
Repurchase and retirement of 175,020
common shares (Note 16) -- -- (175,020) (1,750) (873,350) -- -- (875,100)
Net unrealized loss on securities
available for sale -- -- -- -- -- -- (15,480) (15,480)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1995 -- -- 1,386,757 13,868 6,963,670 2,785,167 (15,480) 9,747,225
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- -- 1,688,686 -- 1,688,686
Dividends paid on common stock -- -- -- -- -- (194,146) -- (194,146)
Increase in unrealized loss on
securities available for sale -- -- -- -- -- -- (46,542) (46,542)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1996 -- $ -- 1,386,757 $13,868 $6,963,670 $4,279,707 $(62,022) $11,195,223
====================================================================================================================================
</TABLE>
F-8
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- --------------------
Unrealized
Loss on
Number Number Retained Securities Total
of Shares of Shares Paid-In Earnings Available Stockholders'
Outstanding Amount Outstanding Amount Capital (Deficit) for Sale Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 -- $ -- 1,386,757 $13,868 $6,963,670 $2,785,167 $(15,480) $ 9,747,225
Net income -- -- -- -- -- 948,929 -- 948,929
Dividends paid on common stock -- -- -- -- -- (83,207) -- (83,207)
Decrease in unrealized loss on
securities available for sale -- -- -- -- -- -- 5,168 5,168
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1995
(Unaudited) -- $ -- 1,386,757 $13,868 $6,963,670 $3,650,889 $(10,312) $10,618,115
====================================================================================================================================
Balance at April 30, 1996 -- $ -- 1,386,757 13,868 6,963,670 4,279,707 (62,022) $11,195,223
Stock options exercised -- -- 2,000 20 13,980 -- -- 14,000
Net income -- -- -- -- -- 678,863 -- 678,863
Dividends paid -- -- -- -- -- (110,940) -- (110,940)
Decrease in unrealized loss on
securities available for sale -- -- -- -- -- -- 38,394 38,394
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1996
(Unaudited) -- $ -- 1,388,757 $13,888 $6,977,650 $4,847,630 $(23,628) $11,815,540
====================================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-9
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 Mos. Ended October 31.
Years Ended April 30, -------------------------
------------------------------------------ 1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 1,688,686 $ 1,694,170 $ 1,634,032 $ 678,863 $ 948,929
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of:
Goodwill 33,157 33,158 33,158 16,579 16,578
Purchased loan servicing costs -- 3,113 18,768 -- --
Deferred loan origination fees (568,896) (641,348) (704,737) (338,675) (285,515)
Depreciation and amortization of premises
and equipment 590,547 382,272 276,241 379,800 271,544
Premium and discounts on loans, mortgage-
backed and related securities (3,879) 4,594 14,722 (7,665) (1,120)
Provision for loan losses and losses on
other assets 260,000 140,000 120,000 240,000 120,000
Proceeds from the sale of loans 32,252,145 30,755,441 35,277,908 18,943,335 16,430,226
Net gain on sales of:
Loans (518,761) (508,585) (619,494) (491,954) (265,514)
Real estate acquired through foreclosure (60,751) (33,334) -- -- (62,777)
Premises and equipment -- (52,651) (42,403) -- --
Changes in assets and liabilities:
Accrued interest receivable (156,693) (222,092) (151,255) (123,313) (61,699)
Accounts receivable and other assets (179,420) (308,149) (32,440) 508,995 (154,695)
Accrued interest payable 17,422 (22,761) 3,706 1,557 12,382
Other liabliities 486,643 347,289 (153,022) (28,991) (20,007)
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 33,840,200 31,571,117 35,675,184 19,778,531 16,948,332
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended April 30, 6 Mos. Ended October 31,
--------------------------------------------------- -----------------------------
1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investing Activities:
Purchase of U.S. Treasury and
other securities (6,985,547) (32,309) -- (2,739,833) (5,986,406)
Proceeds from maturities of U.S.
Treasury and other securities 504,512 32,309 -- -- --
Loan originations (167,791,631) (144,595,237) (138,893,205) (92,466,047) (81,160,865)
Principal payments received
on loans 115,460,113 112,865,770 86,063,087 67,107,279 58,743,655
Purchase of mortgage-backed
securities (576,947) (847,197) (213,559) -- (576,947)
Principal payments received on
mortgage-backed securities 262,963 212,420 364,103 133,479 110,372
Recoveries on charged off loans 6,294 127,571 -- -- --
Sale of investment real estate -- -- 159,210 -- --
Sale of office premises and equipment -- 761,706 -- -- --
Improvement of property and purchase
of office equipment (861,538) (1,216,727) (1,155,081) (254,562) (683,855)
Construction of home office facility -- (2,146,369) (719,642) -- --
Purchase of Federal Home Loan
Bank stock (28,600) (22,400) (104,300) (13,800) (14,500)
Proceeds from sale of foreclosed
real estate 907,750 993,822 -- -- 683,984
Purchase and improvement of
branch facility -- -- -- (1,074,815) --
- ------------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (59,102,631) (33,866,641) (54,499,387) (29,308,299) (28,884,562)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase in demand deposits,
NOW accounts, money market
checking accounts and
statement savings accounts 24,322,653 17,872,444 11,579,787 4,982,128 14,409,406
Net increase (decrease) in
certificates of deposit 4,090,159 (4,150,256) 4,929,924 3,852,056 3,404,517
Net increase (decrease) in
advances from the Federal
Home Loan Bank (2,000,000) (3,900,000) (4,400,000) -- (2,000,000)
Net decrease in debt with
original maturities in
excess of three months -- -- (250,000) -- --
</TABLE>
F-11
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended April 30, 6 Mos. Ended October 31,
--------------------------------------------------- -----------------------------
1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in advances by
borrowers for taxes and insurance (134,919) (26,988) 134,722 629,469 488,409
Sale of common stock -- 3,061,506 962,700 -- --
Payment of stockholder dividend (194,146) (103,546) -- (110,941) (83,205)
Repurchase of common stock -- (875,100) -- -- --
Stock option exercise -- -- -- 14,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 26,083,747 11,923,060 21,757,133 9,366,712 16,219,127
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 821,316 9,627,536 2,932,930 (163,056) 4,282,897
Cash and cash equivalents at
beginning of year 18,632,782 9,005,246 6,072,316 19,454,098 18,632,782
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $19,454,098 $18,632,782 $ 9,005,246 $19,291,042 $22,915,679
====================================================================================================================================
Supplemental disclosures
Interest paid $ 2,165,686 $ 1,627,186 $ 1,310,977 $ 1,297,312 $ 1,049,547
Income taxes paid $ 933,746 $ 864,092 $ 1,190,775 $ 439,065 $ 523,746
Transfer from loans to real estate
acquired through foreclosure $ 813,999 $ 651,196 $ 309,291 $ -- $ 225,661
====================================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-12
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
NATURE OF BUSINESS
The accompanying consolidated financial statements include the accounts of
Horizon Bancorp, Inc., and its wholly-owned subsidiary, Horizon Bank and Trust,
SSB (the "Bank"), collectively (the "Company"). The Bank was capitalized as a
Texas Chartered Savings and Loan Association and commenced operations on
February 27, 1987. The Bank provides a full range of banking services to
individual and corporate customers.
On August 31, 1994, the Bank converted from a Texas Chartered Savings and Loan
Association to a Texas Chartered Savings Bank. As a result of the conversion,
the name of the holding company and the Bank were changed from United Austin
Holdings, Inc. and Horizon Savings Association to Horizon Bancorp, Inc. and
Horizon Bank and Trust, SSB, respectively.
BASIS OF ACCOUNTING
The accompanying consolidated financial statements include the accounts of the
Bank and its wholly-owned subsidiaries, United Austin Mortgage Company and Plaza
Mortgage, Inc. Both of the Bank's subsidiaries have limited operations at the
current time. All significant intercompany accounts and transactions have been
eliminated in consolidation.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosed contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan
losses and the valuation of real estate and other assets acquired in connection
with foreclosure or in satisfaction of loans.
F-13
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
The unaudited financial statements for the six months ended October 31, 1996 and
1995 presented herein are condensed and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. In the opinion of management, such financial
statements reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair statement of results of operations, cash flows and
financial position for the interim periods presented. Operating results for the
interim periods are not necessarily indicative of the results that may be
expected for the full year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the accompanying consolidated statements of
financial condition include federal funds sold, certificates of deposit and
funds due from banks. For purposes of the consolidated statements of cash flows,
the Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
CONCENTRATION OF RISK
The Bank originates loans primarily to customers in the Austin and the Central
Texas area. Although the Bank has a diversified loan portfolio, a substantial
portion of its customers' ability to honor their contracts is dependent upon the
local economy.
INVESTMENT SECURITIES
Effective May 1, 1994, the Company has adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." SFAS 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities, and therefore applies to the Bank's
portfolios of both U.S. Treasury and other securities, and mortgage-backed and
related securities. Investments in such securities are to be classified as
either held-to-maturity, trading, or available for sale. Securities classified
as available for sale are presented at the lower of amortized cost or estimated
market value. Any unrealized losses on investments available for sale are
recorded as a separate component of stockholders' equity, net of tax.
F-14
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
LOANS HELD FOR SALE
Mortgage and other loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized in a valuation allowance by
charges to income, if applicable.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses, and net of deferred loan origination costs and fees and unamortized
discounts and premiums.
Discounts and premiums on the purchased first mortgage loans are amortized to
income using the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments. Discounts and premiums on all
other loans are recognized over the life of the loans using methods that
approximate the interest method.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, composition
of the loan portfolio, and other relevant factors. The allowance is increased by
provisions for loan losses charged against income. Management believes that the
allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgements of information available to them at the time of their examination.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established, based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued. Income is subsequently recognized only to the extent that
cash payments are
F-15
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
received until, in management's judgement, the borrower's ability to make
periodic interest and principal payments is back to normal, in which case the
loan is returned to accrual status.
Loan fees and certain direct origination costs are deferred and the net fee or
cost is recognized as an adjustment to interest income using the interest method
over the contractual life of the loans, adjusted for estimated prepayment
experience. Any unamortized net loan fees or costs are credited or charged to
earnings in the event a loan is sold or repaid. Commitment fees and costs
relating to commitments are recognized over the commitment period on a
straight-line basis if the likelihood of exercise is remote. If exercise is
likely, the commitment fee is deferred and amortized over the life of the loan
as an adjustment to yield.
Effective May 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan
(as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures). The effect of adopting these new
accounting standards was immaterial to the operating results of the Company for
the year ended April 30, 1996.
Under the new accounting standard, a loan is considered to be impaired when it
is probable that the Company will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. A
performing loan may be considered impaired. The allowance for loan losses
related to loans identified as impaired is primarily based on the excess of the
loan's current outstanding principal balance over the estimated fair market
value of the related collateral. For a loan that is not collateral-dependent,
the allowance is recorded at the amount by which the outstanding principal
balance exceeds the current best estimate of the future cash flows on the loan
discounted at the loan's original effective interest rate. Prior to 1995, the
allowance for loan losses for all loans which would have qualified as impaired
under the new accounting standards was
F-16
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
primarily based upon the estimated fair market value of the related collateral.
For impaired loans that are on non accrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a nonaccrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, foreclosures are carried
at the lower of cost (lower of the loan balance) or estimated fair value at the
date of acquisition less estimated selling expenses. Valuations are periodically
performed by management, and an allowance for losses is established by a charge
to operations if the carrying value of the property exceeds its estimated fair
value.
FEDERAL HOME LOAN BANK STOCK
Investment in the stock of the Federal Home Loan Bank of Dallas is stated at
cost.
PREMISES AND EQUIPMENT
Land, leasehold improvements, furniture, fixtures and equipment are carried at
cost. Depreciation and amortization are calculated using the straight-line
method over the estimated useful life of the furniture, fixtures and equipment
or the related lease term in the case of leasehold improvements.
GOODWILL
Goodwill is amortized over the estimated useful life (20 years) using the
straight-line method.
INCOME TAX EXPENSE
The operations of Horizon Bancorp, Inc. and the Bank are included in the
consolidated federal income tax return.
Deferred income taxes are provided on the difference in the bases of assets and
liabilities determined for tax and financial reporting purposes. These
differences arise primarily from the methods of computing depreciation, the
provision to the allowance for loan losses, net deferred loan fees, and
recognition of deferred compensation.
F-17
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
Texas franchise tax on a corporation is calculated as the greater of .25 percent
of net taxable capital or 4.5 percent of net federal taxable income. State taxes
on income in the accompanying statements of income represent the amount of the
franchise tax which exceeds the capital-based tax in a given year.
INCOME PER COMMON SHARE
Primary earnings per share amounts are computed based on the weighted average
number of shares outstanding. Fully diluted earnings per share amounts are based
on an increased number of shares that would be outstanding assuming conversion
of the common stock options.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued its
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"). SFAS 121 requires that long-lived assets and certain intangibles
to be held and used by an entity be reviewed for impairment when events or
changes in circumstances indicate that the carrying amount may not be
recoverable. In addition, SFAS 121 requires that long-lived assets and certain
intangibles to be held and used by an entity be reviewed for impairment when
events or changes in circumstances indicate that the carrying amount may not be
recoverable. In addition, SFAS 121 requires long-lived assets and certain
intangibles to be disposed of to be reported at the lower of carrying amount or
fair value less costs to sell. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of the
Company.
In May 1995, FASB issued its Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights an Amendment of FASB Statement
No. 65". SFAS 122 requires entities to allocate the cost of acquiring or
originating mortgage loans between the mortgage servicing rights and the loans,
based on their relative fair values, if the bank sells or securitizes the loans
and retains the mortgage servicing rights. In addition, SFAS 122 requires
entities to
F-18
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
access its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. SFAS 122 is effective for fiscal years beginning
after December 15, 1995. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of the
Company.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation". SFAS No. 123 allows companies to continue to account for their
stock option plans in accordance with APB Opinion 25 but encourages the adoption
of a new accounting method based on the estimated fair value of employee stock
options. Companies electing not to follow the new fair value based method are
required to provide expanded footnote disclosures, including proforma net income
and earnings per share, determined as if the Company had applied the new method.
SFAS No. 123 is required to be adopted by the Company prospectively beginning
May 1, 1996. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of the Company.
In June 1996 the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". This standard
is based on consistent application of a financial-components approach that
focuses on control.
Under that approach, after a transfer of financial assets, an entity recognizes
the assets it controls and the liabilities it has incurred, and derecognizes
liabilities when extinguished. This statement provides a consistent standard for
distinguishing transfers of financial assets that are secured borrowings and
requires such transfers to be measured at fair market value. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. Management does not expect the
application of this pronouncement to have material effect on the financial
statements of the Company.
F-19
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
RECLASSIFICATIONS
Certain amounts reported for the fiscal years ended April 30, 1996 and 1995 have
been reclassified to conform with the current fiscal year presentation.
F-20
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
1. INVESTMENT SECURITIES
Investment securities have been classified in the consolidated statement of
financial condition according to management's intent. The carrying amount of
securities and their approximate fair values at April 30 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
April 30, 1996:
U.S. Government and agency
securities $ 8,927,507 $25,366 $(126,215) $ 8,826,658
- --------------------------------------------------------------------------------------------
$ 8,927,507 $25,366 $(126,215) $ 8,826,658
============================================================================================
October 31, 1996 (Unaudited):
U.S. Government and agency
securities $10,090,526 $17,383 $ (78,726) $10,029,203
Municipal securities 1,445,000 22,903 -- 1,467,903
- --------------------------------------------------------------------------------------------
$11,535,526 $40,306 $ (78,726) $11,497,106
============================================================================================
April 30, 1995:
U.S. Government and agency
securities $ 2,124,097 $26,005 $ (51,176) $ 2,098,926
Other securities 4,512 -- -- 4,512
- --------------------------------------------------------------------------------------------
$ 2,128,609 $26,005 $ (51,176) $ 2,103,438
============================================================================================
</TABLE>
There were no sales of investment securities during the fiscal years ended April
30, 1996 and 1995, or the six month periods ending October 31, 1996 and 1995.
F-21
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
The scheduled maturities of securities if held to maturity were as follows:
Amortized Fair
April 30, 1996 Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 499,416 $ 497,075
Due from one year to five years 4,990,758 4,941,209
Due from five years to ten years 1,074,969 1,056,109
Due after ten years 2,362,364 2,332,265
- --------------------------------------------------------------------------------
$ 8,927,507 $ 8,826,658
================================================================================
Amortized Fair
October 31, 1996 (Unaudited) Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 2,299,197 $ 2,299,666
Due from one year to five years 5,329,553 5,331,322
Due from five years to ten years 1,523,571 1,540,118
Due after ten years 2,383,205 2,326,000
- --------------------------------------------------------------------------------
$11,535,526 $11,497,106
================================================================================
Expected maturities will differ from contractual maturities because the borrower
may have the right to prepay obligations with or without prepayment penalties.
Investment securities carried at approximately $1,290,000 at April 30, 1996 and
$628,000 at April 30, 1995 and $1,727,000 at October 31, 1996 were pledged for
purposes required or permitted by law.
F-22
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
(Unaudited)
As of April 30, 1996 As of October 31, 1996
-------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Financial assets
Cash and short-term
investments $ 19,454,098 $ 19,454,000 $ 19,291,042 $ 19,291,000
Securities 8,826,658 8,827,000 11,497,106 11,497,000
Loans, net of
allowance for
loan losses 94,463,269 94,191,378 108,363,104 108,013,000
Financial liabilities
Deposits 117,652,574 117,673,321 134,398,605 134,505,000
Unrecognized financial
instruments
Commitments to extend
credit N/A N/A N/A N/A
================================================================================
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
For those short-term investments, the carrying amount is a reasonable estimate
of fair value.
Securities
Fair values are based on quoted market prices of dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
F-23
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
Loan receivables
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining maturities. This calculation ignores loan fees and certain factors
affecting the interest rates charged on various loans such as the borrower's
creditworthiness and compensating balances and dissimilar types of real estate
held as collateral.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the balance sheet date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace, loans fees vary greatly with no fees charged in many
cases. Therefore, management has concluded no value should be assigned.
F-24
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
3. LOANS RECEIVABLE
Loans receivable at the indicated date are summarized as follows:
October 31,
April 30, April 30, 1996
1996 1995 (Unaudited)
- --------------------------------------------------------------------------------
FIRST MORTGAGE LOANS
Principal balances:
Permanent secured by
1-to-4 family residences $ 13,972,043 $ 13,800,078 $ 14,368,114
Permanent secured by 5 or
more residential units 2,682,227 3,014,052 3,309,583
Residential lot and lot
development loans 12,988,219 11,090,123 13,536,469
Construction one-to-four
family loans 40,797,454 38,566,246 41,684,652
Commercial real estate
(including SBA guaranteed
of approximately $3.5 million) 44,832,977 35,032,033 55,296,642
Construction commercial
real estate 1,847,923 263,122 3,165,350
- --------------------------------------------------------------------------------
117,120,843 101,765,654 131,360,810
- --------------------------------------------------------------------------------
Deduct:
Undisbursed portion of
construction loans (21,804,166) (17,565,744) (19,419,431)
Undisbursed portion of
all other loans (3,312,575) (1,553,997) (4,996,246)
Participations sold:
SBA real estate loans (17,894,177) (17,952,774) (19,553,009)
Other mortgage loans (439,243) (430,931) (150,699)
Net deferred loan
origination fees (318,764) (289,889) (336,176)
- --------------------------------------------------------------------------------
(43,768,925) (37,793,335) (44,455,561)
- --------------------------------------------------------------------------------
Total first mortgage loans 73,351,918 63,972,319 86,905,249
- --------------------------------------------------------------------------------
F-25
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
October 31,
April 30, April 30, 1996
1996 1995 (Unaudited)
- --------------------------------------------------------------------------------
CONSUMER AND OTHER LOANS
Principal balances:
Loans on deposits 989,123 611,836 979,260
Automobile 2,132,884 1,433,051 2,492,486
Credit cards 5,848,358 898,556 6,022,807
Other secured consumer
loans 353,885 165,294 622,772
Commercial (including SBA
guaranteed of approximately
$0.7 million) 11,676,057 8,290,730 12,720,505
Other 711,787 450,217 876,232
- --------------------------------------------------------------------------------
21,712,094 11,849,684 23,714,062
- --------------------------------------------------------------------------------
Add/(deduct):
Undisbursed portion of
commercial loans (438,009) -- (237,252)
Participations sold:
SBA commercial loans (2,606,676) (2,532,550) (3,243,449)
Net deferred loan
origination cost 48,852 29,038 66,660
- --------------------------------------------------------------------------------
(2,995,833) (2,503,512) (3,414,041)
- --------------------------------------------------------------------------------
Total consumer and other loans 18,716,261 9,346,172 20,300,021
Less allowance for loan losses (671,807) (733,512) (780,190)
- --------------------------------------------------------------------------------
Total net loans $ 91,396,372 $ 72,584,979 $ 106,425,080
================================================================================
F-26
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
Activity in the allowance for loan losses is summarized as follows:
Years Ended 6 Months Ended
---------------------------------- -----------------------
October 31, October 31,
April 30, April 30, April 30, 1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------
Balance at
beginning
of period $ 733,512 $503,118 $455,988 $ 671,807 $ 733,512
Provision
charged
to income 260,000 102,823 120,000 240,000 120,000
Charge-offs and
recoveries,
net (321,705) 127,571 (72,870) (131,617) (220,869)
- --------------------------------------------------------------------------------
$ 671,807 $733,512 $503,118 $ 780,190 $ 632,643
================================================================================
Of the total allowance for loan losses at April 30, 1996 and 1995 and
October 31, 1996 approximately $661,000, $581,000 and $771,000, respectively,
was not specifically allocated to identified problem loans.
The effect of the adoption of FASB Statement No. 114, as amended by FASB
Statement No. 118 effective May 1, 1995 was not material to the financial
statements and, as such, has not been separately disclosed.
Other than credit cards, the Bank extends minimal credit on an unsecured basis.
Collateral on secured loans generally consist of residential and commercial real
estate, business inventories and receivables, equipment used in business,
vehicles and liquid assets. The customers are generally located in Austin and
Central Texas.
F-27
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
October 31,
April 30, April 30, 1996
1996 1995 (Unaudited)
- --------------------------------------------------------------------------------
Investment securities, time
deposits and federal
funds sold $122,608 $ 129 $ 144,687
Mortgage-backed securities -- 15,908 16,616
Loans receivable 817,589 767,467 902,207
- --------------------------------------------------------------------------------
$940,197 $783,504 $1,063,510
================================================================================
5. FORECLOSED REAL ESTATE
Activity in the allowance for losses on foreclosed real estate is as follows:
Amount
- --------------------------------------------------------------------------------
Balance at April 30, 1993 $ 8,963
Provision charged to income --
Write-downs --
- --------------------------------------------------------------------------------
Balance at April 30, 1994 8,963
Provision charged to income 37,177
Write-downs (46,140)
- --------------------------------------------------------------------------------
Balance at April 30, 1995 and 1996 and October 31, 1996 $ --
================================================================================
F-28
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
October 31,
April 30, April 30, 1996
1996 1995 (Unaudited)
- --------------------------------------------------------------------------------
Land for future expansion $ 593,393 $ 593,393 $ 593,393
Home office land 709,054 709,054 709,054
Home office facility 2,637,190 2,620,051 2,637,190
Leasehold improvements/
branch facilities 960,949 997,596 2,026,384
Furniture, fixtures
and equipment 2,811,536 2,205,242 3,051,177
- --------------------------------------------------------------------------------
7,712,122 7,125,336 9,017,198
Less accumulated depreciation
and amortization (1,571,875) (1,256,080) (1,927,374)
- --------------------------------------------------------------------------------
$ 6,140,247 $ 5,869,256 $ 7,089,824
================================================================================
7. LOAN SERVICING
Mortgage loans serviced for others, on which the Company does not maintain a
participation interest, are not included in the accompanying consolidated
statements of financial condition. The unpaid principal balances of these loans
are summarized as follows:
<TABLE>
<CAPTION>
October 31, October 31,
April 30, April 30, April 30, 1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage loan
portfolios
serviced for:
FNMA $6,991,000 $4,376,000 $17,057,000 $ 8,929,208 $ 6,560,310
Texas Housing
Agency 2,743,000 3,383,000 3,536,000 2,471,596 2,990,927
Other investors 238,000 1,554,000 1,641,000 145,568 1,230,895
- ----------------------------------------------------------------------------------------------------
$9,972,000 $9,313,000 $22,234,000 $11,546,372 $10,782,132
====================================================================================================
</TABLE>
F-29
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
During the fiscal years ended April 30, 1995 and 1994, the Company sold the
servicing rights to approximately $17,500,000 and $19,200,000 in mortgage loans
serviced for FNMA, respectively. The pretax gain on each sale, net of expenses,
was $308,834 and $305,718, respectively. No such sale was made in the year ended
April 30, 1996 or in the period ending October 31, 1996.
Included in deposits are custodial escrow balances maintained in connection with
the foregoing loan servicing of approximately $139,000, $175,000, and $378,000
at April 30, 1996, 1995 and 1994, respectively, and $65,000 at October 31, 1996.
8. DEPOSITS
Deposits at April 30 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average 1996 1995
Yield at ----------------------------------------------------------------
April 30, 1996 Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-interest bearing
commercial deposits 0.00% $ 47,727,854 40.57% $32,419,474 36.33%
NOW accounts 1.54% 17,360,842 14.76% 11,612,150 13.02%
Money market 2.99% 25,374,805 21.57% 23,125,381 25.91%
Statement savings 2.51% 6,746,133 5.72% 5,729,975 6.42%
- ------------------------------------------------------------------------------------------------------------------
1.73% 97,209,634 82.62% 72,886,980 81.68%
- ------------------------------------------------------------------------------------------------------------------
Certificates of deposit:
2.00% - 2.99% 2.63% 1,098,356 0.93% 792,244 0.89%
3.00% - 3.99% 0.00% -- 0.00% 1,206,335 1.35%
4.00% - 4.99% 4.63% 7,619,543 6.48% 7,930,850 8.89%
5.00% - 5.99% 5.21% 7,821,831 6.65% 3,773,399 4.23%
6.00% - 6.99% 6.21% 3,608,622 3.07% 2,464,118 2.76%
7.00% - 7.99% 7.07% 294,578 0.25% 185,826 0.20%
- -------------------------------------------------------------------------------------------------------------------
5.06% 20,442,930 17.38% 16,352,772 18.32%
- -------------------------------------------------------------------------------------------------------------------
1.90% $117,652,564 100.00% $89,239,752 100.00%
===================================================================================================================
</TABLE>
F-30
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
Deposits at October 31 were as follows:
Weighted
Average 1996
Yield at -----------------------
October 31, 1996 Amount Percent
- -------------------------------------------------------------------------------
Non-interest bearing
commercial deposits 0.00% $ 48,114,703 35.80%
NOW accounts 1.40% 20,080,925 14.94%
Money market 2.92% 31,425,844 23.38%
Statement savings 2.29% 7,526,063 5.60%
- -------------------------------------------------------------------------------
1.28% 107,147,535 79.72%
- -------------------------------------------------------------------------------
Certificates of deposit:
2.00% - 2.99% 2.65% 548,112 0.41%
3.00% - 3.99% 0.00% -- 0.00%
4.00% - 4.99% 4.66% 6,103,815 4.54%
5.00% - 5.99% 5.33% 17,551,074 13.06%
6.00% - 6.99% 6.18% 2,644,809 1.97%
7.00% - 7.99% 7.07% 301,839 0.22%
8.00% or greater 10.00% 101,421 0.08%
- -------------------------------------------------------------------------------
5.25% 27,251,070 20.28%
- -------------------------------------------------------------------------------
2.02% $134,398,605 100.00%
===============================================================================
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $5,653,000 and $3,484,000 at
April 30, 1996 and 1995, respectively, and $7,789,000 at October 31, 1996.
Scheduled maturities of certificates of deposit held at April 30, 1996
are as follows:
Weighted
Average
Year Ending April 30, Amount Yield
- -------------------------------------------------------------------------------
1997 $15,838,009 4.89%
1998 4,312,242 5.54%
1999 - 2001 292,679 7.19%
- -------------------------------------------------------------------------------
$20,442,930 5.06%
F-31
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years Ended 6 Months Ended
--------------------------------------------- ---------------------------------
October 31, October 31,
April 30, April 30, April 30, 1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOW accounts $ 255,097 $ 195,774 $ 139,104 $ 131,681 $ 125,004
Money market 781,480 495,398 373,776 445,754 397,530
Statement savings 154,561 138,011 102,977 89,649 75,326
Certificates of deposit 989,625 767,444 605,496 631,139 464,069
Less capitalized interest -- (30,872) (23,786) -- --
- ----------------------------------------------------------------------------------------------------------------------
$2,180,763 $1,565,755 $1,197,568 $1,298,223 $1,061,929
======================================================================================================================
</TABLE>
9. ADVANCES FROM FEDERAL HOME LOAN BANK
The Company has approximately $9,490,000 in available credit lines from the
Federal Home Loan Bank of Dallas (FHLB) which are secured by a blanket pledge of
the Company's qualifying first mortgage loans and FHLB stock. In addition, the
Company has approximately $7,400,000 in available credit against mortgage-backed
securities and Small Business Administration loan participation certificates
held by the FHLB. The available credit against the blanket pledge is subject to
change every quarter based on the dollar amount of qualifying first mortgage
loans and FHLB stock. The interest rate on amounts drawn against available
credit lines changes daily based on the FHLB's internally determined rates. At
April 30, 1996 and 1995, the Company had outstanding borrowings from the FHLB of
$0 and $2,000,000, respectively. At October 31, 1996 these borrowings were also
$0.
Interest expense on borrowed funds from FHLB for the year ended April 30, 1996,
1995 and 1994 was $2,345, $99,275 and $79,785, respectively and $597 and $0 for
the 6 months period ending October 31, 1996 and 1995, respectively.
F-32
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
===============================================================================
10. INCOME TAX EXPENSE
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
Years Ended 6 Months Ended
-------------------------------------- -------------------------
October 31, October 31,
April 30, April 30, April 30, 1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax expense
at statutory
rates $ 919,083 $ 916,207 $871,505 $371,239 $505,218
State franchise
tax, net of federal
income tax benefit 73,441 60,995 47,923 38,031 19,998
Nondeductible
expenses 21,973 23,352 9,792 3,748 11,791
- --------------------------------------------------------------------------------------------
Total income
tax expense $1,014,497 $1,000,554 $929,220 $413,018 $537,007
============================================================================================
</TABLE>
The components of the provision for Federal income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended 6 Months Ended
-------------------------------------- -------------------------
October 31, October 31,
April 30, April 30, April 30, 1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current $ 773,662 $ 797,264 $856,610 $167,832 $434,023
Deferred 129,561 110,873 -- 187,563 72,684
- --------------------------------------------------------------------------------------------
Federal income
tax provision $ 903,223 $ 908,137 $856,610 $355,395 $506,707
============================================================================================
</TABLE>
Deferred income taxes reflet the net effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
F-33
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
===============================================================================
Deferred tax assets (liabilities), included in Other Assets in the consolidated
balance sheets, are as follows:
<TABLE>
<CAPTION>
October 31,
April 30, April 30, 1995
1996 1995 (Unaudited)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets
Employee stock
option compensation $ 154,000 $ 154,000 $154,000
Deferred loan fees 91,770 -- 89,130
Allowance for loan losses 26,391 -- 82,384
Unrealized loss (gain) on investment
securities 38,827 9,691 (12,286)
- ------------------------------------------------------------------------------------
310,988 163,691 313,228
- ------------------------------------------------------------------------------------
Deferred tax liabilities
Depreciable assets -- 35,883 86,463
Deferred loan fees 95,044 24,162 --
FHLB stock 34,517 -- 39,202
Allowance for loan losses -- 25,719 --
Other -- 25,719 --
- ------------------------------------------------------------------------------------
129,561 110,873 125,665
- ------------------------------------------------------------------------------------
Net deferred tax asset $181,427 $ 52,818 $187,563
====================================================================================
</TABLE>
At April 30, 1996 and 1995 and October 31, 1996, the Company had accrued current
income taxes payable of approximately $37,000, $62,000 and $0, respectively.
These amounts are included in other liabilities in the accompanying consolidated
statements of financial condition.
F-34
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
===============================================================================
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is a
defendant in certain claims and legal actions arising in the normal course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial position of the Company.
The principal commitments of the Company are as follows:
LEASE COMMITMENTS: At April 30, 1996, the Company was obligated under
noncancelable operating leases for office space, automobiles and equipment.
Certain office leases contain escalation clauses providing for increased rentals
and/or one time additional payments per year based primarily on increases in
real estate taxes, other operating costs, or the average consumer price index.
The leases for office space are generally renewable at the option of the
Company. Net office rental expense under operating leases included in occupancy
expense for the years ended April 30, 1996, 1995 and 1994 was approximately
$377,000, $283,000 and $288,000, respectively, and for the periods ended October
31, 1996 and 1995 was $192,000 and $172,000, respectively.
LOAN COMMITMENTS: Loan commitments (unfunded loans) are made to accommodate the
financial needs of the Company's customers. These arrangements have credit risk
essentially the same as that involved in extending loans to customers and are
subject to the Company's normal credit policies. The customers' creditworthiness
is evaluated on a case-by-case basis and the amount of collateral obtained, if
any, is based on the credit evaluation of the customer. At April 30, 1996 and
October 31, 1996, in addition to loans-in-process (see Note 3), the Company had
approximately $49,300,000 and $48,713,000 in outstanding commitments to
originate loans at market value. The Company also had outstanding commitments to
sell loans of approximately $32,700,000 and $20,554,000 at April 30, 1996 and
October 31, 1996. Letters of credit extended on customers' behalf
F-35
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
===============================================================================
totaled $1,070,670 and $1,968,000 at April 30, 1996 and October 31, 1996, none
of which were drawn on April 30, 1996 or October 31, 1996. The Company also had
outstanding unfunded loan amounts under revolving lines of credit of
approximately $26,946,000 and $28,162,000, of which approximately $25,000,000
and $25,900,000 were credit card lines at April 30, 1996 and October 31, 1996,
respectively.
12. RELATED PARTY TRANSACTIONS
The Company has approximately $697,000, $586,000 and $557,000 in loans
outstanding to senior offices and directors of the Bank at April 30, 1996 and
1995 and October 31, 1996, respectively.
Since the enactment of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, loans to related parties are made on substantially the
same terms prevailing at the time for comparable transactions with others,
except that directors and executive officers pay no loan origination fees. Such
loans do not involve more than normal risk of collectibility or present other
unfavorable features.
Activity in loans receivable to related parties is summarized as follows:
<TABLE>
<CAPTION>
Years Ended 6 Mos. Ended
------------------------- -------------
October 31,
April 30, April 30, 1996
1996 1995 (Unaudited)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $586,000 $ 648,000 $ 697,000
Loans originated 208,000 142,000 --
Principal repayments (97,000) (204,000) (140,000)
- ------------------------------------------------------------------------------------
$697,000 $ 586,000 $ 557,000
====================================================================================
</TABLE>
F-36
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
===============================================================================
13. REGULATORY REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the Federal Deposit Insurance Corporation and the Texas Savings and Loan
Department. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
taken could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off balance
sheet items as calculated under regulatory accounting practices. The bank's
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes as of April 30, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
F-37
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
===============================================================================
The Bank's regulatory capital in relation to existing minimum capital
requirements are as follows:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
As of April 30, 1996 (in thousands)
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk
weighted
assets) $10,808 12.21% ) $7,081 8.00% ) $8,851 10.00%
- -
Tier I Capital
(to risk
weighted
assets) $10,147 11.46% ) $3,541 4.00% ) $5,311 6.00%
- -
Tier I Capital
(to average
assets) $10,147 8.31% ) $4,885 4.00% ) $6,106 5.00%
- -
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
As of April 30, 1995 (in thousands)
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk
weighted
assets) $ 9,064 13.50% ) $5,371 8.00% ) $6,715 10.00%
- -
Tier I Capital
(to risk
weighted
assets) $ 8,483 12.63% ) $2,686 4.00% ) $4,029 6.00%
- -
Tier I Capital
(to average
assets) $ 8,483 8.36% ) $4,058 4.00% ) $5,074 5.00%
- -
</TABLE>
F-38
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
===============================================================================
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
As of April 30, 1996 (in thousands)
(Unaudited)
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk
weighted
assets) $11,591 11.31% ) $8,196 8.00% ) $10,244 10.00%
- -
Tier I Capital
(to risk
weighted
assets) $10,820 10.56% ) $4,098 4.00% ) $ 6,148 6.00%
- -
Tier I Capital
(to average
assets) $10,820 7.75% ) $5,587 4.00% ) $ 6,984 5.00%
- -
</TABLE>
Under the framework, the Bank's capital levels qualify it as well capitalized.
14. RECONCILIATION OF GAAP AND REGULATORY CAPITAL
A reconciliation of the Bank's GAAP and regulatory capital is as follows:
<TABLE>
<CAPTION>
Total
Tier One Capital
Tier One Risk Risk
(To Average Weighted Weighted
April 30, 1996 Assets) Assets Assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP capital as reported $10,450 $10,450 $10,450
Non-allowable assets:
Goodwill (365) (365) (365)
General valuation allowances -- -- 661
FASB 115 adjustment 62 62 62
- -----------------------------------------------------------------------------------
Regulatory capital -- computed 10,147 10,147 10,808
Less: minimum capital requirement (4,885) (3,541) (7,081)
- -----------------------------------------------------------------------------------
Regulatory capital excess $ 5,262 $ 6,606 $ 3,727
===================================================================================
</TABLE>
F-39
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
===============================================================================
<TABLE>
<CAPTION>
Total
Tier One Capital
Tier One Risk Risk
(To Average Weighted Weighted
April 30, 1995 Assets) Assets Assets
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
GAAP capital as reported $ 8,866 $ 8,866 $ 8,866
Non-allowable assets:
Goodwill (398) (398) (398)
General valuation allowances -- -- 581
FASB 115 adjustment 15 15 15
- -----------------------------------------------------------------------------------
Regulatory capital -- computed 8,483 8,483 9,064
Less: minimum capital requirement (4,058) (2,686) (5,371)
- -----------------------------------------------------------------------------------
Regulatory capital excess $ 4,425 $ 5,797 $ 3,693
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total Risk
Tier One Tier One Based
April 30, 1994 (Leverage) Risk-based Capital
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
GAAP capital as reported $ 5,644 $ 5,644 $ 5,644
Non-allowable assets:
Goodwill (431) (431) (431)
Non-qualifying purchased servicing (3) (3) (3)
General valuation allowances -- -- 499
- -----------------------------------------------------------------------------------
Regulatory capital -- computed 5,210 5,210 5,709
Less: minimum capital requirement (3,519) (2,359) (4,717)
- -----------------------------------------------------------------------------------
Regulatory capital excess $ 1,691 $ 2,851 $ 992
===================================================================================
</TABLE>
F-40
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Risk
Tier One Tier One Based
October 31, 1996 (Unaudited) (Leverage) Risk-based Capital
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
GAAP capital as reported $11,144 $11,144 $11,144
Non-allowable assets:
Goodwill (348) (348) (348)
FASB 115 Adjustment -- -- 771
General valuation allowances 24 24 24
- --------------------------------------------------------------------------------
Regulatory capital-computed 10,820 10,820 11,591
Less: minimum capital requirement (5,587) (4,098) (8,196)
- --------------------------------------------------------------------------------
Regulatory capital excess $ 5,233 $ 6,722 $ 3,395
================================================================================
</TABLE>
15. FHA SUSPENSION
On June 10, 1991, the Bank's HUD-FHA mortgagee approval was suspended by the
Mortgagee Review Board (MRB) of the Department of Housing and Urban Development.
The suspension prevented the Company from closing any FHA loans except for those
applications with an outstanding firm commitment as of June 10, 1991. Further,
the MRB proposed a withdrawal of the Bank's mortgagee approval for a period of
three years. The MRB actions were based on alleged violations of HUD-FHA
requirements by the Bank, as cited in an Office of Inspector General (OIG) Audit
Report dated January 30, 1991. The Bank disputed a substantial portion of the
findings by OIG and formally appealed the MRB actions. In late October, 1991,
the Bank's appeal was heard before a Federal Administrative Law Judge.
In November, 1992, the Administrative Law Judge rendered a decision in which the
Company was exonerated from most of the findings of the OIG Audit Report and
reinstated the Bank as an approved HUD-FHA Lender effective December, 1992.
F-41
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
In February and March, 1993, the Bank and its wholly owned subsidiary, United
Austin Mortgage Company (UAMC) were notified by letters from the United States
Justice Department that it was investigating and evaluating allegations that
both the Bank and UAMC had submitted a number of false statements to HUD-FHA in
violation of the False Claims Act and that it might file suit to recover losses
sustained. The Bank and UAMC strongly deny the allegations and many of the facts
from which the alleged claims arise were found not to exist by the
Administrative Law Judge. Accordingly, the Bank and UAMC will vigorously defend
an action by the Justice Department, if any. No changes in the status of this
matter have occurred to date.
16. CAPITAL STOCK TRANSACTIONS
In July 1994, the Company issued options to purchase 46,600 shares of common
stock at $9.00 per share to its employees, officers and directors. These options
expire upon termination of employment or 10 years, whichever is shorter. The
Company also has stock options under 1992 and 1993 plans with terms similar to
the 1994 plan granted to its employees, officers and directors, which provide
for 94,800 option shares to be exercised at $7.00 per share. In addition, the
Company granted 68,808 "compensatory" option shares to its directors in 1992
exercisable at $.05 per share. These compensatory options expire in 10 years
beginning September 30, 1992. At April 30, 1996 and 1995 and October 31, 1996,
the Company had outstanding stock options totaling 196,208, 200,908 and 190,408,
respectively.
On August 22, 1994, the Board of Directors amended the Articles of Incorporation
to increase the total authorized shares of capital stock to be issued to
5,000,000 shares; 4,000,000 shares designated as Common Stock and 1,000,000
designated as Serial Preferred Stock. The par value on both the common and
preferred stock is $0.01 per share.
During 1995 fiscal year, the Company purchased and retired 175,020 shares of its
own common stock from its largest shareholder at $5.00 per share.
F-42
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
17. INITIAL PUBLIC OFFERING
During 1995 fiscal year, the Company mad an initial public offering ("IPO") to
offer 526,316 shares of its common stock at a price of $7.00 per share. A
registration statement covering that offer was filed with the SEC on November
10, 1994, which became effective on December 12, 1994. The offering resulted in
a sale of 526,316 shares with gross proceeds of $3,684,212. Offering cost
amounted to $622,706 resulting in net proceeds of $3,061,506.
18. CONDENSED FINANCIAL INFORMATION
Condensed financial information is shown only for Horizon Bancorp, Inc. (the
parent company) as follows:
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
October 31,
April 30, April 30, 1996
1996 1995 (Unaudited)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment in subsidiary $10,511,724 $8,881,124 $11,167,297
Cash and due from banks 524,049 724,785 394,058
Other assets 226,681 178,111 277,821
- -------------------------------------------------------------------------------------------
$11,262,454 $9,784,020 $11,839,176
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 5,209 $ 21,315 $ 8
Stockholders' Equity
Common Stock 13,868 13,868 13,888
Paid-in capital 6,963,670 6,963,670 6,977,650
Retained earnings 4,279,707 2,785,167 4,847,630
- -------------------------------------------------------------------------------------------
Total stockholders' equity 11,257,245 9,762,705 11,839,168
- -------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $11,262,454 $9,784,020 $11,839,176
===========================================================================================
</TABLE>
F-43
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended 6 Months Ended
----------------------------------------- ----------------------------
October 31, October 31,
April 30, April 30, April 30, 1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME
Interest income $ 24,952 $ 10,257 $ 5,171 $ 9,723 $ 14,455
Non-interest income -- 86 12,452 -- --
Dividends received from
Savings Bank 153,000 103,546 -- 112,000 41,000
- ---------------------------------------------------------------------------------------------------------
Total income 177,952 113,889 17,623 121,723 55,445
- ---------------------------------------------------------------------------------------------------------
EXPENSE
Interest expense -- 7,802 13,997 -- --
Non-interest expense 168,762 72,270 17,832 140,022 114,131
- ---------------------------------------------------------------------------------------------------------
Total expense 168,762 80,072 31,829 140,022 114,131
- ---------------------------------------------------------------------------------------------------------
Income (loss) before equity in
undistributed net income of the
Savings Bank 9,190 33,817 (14,206) (18,299) (58,686)
Equity in undistributed net
income of the Savings Bank 1,783,601 1,740,192 1,624,727 767,572 1,014,722
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 1,792,791 1,774,009 1,610,521 749,273 956,036
Income tax benefit 48,895 23,707 23,511 41,590 --
- ---------------------------------------------------------------------------------------------------------
Net income $1,841,686 $1,797,716 $1,634,032 $790,863 $ 956,036
=========================================================================================================
</TABLE>
F-44
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows
Years Ended 6 Months Ended
-------------------------------------- ---------------------------
October 31, October 31,
April 30, April 30, April 30, 1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net income $ 1,841,686 $ 1,797,716 $ 1,634,032 $ 790,863 $ 956,036
Adjustments
Equity in income of the
Savings Bank (1,783,601) (1,843,738) (1,624,727) (767,572) (1,014,722)
(Increase) in other assets (48,569) (18,384) (127,748) (51,140) (4,474)
(Decrease) in other
liabilities (16,106) (6,286) (136,528) (5,201) (21,315)
- -----------------------------------------------------------------------------------------------------
Net cash used in operating
activities (6,590) (70,992) (254,971) (33,050) (84,475)
- -----------------------------------------------------------------------------------------------------
Financing activities
Cash used in investment in
Savings Bank, net -- (1,496,454) (250,000) -- --
- -----------------------------------------------------------------------------------------------------
Financing activities
Payments on note payable -- -- (250,000) -- --
Cash dividents paid on
common stock (194,146) (103,546) -- (110,941) (83,205)
Common stock issued -- 3,061,506 962,700 14,000 --
Common stock repurchased -- (875,100) -- -- --
- -----------------------------------------------------------------------------------------------------
</TABLE>
F-45
<PAGE>
HORIZON BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS OF OCTOBER 31, 1996 AND 1995)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended 6 Months Ended
--------------------------------- -------------------------
October 31, October 31,
April 30, April 30, April 30, 1996 1995
1996 1995 1994 (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash (used in)
provided by financing
activities (194,146) 2,082,860 712,700 (96,941) (83,205)
- ----------------------------------------------------------------------------------------------
(Decrease) increase in
cash and cash equivalents (200,736) 515,714 207,729 (129,991) (167,680)
Cash and cash equivalents,
beginning of year 724,785 209,071 1,342 524,049 724,785
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of year $ 524,049 $ 724,785 $209,071 $ 394,058 $ 557,105
==============================================================================================
</TABLE>
F-46
<PAGE>
===============================================================================
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
COMPASS BANCSHARES, INC.
AND
HORIZON BANCORP, INC.
Dated as of December 4, 1996
===============================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I. 1
THE MERGER 1
SECTION 1.1 The Merger 1
SECTION 1.2 Effective Time 2
SECTION 1.3 Certain Effects of the Merger 2
SECTION 1.4 Certificate of Incorporation and By-Laws 2
SECTION 1.5 Directors and Officers 2
SECTION 1.6 Conversion of Shares 2
SECTION 1.7 Shareholders' Meeting 4
SECTION 1.8 Registration of the Compass Common
Stock 4
SECTION 1.9 Closing. 5
ARTICLE II. 5
DISSENTING SHARES; EXCHANGE OF SHARES 5
SECTION 2.1 Dissenting Shares 5
SECTION 2.2 Exchange of Shares 5
ARTICLE III. 7
REPRESENTATIONS AND WARRANTIES OF THE COMPANY 7
SECTION 3.1 Organization and Qualification 7
SECTION 3.2 Company Capitalization 8
SECTION 3.3 Bank Capitalization; Other Securities 8
SECTION 3.4 Authority Relative to the Agreement 9
SECTION 3.5 No Violation 9
SECTION 3.6 Consents and Approvals 10
SECTION 3.7 Regulatory Reports 10
SECTION 3.8 SEC Status; Securities Issuances 10
SECTION 3.9 Financial Statements 11
SECTION 3.10 Absence of Certain Changes 12
SECTION 3.11 Company Indebtedness 14
SECTION 3.12 Litigation 14
SECTION 3.13 Tax Matters 14
SECTION 3.14 Employee Benefit Plans 15
SECTION 3.15 Employment Matters 17
SECTION 3.16 Leases, Contracts and Agreements 18
SECTION 3.17 Related Company Transactions 19
SECTION 3.18 Compliance with Laws 19
SECTION 3.19 Insurance 19
SECTION 3.20 Loans 20
SECTION 3.21 Fiduciary Responsibilities 20
SECTION 3.22 Patents, Trademarks and Copyrights 20
SECTION 3.23 Environmental Compliance 20
SECTION 3.24 Regulatory Actions 22
SECTION 3.25 Title to Properties; Encumbrances 22
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SECTION 3.26 Shareholder List 23
SECTION 3.27 Proxy Statement 23
SECTION 3.28 Dissenting Shareholders 24
SECTION 3.29 Section 368 Representations 24
SECTION 3.30 Employee Stock Options 26
SECTION 3.31 Accounting Matters 26
SECTION 3.32 Representations Not Misleading 26
ARTICLE IV. 27
REPRESENTATIONS AND WARRANTIES OF COMPASS 27
SECTION 4.1 Organization and Authority 27
SECTION 4.2 Authority Relative to Agreement 27
SECTION 4.3 Financial Reports 28
SECTION 4.4 Capitalization 29
SECTION 4.5 Consents and Approvals 29
SECTION 4.6 Proxy Statement 29
SECTION 4.7 Availability of Compass Common Stock 30
SECTION 4.8 Section 368 Representations 30
SECTION 4.9 Representations Not Misleading 31
ARTICLE V. 32
COVENANTS OF THE COMPANY 32
SECTION 5.1 Affirmative Covenants of the Company 32
SECTION 5.2 Negative Covenants of the Company 33
ARTICLE VI. 36
ADDITIONAL AGREEMENTS 36
SECTION 6.1 Access To, and Information Concerning,
Properties and Records 36
SECTION 6.2 Filing of Regulatory Approvals 36
SECTION 6.3 Miscellaneous Agreements and Consents 37
SECTION 6.4 Best Good Faith Efforts 37
SECTION 6.5 Acquisition Proposals 37
SECTION 6.6 Public Announcement 38
SECTION 6.7 Employee Benefit Plans 38
SECTION 6.8 Merger of Bank 39
SECTION 6.9 Environmental Investigation;
Right to Terminate Agreement 39
SECTION 6.10 Proxies 43
SECTION 6.11 Cooperation on Texas Receipts. 43
SECTION 6.12 Exchange Agreement 43
SECTION 6.13 Employee Bonuses 43
SECTION 6.14 Director and Officer Insurance and
Indemnification 43
SECTION 6.15 Periodic Reports 44
SECTION 6.16 Notice of Defaul 44
ARTICLE VII. 44
CONDITIONS TO CONSUMMATION OF THE MERGER 44
SECTION 7.1 Conditions to Each Party's Obligation
to Effect the Merger 44
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SECTION 7.2 Conditions to the Obligations of
Compass and Compass Texas to Effect
the Merger 45
SECTION 7.3 Conditions to the Obligations of
the Company to Effect the Merger 47
ARTICLE VIII. 47
TERMINATION; AMENDMENT; WAIVER 47
SECTION 8.1 Termination 47
SECTION 8.2 Effect of Termination 49
SECTION 8.3 Amendment 49
SECTION 8.4 Extension; Waiver 49
SECTION 8.5 Termination Fee 49
ARTICLE IX. 50
SURVIVAL 50
SECTION 9.1 Survival of Representations and
Warranties 50
ARTICLE X. 50
MISCELLANEOUS 50
SECTION 10.1 Expenses 50
SECTION 10.2 Brokers and Finders 50
SECTION 10.3 Entire Agreement; Assignment 51
SECTION 10.4 Further Assurances 51
SECTION 10.5 Enforcement of the Agreement 51
SECTION 10.6 Severability 51
SECTION 10.7 Notices 51
SECTION 10.8 Governing Law 53
SECTION 10.9 Descriptive Headings 53
SECTION 10.10 Parties in Interest 53
SECTION 10.11 Counterparts 53
SECTION 10.12 Incorporation by References 53
SECTION 10.13 Certain Definitions 53
SECTION 10.17 Time of Essence 55
ATTACHMENTS
EXHIBITS
A. Pooling Transfer Restrictions Agreement
B. Exchange Agent Agreement
C. Pooling of Interest Criteria
D. Voting Agreement and Irrevocable Proxy
E. Opinion of Counsel for the Company and the Bank
F. Retention Bonus, Employment and Confidentiality
Agreement
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G. Opinion of Counsel for Compass and Compass Texas
H. Compass Texas Representations Certificate
I. Release
J. Release
LIST OF SCHEDULES
Schedule 3.1 Qualification
Schedule 3.2 Company Capitalization
Schedule 3.3 Bank Capitalization; List of Equity Ownership
Schedule 3.5 Violations of Law; Conflicts of Interest;
Share Litigation; Termination of Existence
Schedule 3.6 Company Prior Consents
Schedule 3.7 Regulatory Reports
Schedule 3.10 Absence of Material Changes or Adverse Effects
Schedule 3.12 Company Legal Proceedings
Schedule 3.13 Tax Liabilities
Schedule 3.14(a) Employee Welfare Benefit Plans
Schedule 3.14(b) Employee Pension Benefit Plans
Schedule 3.14(c) Deferred Compensation, Bonus and Stock Purchase Plans
Schedule 3.14(l) Additional Payments Due Under Deferred Compensation,
Bonus, Employee Welfare Benefit Plans and Employee
Pension Benefit Plans
Schedule 3.15 Employment Contracts and Collective Bargaining
Agreements
Schedule 3.16 Leases, Subleases, Contracts and Agreements;
Participations; Default of Contracts; Marketable Title
Schedule 3.17 Related Company Transactions
Schedule 3.18 Compliance with Laws
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Schedule 3.19 Insurance Policies
Schedule 3.20 Loans Exceeding Legal Lending Limit, Troubled Loans
Schedule 3.22 Patents, Trademarks and Copyrights
Schedule 3.23 Environmental Compliance
Schedule 3.24 Regulatory Actions; Agreements
Schedule 3.25 Title to Properties; Title Policies; Property
Schedule 3.29 Company Shareholders Disposing of Stock
Schedule 3.30 Stock Option Plans
Schedule 4.2 Compass Prior Consents
Schedule 5.1(j) List of Accounts and Safe Deposit Boxes
Schedule 5.1(k) List of Liabilities and Obligations of the Company
and the Bank
Schedule 6.10 List of Proxy Holders Voting Affirmatively for the
Agreement
Schedule 10.2 Brokers
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of December 4,
1996, by and between Compass Bancshares, Inc., a Delaware corporation
("Compass"), and Horizon Bancorp, Inc., a Texas corporation ("Company").
WHEREAS, Compass desires to effect a business combination with the
Company and its wholly owned subsidiary, Horizon Bank & Trust, SSB, a Texas
chartered savings bank (the "Bank"), and the Company and the Bank desire to
affiliate with Compass in the manner provided in this Agreement;
WHEREAS, Compass and the Company believe that the Merger (as defined
herein) of the Company with an existing or to-be-formed subsidiary ("Compass
Texas") of Compass incorporated under the laws of the State of Delaware to be
added as a party to this Agreement after the date hereof in the manner provided
by, and subject to the terms and conditions set forth in, this Agreement and all
exhibits, schedules and supplements hereto is desirable and in the best
interests of their respective institutions and shareholders;
WHEREAS, the Company has received an opinion of its counsel that the
Merger will qualify as a reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the board of directors of the Company has approved this
Agreement and the proposed transactions substantially on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises, the warranties,
representations and the mutual covenants hereinafter set forth, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, hereby agree as
follows:
ARTICLE I.
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the Texas Business Corporation Act (the "TBCA")
and the General Corporation Law of the State of Delaware (the "GCL"), the Home
Owners' Loan Act (the "HOLA") and the rules and regulations promulgated under
the HOLA, the Company shall be merged with and into Compass Texas (the "Merger")
as soon as practicable following the satisfaction or waiver, if permissible, of
the conditions set forth in Article VII hereof. Following the Merger, Compass
Texas shall continue as the surviving corporation (the "Surviving Corporation")
and the separate corporate existence of the Company shall cease. Compass shall
not be deemed a party to the Merger for the purposes of Article 5.06 of the TBCA
or the GCL.
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SECTION 1.2 Effective Time. The Merger shall be consummated by the
filing by the Texas Secretary of State of Articles of Merger, in the form
required by and executed in accordance with the relevant provisions of the TBCA,
and by the filing by the Delaware Secretary of State of a Certificate of Merger
in the form required by and executed in accordance with the relevant provisions
of the GCL and by the issuance of a Certificate of Merger by the Secretary of
State of Texas. The Articles of Merger of Texas and the Certificate of Merger of
Delaware shall be duly prepared, executed and acknowledged by the Company and
Compass Texas in accordance with the TBCA and the GCL and in form and substance
reasonably acceptable to the parties and their counsel. (The date of such
issuance and filing or such other time and date as may be specified in the
Articles and Certificate of Merger shall be the "Effective Time").
SECTION 1.3 Certain Effects of the Merger. The Merger shall have
the effects set forth in Article 5.06 of the TBCA and Section 259 of the GCL.
SECTION 1.4 Certificate of Incorporation and By-Laws. The
Certificate of Incorporation and the By-Laws of Compass Texas, in each case as
in effect at the Effective Time, shall be the Certificate of Incorporation and
By-Laws of the Surviving Corporation.
SECTION 1.5 Directors and Officers. The directors and officers of
Compass Texas at the Effective Time shall be the directors and officers of the
Surviving Corporation and shall hold office from the Effective Time until their
respective successors are duly elected or appointed and qualified in the manner
provided in the Certificate of Incorporation and By-Laws of the Surviving
Corporation, or as otherwise provided by law.
SECTION 1.6 Conversion of Shares. (a) Each share of the Company's
common stock, par value $0.01 per share ("Company Common Stock" or "Shares"),
issued and outstanding immediately prior to the Effective Time, other than
Dissenting Shares (as defined in Section 2.1) ("Common Shares Outstanding"),
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be converted into and represent the right to receive the consideration
payable as set forth below (the "Merger Consideration") to the holder of record
thereof, without interest thereon, upon surrender of the certificate
representing such Share. For the purposes of determining the number of Shares
issued and outstanding, the number of Shares issued and outstanding shall be
increased by the number and class of Shares that may be acquired upon exercise
or conversion of any warrant, option, convertible debenture or other security
entitling the holder thereof to acquire Shares which is in effect or outstanding
prior to the Effective Time. At the Closing, the Company shall calculate and
certify to Compass the Common Shares Outstanding.
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(b) Each holder of Company Common Stock for each share of Company
Common Stock so held shall receive Merger Consideration equal to the quotient of
888,889 shares of Compass common stock, $2.00 par value per share ("Compass
Common Stock"), divided by the Common Shares Outstanding. In the event the
average closing sale price of the Compass Common Stock as reported by the NASDAQ
National Market System for the twenty days of trading preceding the tenth
business day prior to the Effective Time (the "Share Determination Market
Value") is less than $31.00 per share, the Company may either (i) terminate this
Agreement (the "Pricing Termination Option") by written notice to Compass within
five business days from the date upon which Compass notifies the Company of a
Share Determination Market Value of less than $31.00 per share, or (ii) agree to
accept an aggregate of 888,889 shares of Compass Common Stock. In the event the
Company exercises its Pricing Termination Option pursuant to the preceding
sentence within the specified five business day period, this Agreement shall be
terminated, but Compass shall have the right to reject such termination of the
Agreement by the Company (the "Termination Rejection") by agreeing to issue an
aggregate number of shares of Compass Common Stock equal to the quotient of
$27,555,559 divided by the Share Determination Market Value ("New Shares"). In
such event, each holder of Company Common Stock for each share so held shall
receive Merger Consideration equal to the quotient of the New Shares divided by
the Common Shares Outstanding. Such Termination Rejection shall be exercised by
a notice to the Company within three business days following the date on which
Compass receives notice of the Company's exercise of the Pricing Termination
Option. In the event the Company fails to notify Compass of its election to
terminate this Agreement within the initial five business day period, the
Company shall be deemed to have agreed to accept an aggregate of 888,889 shares
of Compass Common Stock and each holder of Company Common Stock shall receive
for each share so held the per share Merger Consideration set forth in the first
sentence of this subsection 1.6(b). The aggregate number of shares of Compass
Common Stock to be exchanged for each Share, respectively, shall be adjusted
appropriately to reflect any stock dividends or splits, reclassification,
recapitalization or conversion with respect to Compass Common Stock, when the
record date or payment occurs prior to the Effective Time.
(c) Compass will not issue any certificates for any fractional shares
of Compass Common Stock otherwise issuable pursuant to the Merger. In lieu of
issuing such fractional shares, Compass shall pay cash to any holder of Shares
otherwise entitled to receive such fractional share. Such cash payment shall be
based on the Share Determination Market Value.
(d) Each share of capital stock of Compass Texas issued and
outstanding immediately before the Effective Time shall not be converted or
exchanged by virtue of the Merger and shall remain
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outstanding as one share of capital stock of the surviving corporation.
SECTION 1.7 Shareholders' Meeting. The Company, acting through its
Board of Directors, shall, in accordance with applicable law:
(a) duly call, give notice of, convene and hold a meeting (the
"Shareholders' Meeting") of its shareholders as soon as practicable for the
purpose of approving and adopting this Agreement;
(b) require no greater than the minimum vote required by applicable
law or the Company's Articles of Incorporation of each class of the Shares in
order to approve the Merger;
(c) include in the Proxy Statement (defined in paragraph (d) below)
the recommendation of its Board of Directors that the shareholders of the
Company vote in favor of the approval and adoption of this Agreement, subject to
the provisions of Section 6.5; and
(d) use its best efforts to (i) obtain and furnish the information
required to be included by it in the Proxy Statement within 15 days from the
date of this Agreement and use its best efforts to cause the definitive Proxy
Statement to be mailed to its shareholders at the earliest practicable time, and
(ii) obtain the approval and adoption of the Merger by shareholders holding at
least the minimum number of Shares of each class of the Shares entitled to vote
at the Shareholders' Meeting to approve the Merger under applicable law. The
letter to shareholders, notice of meeting, proxy statement and form of proxy to
be distributed to shareholders in connection with the Merger shall be in form
and substance reasonably satisfactory to Compass and the Company, and are
collectively referred to herein as the "Proxy Statement."
SECTION 1.8 Registration of the Compass Common Stock.
(a) Compass shall use its best efforts to file a registration
statement (the "Registration Statement") with the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended ("Securities
Act"), covering the shares of Compass Common Stock to be issued to Company
shareholders in the Merger within 45 days from the date of this Agreement,
provided the Company has delivered to Compass the information required by
Section 1.7(d)(i) within the time period required by such section. Compass
shall notify the Company promptly when the Registration Statement has become
effective and of any supplements or amendments thereto, and shall furnish the
Company with copies of all such documents.
(b) Within 30 days after the date hereof, the Company shall enter
into and cause each Company shareholder who is an "affiliate"
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(as defined in SEC Rule 405) of the Company to enter into with Compass a written
agreement in substantially the form of Exhibit A attached hereto.
SECTION 1.9 Closing. Upon the terms and subject to the conditions
hereof, as soon as practicable after the vote of the shareholders of the Company
in favor of the approval and adoption of this Agreement has been obtained, and
the satisfaction or waiver, if permissible, of the conditions set forth in
Article VII hereof, but without the consent of Compass and the Company not prior
January 2, 1997, the Company and Compass Texas shall execute and deliver the
Articles of Merger and the Certificate of Merger, as described in Section 1.2,
and the parties hereto shall take all such other and further actions as may be
required by law to make the Merger effective. Prior to the filing referred to
in this Section, a closing (the "Closing") will be held at the office of
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. in Austin, Texas (or such other
place as the parties may agree) for the purpose of confirming all of the
foregoing. Compass shall provide the Company with 12 days prior notice of the
proposed date of Closing.
ARTICLE II.
DISSENTING SHARES; EXCHANGE OF SHARES
SECTION 2.1 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, Shares which are issued and outstanding immediately
prior to the Effective Time and which are held by shareholders who have not
voted such shares in favor of the Merger and who shall have delivered a written
demand for payment of the fair value of such shares within the time and in the
manner provided in Article 5.12 of the TBCA (the "Dissenting Shares") shall not
be converted into or be exchangeable for the right to receive the Merger
Consideration provided in Section 1.6 of this Agreement, unless and until such
holder shall have failed to perfect or shall have effectively withdrawn or lost
his right to appraisal and payment under the TBCA. If any such holder shall
have so failed to perfect or shall have effectively withdrawn or lost such
right, such holder's Shares shall thereupon be deemed to have been converted
into and to have become exchangeable for, at the Effective Time, the right to
receive the Merger Consideration without any interest thereon.
SECTION 2.2 Exchange of Shares.
(a) Compass shall deposit or cause to be deposited in trust with
River Oaks Trust Company, Houston, Texas (the "Exchange Agent"), pursuant to an
exchange agent agreement in substantially the form attached hereto as Exhibit B
(the "Exchange Agreement"), prior to the Effective Time cash in an aggregate
amount estimated to be sufficient to make the cash payments in lieu of
fractional shares of Compass Common Stock pursuant to Section 1.6 hereof and
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to make the appropriate cash payments, if any, to holders of Dissenting Shares
(such amounts being hereinafter referred to as the "Exchange Fund"). The
Exchange Agent shall, pursuant to irrevocable instructions jointly given by the
Company and Compass, promptly make the payments in lieu of fractional shares out
of the Exchange Fund upon surrender of Shares in accordance with Section 2.2(b).
Payments to dissenting shareholders shall be made as required by Article 5.12 of
the TBCA. Subject to holding sufficient cash to make prompt payments to holders
of Shares, the Exchange Agent shall invest the Exchange Fund in The Starburst
Government Money Market Fund, managed by Compass Bank, Birmingham, Alabama, an
affiliate of Compass. The Exchange Fund shall not be used for any other
purpose, except as provided in this Agreement.
(b) No later than five business days after the Effective Time
(provided the Company has provided to the Exchange Agent the shareholder list
required by the Exchange Agreement at the Effective Time), the Exchange Agent
shall mail to each record holder of an outstanding certificate or certificates
which as of the Effective Time represented Shares (the "Certificates"), a form
letter of transmittal approved by the Company and Compass (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Exchange Agent)
and instructions for use in effecting the surrender of the Certificates for
payment therefor. Upon surrender to the Exchange Agent of a Certificate,
together with such letter of transmittal duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor cash and Compass
Common Stock in the amount provided in Section 1.6, and such Certificate shall
forthwith be canceled. Compass shall provide the Exchange Agent with
certificates for Compass Common Stock, as requested by the Exchange Agent, in
the amounts provided in Section 1.6 hereof. No interest will be paid or accrued
on the cash payable upon surrender of the Certificate and no dividend will be
disbursed with respect to the shares of Compass Common Stock until the holder's
Shares are surrendered in exchange therefor. If payment or delivery of Compass
Common Stock is to be made to a person other than the person in whose name the
Certificate surrendered is registered, it shall be a condition of payment that
the Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such payment shall pay any
transfer or other taxes required by reason of the payment and delivery of
Compass Common Stock to a person other than the registered holder of the
Certificate surrendered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Until surrendered
in accordance with the provisions of this Section 2.2, each Certificate (other
than Certificates representing Dissenting Shares) shall represent for all
purposes the right to receive the Merger Consideration without any interest
thereon.
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(c) After the Effective Time, the stock transfer ledger of the
Company shall be closed and there shall be no transfers on the stock transfer
books of the Company of the Shares which were outstanding immediately prior to
such time of filing. If, after the Effective Time, Certificates are presented
to the Surviving Corporation, they shall be promptly presented to the Exchange
Agent and exchanged as provided in this Article II.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the shareholders of the Company
for six months after the Effective Time shall be paid to Compass, and the
holders of Shares not theretofore presented to the Exchange Agent shall look to
Compass only, and not the Exchange Agent, for the payment of any Merger
Consideration in respect of such shares.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby makes the representations and warranties set forth
in this Article III to Compass. The Company has delivered to Compass the
Schedules to this Agreement referred to in this Article III prior to the date
hereof. The Company agrees at the Closing to provide Compass and Compass Texas
with supplemental Schedules reflecting any changes thereto between the date of
such Schedules and the date of the Closing. For purposes of the representations
and warranties set forth in Sections 3.9, 3.10, 3.13, 3.14, 3.16, 3.18 and 3.23
of this Agreement, a reference to the Bank shall include the Bank and its
Subsidiaries (as defined in Section 10.13(a)).
SECTION 3.1 Organization and Qualification. The Company is a Texas
corporation, duly organized, validly existing and in good standing under the
laws of the State of Texas. The Company is registered as a savings and loan
holding company with the Office of Thrift Supervision ("OTS") under the HOLA and
is in good standing under all laws, rules, and regulations applicable to savings
and loan holding companies. The Bank is a Texas chartered savings bank, duly
organized, validly existing and in good standing under the laws of the State of
Texas. Each of the Company and the Bank has all requisite corporate power and
authority to carry on its business as now being conducted and to own, lease and
operate its properties and assets as now owned, leased or operated. Except as
set forth on Schedule 3.17, the Company does not own or control any Affiliate
(as defined in Section 3.17) or Subsidiary other than the Bank. True and
correct copies of the Articles of Incorporation or Association and Bylaws of the
Company and the Bank, with all amendments thereto through the date of this
Agreement, have been delivered by the Company to Compass. The Bank is duly
qualified or licensed to do business and is in good standing in the State of
Texas. Except as set forth on Schedule 3.1, the nature of the
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business of the Company and the Bank and their respective activities, as
currently conducted, do not require them to be qualified to do business in any
jurisdiction other than the State of Texas.
SECTION 3.2 Company Capitalization. As of the date hereof, the
authorized capital stock of the Company consists solely of (a) 4,000,000 shares
of Company Common Stock, of which 1,388,757 shares are issued and outstanding,
and none of which are held in treasury, and (b) 1,000,000 shares of Preferred
Stock, par value $0.01 per share, none of which are outstanding or held in
treasury. The Company has reserved 105,000 shares of Company Common Stock for
issuance under the Company's 1996 and 1997 Stock Option and Incentive Plans,
pursuant to which no options are outstanding. Except as set forth on Schedule
3.2, there are no outstanding subscriptions, options, convertible securities,
rights, warrants, calls, or other agreements or commitments of any kind issued
or granted by, or binding upon, the Company or the Bank to purchase or otherwise
acquire any security of or equity interest in the Company or the Bank. Except
as set forth on Schedule 3.2, there are no outstanding subscriptions, options,
rights, warrants, calls, convertible securities or other agreements or
commitments obligating the Company to issue any shares of the Company, or to the
knowledge of the Company, irrevocable proxies or any agreements restricting the
transfer of or otherwise relating to shares of its capital stock of any class.
All of the Shares that have been issued have been duly authorized, validly
issued and are fully paid and non-assessable, and are free of preemptive rights.
There are no restrictions applicable to the payment of dividends on the Shares
except pursuant to the TBCA and laws and regulations applicable to state
chartered savings banks and all dividends declared prior to the date hereof have
been paid.
SECTION 3.3 Bank Capitalization; Other Securities. All of the
issued and outstanding shares of the capital stock of the Bank (i) are duly
authorized, validly issued, fully paid and nonassessable, (ii) are free and
clear of any liens, claims, security interests and encumbrances of any kind, and
(iii) there are no irrevocable proxies with respect to such shares and there are
no outstanding or authorized subscriptions, options, warrants, calls, rights, or
other agreements or commitments of any kind restricting the transfer of,
requiring the issuance or sale of, or otherwise relating to any of such shares
of capital stock to any person. The Company owns, directly, all of the issued
and outstanding capital stock of the Bank. Set forth on Schedule 3.3 hereto is
a list of all equity ownership by the Company or the Bank for the account of the
Company or the Bank in any other person other than the Bank (the "Other
Securities"). The Company or the Bank owns each Other Security free and clear of
any lien, encumbrance, security interest or charge. The Other Securities
represent less than five percent of the outstanding equity securities of each
such person.
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SECTION 3.4 Authority Relative to the Agreement. The Company has
full corporate power and authority, and, except for the approval by the
Company's shareholders, no further proceedings on the part of the Company are
necessary, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby which have been duly and validly authorized by
its Board of Directors. This Agreement has been duly executed and delivered by
the Company and is a duly authorized, valid, legally binding and enforceable
obligation of the Company, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium, or other similar laws relating to creditors' rights
generally and general equitable principles, and subject to such shareholder
approvals and such approval of regulatory agencies and other governmental
authorities having authority over the Company as may be required by statute or
regulation; and further subject to the rights of creditors of Texas chartered
and federally insured savings banks or savings and loan holding companies. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will not conflict with, or result in any
violation or breach of or default under the respective Articles of Incorporation
or Association or By-Laws of the Company or the Bank.
SECTION 3.5 No Violation. Except as set forth on Schedule 3.5,
neither the execution, delivery nor performance of this Agreement in its
entirety, nor the consummation of all of the transactions contemplated hereby,
following the receipt of such approvals as may be required from the Company's
shareholders, the SEC, the OTS, the Federal Deposit Insurance Corporation
("FDIC"), the Board of Governors of the Federal Reserve System ("FRB"), the
Banking Commissioner of Texas ("Commissioner"), the Texas Savings and Loan
Commissioner ("TSLD"), the Department of Justice ("DOJ") and the Federal Trade
Commission ("FTC") will (i) violate (with or without the giving of notice or the
passage of time), any law, order, writ, judgment, injunction, award, decree,
rule, statute, ordinance or regulation applicable to the Company or the Bank or
(ii) be in conflict with, result in a breach or termination of any provision of,
cause the acceleration of the maturity of any debt or obligation pursuant to,
constitute a default (or give rise to any right of termination, cancellation or
acceleration) under, or result in the creation of any security interest, lien,
charge or other encumbrance upon any property or assets of the Company or the
Bank pursuant to, any terms, conditions or provisions of any note, license,
instrument, indenture, mortgage, deed of trust or other agreement or
understanding or any other restriction of any kind or character, to which the
Company or the Bank is a party or by which any of their assets or properties are
subject or bound. Except as set forth on Schedule 3.5, there are no proceedings
pending or, to the knowledge of the Company or the Bank, threatened, against the
Company, the Bank or involving the Shares, at law or in equity or before or by
any foreign, federal, state, municipal or other governmental court, department,
commission, board, bureau, agency,
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instrumentality or other person which may result in liability to Compass or
Compass Texas upon the consummation of the transactions contemplated hereby or
which would prevent or delay such consummation. Except as set forth in Schedule
3.5, or as contemplated hereby, the corporate existence, business organization,
assets, licenses, permits, authorizations and contracts of the Company and the
Bank will not be terminated or impaired by reason of the execution, delivery or
performance by the Company of this Agreement or consummation by the Company of
the transactions contemplated hereby, assuming the receipt of required
shareholder and regulatory approvals.
SECTION 3.6 Consents and Approvals. The Company's Board of
Directors (at a meeting called and duly held) has determined that the Merger is
fair to the Company's shareholders and has resolved to recommend approval and
adoption of this Agreement by the Company's shareholders. Except as described
in Schedule 3.6 hereto, no prior consent, approval or authorization of, or
declaration, filing or registration with any person, domestic or foreign, is
required of the Company in connection with the execution, delivery and
performance by the Company of this Agreement and the transactions contemplated
hereby or the resulting change of control of the Bank, except the filing of the
Articles of Merger under the TBCA, the Certificate of Merger under the GCL, and
such approvals as may be required from the SEC, the FRB, the OTS, the FDIC, the
TSLD, the Commissioner, the holders of Shares under the TBCA, the DOJ, the FTC
and any appropriate state agency empowered to enforce state securities or "blue
sky" acts.
SECTION 3.7 Regulatory Reports. Except as set forth on Schedule
3.7, the Company and the Bank have filed all reports, registrations and
statements, together with any amendments required to be made thereto, that are
required to be filed with the OTS, the TSLD, the FDIC, or any other regulatory
authority having jurisdiction over the Bank and the Company, other than plans,
reports or information listed on Schedule 3.7.
SECTION 3.8 SEC Status; Securities Issuances. The Company is
subject to the registration provisions of Section 12 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the rules and regulations of
the SEC promulgated under Section 12 of the Exchange Act, including the anti-
fraud provisions of such act. All issuances of securities by the Company and
the Bank have been registered under the Securities Act, the Securities Act of
the State of Texas, and all other applicable laws or were exempt from any such
registration requirements. The Company has made all filings required to be made
in compliance with the Exchange Act. None of the information contained in any
filing by the Company under the Exchange Act or the Securities Act is false or
misleading with respect to any material fact, or omits to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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SECTION 3.9 Financial Statements. The Company has provided Compass
with a true and complete copy of the audited consolidated statement of financial
condition of the Company and the Bank as of April 30, 1996, and the related
consolidated statements of operations, stockholders' equity and statements of
cash flows for the years ended April 30, 1996 and 1995, plus consolidating
financial statements of the Bank, and the unaudited consolidated statements of
financial condition of the Company and the Bank as of July 31, 1996 and the
related unaudited consolidated statements of operations and statements of cash
flows for the three-month periods ended July 31, 1996 and 1995, and promptly
following their availability the Company will provide Compass with the Company's
audited consolidated statement of financial condition of the Company and the
Bank as of April 30, 1997, if applicable, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
April 30, 1997 (such consolidated statements of financial condition and the
related consolidated statements of operations, stockholders' equity and
statements of cash flows are collectively referred to herein as the
"Consolidated Financial Statements"), plus all consolidating financial
statements for the Bank (collectively, with the Consolidated Financial
Statements and the notes and schedules thereto, referred to as the "Financial
Statements"). Except as described in the notes to the Consolidated Financial
Statements, the Consolidated Financial Statements, including the consolidated
statement of financial condition and the related consolidated statements of
operations, stockholders' equity and statements of cash flows (including the
related notes thereto) of the Company and the Bank, fairly present the financial
position of the Company and the Bank as of the dates thereof and the results of
operations and changes in consolidated financial position of the Company and the
Bank for the periods then ended, in conformity with Generally Accepted
Accounting Principles ("GAAP") applied on a basis consistent with prior periods
(subject, in the case of the unaudited interim financial statements, to normal
year-end adjustments and the fact that they do not contain all of the footnote
disclosures required by GAAP), except as otherwise noted therein, and the
accounting records underlying the Consolidated Financial Statements accurately
and fairly reflect in all material respects the transactions of the Company and
the Bank. As of their dates, the Consolidated Financial Statements conformed, or
will conform when delivered, in all material respects with all applicable rules
and regulations promulgated by the TSLD, the OTS and the FDIC. Neither the
Company nor the Bank have any liabilities or obligations of a type which should
be included in or reflected on the Financial Statements if prepared in
accordance with GAAP, whether related to tax or non-tax matters, accrued or
contingent, due or not yet due, liquidated or unliquidated, or otherwise, except
as and to the extent disclosed or reflected in the Financial Statements. The
Company will provide Compass with the unaudited consolidated and unconsolidated
statements of financial position of the Company and the Bank as of the end of
each month hereafter, prepared on a basis consistent with prior
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periods. Promptly following their availability, the Company will provide
Compass with its Quarterly Reports on Form 10-Q and with the Reports of
Condition and Statements of Income ("Call Reports") of the Bank for all periods
ending after June 30, 1996. The Company and the Bank have no off balance sheet
liabilities associated with financial derivative products or potential
liabilities associated with financial derivative products.
SECTION 3.10 Absence of Certain Changes. Except as and to the
extent set forth on Schedule 3.10, since July 31, 1996 (the "Balance Sheet
Date") neither the Company nor the Bank has:
(a) made any amendment to its Articles of Incorporation or
Association or Bylaws or changed the character of its business in any material
manner;
(b) except for the recapitalization of the Savings Association
Insurance Fund pursuant to the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 ("EGA"), suffered any Material Adverse Effect (as defined
in Section 10.13(b));
(c) entered into any agreement, commitment or transaction except in
the ordinary course of business and consistent with prudent banking practices;
(d) except in the ordinary course of business and consistent with
prudent banking practices, incurred, assumed or become subject to, whether
directly or by way of any guarantee or otherwise, any obligations or liabilities
(absolute, accrued, contingent or otherwise);
(e) permitted or allowed any of its property or assets to be subject
to any mortgage, pledge, lien, security interest, encumbrance, restriction or
charge of any kind (other than statutory liens not yet delinquent) except in the
ordinary course of business and consistent with prudent banking practices;
(f) except in the ordinary course of business and consistent with
prudent banking practices, canceled any debts, waived any claims or rights, or
sold, transferred, or otherwise disposed of any of its properties or assets;
(g) disposed of or permitted to lapse any rights to the use of any
trademark, service mark, trade name or copyright, or disposed of or disclosed to
any person other than its employees or agents, any trade secret not theretofore
a matter of public knowledge;
(h) except as set forth on Schedule 3.10 and except for regular
salary increases granted in the ordinary course of business within the Company's
or the Bank's 1997 budget and consistent with prior practices, granted any
increase in compensation or paid or
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agreed to pay or accrue any bonus, percentage compensation, service award,
severance payment or like benefit to or for the credit of any director, officer,
employee or agent, or entered into any employment or consulting contract or
other agreement with any director, officer or employee or adopted, amended or
terminated any pension, employee welfare, retirement, stock purchase, stock
option, stock appreciation rights, termination, severance, income protection,
golden parachute, savings or profit-sharing plan (including trust agreements and
insurance contracts embodying such plans), any deferred compensation, or
collective bargaining agreement, any group insurance contract or any other
incentive, welfare or employee benefit plan, program or agreement maintained by
the Company or the Bank, for the directors, employees or former employees of the
Company or the Bank ("Employee Benefit Plan");
(i) directly or indirectly declared, set aside or paid any dividend
or made any distribution in respect to its capital stock or redeemed, purchased
or otherwise acquired, or arranged for the redemption, purchase or acquisition
of, any shares of its capital stock or other of its securities, except for
dividends paid to the Company by the Bank;
(j) organized or acquired any capital stock or other equity
securities or acquired any equity or ownership interest in any person (except
through settlement of indebtedness, foreclosure, the exercise of creditors'
remedies or in a fiduciary capacity, the ownership of which does not expose the
Company or the Bank to any liability from the business, operations or
liabilities of such person);
(k) issued, reserved for issuance, granted, sold or authorized the
issuance of any shares of its capital stock or subscriptions, options, warrants,
calls, rights or commitments of any kind relating to the issuance or sale of or
conversion into shares of its capital stock;
(l) made any or acquiesced with any change in any accounting methods,
principles or practices;
(m) experienced any material adverse change in relations with
customers or clients of the Company or the Bank;
(n) except for the transactions contemplated by this Agreement or as
otherwise permitted hereunder, entered into any transaction, or entered into,
modified or amended any contract or commitment, other than in the ordinary
course of business and consistent with prudent banking practices; or
(o) agreed, whether in writing or otherwise, to take any action the
performance of which would change the representations contained in this Section
3.10 in the future so that any such
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representation would not be true in all material respects as of the Closing.
SECTION 3.11 Company Indebtedness. The Company does not have any
indebtedness ("Company Indebtedness") (including indebtedness of its
Subsidiaries) other than deposits, accounts payable and other immaterial
indebtedness incurred in the ordinary course of business.
SECTION 3.12 Litigation. Except as set forth on Schedule 3.12,
there are no actions, suits, claims, investigations, reviews or other
proceedings pending or, to the knowledge of the Company or the Bank, threatened
against the Company or the Bank or involving any of their respective properties
or assets, at law or in equity or before or by any foreign, federal, state,
municipal, or other governmental court, department, commission, board, bureau,
agency, or other instrumentality or person or any board of arbitration or
similar entity ("Proceeding"). The Company will notify Compass immediately in
writing of any Proceedings against the Company or the Bank.
SECTION 3.13 Tax Matters. The Company and the Bank have duly filed
all tax returns required to be filed by them involving a tax liability or other
material potential detriment for failure to file (the "Filed Returns"). The
Company and the Bank have paid, or have established adequate reserves for the
payment of, all federal income taxes and all state and local income taxes and
all franchise, property, sales, employment, foreign or other taxes required to
be paid with respect to the periods covered by the Filed Returns. With respect
to the periods for which returns have not yet been filed, the Company and the
Bank have established adequate reserves determined in accordance with GAAP for
the payment of all federal income taxes and all state and local income taxes and
all franchise, property, sales, employment, foreign or other taxes. Except as
described in Schedule 3.13, the Company and the Bank have no direct or indirect
liability for the payment of federal income taxes, state and local income taxes,
and franchise, property, sales, employment or other taxes in excess of amounts
paid or reserves established. Except as set forth on Schedule 3.13, the Company
has not entered into any tax sharing agreement or other agreement regarding the
allocation of the tax liability of the Company or the Bank or similar
arrangement with its Subsidiaries, other than the allocation of federal income
taxes as provided by regulation (S)1.1552-1(a)(1) under the Code. Set forth on
Schedule 3.13 are the dates of filing of all Filed Returns for all fiscal years
since and including May 1, 1990 and any amendments thereto which relate to
federal or state income or franchise taxes. Neither the Company nor the Bank
have filed any Internal Revenue Service ("IRS") Forms 1139 (Application for
Tentative Refund). Except as set forth on Schedule 3.13, there are no pending
questions raised in writing by the IRS or other taxing authority for taxes or
assessments of the Company or the Bank, nor
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are there any outstanding agreements or waivers extending the statutory period
of limitation applicable to any tax return of the Company or the Bank for any
period. The Company and the Bank have withheld from employee wages and paid
over to the proper governmental authorities all amounts required to be so
withheld and paid over. For the purposes of this Agreement, the term "tax"
shall include all federal, state and local taxes and related governmental
charges and any interest or penalties payable in connection with the payment of
taxes.
SECTION 3.14 Employee Benefit Plans. With respect to all employee
benefit plans and programs in which employees of the Company or the Bank
participate the following are true and correct:
(a) Schedule 3.14(a) lists each "employee welfare benefit plan" (as
defined in Section 3(1) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) maintained by the Company or the Bank or to which the
Company or the Bank contributes or is required to contribute, including any
multiemployer welfare plan (such employee welfare benefit plans being
hereinafter collectively referred to as the "Welfare Benefit Plans") and sets
forth (i) the amount of any liability of the Company or the Bank for
contributions more than thirty days past due with respect to each Welfare
Benefit Plan as of the date hereof and as of the end of any subsequent month
ending prior to the Closing and (ii) the annual cost attributable to each of the
Welfare Benefit Plans; no Welfare Benefit Plan provides for continuing benefits
or coverage for any participant, beneficiary or former employee after such
participant's or former employee's termination of employment except as may be
required by Section 4980B of the Code and Sections 601-608 of ERISA;
(b) Schedule 3.14(b) lists each "employee pension benefit plan" (as
defined in Section 3(2) of ERISA and not exempted under Section 4(b) or 201 of
ERISA) maintained by the Company or the Bank or to which the Company or the Bank
contributes or is required to contribute, including any multiemployer plan (as
defined in Section 3(37) of ERISA) (such employee pension benefit plans being
hereinafter collectively referred to as the "Pension Benefit Plans");
(c) Schedule 3.14(c) lists each deferred compensation plan, bonus
plan, stock option plan, employee stock purchase plan, restricted stock, excess
benefit plan, incentive compensation, stock bonus, cash bonus, severance pay,
golden parachute, life insurance, all nonqualified deferred compensation
arrangements, rabbi trusts, cafeteria plans, dependent care plans, all unfunded
plans and any other employee benefit plans or programs, agreements, arrangements
or commitments not required under a previous subsection to be listed (other than
normal policies concerning holidays, vacations and salary continuation during
short absences
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for illness or other reasons) maintained by the Company or the Bank (referred to
as ("Other Programs");
(d) All of the Pension Benefit Plans and Welfare Benefit Plans and
any related trust agreements or annuity contracts (or any other funding
instruments) and all Other Programs comply currently, and have complied in the
past, both as to form and operation, with the provisions of ERISA, the Code and
with all other applicable laws, rules and regulations governing the
establishment and operation of the Pension Benefit Plans, Welfare Benefit Plans
and all Other Programs; all necessary governmental approvals relating to the
establishment of the Pension Benefit Plans have been obtained; and with respect
to each Pension Benefit Plan that is intended to be tax-qualified under Section
401(a) or 403(a) of the Code, a favorable determination letter as to the
qualification under the Code of each such Pension Benefit Plan and each material
amendment thereto has been issued by the Internal Revenue Service (and nothing
has occurred since the date of the last such determination letter which resulted
in, or is likely to result in the revocation of such determination);
(e) Each Welfare Benefit Plan, each Pension Benefit Plan and each
Other Program has been administered in compliance with the requirements of the
Code, ERISA and all other applicable laws, and all reports and disclosures
required by ERISA, the Code and any other applicable laws with respect to each
Welfare Benefit Plan, each Pension Benefit Plan and each Other Program have been
timely filed;
(f) On and after January 1, 1975, neither the Company, the Bank nor
any plan fiduciary of any Welfare Benefit Plan or Pension Benefit Plan has
engaged in any transaction in violation of Section 406 of ERISA (for which
transaction no exemption exists under Section 408 of ERISA) or in any
"prohibited transaction" as defined in Section 4975(c)(1) of the Code (for which
no exemption exists under Section 4975(c)(2) or 4975(d) of the Code);
(g) Neither the Company, the Bank nor any corporation or other trade
or business controlled by or under common control with the Company (as
determined under Sections 414(b) and 414(c) of the Code) ("Common Control
Entity") is, or has been within the past five years, a contributing sponsor (as
defined in Section 4001(a)(13) of ERISA) of a Pension Benefit Plan subject to
the provisions of Title IV of ERISA, nor has the Company, the Bank or a Common
Control Entity maintained or participated in any employee pension benefit plan
(defined in Section 3(2) of ERISA) subject to the provision of Title IV of
ERISA. In addition, neither the Company, nor the Bank nor a Common Control
Entity (i) is a party to a collective bargaining agreement, (ii) has maintained
or contributed to, or has participated in or agreed to participate in, a
multiemployer plan (as defined in Section 3(37) of ERISA), or (iii) has made a
complete or partial withdrawal from a
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multiemployer plan (as defined in Section 3(37) of ERISA) so as to incur
withdrawal liability as defined in Section 4201 of ERISA (without regard to
subsequent reduction or waiver of such liability under Section 4207 or 4208 of
ERISA);
(h) True and complete copies of each Welfare Benefit Plan, each
Pension Benefit Plan and each Other Program, related trust agreements or annuity
contracts (or any other funding instruments), summary plan descriptions, the
most recent determination letter issued by the Internal Revenue Service with
respect to each Pension Benefit Plan, the most recent application for a
determination letter from the Internal Revenue Service with respect to each
Pension Benefit Plan and Annual Reports on Form 5500 Series filed with any
governmental agency for each Welfare Benefit Plan, Pension Benefit Plan and
Other Program for the two most recent plan years, have been furnished to
Compass;
(i) All Welfare Benefit Plans, Pension Benefit Plans, and Other
Programs related trust agreements or annuity contracts (or any other funding
instruments), are legally valid and binding and in full force and effect and
there are no promised increases in benefits (whether expressed, implied, oral or
written) under any of these plans nor any obligations, commitments or
understandings to continue any of these plans, (whether expressed, implied, oral
or written) except as required by Section 4980B of the Code and Sections 601-608
of ERISA;
(j) There are no claims pending with respect to, or under, any
Pension Benefit Plan, Welfare Benefit Plan or any Other Program, other than
routine claims for plan benefits, and there are no disputes or litigation
pending or threatened with respect to any such plans;
(k) No action has been taken, nor has there been a failure to take
any action that would subject any person or entity to any liability for any
income, excise or other tax or penalty in connection with any Pension Benefit
Plan, Welfare Benefit Plan or any Other Program, other than for income taxes due
with respect to benefits paid; and
(l) Except as otherwise set forth in Schedule 3.14(l), neither the
execution and delivery of this Agreement nor the consummation of the transaction
contemplated hereby will (i) result in any payment to be made by the Company or
the Bank (including, without limitation, severance, unemployment compensation,
golden parachute (defined in Section 280G of the Code), or otherwise) becoming
due to any employee, director or consultant, or (ii) increase any benefits
otherwise payable under any Welfare Benefit Plan, Pension Benefit Plan, or any
Other Program.
SECTION 3.15 Employment Matters. Except as disclosed on Schedule
3.15, neither the Company nor the Bank is a party to any
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oral or written contracts or agreements granting benefits or rights to employees
or any collective bargaining agreement or to any conciliation agreement with the
Department of Labor, the Equal Employment Opportunity Commission or any federal,
state or local agency which requires equal employment opportunities or
affirmative action in employment. Except as set forth on Schedule 3.15, there
are no unfair labor practice complaints pending against the Company or the Bank
before the National Labor Relations Board and no similar claims pending before
any similar state, local or foreign agency. To the knowledge of the Company,
there is no activity or proceeding of any labor organization (or representative
thereof) or employee group to organize any employees of the Company or the Bank,
nor of any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by
or with respect to any such employees. The Company and the Bank are in
compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and neither the Company nor the Bank is engaged in any unfair
labor practice.
SECTION 3.16 Leases, Contracts and Agreements. Schedule 3.16 sets
forth an accurate and complete list of all leases, subleases, licenses,
contracts and agreements to which the Company or the Bank is a party or by which
the Company or the Bank is bound which obligate or may obligate the Company or
the Bank in the aggregate for an amount in excess of $25,000 over the entire
term of any such agreement or related contracts of a similar nature which in the
aggregate obligate or may obligate the Company or the Bank in the aggregate for
an amount in excess of $25,000 over the entire term of such related contracts
(the "Contracts"). The Company has delivered to Compass true and correct copies
of all Contracts. For the purposes of this Agreement, the Contracts shall be
deemed not to include loans made by, repurchase agreements made by, spot foreign
exchange transactions of, bankers acceptances of, agreements with Bank customers
for trust services, or deposits by the Company or the Bank, but does include
unfunded loan commitments and letters of credit issued by the Company or the
Bank where the borrowers' total direct and indirect indebtedness to the Bank is
in excess of $50,000. Except as set forth in Schedule 3.16, no participations
or loans have been sold which have buy back, recourse or guaranty provisions
which create contingent or direct liabilities of the Company or the Bank. All
of the Contracts are legal, valid and binding obligations of the parties to the
Contracts enforceable in accordance with their terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and to general equitable principles and
further subject to the rights of creditors of Texas chartered and federally
insured savings banks or savings and loan holding companies, and are in full
force and effect. Except as described in Schedule 3.16, all rent and other
payments by the Company and the Bank under the Contracts are current, there are
no existing defaults by the Company or the Bank
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under the Contracts and no termination, condition or other event has occurred
which (whether with or without notice, lapse of time or the happening or
occurrence of any other event) would constitute a default. Each of the Company
and the Bank has a valid leasehold interest in each parcel of real property
leased by it free and clear of all mortgages, pledges, liens, encumbrances and
security interests.
SECTION 3.17 Related Company Transactions. Except as set forth on
Schedule 3.17, there are no agreements, instruments, commitments, extensions of
credit, tax sharing or allocation agreements or other contractual agreements of
any kind between or among the Company, whether on its own behalf or in its
capacity as trustee or custodian for the funds of any employee benefit plan (as
defined in ERISA), and any of its Affiliates (including the Bank). The term
"Affiliate" as used in this Agreement means, with respect to any person, any
person that, directly or indirectly, controls, is controlled by, or is under
common control with, such person in question. For the purposes of this
definition, "control" (including, with correlative meaning, the terms
"controlled by" and "under common control with") as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
whether through the ownership of voting securities or by contract or otherwise.
SECTION 3.18 Compliance with Laws. Except as set forth on Schedule
3.18, neither the Company nor the Bank is in default in respect to or is in
violation of (i) any judgment, order, writ, injunction or decree of any court or
(ii) any statute, law, ordinance, rule, order or regulation of any governmental
department, commission, board, bureau, agency or instrumentality, federal, state
or local, including (for purposes of illustration and not limitation) capital
and FRB reserve requirements, capital ratios and loan limitations of the TSLD,
the OTS, the FDIC or the Commissioner; and the consummation of the transactions
contemplated by this Agreement will not constitute such a default or violation
as to the Company or the Bank. The Company and the Bank have all permits,
licenses, and franchises from governmental agencies required to conduct their
businesses as they are now being conducted.
SECTION 3.19 Insurance. The Company and the Bank have in effect the
insurance coverage (including fidelity bonds) listed in Schedule 3.19 and have
had similar insurance in force for the last 3 years. Except as set forth on
Schedule 3.19, there have been no claims under such bonds within the last 3
years and neither the Company nor the Bank is aware of any facts which would
form the basis of a claim under such bonds. Neither the Company nor the Bank
has any reason to believe that the existing fidelity coverage would not be
renewed by its carrier on substantially the same terms.
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SECTION 3.20 Loans. Each loan reflected as an asset in the
Financial Statements is the legal, valid and binding obligation of the obligor
of each loan, enforceable in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and to general equitable principles;
provided, however, that no representation or warranty is made as to the
collectibility of such loans. The Bank does not have in its portfolio any loan
exceeding its legal lending limit, and except as disclosed on Schedule 3.20, the
Bank has no known significant delinquent, substandard, doubtful, loss,
nonperforming or problem loans.
SECTION 3.21 Fiduciary Responsibilities. The Company and the Bank
have performed in all material respects all of their respective duties as a
trustee, custodian, guardian or as an escrow agent in a manner which complies in
all respects with all applicable laws, regulations, orders, agreements,
instruments and common law standards.
SECTION 3.22 Patents, Trademarks and Copyrights. Except as set
forth in Schedule 3.22, neither the Company nor the Bank require the use of any
material patent, patent application, invention, process, trademark (whether
registered or unregistered), trademark application, trade name, service mark,
copyright, or any material trade secret for the business or operations of the
Company or the Bank. The Company and the Bank own or are licensed or otherwise
have the right to use the items listed in Schedule 3.22.
SECTION 3.23 Environmental Compliance. Except as set forth in
Schedule 3.23:
(a) The Company, the Bank and any property owned or operated by
either of them are in compliance with all applicable Environmental Laws (as
defined in Section 10.13(c)) and have obtained and are in compliance with all
permits, licenses and other authorizations (individually a "Permit," and
collectively, "Permits") required under any Environmental Law. There is no past
or present event, condition or circumstance that could (1) interfere with the
conduct of the business of the Company or the Bank in the manner now conducted
relating to such entity's compliance with Environmental Laws, (2) constitute a
violation of any Environmental Law or (3) which could have a Material Adverse
Effect upon the Company or the Bank;
(b) Neither the Company nor any Subsidiary currently leases,
operates, owns, or exercises managerial functions at nor has formerly leased,
operated, owned, or exercised managerial functions at any facility or real
property that is subject to any actual, potential, or, to the knowledge of the
Company or the Bank, threatened Proceeding under any Environmental Law;
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(c) There are no Proceedings pending or, to the knowledge of the
Company or the Bank, threatened against the Company or the Bank under any
Environmental Law, or relating to the release, threatened release, management,
treatment, storage or disposal of, or exposure to Polluting Substances (as
defined in Section 10.13(d)), and neither the Company nor the Bank has received
any notice (whether from any regulatory body or private person) of any claim
under, or violation, or potential or threatened violation of, any Environmental
Law;
(d) There are no actions or Proceedings pending or, to the knowledge
of the Company or the Bank, threatened under any Environmental Law involving the
release or threat of release of any Polluting Substances at, on or under any
property where Polluting Substances generated by the Company or the Bank have
been disposed, treated or stored;
(e) There is no Property for which the Company or the Bank is or was
required to obtain any Permit under an Environmental Law to construct, demolish,
renovate, occupy, operate, or use such Property or any portion of it;
(f) Neither the Bank nor the Company has generated any Polluting
Substances for which it was required under an Environmental Law to execute any
waste disposal manifest or receipt;
(g) There has been no release of Polluting Substances at or under any
Property in violation of any Environmental Laws or which would require any
remediation or report or notification to any governmental or regulatory
authority;
(h) There are no underground or above ground storage tanks on or
under any Property which are not in compliance with Environmental Laws and any
Property previously containing such tanks has been remediated for any releases
in compliance with all Environmental Laws;
(i) There is no asbestos containing material present in any
Controlled Property (as defined below) or any Collateral Property (as defined
below); and
(j) The Company and the Bank have fully complied with the guidelines
issued by the FDIC on February 25, 1993, and any other governmental authority
with jurisdiction over the Bank, that directs banks to implement programs to
reduce the potential for banks to incur liability under, or to assess the
compliance of borrowers or Collateral Property with, Environmental Laws;
(k) For purposes of this Section 3.23 and Section 6.9, "Property"
includes (1) any property (whether real or personal) which the Company or the
Bank currently or in the past has leased,
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operated or owned or managed in any manner including without limitation any
property acquired by foreclosure or deed in lieu thereof ("Controlled Property")
and (2) property now held as security for a loan or other indebtedness by the
Company or the Bank or property currently proposed as security for loans or
other credit the Company or the Bank is currently evaluating whether to extend
or has committed to extend ("Collateral Property"). With respect to any
Collateral Property, the representations of this Section 3.23 shall be limited
to the knowledge of the Company.
SECTION 3.24 Regulatory Actions. Except as set forth on Schedule
3.24, there are no actions or proceedings pending or, to the knowledge of the
Company and the Bank, threatened against the Company or the Bank by or before
the OTS, the TSLD, the FDIC, the Environmental Protection Agency, the Texas
Natural Resource Conservation Commission, or any other nation or government, any
state or political subdivision thereof, or any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government. Except as set forth on Schedule 3.24, neither the Bank nor the
Company is subject to a formal or informal agreement, memorandum of
understanding, enforcement action with or any type of financial assistance by
any regulatory authority having jurisdiction over such entity. Neither the
Company nor the Bank has taken or agreed to take any action or has knowledge of
any fact or circumstance that would materially impede or delay receipt of any
required regulatory approval. Except as set forth in Schedule 3.24, the Company
and the Bank have not received or been made aware of any complaints or inquiries
under the Community Reinvestment Act, the Fair Housing Act, the Equal Credit
Opportunity Act or any other state or federal anti-discrimination fair lending
law and, to the knowledge of the Company and the Bank, there is no fact or
circumstance that would form the basis of any such complaint or inquiry.
SECTION 3.25 Title to Properties; Encumbrances. Except as set forth
on Schedule 3.25, each of the Company and the Bank has good, legal, and
indefeasible title to all its properties and assets, real and personal,
including, without limitation, all the properties and assets reflected in the
Financial Statements except for those properties and assets disposed of for fair
market value in the ordinary course of business and consistent with prudent
banking practice since the date of the Financial Statements. All properties and
assets reflected in the July 31, 1996 Quarterly Report on Form 10-Q of the
Company ("July 31 Report") are free and clear of all encumbrances except for (a)
mortgages or security interests shown on the July 31 Report and (b) liens for
current taxes not yet due. Except as set forth on Schedule 3.25, the Company
has a title policy in full force and effect from a title insurance company
which, to the best of Company's knowledge, is solvent, insuring good and
indefeasible title to all real property owned by the Company and the Bank in
favor of the Company or the Bank, whichever is applicable. The Company has made
available to
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Compass all of the files and information in the possession of the Company or the
Bank concerning such properties, including any title exceptions which might
affect indefeasible title or value of such property. The Company and the Bank
each hold good and legal title or good and valid leasehold rights to all assets
that are necessary for them to conduct their respective businesses as they are
currently being conducted. Except as set forth on Schedule 3.25, the Company
owns all furniture, equipment, art and other property used to transact business
presently located on its premises. Except as set forth on Schedule 3.25, no
Property has been deed recorded or otherwise been identified in public records
or should have been recorded or so identified as containing Polluting
Substances.
SECTION 3.26 Shareholder List. The Company has provided to Compass
prior to the date of this Agreement a list of the holders of Shares (as prepared
by the transfer agent) and the holders of any outstanding warrant, option,
convertible debenture or other security entitling the holder thereof to acquire
Shares as of September 26, 1996 containing the names, addresses and number of
Shares or such other securities held of record, which is accurate in all
respects as of such date, and the Company will promptly after its record date
for the Shareholders' Meeting, and in any event prior to the mailing of the
Proxy Statement, advise Compass of any significant changes thereto.
SECTION 3.27 Proxy Statement. None of the information supplied or
to be supplied by the Company or the Bank, or, to the knowledge of the Company
or the Bank, any of their respective directors, officers, employees or agents
for inclusion in:
(a) the Proxy Statement; or
(b) any registration statement or other documents to be filed with
the SEC or any regulatory or governmental agency or authority in
connection with the transactions contemplated hereby, at the
respective times such documents are filed, and, with respect to
the Proxy Statement, when first mailed to the shareholders of
Company;
will be false or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, or, in the case of
the Proxy Statement or any amendment thereof or supplement thereto, at the time
of the Shareholders' Meeting, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Shareholders' Meeting. All documents that the Company or the Bank
is responsible for filing with any regulatory or governmental agency in
connection with the
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Merger will comply in all material respects with the provisions of applicable
law.
SECTION 3.28 Dissenting Shareholders. The Company and the Bank, and
their respective directors, have no knowledge of any plan or intention on the
part of any Company shareholders to make written demand for payment of the fair
value of such Shares in the manner provided in Article 5.12 of the TBCA.
SECTION 3.29 Section 368 Representations. (a) The fair market value
of the Compass Common Stock and other consideration received by each Company
shareholder will be approximately equal to the fair market value of the Company
Common Stock surrendered in the merger.
(b) There is no plan or intention by the shareholders of the Company
who own 5% percent or more of Company Common Stock (5% Shareholders), and to the
best of the knowledge of the management of the Company, there is no plan or
intention on the part of the remaining shareholders of the Company to sell,
exchange or otherwise dispose of a number of shares of Compass Common Stock
received in the transaction that would reduce the Company shareholders'
ownership of Compass Common Stock to a number of shares having a value, as of
the date of the transaction, of less than 50 percent of the value of all of the
formerly outstanding stock of the Company as of the same date. For purposes of
this representation, shares of Company Common Stock exchanged for cash or other
property, surrendered by dissenters or exchanged for cash in lieu of fractional
shares of Compass Common Stock will be treated as outstanding Company Common
Stock on the date of the transaction, moreover, shares of the Company Common
Stock and share of Compass Stock held by the Company shareholders and otherwise
sold, redeemed, or disposed of prior or subsequent to the transaction will be
considered in making this representation.
(c) The Company has provided to Compass true and correct copies of
statements ("Section 368 Certificates") received from each 5% Shareholder who is
a director, officer, employee or agent of the Company or the Bank with respect
to his plan or intention to sell or otherwise dispose of the Compass Common
Stock to be received pursuant to the Merger, and has set forth on Schedule 3.29
all knowledge of the Company and the Bank and their respective directors about
the plans or intentions of any other Company shareholders to sell or otherwise
dispose of the Compass Common Stock to be received pursuant to the Merger. The
Company shall use its best efforts to provide to Compass within 30 days after
the date hereof Section 368 Certificates for each 5% shareholder who is not a
director, officer, employee or agent of the Company or the Bank.
(d) Compass Texas will acquire at least 90 percent of the fair market
value of the net assets and at least 70 percent of the
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fair market value of the gross assets held by the Company immediately prior to
the transaction. For purposes of this representation, amounts paid by the
Company to dissenters, amounts paid by the Company to shareholders who receive
cash or other property, Company assets used to pay its reorganization expenses,
and all redemptions and distributions (except for regular, normal dividends)
made by the Company immediately preceding the transfer, will be included as
assets of the Company held immediately prior to the transaction.
(e) Neither Compass nor Compass Texas will assume any debts or
obligations of the holders of the Shares as part of the Merger.
(f) Except as set forth on Schedule 3.29, there have not been any
sales or redemptions of the Company's capital stock in contemplation of the
Merger. Schedule 3.29 sets forth all transactions in the capital stock of 5%
Shareholders of the Company since June 30, 1995.
(g) The liabilities of the Company assumed by Compass Texas and the
liabilities to which the transferred assets of the Company are subject were
incurred by the Company in the ordinary course of its business.
(h) The Company and its shareholders will pay their respective
expenses, if any, which are incurred in connection with the Merger.
(i) The Company has not disposed of any assets (either as a dividend
or otherwise) constituting more than 10% of the fair market value of all of its
assets (ignoring any liabilities) at any time either during the past twelve
months or in contemplation of the Merger.
(j) The Company is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(k) The Company is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of Section 368(a)(3)(A) of the Code.
(l) The fair market value of the assets of the Company transferred to
Compass Texas will equal or exceed the sum of the liabilities assumed by Compass
Texas, plus the amount of liabilities, if any, to which the transferred assets
are subject.
(m) The Company has a valid business purpose for entering into the
Merger and the merger of the Bank and Compass Bank (as defined in Section 6.2).
The two mergers are completely independent transactions. Compass has the right,
after the Merger to either proceed with the bank merger, or not.
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(n) Any compensation paid or to be paid to any shareholder of the
Company who will be an employee of, or perform advisory services for, Compass or
any affiliate thereof after the Merger will be in consideration for services
rendered or to be rendered, and such compensation will be commensurate with
amounts paid to third parties bargaining at arm's length for similar services
and has been bargained for independently of negotiations regarding consideration
to be paid for Company Shares Outstanding. None of the shares of Compass Common
Stock received by any shareholder of the Company is or will be separate
consideration for, or allocable to, any employment, consulting or other
arrangement which may be entered into between Compass or any affiliate thereof
and such shareholder for services rendered or to be rendered by any shareholder.
(o) No indebtedness between Compass or any of its subsidiaries, on the
one hand, and the Company or any of its subsidiaries, on the other hand, exists
or will exist prior to the Merger that (a) was issued or acquired at a discount,
or (b) will be settled, as a result of the Merger, at a discount. No
"installment obligation" (as the quoted term is defined for purposes of Section
453B of the Code) between Compass or any of its subsidiaries, on the one hand,
and the Company or any of its subsidiaries, on the other hand, exists or will
exist prior to the Merger that will be extinguished as a result of the Merger.
SECTION 3.30 Employee Stock Options. Except as set forth on
Schedule 3.30, there are no Company employee stock option plans or provisions in
any other plan, program, or arrangement providing for the issuance or grant of
any other interest in respect of the capital stock of the Company or the Bank.
SECTION 3.31 Accounting Matters. Neither the Company nor any of its
affiliates has taken or agreed to take any action that would prevent Compass
from accounting for the business combination to be effected by the Merger as a
pooling of interests, including, without limitation, any action inconsistent
with the provisions of Exhibit C hereto.
SECTION 3.32 Representations Not Misleading. No representation or
warranty by the Company in this Agreement, nor any statement, summary, exhibit
or schedule furnished to Compass or Compass Texas by the Company or the Bank
under and pursuant to, or in anticipation of this Agreement, contains or will
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained herein or therein, in light of the
circumstances in which they were made, not misleading.
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
OF COMPASS
Compass hereby makes the representations and warranties set forth in
this Article IV to the Company. Compass has delivered to the Company the
Schedules to this Agreement referred to in this Article IV prior to the date
hereof. Compass agrees to provide the Company with supplemental schedules
reflecting any changes thereto between the date of such Schedules and the date
of Closing.
SECTION 4.1 Organization and Authority.
(a) Compass is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware, and has all requisite
corporate power and authority to conduct its business as now conducted, to own,
lease and operate its properties and assets as now owned, leased or operated and
to enter into and carry out its obligations under this Agreement.
(b) Compass is a bank holding company under the Bank Holding Company
Act of 1956, as amended, and in good standing under all laws, rules and
regulations applicable to bank holding companies. Compass is duly qualified or
licensed and in good standing in each jurisdiction which requires such
qualification where it owns or leases properties or conducts business.
(c) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not conflict with, or
result in any violation or breach of or default under the Certificate of
Incorporation or Bylaws of Compass or any agreement, document or instrument by
which Compass is obligated or bound.
SECTION 4.2 Authority Relative to Agreement. Compass has full
corporate power and authority and no further corporate proceedings on the part
of Compass are necessary to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. Approval of this Agreement by the board
of directors of Compass is not required. This Agreement has been duly executed
and delivered by Compass and is a duly authorized, valid, legally binding and
enforceable obligation of Compass, subject to the effect of bankruptcy,
insolvency, reorganization, moratorium, or other similar laws relating to
creditors' rights generally and general equitable principles, and subject to
such shareholder approvals and such approval of regulatory agencies and other
governmental authorities having authority over Compass as may be required by
statute or regulation. Compass is not in violation of or default under its
Certificate of Incorporation or By-Laws or any agreement, document or instrument
under which Compass is obligated or bound, or any law, order, judgment,
injunction, award, decree,
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statute, rule, ordinance or regulation applicable to Compass or any of its
Subsidiaries, the violation or breach of which could have a Material Adverse
Effect on Compass. Except as set forth on Schedule 4.2, neither the execution,
delivery nor performance of this Agreement in its entirety, nor the consummation
of all the transactions contemplated hereby, following the receipt of such
approvals as may be required from the SEC, the OTS, the FRB, the TSLD, the FDIC,
the Commissioner, the DOJ, the FTC, and any appropriate state agency empowered
to enforce state securities or "blue sky" acts, will (i) violate (with or
without the giving of notice or passage of time), any law, order, writ,
judgment, injunction, award, decree, rule, statute, ordinance or regulation
applicable to Compass, or (ii) be in conflict with, result in a breach or
termination of any provision of, cause the acceleration of the maturity of any
debt or obligation pursuant to, constitute a default (or give rise to any right
of termination, cancellation or acceleration) under, or result in the creation
of any security interest, lien, charge or other encumbrance upon any property or
assets of Compass pursuant to, any terms, conditions or provisions of any note,
license, instrument, indenture, mortgage, deed of trust or other agreement or
understanding or any other restriction of any kind or character, to which
Compass is a party or by which any of its assets or properties are bound.
Except as set forth on Schedule 4.2, there are no proceedings pending or, to the
knowledge of Compass, threatened, against Compass, at law or in equity or before
any foreign, federal, state, municipal or other governmental court, department,
commission, board, bureau, agency, instrumentality or other person which may
result in liability to the Company or the Bank on the consummation of the
transactions contemplated hereby or which would prevent or delay such
consummation. Except as set forth in Schedule 4.2, or as contemplated hereby,
the corporate existence, business, organization, assets, licenses, permits,
authorizations and contracts of Compass will not be terminated or impaired by
reason of the execution, delivery or performance by Compass of this Agreement or
consummation by Compass of the transactions contemplated hereby, assuming
receipt of the required regulatory approvals.
SECTION 4.3 Financial Reports. Compass has previously furnished the
Company a true and complete copy of (i) the 1995 Annual Report to Shareholders,
which report (the "Compass 1995 Annual Report") includes, among other things,
consolidated balance sheets of Compass and its Subsidiaries as of December 31,
1995 and 1994, the related consolidated statements of income, shareholders'
equity and cash flows for the years ended December 31, 1995, 1994 and 1993 and
(ii) Compass' quarterly reports on Form 10-Q for the quarters ended March 31 and
June 30, (the "Quarterly Reports") which reports include among other things
unaudited balance sheets of Compass and its Subsidiaries as of March 31 and June
30, 1996 and 1995, respectively, and the related unaudited consolidated
statements of income and cash flows for the three- and six-month
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periods ending March 31 and June 30, 1996 and 1995. The financial statements
contained in the Compass 1995 Annual Report and such Quarterly Reports have been
prepared in conformity with GAAP applied on a basis consistent with prior
periods. The consolidated balance sheets of Compass and its subsidiaries as of
December 31, 1995 and 1994 contained in the Compass 1995 Annual Report fairly
present the consolidated financial condition of Compass and its Subsidiaries as
of the dates thereof, and the related consolidated statements of income,
shareholders' equity and cash flows of Compass and its Subsidiaries contained
therein fairly present the results of operations and cash flows thereof for the
fiscal years then ended. The unaudited consolidated financial statements of
Compass and its Subsidiaries as of March 31 and June 30, 1996 and 1995,
contained in Compass' Quarterly Reports, fairly present the financial condition,
the results of the operations and changes in cash flows thereof as of such dates
and for the periods indicated. For the purposes of this Agreement, all financial
statements referred to in this Section 4.3 shall be deemed to include any notes
to such financial statements. Compass has made all filings required to be made
in compliance with the Exchange Act. None of the information contained in the
Compass 1995 Annual Report or Compass' Quarterly Reports is false or misleading
with respect to any material fact, or omits to state any material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
SECTION 4.4 Capitalization. The shares of Compass Common Stock to
be issued pursuant to this Agreement, when so issued, will be duly and validly
authorized and issued, fully paid and nonassessable, and not issued in violation
of any preemptive rights. As of September 30, 1996, Compass had 40,509,654
shares of common stock, $2.00 per share par value, issued and outstanding. None
of the shares of Compass Common Stock to be issued pursuant to this Agreement
will be subject to any lien, charge, encumbrance, claim, rights of others,
mortgage, pledge or security interest, and none will be subject to any
agreements or understandings among any persons with respect to the voting or
transfer of such shares of Compass Common Stock except as contemplated hereby.
SECTION 4.5 Consents and Approvals. No prior consent, approval or
authorization of, or declaration, filing or registration with any person,
domestic or foreign, is required of or by Compass in connection with the
execution, delivery and performance by Compass of this Agreement and the
transactions contemplated hereby or the resulting change in control of the
Company and the Bank, except the filing of Articles of Merger under the TBCA,
the filing of the Certificate of Merger under the GCL, and such approvals as may
be required from the SEC, the FRB, the OTS, the Commissioner, the TSLD and the
FDIC.
SECTION 4.6 Proxy Statement. None of the information supplied or to
be supplied by Compass, or, to the best knowledge of
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Compass, any of its directors, officers, employees or agents for inclusion in:
(a) the Proxy Statement; or
(b) any registration statement or other documents to filed with the
SEC or any regulatory or governmental agency or authority in
connection with the transactions contemplated herein, at the
respective times such documents are filed, and, with respect to
the Proxy Statement, when first mailed to the shareholders of the
Company;
will be false or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, or, in the case of
the Proxy Statement or any amendment thereof or supplement thereto, at the time
of the Shareholders' Meeting, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Shareholders' Meeting. All documents that Compass is responsible
for filing with any regulatory or governmental agency in connection with the
Merger will comply in all material respects with the provisions of applicable
law.
SECTION 4.7 Availability of Compass Common Stock. Compass has
available a sufficient number of authorized and unissued shares of Compass
Common Stock to pay the Merger Consideration, and Compass will not take any
action during the term of this Agreement that will cause it not to have a
sufficient number of authorized and unissued shares of Compass Common Stock to
pay the Merger Consideration.
SECTION 4.8 Section 368 Representations. (a)Prior to the Merger,
Compass will be in control of Compass Texas within the meaning of Section
368(c)(1) of the Code.
(b) Following the transaction, Compass Texas will not issue additional
shares of its stock that would result in Compass losing control of Compass Texas
within the meaning of Section 368(c)(1) of the Code.
(c) Compass has no plan or intention to reacquire any of the Compass
Common Stock issued in the Merger.
(d) Compass has no plan or intention to liquidate Compass Texas; to
merge Compass Texas with and into another corporation; to sell or otherwise
dispose of the stock of Compass Texas; or to cause Compass Texas to sell or
otherwise dispose of any of the assets of the Company acquired in the
transaction, except for
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dispositions made in the ordinary course of business or transfers described in
Section 368(a)(2)(C) of the Code.
(e) Following the Merger, Compass Texas will continue the historic
business of the Company or use a significant portion of the Company business
assets in a business.
(f) Compass and Compass Texas will pay their respective expenses, if
any, incurred in connection with the Merger.
(g) Compass and Compass Texas are not investment companies as defined
in Section 368(a)(2)(F)(iii) and (iv) of the Code.
(h) No stock of Compass Texas will be issued in the Merger.
(i) Compass has a valid business purpose for entering into the Merger
and the merger of the Bank and Compass Bank. The two mergers are completely
independent transactions. Compass has the right, after the Merger to either
proceed with the bank merger, or not.
(j) Any compensation paid or to be paid to any shareholder of the
Company who will be an employee of, or perform advisory services for, Compass or
any affiliate thereof after the Merger will be in consideration for services
rendered or to be rendered, and such compensation will be commensurate with
amounts paid to third parties bargaining at arm's length for similar services
and has been bargained for independently of negotiations regarding consideration
to be paid for Company Shares Outstanding. None of the shares of Compass Common
Stock received by any shareholder of the Company is or will be separate
consideration for, or allocable to, any employment, consulting or other
arrangement which may be entered into between Compass or any affiliate thereof
and such shareholder for services rendered or to be rendered by any shareholder.
(k) No indebtedness between Compass or any of its subsidiaries, on the
one hand, and the Company or any of its subsidiaries, on the other hand, exists
or will exist prior to the Merger that (a) was issued or acquired at a discount,
or (b) will be settled, as a result of the Merger, at a discount. No
"installment obligation" (as the quoted term is defined for purposes of Section
453B of the Code) between Compass or any of its subsidiaries, on the one hand,
and the Company or any of its subsidiaries, on the other hand, exists or will
exist prior to the Merger that will be extinguished as a result of the Merger.
SECTION 4.9 Representations Not Misleading. No representation or
warranty by Compass in this Agreement, nor any statement or exhibit furnished to
the Company or the Bank under and pursuant to, or in anticipation of this
Agreement, contains or will contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements contained herein
or
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therein, in light of the circumstances in which they were made, not misleading.
ARTICLE V.
COVENANTS OF THE COMPANY
SECTION 5.1 Affirmative Covenants of the Company. For so long as
this Agreement is in effect, the Company shall, and shall use its best efforts
to cause its Subsidiaries, including the Bank (collectively, the "Acquired
Companies") to, from the date of this Agreement to the Closing, except as
specifically contemplated by this Agreement:
(a) operate and conduct the businesses of the Acquired Companies in
the ordinary course of business and consistent with prudent banking practices;
(b) preserve intact the Acquired Companies' corporate existence,
business organization, assets, licenses, permits, authorizations, and business
opportunities;
(c) comply with all material contractual obligations applicable to
the Acquired Companies' operations;
(d) maintain all the Acquired Companies' properties in good repair,
order and condition, reasonable wear and tear excepted, and maintain the
insurance coverages described in Schedule 3.19 (which shall list all Property
insured by such coverages) or obtain comparable insurance coverages from
reputable insurers which, in respect to amounts, types and risks insured, are
adequate for the business conducted by the Acquired Companies and consistent
with the existing insurance coverages;
(e) in good faith and in a timely manner (i) cooperate with Compass
and Compass Texas in satisfying the conditions in this Agreement, (ii) assist
Compass and Compass Texas in obtaining as promptly as possible all consents,
approvals, authorizations and rulings, whether regulatory, corporate or
otherwise, as are necessary for Compass and Compass Texas and the Company (or
any of them) to carry out and consummate the transactions contemplated by this
Agreement, including all consents, approvals and authorizations required by any
agreement or understanding existing at the Closing between the Company and any
governmental agency or other third party, (iii) furnish information concerning
the Acquired Companies not previously provided to Compass required for inclusion
in any filings or applications that may be necessary in that regard and (iv)
perform all acts and execute and deliver all documents necessary to cause the
transactions contemplated by this Agreement to be consummated at the earliest
possible date;
(f) timely file with the OTS, the TSLD, and the FDIC, all financial
statements and other reports required to be so filed by
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any of the Acquired Companies and to the extent permitted by applicable law,
promptly thereafter deliver to Compass copies of all financial statements and
other reports required to be so filed;
(g) comply in all material respects with all applicable laws and
regulations, domestic and foreign;
(h) promptly notify Compass upon obtaining knowledge of any default,
event of default or condition with which the passage of time or giving of notice
would constitute a default or an event of default under the Company Loan
Documents and promptly notify and provide copies to Compass of any material
written communications concerning the Company Loan Documents;
(i) between the date of this Agreement and Closing, promptly give
written notice to Compass upon obtaining knowledge of any event or fact that
would cause any of the representations or warranties of the Company contained in
or referred to in this Agreement to be untrue or misleading in any material
respect;
(j) deliver to Compass a list (Schedule 5.1(j)), dated as of the
Effective Time, showing (i) the name of each bank or institution where the
Acquired Companies have accounts or safe deposit boxes, (ii) the name(s) in
which such accounts or boxes are held and (iii) the name of each person
authorized to draw thereon or have access thereto;
(k) deliver to Compass a list (Schedule 5.1(k)), dated as of the
Effective Time, showing all liabilities and obligations of the Acquired
Companies, except those arising in the ordinary course of their respective
businesses, incurred since the Balance Sheet Date, certified by an officer of
Company;
(l) promptly notify Compass of any material change or inaccuracies in
any data previously given or made available to Compass or Compass Texas pursuant
to this Agreement; and
(m) provide access, to the extent that the Company or the Bank have
the right to provide access, to any or all Property (as defined in Section 3.23)
so as to enable Compass to physically inspect any structure or components of any
structure on such Property, including without limitation surface and subsurface
testing and analyses.
SECTION 5.2 Negative Covenants of the Company. Except with the
prior written consent of Compass or as otherwise specifically permitted by this
Agreement, the Company will not and will use its best efforts not to permit the
Bank, or any other Subsidiary of the Company, to, from the date of this
Agreement to the Closing:
(a) make any amendment to its articles of incorporation or
association or bylaws;
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(b) make any change in the methods used in allocating and charging
costs, except as may be required by applicable law, regulation or GAAP and after
notice to Compass;
(c) make any change in the number of shares of the capital stock
issued and outstanding, or issue, reserve for issuance, grant, sell or authorize
the issuance of any shares of its capital stock or subscriptions, options,
warrants, calls, rights or commitments of any kind relating to the issuance or
sale of or conversion into shares of its capital stock; provided that the
Company shall not be restricted from issuing shares of its Common Stock to
current option holders of the Company upon the exercise of their stock options;
(d) contract to create any obligation or liability (absolute,
accrued, contingent or otherwise) except in the ordinary course of business and
consistent with prudent banking practices;
(e) contract to create any mortgage, pledge, lien, security interest
or encumbrances, restrictions, or charge of any kind (other than statutory liens
for which the obligations secured thereby shall not become delinquent), except
in the ordinary course of business and consistent with prudent banking
practices;
(f) cancel any debts, waive any claims or rights of value or sell,
transfer, or otherwise dispose of any of its material properties or assets,
except in the ordinary course of business and consistent with prudent banking
practices;
(g) sell any real estate owned as of the date of this Agreement or
acquired thereafter, which real estate qualifies as "other real estate owned"
under accounting principles applicable to it, except in the ordinary course of
business and consistent with prudent banking practices and applicable banking
laws and regulations;
(h) dispose of or permit to lapse any rights to the use of any
material trademark, service mark, trade name or copyright, or dispose of or
disclose to any person other than its employees any material trade secret not
theretofore a matter of public knowledge;
(i) except as set forth on Schedule 3.10 and except for regular
salary increases granted in the ordinary course of business within the Company
or the Bank's 1997 budget and consistent with prior practices, grant any
increase in compensation or directors' fees, or pay or agree to pay or accrue
any bonus or like benefit to or for the credit of any director, officer,
employee or other person or enter into any employment, consulting or severance
agreement or other agreement with any director, officer or employee, or adopt,
amend or terminate any Employee Benefit Plan or change or modify the period of
vesting or retirement age for any participant of such a plan;
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(j) declare, pay or set aside for payment any dividend or other
distribution or payment in respect of shares of its capital stock, except for
dividends from the Bank to the Company permitted by Section 6.12 and except for
quarterly dividends consistent with past practice;
(k) except through settlement of indebtedness, foreclosure, the
exercise of creditors' remedies or in a fiduciary capacity, acquire the capital
stock or other equity securities or interest of any person;
(l) make any capital expenditure or a series of expenditures of a
similar nature in excess of $50,000 in the aggregate, provided that the Bank may
continue the construction and improvement of the Bank's new South Austin branch
office, the relocated Medical Center branch office, the Barton Creek Mall branch
office and the construction of presently committed ATM facilities pursuant to
the Company's present plans;
(m) make any income tax or franchise tax election or settle or
compromise any federal, state, local or foreign income tax or franchise tax
liability, or, except in the ordinary course of business consistent with prudent
banking practices, make any other tax election or settle or compromise any other
federal, state, local or foreign tax liability;
(n) except for negotiations and discussions between the parties
hereto relating to the transactions contemplated by this Agreement or as
otherwise permitted hereunder, enter into any transaction, or enter into, modify
or amend any contract or commitment other than in the ordinary course of
business and consistent with prudent banking practices;
(o) except as contemplated by this Agreement, adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization, or other reorganization or business combination
of the Company or the Bank;
(p) issue any certificates of deposit except in the ordinary course
of business and in accordance with prudent banking practices;
(q) make any investments except in the ordinary course of business
and in accordance with prudent banking practices;
(r) modify any outstanding loan, make any new loan, or acquire any
loan participation, unless such modification, new loan, or participation is made
in the ordinary course of business and in accordance with prudent banking
practices;
(s) sell or contract to sell any part of the Bank premises;
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(t) change any fiscal year or the length thereof;
(u) take or agree to take any action that would prevent Compass from
accounting for the business combination to be effected by the Merger as a
pooling of interests, including, without limitation, any action inconsistent
with the provisions of Exhibit C hereto; or
(v) enter into any agreement, understanding or commitment, written or
oral, with any other person which is in any manner inconsistent with the
obligations of the Company and its directors and the Bank under this Agreement
or any related written agreement. Nothing contained in this Section 5.2 or in
Section 5.1 is intended to influence the general management or overall
operations of the Company or the Bank in a manner not permitted by applicable
law and the provisions thereof shall automatically be reduced in compliance
therewith.
ARTICLE VI.
ADDITIONAL AGREEMENTS
SECTION 6.1 Access To, and Information Concerning, Properties and
Records. During the pendency of the transactions contemplated hereby, the
Company shall, to the extent permitted by law, give Compass, its legal counsel,
accountants and other representatives full access, during normal business hours,
throughout the period prior to the Closing, to all of the Company's and the
Bank's properties, books, contracts, commitments and records, permit Compass to
make such inspections (including without limitation physical inspection of the
surface and subsurface of any property thereof and any structure thereon) as
they may require and furnish to Compass during such period all such information
concerning the Company and the Bank and their affairs as Compass may reasonably
request. In the event this Agreement is terminated pursuant to the provisions
of Article VIII, upon the written request of the Company, Compass agrees to
destroy or return to the Company all copies of such confidential information.
Compass acknowledges and agrees that the information provided by the Company and
the Bank is subject to the terms of that confidentiality letter agreement
("Confidentiality Agreement") dated September 25, 1995 between Compass Banks of
Texas, Inc. and the Company, and by the execution and delivery of this
Agreement, Compass ratifies, confirms and fully adopts the terms of the
Confidentiality Agreement.
SECTION 6.2 Filing of Regulatory Approvals. As soon as reasonably
practicable (but in no event later than 30 days from the date of this Agreement
provided the Company has provided to Compass all necessary information within 10
days of the date of the information request delivered to the Company), Compass
shall file all notices and applications to the FRB, the OTS, the Commissioner,
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the TSLD and the FDIC which Compass deems necessary or appropriate to complete
the transactions contemplated herein, including the merger of the Bank and
Compass Bank, Houston, Texas, a Texas banking corporation and indirect wholly-
owned subsidiary of Compass ("Compass Bank"). Compass will deliver to the
Company, and the Company will deliver to Compass, copies of all non-confidential
portions of any such applications.
SECTION 6.3 Miscellaneous Agreements and Consents. Subject to the
terms and conditions of this Agreement, Compass and the Company agree to use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper, or advisable under applicable
laws and regulations to consummate and make effective, as soon as practicable
after the date hereof, the transactions contemplated by this Agreement. Compass
and the Company shall use their respective best efforts to obtain or cause to be
obtained consents of all third parties and governmental and regulatory
authorities necessary or desirable for the consummation of the transactions
contemplated herein.
SECTION 6.4 Best Good Faith Efforts. All parties hereto agree that
the parties will use their best good faith efforts to secure all regulatory
approvals necessary to consummate the Merger, the effectiveness of the
Registration Statement and other transactions provided herein and to satisfy the
other conditions to Closing contained herein.
SECTION 6.5 Acquisition Proposals. The Company and the Bank will
not, and will use their best efforts to cause their respective directors,
officers, financial advisors, legal counsel, accountants and other agents and
representatives (for purposes of this Section 6.5 only, being referred to as
"affiliates") not to, initiate, solicit or encourage, directly or indirectly, or
take any other action to facilitate any inquiries or the making of any proposal
with respect to, engage or participate in negotiations concerning, provide any
nonpublic information or data to or have any discussions with any person other
than a party hereto or their affiliates relating to any acquisition, tender
offer (including a self-tender offer), exchange offer, merger, consolidation,
acquisition of beneficial ownership of or the right to vote securities of such
entity or any of its subsidiaries, dissolution, business combination, purchase
of all or any significant portion of the assets or any division of, or any
equity interest in, such entity or any Subsidiary, or similar transaction other
than the Merger (such proposals, announcements, or transactions being referred
to as "Acquisition Proposals"). Notwithstanding the preceding sentence, to the
extent its Board of Directors determines it is required to do so in the exercise
of its fiduciary duties to the Company's shareholders under applicable law as so
advised in writing by independent counsel, the Company and the Bank, and their
affiliates, may engage and participate in negotiations concerning,
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provide nonpublic information or data to and have discussions with any person or
their affiliates relating to an Acquisition Proposal may take or disclose to the
Company's stockholders a position with respect to a tender offer by a third
party pursuant to Rules 14D-9 and 14e-2(a) promulgated under the Exchange Act
and may make such disclosures to the Company's stockholders that, in the
judgment of the Board of Directors with the written advice of independent
counsel, is required under applicable law. The Company and the Bank will
promptly notify Compass orally and in writing if any such Acquisition Proposal
(including the terms thereof and identity of the persons making such proposal)
is received and furnish to Compass a copy of any written proposal.
SECTION 6.6 Public Announcement. Subject to written advice of
counsel with respect to legal requirements relating to public disclosure of
matters related to the subject matter of this Agreement, the timing and content
of any announcements, press releases or other public statements concerning the
proposal contained herein will occur upon, and be determined by, the mutual
consent of the Company and Compass. If a party is required by law to make any
such disclosure, it must first provide to the other party the content of the
proposed disclosure, the reasons that such disclosure is required by law, and
the time and place that the disclosure will be made.
SECTION 6.7 Employee Benefit Plans. Compass presently intends that,
after the Merger, Compass, the Company and the Bank will not make additional
contributions to the employee benefit plans that were sponsored by the Company
or the Bank immediately prior to the Merger. Compass agrees that the employees
of the Company and the Bank will be entitled to participate as newly hired
employees in the employee benefit plans and programs maintained for employees of
Compass and its affiliates, in accordance with the respective terms of such
plans and programs, and Compass shall take all actions necessary or appropriate
to facilitate coverage of the Company's and the Bank's employees in such plans
and programs from and after the Effective Time, subject to the following:
(i) Employee Welfare Benefit Plans and Programs: Each employee of the
Company and the Bank will be entitled to credit for prior service with the
Company and the Bank for all purposes under the employee welfare benefit plans
and other employee benefit plans and programs (other than those described in
subparagraph (ii) below and any stock option plans) sponsored by Compass to the
extent the Company or the Bank sponsored a similar type of plan which the
Company or Bank employee participated in immediately prior to the Effective
Time. Any preexisting condition exclusion applicable to such plans and programs
shall be waived with respect to any Bank or Company employee. For purposes of
determining each Company or Bank employee's benefit for the year in which the
Merger occurs under the Compass vacation program, any vacation taken by a
Company or Bank employee preceding the Effective Time for the year in which
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the Merger occurs will be deducted from the total Compass vacation benefit
available to such Company or Bank employee for such year. Compass agrees that
for purposes of determining the number of vacation days available with respect
to each Company or Bank employee for the year in which the Merger occurs, that
the number of vacation days for such year shall be determined under the Company
or Bank vacation policy in effect as of January 1, 1996. Compass further agrees
to credit each Company or Bank employee for the year during which such coverage
under the Compass welfare benefit plans begins, with any deductibles already
incurred during such year under the Company's or the Bank's group health plan.
(ii) Employee Pension Benefit Plans: Each Company and Bank employee
shall be entitled to credit for past service with the Company and Bank for the
purpose of satisfying any eligibility or vesting periods applicable to the
Compass employee pension benefit plans which are subject to Sections 401(a) and
501(a) of the Code (including, without limitation, the Compass 401(k)/ESOP
Plan). Notwithstanding the foregoing, Compass shall not grant any prior years of
service credit to employees of the Company and the Bank with respect to any
defined benefit pension plans sponsored (or contributed to) by Compass; instead,
Company and Bank employees shall be treated as newly hired employees of Compass
as of the date following the Effective Time for purposes of determining
eligibility, vesting and benefit accruals thereunder.
On or before, but effective as of the Effective Time, the Company and
the Bank may take such actions as may be necessary to cause each individual
employed by the Company and the Bank immediately prior to the Effective Time to
have a fully vested and nonforfeitable interest in such employee's account
balance under the 401(k) plan sponsored by the Company as of the Effective Time.
Upon request, Compass shall provide to the Company publicly available
copies of its employee benefit plans and related materials which are available
to employees of Compass at large.
SECTION 6.8 Merger of Bank. Compass presently intends to cause the
Bank to merge into Compass Bank immediately after the Merger, and the Company
agrees to cause the Bank to execute documents and take actions (conditioned on
the Merger being effective) and otherwise cooperate with Compass during the time
the Merger transaction is pending in order to facilitate such merger of the Bank
into Compass Bank immediately after the Closing.
SECTION 6.9 Environmental Investigation; Right to Terminate
Agreement. (a) Compass and its consultants, agents and representatives, shall
have the right to the same extent that the Company and the Bank have such right,
but not the obligation or responsibility, to inspect any Property, including,
without limitation, for the purpose of conducting asbestos surveys and sampling,
and other environmental assessments and investigations
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("Environmental Inspections"). Compass' right to conduct Environmental
Inspections shall include the right to sample and analyze air, sediment, soil
and groundwater of any Property to the same extent that the Company or the Bank
have such right. Compass may conduct such Environmental Inspections at any time
subject to Section 6.9(d) below. Compass shall comply with applicable laws in
conducting such Environmental Inspections.
(b) The Company and the Bank shall cause to be performed by an
environmental consulting firm acceptable to Compass an environmental
investigation of any Property acquired, leased, foreclosed, managed or
controlled by the Company or the Bank between the date hereof and the Closing
Date, the scope and results of which shall be acceptable to Compass in its sole
discretion. Compass shall require that such environmental consulting firms
maintain a policy providing comprehensive general liability insurance coverage
in the minimum amount of $1,000,000 combined single limit.
(c) The Company and the Bank shall cause to be performed by an
environmental consulting firm acceptable to Compass an environmental
investigation of any Property in which the Company or the Bank acquires a
security interest between the date hereof and the Closing Date, the scope and
results of which shall be acceptable to Compass in its sole discretion and the
scope and results of which are equivalent to the policies of Compass with
respect to acquiring security interests on real or personal property.
(d) Compass shall notify the Company of any physical inspections of
Property which it intends to conduct, and the Company may place reasonable
restrictions on the time of such inspections. Upon Compass' notification to the
Company of the Property upon which it intends to conduct such physical
inspections, the Company and the Bank shall notify the owner of such Property
and use their best efforts to secure access to such Property for Compass. If,
as a result of any such Environmental Inspection, further investigation
("secondary investigation") including, without limitation, test borings, soil,
water and other sampling is deemed desirable by Compass, Compass shall notify
the Company of the Properties on which it intends to conduct a secondary
investigation on or prior to the 30th day after the date hereof. The Company
and the Bank will provide notification to owners of Property on which Compass
intends to conduct secondary investigations and will use their best efforts to
secure access to such property for Compass. Compass shall notify the Company of
any Properties that, in the sole discretion of Compass, are not acceptable and
require remediation on or prior to the 60th day after the date hereof.
(e) (1) With respect to any Controlled Property that Compass has
notified the Company is not acceptable and requires
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remediation, the Company shall promptly prepare a remediation plan acceptable to
Compass, and obtain approval of such remediation plan by the Texas Natural
Resource Conservation Commission or any other appropriate governmental authority
("Environmental Regulatory Authority") on or prior to the 240th day after the
date hereof ("Remediation Completion Date").
(2) With respect to any Collateral Property that Compass has notified
the Company is not acceptable and requires remediation, the Company agrees
promptly to, and shall cause the Bank to, add to its loan loss reserve the
lesser of (a) the written estimate of expenditures ("Remediation Estimate")
prepared by the environmental consultant engaged by Compass to perform the
Environmental Inspections, in connection with (i) additional assessment,
remediation, removal and/or monitoring (ii) correction of any violation of any
applicable Environmental Law, and (iii) preparing and obtaining approval by the
appropriate Environmental Regulatory Authority of remediation plans, or (b) the
outstanding balance of the loan or indebtedness secured by such Collateral
Property. If the expenditures set forth in clause (a) above would exceed 80% of
the outstanding balance of such loan or indebtedness, the Company will, and will
cause the Bank to, increase its loan loss reserve by the outstanding amount of
the loan or indebtedness.
(3) Notwithstanding the foregoing, and without limiting any rights of
Compass to terminate this Agreement, the Company shall not be obligated to incur
aggregate expenditures in excess of $150,000 in connection with additional
assessment, remediation or monitoring of any Property, preparing and obtaining
approval by the appropriate Environmental Regulatory Authority of remediation
plans with respect to Controlled Properties, and in connection with making
allocations to the Company's and the Bank's loan loss reserves.
(f) Each party hereto agrees to indemnify and hold harmless the other
party for any claims for damage to the Property or injury or death to persons in
connection with any Environmental Inspection or secondary investigation of the
Property to the extent such damage, injury or death is directly attributable to
the negligent actions or negligent omissions of such indemnifying party.
Compass shall have no liability or responsibility of any nature whatsoever for
the results, conclusions or other findings related to any Environmental
Inspection, secondary investigation or other environmental survey. If this
Agreement is terminated, then except as otherwise required by law, Compass shall
have no obligation to make any reports to any governmental authority of the
results of any Environmental Inspection, secondary investigation or other
environmental survey, but such reporting shall remain the responsibility of and
within the discretion of the Company. Compass shall have no liability to the
Company or its Subsidiaries (including the Bank) for making any report of such
results to any governmental authority.
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(g) Compass shall have the right to terminate this Agreement in the
following circumstances:
(i) the Company's material breach of any representation or
warranty set forth in Section 3.23,
(ii) the factual substance of any warranties set forth in Section
3.23 is not true and accurate in all material respects irrespective of the
knowledge or lack of knowledge of the Company;
(iii) the results of such Environmental Inspection, secondary
investigation or other environmental survey are unacceptable to Compass because
the Environmental Inspection, secondary investigation or other environmental
survey identifies violations or potential violations of Environmental Laws;
(iv) if the Environmental Inspection, secondary investigation or
other environmental survey identifies any past or present event, condition or
circumstance that, based on the estimates of the environmental professionals
referred to in this Section 6.9, may currently or in the future require (a)
expenditures by the Company, in connection with (1) investigation, remediation
or monitoring of any Controlled Property (including without limitation eventual
removal of asbestos-containing material), (2) preparing and obtaining approval
by the appropriate Environmental Regulatory Authority of remediation plans with
respect to Controlled Properties, (3) any violations of applicable Environmental
Laws, or (b) additions to loan loss reserve pursuant to Section 6.9(e), which
expenditures or additions to loan loss reserve individually or in the aggregate
may exceed $150,000;
(v) Compass is not permitted to conduct an Environmental
Inspection or secondary investigation of any Property to the extent it deems
appropriate;
(vi) If on or before the Remediation Completion Date,
a) for each Controlled Property identified by Compass as
unacceptable and requiring remediation, the Company does not deliver to Compass
written evidence acceptable to Compass that the Company has developed a
remediation plan approved by the applicable Environmental Regulatory Authority,
b) for each Collateral Property identified by Compass as
unacceptable and requiring remediation, the Company does not provide evidence
acceptable to Compass that the Company and the Bank increased their respective
loan loss reserves in accordance with Section 6.9(e).
(h) The Company agrees to make available to Compass and its
consultants, agents and representatives all documents and other material
relating to environmental conditions of the Property
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including, without limitation, the results of all other environmental
inspections and surveys. The Company also agrees that all engineers and
consultants who prepared or furnished such reports may discuss such reports and
information with Compass and shall be entitled to certify the same in favor of
Compass and its consultants, agents and representatives in such a manner which
will entitle Compass to rely upon such reports and make all other data available
to Compass and its consultants, agents and representatives. At the written
request of the Company, Compass agrees to provide the Bank with a copy of all
environmental reports prepared by its consultants as a result of the
Environmental Inspections. Unless otherwise required by law, Compass will keep
confidential the results of the environmental reports. Compass agrees to
provide the Company prior notice of any disclosures which notice shall state the
reason disclosure is required and the reason Compass is required to make the
disclosure.
SECTION 6.10 Proxies. The Company acknowledges that the persons
listed in Schedule 6.10 have agreed that they will vote the Shares owned by them
in favor of this Agreement and the transactions contemplated hereby, subject to
required regulatory approvals, and that they will retain the right to vote such
Shares during the term of this Agreement and have given Compass a proxy to vote
such Shares in favor of the Merger if they should fail to do so, pursuant to a
Voting Agreement and Irrevocable Proxy in substantially the form attached hereto
as Exhibit D.
SECTION 6.11 Cooperation on Texas Receipts. The Company and Compass
agree to cooperate in good faith and to use their best efforts, and the Company
agrees to take action reasonably requested by Compass, so as to cause the
Company not to have any Texas gross receipts, including dividends from the Bank,
for purposes of Texas franchise taxes after the date of incorporation of Compass
Texas.
SECTION 6.12 Exchange Agreement. Immediately prior to the Effective
Time, the Company and Compass agree to enter into, and Compass agrees to cause
Compass Texas to enter into, the Exchange Agreement with the Exchange Agent, or
if the Exchange Agent refuses to serve as exchange agent, such other exchange
agent as shall mutually agreed to by the Company and Compass.
SECTION 6.13 Employee Bonuses. Unless paid by the Bank on or prior
to the Effective Time, Compass agrees to cause to be paid to the employees of
the Bank the awards, if any, due such employees under the Bank's Incentive
Compensation Plan provided that such amounts are consistent with the prior year
awards and are based on the actual operating performance of the Bank without
considering the extraordinary terms related to the Merger and prorated through
the Effective Time.
SECTION 6.14 Director and Officer Insurance and Indemnification.
Compass agrees to permit the Company to obtain an
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extended reporting period (otherwise known as "tail coverage") under the
Company's existing director's and officer's liability policy; provided, however,
that the premium expense for such extended reporting period shall not exceed
$29,400. Compass agrees that all rights to indemnification that the directors
and officers of the Company and the Bank have pursuant to the Articles of
Incorporation or Association (and their respective Bylaws as of the date of this
Agreement) of the Company and the Bank shall survive the Merger and shall
continue in full force and effect. Nothing contained in this Section 6.14 shall
require Compass to indemnify any person who was a director or officer of the
Company or the Bank to a greater extent than the Company or the Bank is, as of
the date of this Agreement, required to indemnify any such person. The
indemnification provisions currently contained in the Articles of Incorporation
and Bylaws of the Company shall not be amended after the date hereof. This
Section 6.15 shall survive the Closing, is intended to benefit the Company and
each of the indemnified parties (each of whom shall be entitled to enforce this
Section 6.14 against the Company and Compass, as the case may be) and shall be
binding on all successors and assigns of Compass and the Company.
SECTION 6.15 Periodic Reports. Upon request, Compass agrees to
provide to the Company copies of its periodic reports filed under the Exchange
Act and shall make available to the Company, representatives of Compass to
respond to inquiries by the Company.
SECTION 6.16 Notice of Default. Each party will promptly give notice
to the other party of the occurrence of any event or the failure of any event to
occur that results in a breach of any representation or warranty by that party
contained herein or a failure by that party to comply with any covenant,
condition or agreement contained herein.
ARTICLE VII.
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 7.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger are
subject to the satisfaction or waiver of the following conditions prior to the
Effective Time:
(a) the receipt of regulatory approvals which approvals shall not
have imposed any condition or requirement which in the judgment of the party on
which it is imposed would adversely impact the economic or business benefits of
the transactions contemplated by this Agreement or otherwise would in the
judgment of Compass or the Company be so burdensome as to render inadvisable the
consummation of the Merger, and the expiration of any applicable waiting period
with respect thereto;
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(b) the Closing will not violate any injunction, order or decree of
any court or governmental body having competent jurisdiction;
(c) the approval of the Merger by the Company's shareholders entitled
to vote at the Shareholders' Meeting; and
(d) a registration statement covering the Compass Common Stock to be
issued in the Merger shall be effective under the Securities Act and any
applicable state securities or "blue sky" acts and no stop order suspending the
effectiveness of such registration statement shall be in effect and no
proceedings for such purpose, or any proceedings under the SEC or applicable
state securities authorities rules with respect to the transactions contemplated
hereby, shall be pending before or threatened by the SEC or any applicable state
securities or blue sky authorities.
SECTION 7.2 Conditions to the Obligations of Compass and Compass
Texas to Effect the Merger.
The obligations of Compass and Compass Texas to effect the Merger are
subject to the satisfaction or waiver of the following conditions prior to the
Effective Time:
(a) all representations and warranties of the Company shall be true
and correct in all material respects as of the date hereof (and except as
reflected by the Company on updated Schedules relating to intervening events)
and at and as of the Closing, with the same force and effect as though made on
and as of the Closing;
(b) the Company shall have performed in all material respects all
obligations and agreements and in all material respects complied with all
covenants and conditions, contained in this Agreement to be performed or
complied with by it prior to the Effective Time;
(c) there shall not have occurred a Material Adverse Effect with
respect to the Company or the Bank;
(d) the directors of the Company and the Bank shall have delivered to
Compass an instrument in the form of Exhibit I attached hereto dated the
Effective Time releasing the Company and the Bank from any and all claims of
such directors (except as to their deposits and accounts, and as to rights of
indemnification pursuant to the Articles of Incorporation or Association of the
Company and the Bank) and shall have delivered to Compass their resignations as
directors of the Company and the Bank;
(e) the officers of the Company and the Bank shall have delivered to
Compass an instrument in the form of Exhibit I attached hereto dated the
Effective Time releasing the Company and the Bank from any and all claims of
such officers (except as to
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deposits and accounts and accrued compensation permitted by their respective
agreements with the Company or the Bank, and as to rights of indemnification
pursuant to the Articles of Incorporation or Association of the Company and the
Bank);
(f) Compass shall have received the opinions of counsel to the
Company acceptable to it as to the matters set forth on Exhibit E attached
hereto;
(g) the holders of no more than 5% of the Shares shall have demanded
or be entitled to demand payment of the fair value of their shares as dissenting
shareholders;
(h) Compass shall have received a letter from KPMG Peat Marwick,
dated as of the Effective Time, to the effect that the Merger will qualify for
pooling-of-interests accounting treatment if closed and consummated in
accordance with this Agreement;
(i) there shall be no Company Indebtedness;
(j) Compass shall have received from holders of the Company's capital
stock receiving at least 40% of the total Merger Consideration a representation
that they have no plan or intention to sell or otherwise dispose of shares of
Compass Common Stock received pursuant to the Merger;
(k) Compass shall have received an opinion of counsel satisfactory to
it that the Merger will qualify as a reorganization under Section 368(a) of the
Code;
(l) the Company shall have delivered to Compass a schedule of all
transactions in the capital stock (or instruments exercisable for or convertible
into capital stock) of the Company of which the Company has knowledge from and
including the date of this Agreement through the Effective Time;
(m) Compass shall have determined, in its sole judgment, that the
liabilities and obligations set forth on Schedule 5.1(k) do not have a Material
Adverse Effect;
(n) all warrants, options, rights, convertible debentures or other
securities entitling the holder thereof to acquire Shares shall have been
exercised prior to the Effective Time;
(o) Douglas B. Kadison, Paul Antrim and Charles Nichols shall have
entered into retention bonus, employment confidentiality agreement with Compass
Bank, or one of its Affiliates, in substantially the form of Exhibit F, attached
hereto and shall have terminated their existing employment agreements with the
Bank; and
(p) Compass shall have received certificates dated the Closing
executed by the Chairman of the Board of the Company and by
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the Chairman of the Board of the Bank, and the Secretary or Cashier of the
Company and the Bank, respectively, certifying in such reasonable detail as
Compass may reasonably request, to the effect described in Sections 7.2(a), (b),
(c), (g), (i) and (n).
SECTION 7.3 Conditions to the Obligations of the Company to Effect
the Merger. The obligations of the Company to effect the Merger are subject to
the satisfaction or waiver of the following conditions prior to the Effective
Time:
(a) all representations and warranties of Compass shall be true and
correct in all material respects as of the date hereof and at and as of the
Closing, with the same force and effect as though made on and as of the Closing;
(b) Compass and Compass Texas shall have performed in all material
respects all obligations and agreements and in all material respects complied
with all covenants and conditions contained in this Agreement to be performed or
complied with by either of them prior to the Effective Time; and
(c) the Company shall have received the opinion of counsel to Compass
and Compass Texas acceptable to it, as to the matters set forth on Exhibit G
attached hereto;
(d) the Company and the Bank shall have delivered to the directors of
the Company and the Bank an instrument in the form of Exhibit J attached hereto
dated the Effective Time releasing such directors from any and all claims of the
Company and the Bank (except as to indebtedness or other contractual
liabilities, and as to rights of indemnification pursuant to the Articles of
Incorporation or Association of the Company and the Bank); provided, however,
that such releases shall not release an action against such directors by Compass
or Compass Texas in connection with the transactions contemplated by this
Agreement; and
(e) the Company shall have received certificates dated the Closing,
executed by an appropriate officers of Compass and Compass Texas, respectively,
certifying, in such detail as the Company may reasonably request, to the effect
described in Sections 7.3(a) and (b).
ARTICLE VIII.
TERMINATION; AMENDMENT; WAIVER
SECTION 8.1 Termination. This Agreement may be terminated and the
Merger contemplated hereby may be abandoned at any time notwithstanding approval
thereof by the shareholders of the Company, but prior to the Effective Time:
(a) by mutual written consent duly authorized by the Boards of
Directors of Compass and the Company;
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(b) by Compass (i) if Compass learns or becomes aware of a state of
facts or breach or inaccuracy of any representation or warranty of the Company
contained in Article III which constitutes a Material Adverse Effect which
breach has not been cured within 30 days of the notice of such breach by Compass
to the Company; (ii) pursuant to Section 6.9(g)(i) and (ii); (iii) pursuant to
Section 6.9(g)(iii), (iv), (v) and (vi) on or before the 60th day from the date
of this Agreement, but not thereafter; (iv) if there shall have been a breach of
Section 6.5; (v) if any of the conditions to Closing contained in Section 7.1 or
7.2 are not satisfied or waived in writing by Compass; or (vi) pursuant to
Section 1.6(b);
(c) by the Company (i) if the Company learns or becomes aware of a
state of facts or breach or inaccuracy of facts or breach or inaccuracy of any
representation or warranty of Compass contained in Article IV which constitutes
a Material Adverse Effect which breach has not been cured within 30 days of the
notice of such breach by the Company to Compass, (ii) if the conditions to
Closing contained in Section 7.1 or 7.3 are not satisfied or waived in writing
by the Company, or (iii) pursuant to Section 1.6(b);
(d) by Compass or the Company if the Effective Time shall not have
occurred on or before the April 1, 1997 or such later date agreed to in writing
by Compass and the Company provided, however, that such April 1, 1997 date shall
be extended by a period of time equal to the number of days in which (i) a
protest has been filed under the Community Reinvestment Act and is not resolved
(including regulatory approvals and any waiting periods), or (ii) the SEC delays
the effectiveness of the Proxy Statement; provided, however, that any such
extension shall not go beyond July 1, 1997;
(e) by Compass or the Company if any court of competent jurisdiction
in the United States or other United States (federal or state) governmental body
shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have been final and nonappealable;
(f) by Compass or the Company if (i) any regulatory authority denies
approval of the Merger, or (ii) the shareholders of the Company do not approve
this Agreement and the Merger at the Shareholders' Meeting;
(g) by Compass if the Board of Directors of the Company shall have
withdrawn or modified in any manner its approval or recommendation of this
Agreement or the Merger, or shall have resolved to do the same; or
(h) the Company if it shall receive any Acquisition Proposal after the
date hereof from a third party or parties and the Board of Directors of the
Company shall have received a written opinion from independent legal counsel to
the effect that, and the Board of
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Directors shall have determined in good faith in the exercise of its fiduciary
duties that, the Company is required to pursue such Acquisition Proposal;
provided, however that the Company may only terminate this Agreement pursuant to
this clause if it simultaneously with such termination delivers to Compass the
termination fee provided for in Section 8.5 hereof.
SECTION 8.2 Effect of Termination. In the event of the termination
and abandonment of this Agreement pursuant to Section 8.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party or its directors, officers or shareholders, other than the
provisions of Sections 6.9, 8.2, 8.5, 9.1, 10.1 and 10.8. Nothing contained in
this Section 8.2 shall relieve any party from liability for any breach of this
Agreement.
SECTION 8.3 Amendment. (a) To the extent permitted by applicable
law, this Agreement may be amended by action taken by or on behalf of the Board
of Directors of the Company, Compass and, if required, Compass Texas at any time
before or after adoption of this Agreement by the shareholders of the Company
but, after any submission of this Agreement to such shareholders for approval,
no amendment shall be made which reduces the Merger Consideration or which
materially and adversely affects the rights of the Company's shareholders
hereunder without any required approval of such shareholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of all
the parties.
(b) The parties hereto hereby agree to enter into an amendment of this
Agreement for the purpose of adding Compass Texas as a party hereto, which
amendment shall be made prior to any submission of this Agreement to
shareholders of the Company for their approval. As a condition to the Company's
entry into such an amendment, Compass Texas shall deliver to the Company a
certificate in substantially the form of Exhibit H attached hereto.
SECTION 8.4 Extension; Waiver. At any time prior to the Effective
Time, the parties may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document, certificate or writing delivered pursuant hereto, or (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
SECTION 8.5 Termination Fee. If the Company either (a) violates its
obligations set forth in Section 6.5 hereof and this Agreement is thereafter
terminated pursuant to Section 8.1(b)(iv), or (b) prior to termination of this
Agreement receives any Acquisition Proposal and this Agreement is thereafter
terminated
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pursuant to Sections 8.1(g) or 8.1(h) as a result of receipt of such Acquisition
Proposal, then the Company shall pay to Compass an aggregate fee of $2,000,000
in cash at the time of such termination.
ARTICLE IX.
SURVIVAL
SECTION 9.1 Survival of Representations and Warranties. The parties
hereto agree that all of their respective representations and warranties
contained in this Agreement shall not survive after the Effective Time.
ARTICLE X.
MISCELLANEOUS
SECTION 10.1 Expenses. (a) All costs and expenses incurred in
connection with the transactions contemplated by this Agreement, including
without limitation, attorneys' fees, accountants' fees, other professional fees
and costs related to expenses of officers and directors of the Company and the
Bank, shall be paid by the party incurring such costs and expenses; provided,
however, without the consent of Compass, which consent shall not be unreasonably
withheld, all such costs and expenses incurred by the Company and the Bank shall
not exceed $150,000. Compass shall be responsible for and shall pay all filing
fees, printing expenses, exchange agent fees and expenses, the costs of
environmental reports pursuant to Section 6.9, and "blue sky" fees and expenses.
Each party hereto hereby agrees to and shall indemnify the other parties hereto
against any liability arising from any such fee or payment incurred by such
party.
(b) In recognition of the significant expenditure of management time
and resources and substantial out-of-pocket expenses incurred by Compass and its
Affiliates in connection with the negotiation of this Agreement and the
investigation of the transactions contemplated hereby, and in light of the
difficulty in calculating the value of such management time, resources and other
expenses and due to the fact that the Articles of Incorporation of the Company
require approval of this transaction by 80% of the shares entitled to vote, the
Company agrees to pay Compass 40,000 shares of Company Common Stock and the
Company shall use its best efforts to promptly register such shares with the SEC
or the OTS as applicable, in the event that the Company's shareholders do not
approve the Merger.
SECTION 10.2 Brokers and Finders. Except as set forth on Schedule
10.2, all negotiations on behalf of Compass and the Company relating to this
Agreement and the transactions
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contemplated by this Agreement have been carried on by the parties hereto and
their respective agents directly without the intervention of any other person in
such manner as to give rise to any claim against Compass, Compass Texas, the
Company or the Bank for financial advisory fees, brokerage or commission fees,
finder's fees or other like payment in connection with the consummation of the
transactions contemplated hereby.
SECTION 10.3 Entire Agreement; Assignment. This Agreement and the
Confidentiality Agreement (a) constitute the entire agreement among the parties
with respect to the subject matter hereof and supersede all other prior
agreements and understandings, both written and oral, among the parties or any
of them with respect to the subject matter hereof, and (b) shall not be assigned
by operation of law or otherwise, provided that Compass may assign its rights
and obligations or those of Compass Texas to any direct or indirect, wholly-
owned, subsidiary of Compass, but no such assignment shall relieve Compass of
its obligations hereunder if such assignee does not perform such obligations.
SECTION 10.4 Further Assurances. From time to time as and when
requested by Compass or its successors or assigns, the Company, the officers and
directors of the Company, or the Bank, shall execute and deliver such further
agreements, documents, deeds, certificates and other instruments and shall take
or cause to be taken such other actions, including those as shall be necessary
to vest or perfect in or to confirm of record or otherwise the Company's title
to and possession of, all of its property, interests, assets, rights,
privileges, immunities, powers, franchises and authority, as shall be reasonably
necessary or advisable to carry out the purposes of and effect the transactions
contemplated by this Agreement.
SECTION 10.5 Enforcement of the Agreement. The parties hereto agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
SECTION 10.6 Severability. The invalidity or unenforceability of
any provision of this Agreement shall not affect the validity or enforceability
of any other provisions of this Agreement, which shall remain in full force and
effect.
SECTION 10.7 Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be deemed to have
been duly given when delivered if in person, by cable, telegram or telex or by
telecopy, or five
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business days after mailing if delivered by registered or certified mail
(postage prepaid, return receipt requested) to the respective parties as
follows:
if to Compass or Compass Texas:
D. Paul Jones, Jr.
Chairman and Chief Executive Officer
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Telecopy No.: (205) 933-3043
Charles E. McMahen
Chairman and Chief Executive Officer
Compass Banks of Texas, Inc.
24 Greenway Plaza
Houston, Texas 72046
Telecopy No.: (713) 993-8500
with copies to:
Daniel B. Graves
Associate General Counsel
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Telecopy No.: (205) 933-3043
and
Annette L. Tripp
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
3400 Texas Commerce Tower, 600 Travis
Houston, Texas 77002
Telecopy No.: (713) 223-3717
if to the Company:
Douglas B. Kadison
Chairman of the Board and Chief Executive Officer
Horizon Bancorp, Inc.
5800 North Mopac Boulevard
Austin, Texas 78731
Telecopy No.: (512) 371-9498
with a copy to:
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Jack A. Selman
Selman & Munson
1000 Franklin Plaza, Tenth Floor
111 Congress Avenue
Austin, Texas 78701
Telecopy No.: (512) 505-5956
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
SECTION 10.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, regardless of the
laws that might otherwise govern under applicable principles of conflicts of
laws thereof, except to the extent that the GCL governs aspects of the Merger.
SECTION 10.9 Descriptive Headings. The descriptive headings are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 10.10 Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 10.11 Counterparts. 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.
SECTION 10.12 Incorporation by References. Any and all schedules,
exhibits, annexes, statements, reports, certificates or other documents or
instruments referred to herein or attached hereto are incorporated herein by
reference hereto as though fully set forth at the point referred to in the
Agreement.
SECTION 10.13 Certain Definitions.
(a) "Subsidiary" shall mean, when used with reference to an entity, any
corporation, a majority of the outstanding voting securities of which are owned
directly or indirectly by such entity or any partnership, joint venture or other
enterprise in which any entity has, directly or indirectly, any equity interest.
(b) "Material Adverse Effect" shall mean any material adverse
circumstance, event or series of events with respect to the financial condition,
assets, liabilities (absolute, accrued, contingent or otherwise), reserves,
business or results of
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operations of the Company and the Bank taken as a whole (or when the reference
is to Compass, to Compass and its Subsidiaries, taken as a whole).
(c) "Environmental Laws" shall mean all federal, state and local laws,
ordinances, rules, regulations, guidance documents, directives, and decisions,
interpretations and orders of courts or administrative agencies or authorities,
relating to the release, threatened release, recycling, processing, use,
handling, transportation treatment, storage, disposal, remediation, removal,
inspection or monitoring of Polluting Substances or protection of human health
or safety or the environment (including, without limitation, wildlife, air,
surface water, ground water, land surface, and subsurface strata), including,
without limitation, the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, as amended ("SARA"), the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), Hazardous and Solid Waste Amendments
of 1984, as amended ("HSWA"), the Hazardous Materials Transportation Act, as
amended ("HMTA"), the Toxic Substances Control Act ("TSCA"), Occupational Safety
and Health Act ("OSHA"), Federal Water Pollution Control Act, Clean Air Act, the
EGA, and any and all regulations promulgated pursuant to any of the foregoing.
(d) "Polluting Substances" shall mean those substances included within the
statutory or regulatory definitions, listings or descriptions of "pollutant,"
"contaminant," "toxic waste," "hazardous substance," "hazardous waste," "solid
waste," or "regulated substance" pursuant to CERCLA, SARA, RCRA, HSWA, HMTA,
TSCA, OSHA, and/or any other Environmental Laws, as amended, and shall include,
without limitation, any material, waste or substance which is or contains
explosives, radioactive materials, oil or any fraction thereof, asbestos, or
formaldehyde. To the extent that the laws or regulations of the State of Texas
establish a meaning for "hazardous substance," "hazardous waste," "hazardous
materials," "solid waste," or "toxic waste," which is broader than that
specified in any of CERCLA, SARA, RCRA, HSWA, HMTA, TSCA, OSHA or other
Environmental Laws such broader meaning shall apply.
(e) "Release" shall mean any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, disposing,
discarding or abandoning.
(f) "Knowledge" or "known" -- An individual shall be deemed to have
"knowledge" of or to have "known" a particular fact or other matter if (i) such
individual is actually aware of such fact or other matter, or (ii) a prudent
individual could be expected to discover or otherwise become aware of such fact
or other matter in the course of conducting a reasonably comprehensive
investigation concerning the truth or existence of such fact or other matter. A
corporation or bank shall be deemed to have "knowledge" of or to
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have "known" a particular fact or other matter if any individual who is serving,
or who has at any time served, as a director or officer (or in any similar
capacity) of the corporation or bank, has, or at any time had, knowledge of such
fact or other matter. The Company and the Bank are understood to have undertaken
a separate investigation in connection with the transactions contemplated hereby
to determine the existence or absence of facts or other matters in the statement
qualified as "known" by, or the "knowledge" of, the Company or the Bank.
SECTION 10.17 Time of Essence. Time is of the essence in the
performance of the obligations stated herein.
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
day and year first above written.
[SIGNATURE PAGE FOLLOWS]
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ATTEST: COMPASS BANCSHARES, INC.
By /s/ Daniel B. Graves By /s/ D. Paul Jones
---------------------- ------------------------------
Its: Its
ATTEST: HORIZON BANCORP, INC.
By /s/ Paul A. Antrim By /s/ Douglas B. Kadison
---------------------- ------------------------------
Its: Its
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EXHIBIT A
POOLING TRANSFER RESTRICTIONS AGREEMENT
---------------------------------------
This Pooling Transfer Restrictions Agreement (this "Agreement") is executed
and delivered this ____ day of December, 1996 by and between Compass Bancshares,
Inc. ("Compass"), Horizon Bancorp, Inc. (the "Company"), and the undersigned
shareholder of the Company (the "Shareholder").
WHEREAS, Compass and the Company entered into an Agreement and Plan of
Merger dated December ____, 1996 ("Merger Agreement") pursuant to which the
Company will be merged with an existing or to-be-formed subsidiary of Compass
(the "Merger"), and
WHEREAS, Compass has required as a condition to entering into the Merger
Agreement that the Company and the Shareholder and each other affiliate of the
Company deliver to Compass an agreement in substantially the form hereof,
NOW, THEREFORE, in consideration of Compass' agreement to enter into the
Merger Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned, intending to be
legally bound, hereby agree as follows:
1. The Shareholder agrees that he will not sell, pledge, transfer or
otherwise dispose of any shares of the Company's common stock, par value $0.01
per share ("Company Common Stock"), within 30 days prior to the Effective Time
(as defined in the Merger Agreement). The Shareholder further agrees that until
the publication of financial results covering at least 30 days of post-Merger
combined operations of the Company and Compass, he will not sell, pledge,
transfer or otherwise dispose of any shares of the Compass Common Stock to be
acquired by him in the Merger, except for pledges by the Shareholder of all or
part of such Shareholder's Compass Common Stock acquired in the Merger to secure
loans, provided the lender accepts any pledge of such Compass Common Stock
subject to the terms of this Agreement. The Shareholder further agrees that he
will not sell, pledge, transfer or otherwise dispose of any shares of the
Compass Common Stock to be acquired by him in the Merger except in a manner
which is consistent with any additional requirements for Compass' accounting for
the Merger as a pooling of interests, including without limitation any new
requirements imposed by the applicable provisions of the Securities Act of 1933,
the Securities Exchange Act of 1934, and the respective rules and regulations
thereunder.
2. The Shareholder further acknowledges and agrees that he will be subject
to Rule 145 promulgated by the Securities and Exchange Commission under the
Securities Act, and agrees not to transfer any Compass Common Stock received by
him in the Merger
<PAGE>
except in compliance with the applicable provisions of the Securities Act and
the respective rules and regulations thereunder.
3. The Shareholder agrees that the shares of Compass Common Stock to be
issued to him in the Merger will bear a restrictive transfer legend in
substantially the following form:
The shares represented by this certificate are subject to a Pooling
Transfer Restrictions Agreement dated December __, 1996 which restricts any
sale or other transfer of such shares prior to the public release by
Compass Bancshares, Inc. of 30 days of post-merger combined operations of
Horizon Bancorp, Inc. and Compass Bancshares, Inc. The issuer will furnish
to the record holder of this certificate, without charge, upon written
request to the issuer at its principal place of business, a copy of the
Pooling Transfer Restrictions Agreement.
Compass agrees to instruct its transfer agent to remove the restrictive legend
from any certificates evidencing shares subject hereto promptly following the
expiration of the transfer restrictions described in Section 1.
4. The Company agrees and the Shareholder acknowledges and agrees that
the Company will not permit the transfer of any shares of Company Common Stock
by the Shareholder or any other Company affiliate within 30 days prior to the
Effective Time.
5. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
6. Neither this Agreement nor any of the rights and obligations hereunder
may be assigned by any party hereto without the prior written consent of all of
the other parties. This Agreement shall be binding upon the parties' heirs,
distributees and assigns.
7. The parties hereto agree that if for any reason any of them shall have
failed to perform its obligations under this Agreement that damages may not be
an adequate remedy and any party hereto seeking to enforce this Agreement
against such non-performing party shall be entitled to specific performance and
injunctive and other equitable relief. The parties hereto further agree to
waive any requirement for the securing or posting of any bond in connection with
the obtaining of any such injunctive or other equitable relief. This provision
is without prejudice to any other rights that any party hereto may have against
any other party hereto for any failure to perform any of their respective
obligations under this Agreement. The failure by any party to perform his
obligations hereunder shall in no way affect the
2
<PAGE>
obligation of the other parties to perform their respective obligations
hereunder.
8. Time is of the essence to this Agreement, and to all obligations of
the parties hereto.
[SIGNATURE PAGE FOLLOWS]
3
<PAGE>
IN WITNESS WHEREOF, the undersigned set his hand effective as of the day
first written above.
COMPASS BANCSHARES, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
HORIZON BANCORP, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
_____________________________________
Signature of Shareholder
_____________________________________
Printed Name of Shareholder
4
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EXHIBIT B
EXCHANGE AGENT AGREEMENT
------------------------
This Exchange Agent Agreement, dated as of _____, 1997, is made and entered
into by and among Compass Bancshares, Inc., a Delaware corporation ("Compass"),
_____________________, a Delaware corporation ("Compass Texas"), Horizon
Bancorp, Inc., a Texas corporation ("Company"), and River Oaks Trust Company, a
Texas trust company ("Exchange Agent").
PREAMBLE:
Pursuant to the Agreement and Plan of Merger dated as of December __
("Merger Agreement") among Compass, Compass Texas and the Company, Compass Texas
shall, at the Effective Time, be merged into the Company. The name of the
surviving corporation shall be _________________ ("Surviving Corporation").
After the Effective Time, the outstanding shares of the Common Stock, par
value $0.01 per share (including for this purpose any shares of Common Stock
which can be acquired upon the exercise of any warrant, option, right,
convertible debt instrument or other security pursuant to which shares of Common
Stock may be obtained (collectively, "Derivative Securities")), of the Company
("Company Common Stock") shall solely represent, in the aggregate, the right to
payment by Compass of total Merger Consideration of __________ shares of Compass
common stock, par value $2.00 per share ("Compass Common Stock") (or cash in
lieu of fractional shares), subject to the rights of qualified dissenting
shareholders of the Company.
The Company has requested Compass to designate the Exchange Agent in
connection with the exchange (the "Exchange") of shares of Company Common Stock
for shares of Compass Common Stock, subject to the terms and conditions hereof
and of the Merger Agreement. The Exchange Agent will receive Company Common
Stock delivered for exchange pursuant to the terms of the Merger Agreement, and
will process such certificates representing Company Common Stock
("Certificates") and related documents. Compass desires that the Exchange Agent
act in such capacity.
NOW THEREFORE, in consideration of the premises and of the mutual
agreements and covenants contained herein, and other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties,
intending to be legally bound, hereby agree as follows:
<PAGE>
1. Appointment of Exchange Agent. River Oaks Trust Company is hereby
appointed as the Exchange Agent for payment of the Merger Consideration to
shareholders of the Company. Such appointment shall be in accordance with the
terms and conditions set forth herein.
2. Closing of Stock Transfer Books. At the Effective Time, the Company's
stock transfer books will be closed and no transfers shall be permitted.
3. Duties of Exchange Agent. The Exchange Agent is authorized and directed
to perform the following functions contemplated by the Merger Agreement and the
Letters of Transmittal (defined below):
(a) Distribution of Letters of Transmittal. The Exchange Agent shall mail
to the holders of record of Company Common Stock, by first class United States
mail, postage prepaid, copies of Letters of Transmittal, including Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9 in
substantially the form attached hereto as Exhibit A ("Letters of Transmittal"),
and return envelopes to the Exchange Agent, at the earliest practicable time
following the Effective Time. A form of Stock Assignment, Power of Attorney and
Lost Stock Certificate Affidavit will be provided to the Exchange Agent for use
by shareholders if necessary.
(b) Acceptance of Certificates.
(i) The Exchange Agent will examine the Letters of Transmittal,
Certificates and other documents and instruments delivered to the Exchange Agent
by or on behalf of holders tendering Company Common Stock and shall determine
whether (i) the Letters of Transmittal have been completed and executed
properly, and are accompanied by proper evidence of authority, (ii) Certificates
corresponding to the names of the registered holders, Certificate numbers and
the number of shares represented thereby with the information set forth in the
Company's shareholder and other records and which appear to be in negotiable,
good delivery form, properly endorsed or accompanied by stock powers with
transfer tax stamps or evidence of payment or exemption from transfer taxes
affixed (where required), and (iii) signatures are guaranteed (where required),
all in accordance with the terms and conditions of the Merger Agreement and the
Letters of Transmittal. The Exchange Agent shall accept Certificates which are
surrendered in accordance with the provisions of the Merger Agreement and
accompanied by the executed Letters of Transmittal. Such Certificates and
Letters of Transmittal shall only be accepted
2
<PAGE>
by the Exchange Agent and eligible for payment hereunder if they have been
properly executed and completed in accordance with the instructions contained in
the Letters of Transmittal and if the person or persons surrendering such
Certificates and Letters of Transmittal appears as a shareholder of record of
the number of shares surrendered on the list of shareholders supplied and
certified to the Exchange Agent by the Company ("Shareholder List") attached as
Exhibit B hereto. In the event the Exchange Agent shall have any questions as to
whether a Certificate and Letters of Transmittal have been properly executed and
completed or whether the Certificates have been surrendered by the holder of
record thereof, the Exchange Agent shall promptly refer such questions to
Compass for resolution by Compass and the Exchange Agent shall be able to rely
on the written instructions and decisions of any officer of Compass.
Determination of all questions as to the proper completion or execution of the
Letters of Transmittal or as to the proper form for transfer of the Certificates
for Company Common Stock shall be made by Compass together with its attorneys,
and such other persons as Compass shall designate, and such determinations shall
be final and binding; provided, however, that the rejection by Compass of any
Letters of Transmittal or Certificates deemed by Compass to be ineffective to
transfer the Certificates shall not affect the right of any shareholder in or to
his respective share of the Merger Consideration;
(ii) If any defect or irregularity appears to exist in connection with a
purported tender, the Exchange Agent will notify promptly the persons by whom
the tender was made and will return all documents delivered in connection
therewith or take such action as is necessary or advisable to cause such defect
or irregularity to be cured;
(iii) Tenders may be made only as set forth in the Letters of
Transmittal;
(iv) Letters of Transmittal, and facsimiles thereof submitted to the
Exchange Agent, shall be marked by the Exchange Agent's designated officers to
show the date and time of receipt and their review and acceptance thereof;
(v) At the close of business each Friday, the Exchange Agent shall
provide Compass and First National Bank of Boston, Compass' transfer agent and
registrar ("Transfer Agent") with a list of shareholders who have properly
tendered their Company Common Stock. In addition, the Exchange Agent shall
inform Compass in writing of the number of shares of Company
3
<PAGE>
Common Stock which have been properly tendered and the number which have been
improperly tendered to the Exchange Agent during the week then ended and on a
cumulative basis through that day. The Exchange Agent shall provide Compass such
other information concerning the Company Common Stock as it may reasonably
request. Such communications should be sent to:
Compass Bancshares, Inc.
701 South 20th Street
Birmingham, Alabama 35233
Attn: Michael A. Bean
Telephone No. (205) 558-5740
With a copy to: First National Bank of Boston
Post Office Box 1865
Boston, Massachusetts 02105
Attn: Janet Moor, Shareholder
Services Officer
Telephone No. (617) 575-2130
(c) Exchange Fund. In order to provide for payment of the Merger
Consideration in accordance with the terms of the Merger Agreement, Compass,
from time to time prior to or after the Effective Time, shall deposit or cause
to be deposited with the Exchange Agent cash in an amount sufficient to make
payments in lieu of fractional shares (the "Exchange Fund"). This Exchange Fund
shall not be used for any purpose except as provided by this Agreement.
(d) Compass Common Stock. Compass Texas and the Company shall jointly
advise the Exchange Agent as to the number of shares of Compass Common Stock to
be distributed to each shareholder which shall be calculated by Compass Texas
and the Company as follows:
(i) Company Common Stock. Each holder of Company Common Stock shall
receive Merger Consideration equal to ____________ shares of Compass Common
Stock for each share of Company Common Stock held immediately prior to the
Effective Time.
(ii) Fractional Shares. For each fractional share of Compass Common
Stock which would be delivered upon the surrender of Company Common Stock, each
holder of Stock shall receive cash in an amount equal to the product of such
fraction and $_____.
4
<PAGE>
As soon as practicable after acceptance of properly executed
Certificates and accompanying Letters of Transmittal in accordance with the
terms of paragraph 3(b) hereof, the Exchange Agent shall instruct and Compass
shall cause the Transfer Agent to issue and mail certificates representing
shares of Compass Common Stock to the shareholder surrendering such
certificates. The Exchange Agent shall promptly make the payments in lieu of
fractional shares out of the Exchange Fund upon surrender of the Certificates.
(e) Other Duties of Exchange Agent.
(i) The Exchange Agent shall have no obligation to make payment for
surrendered Certificates unless Compass shall have issued sufficient
Compass Common Stock or caused such stock to be issued and shall have
deposited or caused to be deposited in the Exchange Fund sufficient cash
with which to pay all amounts due and payable for such shares.
(ii) The Exchange Agent shall be regarded as having made no
representations or warranties as to the validity, sufficiency, value or
genuineness of any Certificates or the shares of Company Common Stock
represented thereby, and the Exchange Agent shall not be deemed to have
made any representations as to the value of such shares.
(iii) The Exchange Agent may rely on and shall be protected in acting
upon the written instructions of any officer of Compass or the Surviving
Corporation with respect to any matter relating to its actions or duties
hereunder; and the Exchange Agent shall be entitled to request further
instructions from Compass or the Surviving Corporation, as appropriate, and
to act in accordance therewith.
(iv) The Exchange Agent may consult attorneys satisfactory to the
Exchange Agent (including, without limitation, attorneys for Compass or the
Surviving Corporation) and the written advice and opinion of such attorneys
shall constitute full and complete authorization and protection in respect
of any action taken, suffered or omitted by it hereunder in good faith and
in accordance with such advice or opinion.
(v) The Exchange Agent shall take all other actions which it or
Compass deems necessary or appropriate under the terms of the Merger
Agreement, the Letters of Transmittal and under the customs and practices
normally applied to transactions of this type and appropriate to the proper
5
<PAGE>
transfer of the Company Common Stock and the proper maintenance of the
Company's and Compass' shareholder books and records. Following payment in
accordance with the terms hereof, the Exchange Agent shall forward to
Compass all documents received by it in connection with tenders of
Certificates (including Letters of Transmittal, telegrams, facsimile
transmissions or letters representing tenders made without concurrent
deposit of certificates) and the tendered Certificates prominently marked
"CANCELLED" on the front thereof, via Federal Express or other means
acceptable to Compass.
4. Alteration of Instructions. The Exchange Agent shall follow and act
upon any written amendments, modifications or supplements to these instructions
and upon any further instructions from Compass or the Surviving Corporation in
connection with the Merger Agreement or any of the transactions contemplated
thereby.
5. Indemnification of Exchange Agent. Compass and the Surviving
Corporation covenant and agree to indemnify the Exchange Agent and hold it
harmless against any loss, liability or expense it may incur in the absence of
negligence or bad faith on the part of the Exchange Agent arising out of or in
connection with the administration of its duties hereunder, including but not
limited to legal fees and other costs and expenses of defending or preparing to
defend against any claim or liabilities in connection with this Agreement.
6. Compensation for Services. Compass shall compensate the Exchange
Agent for its services hereunder.
7. Payment of Amounts Due Dissenting Shareholders. In the event that
qualified dissenting shareholders of the Company exercise the rights afforded
them under the Texas Business Corporation Act, such shareholders may be entitled
to payment of an amount other than the Merger Consideration. Any payment for
shares other than the Merger Consideration will be paid only upon the written
instructions of the Surviving Corporation. The Exchange Agent may request and
shall be provided additional funds from the Surviving Corporation in order to
make any required payment to dissenting shareholders, and the Exchange Agent
shall return to Compass any Merger Consideration which would have otherwise been
payable to such persons. The Exchange Agent shall rely on the instructions of
the Surviving Corporation as to all matters covered by this paragraph,
including, without limitation, the time and amount of payment to dissenting
shareholders.
6
<PAGE>
8. Unclaimed Funds. Any moneys or certificates deposited hereunder which
shall remain unclaimed by the holders of shares of Company Common Stock for a
period of six (6) months following the Effective Time shall, upon written
request of the Surviving Corporation, be returned to Compass, plus interest
earned on the cash portion thereof and the shareholders of Certificates not
theretofore presented to and accepted by the Exchange Agent shall look to
Compass only, and not the Exchange Agent, for the payment of any Merger
Consideration in respect of such Certificates.
9. Investment of Exchange Fund. At the direction of the Surviving
Corporation, the Exchange Agent shall invest portions of the Exchange Fund and
remit earnings thereon monthly to the Surviving Corporation, provided that all
such investments shall be in The Starburst Government Money Market Fund (the
"Fund"), managed by Compass Bank, an Alabama banking corporation and an
affiliate of Compass, or if for any reason the Fund is not available to the
Exchange Agent as an investment alternative, as otherwise directed by the
Surviving Corporation.
10. Amendment. Except as otherwise expressly provided herein, neither
this Agreement nor any provision hereof may be amended, modified, waived,
discharged or terminated except in a writing signed by all of the parties hereto
prior to the Effective Time or by Compass and the Exchange Agent after the
Effective Time; provided, however, that no amendment shall be made if such
modification shall reduce the amount of or eliminate the opportunity of any
shareholder to receive his share of the Merger Consideration contemplated by the
Merger Agreement.
11. Section Headings. The section headings used herein are for
convenience of reference only and shall not define or limit the provisions of
this Agreement.
12. GOVERNING LAW. THIS AGREEMENT AND THE APPOINTMENT OF THE EXCHANGE
AGENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF TEXAS AND SHALL INURE TO THE BENEFIT OF AND BE BINDING UPON THE SUCCESSORS
AND ASSIGNS OF THE PARTIES HERETO.
13. Notices. Notices under this Agreement shall be deemed given if made
in writing and sent via prepaid first-class United States mail, or by nationally
recognized overnight courier, to:
7
<PAGE>
If to Compass:
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Attn: Daniel B. Graves
Associate General Counsel
If to the Exchange Agent:
River Oaks Trust Company
6990 Portwest, Suite 170
Houston, Texas 77024
Attn: Stephen K. Brownlow
Senior Vice President and Trust Officer
If to the Company prior
to the Effective Time:
Horizon Bancorp, Inc.
5800 North Mopac Boulevard
Austin, Texas 78731
Attn: Douglas B. Kadison
Chairman, President, and Chief Executive Officer
If to Compass Texas or, following
the Effective Time, the
Surviving Corporation:
____________________________
c/o Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Attn: Daniel B. Graves
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15. Conflict. In the event the terms of this Agreement conflict with the
terms and provisions of the Merger Agreement, the terms and provisions of the
Merger Agreement shall be controlling.
16. Defined Terms. Capitalized terms not defined herein have the meanings
ascribed to them in the Merger Agreement.
[SIGNATURE PAGE FOLLOWS]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized appointed officers on the date first written
above.
COMPASS BANCSHARES, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
HORIZON BANCORP, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
RIVER OAKS TRUST COMPANY
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Exhibit A - Form of Letters of Transmittal
Exhibit B - Shareholder List
9
<PAGE>
EXHIBIT "A"
LETTER OF TRANSMITTAL
For Shares of Common Stock of
HORIZON BANCORP, INC.
Delivered Pursuant to the Agreement and Plan of Merger
dated as of December __, 1996
By Mail or Overnight Delivery Service:
River Oaks Trust Company
6990 Portwest, Suite 170
Houston, Texas 77024
Attention: Mr. Stephen K. Brownlow
DO NOT HAND DELIVER
DESCRIPTION OF SHARES SURRENDERED
---------------------------------
Based on its stock transfer records, Horizon Bancorp, Inc. (the "Company")
has listed below your name, address and the certificate numbers representing
your shares of Common Stock, par value $0.01 per share ("Shares"), of the
Company. If any of the listed information appears to be incorrect, please
notify Mr. Stephen K. Brownlow at (713) 867-1101 at once.
<TABLE>
<CAPTION>
=========================================================================
Name, Address and Social Security
Number of Registered Holders Certificate(s) Surrendered
- -------------------------------------------------------------------------
<S> <C> <C>
Total Number of
Certificate Shares Represented
Number(s) by Certificate(s)
- -------------------------------------------------------------------------
_______________________________ ______________ ___________________
Name ______________ ___________________
______________ ___________________
_______________________________
_______________________________
Address
_______________________________ Total Shares ___________________
Social Security Number
=========================================================================
</TABLE>
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Gentlemen:
I, as the registered holder of the above described Shares of the Company,
hereby tender to Compass Bancshares, Inc. ("Compass"), such Shares pursuant to
the Agreement and Plan of Merger dated as of December __, 1996 as amended ("the
Merger Agreement"), by and between Compass, _______________________ ("Compass
Texas"), and the Company. I hereby acknowledge receipt of the Proxy Statement
dated _________1996, which described the merger ("Merger") provided by the
Merger Agreement.
I represent and warrant to Compass and Compass Texas that I am the true and
lawful owner of the Shares, and have full capacity, power and authority to
exchange the Shares, free and clear of all liens, restrictions and encumbrances
of any kind whatsoever, and the Shares will not be subject to any adverse claim.
I understand that River Oaks Trust Company, as Exchange Agent for this exchange,
may require additional documentation, and I agree, upon request, to execute and
deliver any additional documents or instruments deemed by the Exchange Agent or
Compass reasonably necessary to complete the exchange of the Shares.
The authority conferred in this Letter of Transmittal shall not be affected
by, and shall survive, my death or incapacity, and any obligation I may have
hereunder shall be binding upon my successors, assigns, heirs, executors,
administrators, trustees in bankruptcy and personal and legal representatives.
I acknowledge that the tender of my Shares is irrevocable.
INSTRUCTIONS REGARDING ISSUANCE OF SHARES
If you wish to have the shares of Compass Common Stock to be issued
pursuant to the Merger Agreement in the name and at the address set forth above,
please sign and date this letter on page 3. If you wish to have the shares of
Compass Common Stock to be issued pursuant to the Merger Agreement in a name or
to an address other than the name and address specified above, please complete
the following section. You will be required to pay any transfer or other taxes
required by reason of the payment and delivery of Compass Common Stock to such
other person.
NEW CERTIFICATES TO BE ISSUED
IN A DIFFERENT NAME OR TO A DIFFERENT ADDRESS
If you are entitled to receive shares of Compass Common Stock and wish to
have certificates representing Compass Common Stock issued in a name or to an
address other than the name or address shown on your Company stock certificates,
please indicate the name and address of your assignee below:
Name and Address of Assignee
----------------------------
Name:______________________________ Taxpayer I.D. No. or
(Type or print full name) Social Security No.:______________________
Address:________________________________________________________________________
City, State, Zip Code:__________________________________________________________
<PAGE>
PLEASE SIGN AND DATE BELOW AS INDICATED
THEN PLEASE COMPLETE SUBSTITUTE FORM W-9
Signatures _________________________________
_________________________________
Dated _________________________, 1997
Name(s) _____________________________________________________________
(Please Print)
Capacity _________________________________
(Full Title)
Address _________________________________
_________________________________
(Include Zip Code)
Area Code and Telephone Number _____________________________
Tax Identification or Social Security Number _____________________________
_______________________________________________________________________________
GUARANTEE OF SIGNATURES
(Must be signed by registered holder(s) as name(s) appear on the certificate(s)
or by person(s) authorized to become registered holder(s) by certificate(s) and
documents transmitted. If signing is by an officer or a corporation, or by an
attorney, executor, administrator, trustee, guardian, agent or other person
acting in a fiduciary or representative capacity, please set forth full title.
See Instruction 1.)
Authorized Signature __________________________________
Name __________________________________
(Please Print)
Title __________________________________
Name of Firm __________________________________
Address __________________________________
__________________________________
(Include Zip Code)
Area Code and Telephone Number ________________________
Dated ____________________________, 1997
_______________________________________________________________________________
PLEASE COMPLETE SUBSTITUTE FORM W-9
IT IS THE LAST FORM IN THIS PACKAGE
_______________________________________________________________________________
3
<PAGE>
DO NOT WRITE IN SPACE BELOW
Date Received:_________________ By:_______________ Date:________________, 1997
<TABLE>
<CAPTION>
======================================================================================
Company Compass No. of
Shares Shares Accepted Stock Certificate Fractional Cash Check
Surrendered for Exchange Certificate Nos. No. issued Shares Paid No.
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
======================================================================================
</TABLE>
Accepted by:_______________ Checked By:________________ Date:____________, 1997
4
<PAGE>
LETTER OF TRANSMITTAL
INSTRUCTIONS
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; SIGNATURE
GUARANTEES. Please send all certificates for Shares to River Oaks Trust
Company, as Exchange Agent (the "Exchange Agent"), with the Letter of
Transmittal, or a facsimile thereof, fully completed and signed by you, the
registered holder(s). Compass retains the right to require that a signature on
the Letter of Transmittal and the Share certificates be guaranteed by an
Eligible Institution. An Eligible Institution is a member of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc. (the "NASD") or a commercial bank or trust company having an
office, branch or agency located in the United States. If Compass wishes to
have your signature guaranteed by an Eligible Institution, you will be notified
by separate letter.
If certificates are registered in the name of a person other than you,
the certificate(s) must be duly endorsed or accompanied by stock powers signed
by the registered holder and the Letter of Transmittal. If the Letter of
Transmittal is executed by an officer on behalf of a corporation or by an
executor, administrator, trustee, guardian, attorney, agent or other person
acting in a fiduciary or representative capacity, the Exchange Agent reserves
the right to require that proper documentary evidence of the authority of the
person executing the Letter of Transmittal. If the tendered certificates are
owned of record by two or more joint owners, each of you must sign the Letter of
Transmittal. Questions regarding such evidence of authority may be referred to
Mr. Stephen K. Brownlow, a representative of the Exchange Agent, at (713) 867-
1101.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES, THE LETTER OF TRANSMITTAL AND
ANY OTHER REQUIRED DOCUMENTS IS AT YOUR OPTION AND RISK. IF DELIVERY IS BY
MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
STRONGLY RECOMMENDED.
2. ISSUANCE OF COMPASS COMMON STOCK. You will receive the Compass
Common Stock for your Shares only after receipt and acceptance by the Exchange
Agent and Compass of all of the certificates representing your Shares, a
properly completed and executed Letter of Transmittal, and any other required
documents and upon processing of the documents by the Exchange Agent.
3. PAYMENT FOR FRACTIONAL SHARES. As provided in Section 1.6(c) of
the Merger Agreement, Compass will not issue any certificates of Compass Common
Stock for fractional shares. In lieu of issuing fractional shares, Compass will
pay to any Company shareholder entitled to receive a fractional share of Compass
Common Stock, a cash payment based on a price of $______ per share.
4. NO CONDITIONAL TENDERS; WAIVER OF NOTICE. No alternative,
conditional, irregular or contingent deliveries of Shares will be accepted. By
execution of the Letter of Transmittal or any manually signed facsimile thereof,
you waive any rights to receive any notice of the acceptance of your Shares for
exchange.
5. SIGNATURES ON LETTER OF TRANSMITTAL. In order for the Letter of
Transmittal to be properly signed by you, the signature must correspond exactly
with the name(s) as written on the face of the certificate(s).
If the Shares tendered hereby are owned of record by two or more joint
owners, all of you must sign the Letter of Transmittal.
If your Shares are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal as there are different registrations of certificates.
If the certificate(s) representing the Shares transmitted hereby are
registered in your name and the
5
<PAGE>
Letter of Transmittal is properly signed by you, no endorsements of certificates
or separate stock powers are required. In all other cases, the certificate(s)
representing the Shares transmitted hereby must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name(s) of the
registered holder(s) appear on the certificate(s), and if required, signature(s)
on such certificate(s) or stock power(s) must be guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any certificate or stock power is
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of corporation or other acting in a fiduciary or representative
capacity, such person should so indicate when signing, and the Exchange Agent
reserves the right to require proper evidence of their authority to so act.
6. IRREGULARITIES. All questions as to the validity, form,
eligibility, acceptance of and delivery of Shares and the issuance of Compass
Common Stock and the payment of cash in lieu of fractional shares will be
determined by Compass, which determination shall be final and binding. Compass
reserves the absolute right to reject any or all tenders determined by Compass
not to be in appropriate form or which would, in the opinion of Compass'
counsel, be unlawful. Compass also reserves the absolute right in its sole
discretion, to waive any of the conditions hereof, or any defect in any tender
with respect to any particular Shares of any particular shareholder, and
Compass' interpretations of the terms and conditions of the Merger Agreement and
these instructions shall be final and binding. The Exchange Agent and Compass
shall not be obligated to give notice of defects or irregularities in tenders,
nor shall they incur any liability for failure to give any such notice. Tenders
will be deemed not to have been made until all defects and irregularities have
been cured or waived.
7. 31% BACKUP WITHHOLDING. Under the Federal income tax law, you
must provide Compass with a correct taxpayer identification number ("TIN")
unless an exemption applies. If the correct TIN is not provided, a $50 penalty
may be imposed upon you by the Internal Revenue Service and you will be subject
to backup withholding of 31% of the payments to be received by you.
8. REQUEST FOR ASSISTANCE OF ADDITIONAL COPIES. Questions and
requests for assistance or additional copies of the Letter of Transmittal may be
directed to the Exchange Agent at the address set forth at the top of page 1.
IMPORTANT TAX INFORMATION
Under the Federal income tax law, you are to provide Compass (as
payer) with a correct taxpayer identification number on Substitute Form W-9
below. If Compass is not provided with the correct taxpayer identification
number, you may be subject to a $50 penalty imposed by the Internal Revenue
Service. In addition, all payments that are made to you with respect to Shares
(including any cash payable to you under the Merger Agreement in lieu of
fractional shares) may be subject to backup withholding.
Exempt shareholders (including among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Nonetheless, exempt shareholders should complete the
Substitute Form W-9 below and so indicate their exempt status by writing
"exempt" across the face of the Substitute Form W-9. In order for a foreign
individual to qualify as an exempt recipient, that shareholder must submit a
statement, signed under penalties of perjury, attesting to that individual's
exempt status. Such statements can be obtained from the Exchange Agent. See
the enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional information.
If backup withholding applies, Compass is required to withhold 31% of
any payments made to the shareholder. Backup withholding is not an additional
tax. Rather, the tax liability of persons subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in an overpayment
of taxes, a refund may be obtained.
6
<PAGE>
Purpose of Substitute Form W-9
To prevent backup withholding on payments that are made to you with
respect to shares of Compass Common Stock acquired as a result of the Merger or
with respect to cash payments, if any, receivable in lieu of fractional shares
pursuant to the Merger Agreement, you are required to notify Compass of your
correct taxpayer identification number by completing the form below certifying
that the taxpayer identification number provided on Substitute Form W-9 is
correct (or that you are awaiting a taxpayer identification number).
What Number to Give
As the record owner of the Shares, you are required to give Compass
your Social Security Number or Employer Identification Number. If the Shares
are in more than one name or are not in the name of the actual owners, consult
the enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional guidelines on which number to report.
7
<PAGE>
SUBSTITUTE FORM W-9
Department of the Treasury
Internal Revenue Service
Taxpayer Identification Number
PART 1 - PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER IN THE BOX AT
RIGHT AND CERTIFY BY SIGNING AND DATING BELOW [ ]
Social Security
Number or
Employer
Identification
Number
PART 2 - Check the following box if you are NOT subject to backup withholding
under the provisions of Section 3406(a)(1)(C) of the Internal Revenue
Code because (1) you have not been notified that you are subject to
backup withholding as a result of failure to report all interest or
dividends or (2) the Internal Revenue Service has notified you that
you are no longer subject to backup withholding. [ ]
PART 3 - Check the following box if you are awaiting a Taxpayer Identification
Number. [ ]
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
By checking the box in Part 3, I certify under penalties of perjury that a
taxpayer identification number has not been issued to me, and either (a) I have
mailed or delivered an application to receive a taxpayer identification number
to the appropriate Internal Revenue Service Center or Social Security
Administration Office, or (b) I intend to mail or deliver an application in the
near future. I understand that if I do not provide a taxpayer identification
number within sixty (60) days, 31% of all reportable payments made to me
thereafter will be withheld until I provide a number.
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION
PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE.
Signature: _______________________________ Date:_________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
________________________________________________________________________________
8
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.--
- -Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-
0000. Employer identification numbers have nine digits separated by only one
hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
GIVE THE EMPLOYER
GIVE THE SOCIAL SECURITY NUMBER IDENTIFICATION NUMBER OF
FOR THIS TYPE OF ACCOUNT: OF ---- FOR THIS TYPE OF ACCOUNT: ----
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. An individual's account The individual 9. A valid trust, estate, or The legal entity (Do not
pension trust furnish the identifying
2. Two or more individuals (joint The actual owner of the number of the personal
account) account or, if combined representative or trustee
funds, any one of the unless the legal entity
individuals (1) itself is not designated in
the account title.) (5)
3. Husband and wife (joint The actual owner of the
account) account or, if joint funds, 10. Corporate account The corporation
either person(1)
4. Custodian account of a minor The minor(2) 11. Religious, charitable, or The organization
(Uniform Gift to Minors Act) educational organization
account
5. Adult and minor (joint The adult or, if the minor
account) is the only contributor, the 12. Partnership account held in The partnership
minor(1) the name of the business
6. Account in the name of The ward, minor, or 13. Association, club, or other The organization
guardian or committee for a incompetent person (3) tax-exempt organization
designated ward, minor, or
incompetent person 14. A broker or registered The broker or nominee
nominee
7. a The usual revocable savings The grantor-trustee(1)
trust account (grantor is 15. Account with the The public entity
also trustee) Department of Agriculture
in the name of a public
b So-called trust account The actual owner(1) entity (such as a State or
that is not a legal or local government, school
valid trust under State district, or prison) that
law receives agricultural
program payments
8. Sole proprietorship account The owner(4)
------------------------------------------------------------ ----------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social
security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension
trust.
Note: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
9
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following:
. A corporation.
. A financial institution.
. An organization exempt from tax under section 501(a), or an individual
retirement plan.
. The United States or any agency or instrumentality thereof.
. A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
. A foreign government, a political subdivision of a foreign government, or any
agency or instrumentality thereof.
. An international organization or any agency, or instrumentality thereof.
. A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
. A real estate investment trust.
. A common trust fund operated by a bank under section 584(a).
. An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
. An entity registered at all times under the Investment Company Act of 1940.
. A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
. Payments to nonresident aliens subject to withholding under section 1441.
. Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
. Payments of patronage dividends where the amount received is not paid in
money.
. Payments made by certain foreign organizations.
. Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
. Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided your
taxpayer identification number to the payer.
. Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
. Payments described in section 6049(b)(5) to nonresident aliens.
. Payments on tax-free covenant bonds under section 1451.
. Payments made by certain foreign organizations.
. Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER. WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS OR PATRONAGE DIVIDENDS, ALSO
SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends,
that are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045 and 6050A.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend, interest
or other payments to give taxpayer identification numbers to payers who must
report the payments to the IRS. The IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Beginning January 1, 1993, payers must generally
withhold 31% of taxable interest, dividend, and certain other payments to a
payee who does not furnish a taxpayer identification number to a payer. Certain
penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS.--If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an under-
payment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDINGS.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE
10
<PAGE>
EXHIBIT C
POOLING OF INTEREST CRITERIA
----------------------------
ATTRIBUTES OF COMBINING ENTERPRISES
- -----------------------------------
(a) Autonomy Condition. Each of the combining enterprises is autonomous and
has not been a subsidiary or division of another enterprise within two
years before the plan of combination is initiated.
(b) Independence Condition. Each of the combining enterprises is independent
of the other combining enterprises.
MANNER OF COMBINING INTERESTS
- -----------------------------
(c) One-Year Rule. The combination is effected in a single transaction or is
completed in accordance with a specific plan within one year after the plan
is initiated.
(d) Common-Stock-for-Common-Stock-Condition. An enterprise offers and issues
only common stock with rights identical to those of the majority of its
outstanding voting common stock in exchange for substantially all of the
voting common stock interest of another enterprise at the date the plan of
combination is consummated.
(e) Change-in-Equity-Interests Condition. None of the combining enterprises
changes the equity interest of the voting common stock in contemplation of
effecting the combination either within two years before the plan of
combination is initiated or between the dates the combination is initiated
and consummated; changes in contemplation of effecting the combination may
include distributions to stockholders and additional issuances, exchanges,
and retirements of securities.
(f) Treasury-Stock Condition. Each of the combining enterprises reacquires
shares of voting common stock only for purposes other than business
combinations, and no enterprise reacquires more than a normal number of
shares between the dates the plan of combination is initiated and
consummated.
(g) Proportionate-Interest Condition. The ratio of the interest of an
individual common stockholder to those of other common stockholders in a
combining enterprise remains the same as a result of the exchange of stock
to effect the combination.
(h) Voting-Rights Condition. The voting rights to which the common stock
ownership interests in the resulting combined enterprise are entitled are
exercisable by the stockholders; the stockholders are neither deprived of
nor restricted in exercising those rights for a period.
<PAGE>
(i) Contingency Condition. The combination is resolved at the date the plan is
consummated and no provisions of the plan relating to the issue of
securities or other consideration are pending.
ABSENCE OF PLANNED TRANSACTIONS
- -------------------------------
(j) The combined enterprise does not agree directly or indirectly to retire or
reacquire all or part of the common stock issued to effect the combination.
(k) The combined enterprise does not enter into other financial arrangements
for the benefit of the former stockholders of a combining enterprise, such
as a guaranty of loans secured by stock issued in the combination, that in
effect negates the exchange of equity securities.
(l) The combined enterprise does not intend or plan to dispose of a significant
part of the assets of the combining enterprises within two years after the
combination other than disposals in the ordinary course of business of the
formerly separate enterprise and to eliminate duplicate facilities or
excess capacity.
2
<PAGE>
EXHIBIT D
VOTING AGREEMENT AND IRREVOCABLE PROXY
--------------------------------------
This Voting Agreement and Irrevocable Proxy (this "Agreement") dated as of
December __, 1996 is executed by and among Horizon Bancorp, Inc., a Texas
corporation (the "Company"), Compass Bancshares, Inc., a Delaware corporation
("Compass"), and the other persons who are signatories hereto (referred to
herein individually as a "Shareholder" and collectively as the "Shareholders").
WHEREAS, the Company and Compass have executed that certain Agreement and
Plan of Merger dated as of December __, 1996 (the "Merger Agreement") whereby
the Company will merge with an existing or to-be-formed wholly-owned subsidiary
of Compass (the "Merger"); and
WHEREAS, Section 6.11 of the Merger Agreement requires that the Company
deliver to Compass the irrevocable proxies of the Shareholders; and
WHEREAS, Compass and the Company are relying on the irrevocable proxies in
incurring expense in reviewing the Company's business, in preparing a proxy
statement, in proceeding with the filing of applications for regulatory
approvals, and in undertaking other actions necessary for the consummation of
the Merger;
NOW THEREFORE, the parties hereto agree as follows:
1. Each of the Shareholders hereby represents and warrants to Compass and
the Company that they are the registered holders of and have the exclusive right
to vote the shares of capital stock ("Stock") of the Company set forth below his
name on the signature pages hereto. Each Shareholder hereby agrees to vote at
the shareholders' meeting referred to in Section 1.7 of the Merger Agreement
(the "Meeting") the shares of Stock set forth below his name on the signature
pages hereto and all other shares of Stock such Shareholder owns of record as of
the date of the Meeting and to direct the vote of all shares of Stock which the
Shareholders own beneficially and have the power and authority to direct the
voting thereof as of the date of the Meeting (the "Shares") in favor of approval
of the Merger Agreement, and the other agreements and transactions contemplated
thereby.
2. In order better to effect the provisions of Section 1, each Shareholder
hereby revokes any previously executed proxies and hereby constitutes and
appoints Compass (the "Proxy Holder"), with full power of substitution, his true
and lawful proxy and attorney-in-fact to vote at the Meeting all of such
Shareholder's Shares in favor of the authorization and approval of the Merger
Agreement and the other agreements and transactions contemplated thereby, with
such modifications to the Merger
<PAGE>
Agreement and the other agreements and transactions contemplated thereby as the
parties thereto may make, in the event such Shareholder does not vote in favor
of the authorization and approval of the Merger Agreement and the other
agreements and transactions contemplated thereby; provided, however, that this
proxy shall not apply with respect to any vote on the Merger Agreement, and the
other agreements and transactions contemplated thereby, if the Merger Agreement
shall have been modified so as to reduce the amount of consideration to be
received by the Shareholders under the Merger Agreement in its present form.
3. Each Shareholder hereby covenants and agrees that until this Agreement
is terminated in accordance with its terms, each Shareholder will not, and will
not agree to, without the consent of Compass, directly or indirectly, sell,
transfer, assign, pledge, hypothecate, cause to be redeemed or otherwise dispose
of any of the Shares or grant any proxy or interest in or with respect to any
such Shares or deposit such shares into a voting trust or enter into another
voting agreement or arrangement with respect to such Shares except as
contemplated by this Agreement, unless the Shareholder causes the transferee of
such Shares to deliver to Compass an amendment to this Agreement whereby such
transferee or other holder becomes bound by the terms of this Agreement.
4. This proxy shall be limited strictly to the power to vote the Shares in
the manner set forth in Section 2 and shall not extend to any other matters.
5. The Shareholders acknowledge that Compass and the Company are relying
on this Agreement in incurring expense in reviewing the Company's business, in
preparing a proxy statement, in proceeding with the filing of applications for
regulatory approvals, and in undertaking other actions necessary for the
consummation of the Merger and that the proxy granted hereby is coupled with an
interest and is irrevocable to the full extent permitted by applicable law,
including Article 2.29C of the Texas Business Corporation Act. The Shareholders
and the Company acknowledge that the performance of this Agreement is intended
to benefit Compass.
6. The irrevocable proxy granted pursuant hereto shall continue in effect
until the earlier to occur of (i) the termination of the Merger Agreement, as it
may be amended or extended from time to time, or (ii) the consummation of the
Merger. In no event shall this Agreement apply to shares of common stock, par
value $2.00 per share, of Compass to be received by the Shareholders upon
consummation of the Merger.
7. The vote of the Proxy Holder shall control in any conflict between its
vote of the Shares and a vote by the Shareholders of the Shares and the Company
agrees to recognize the vote of the Proxy Holder instead of the vote of the
Shareholders in
2
<PAGE>
the event the Shareholders do not vote in favor of the approval of the Merger
Agreement as set forth in Section 1 hereof.
8. This Agreement may not be modified, amended, altered or supplemented
with respect to a particular Shareholder except upon the execution and delivery
of a written agreement executed by the Company, Compass and the Shareholder.
9. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
10. This Agreement, together with the Merger Agreement and the agreements
contemplated thereby, embody the entire agreement and understanding of the
parties hereto in respect to the subject matter contained herein. This
Agreement supersedes all prior agreements and understandings among the parties
with respect to such subject matter contained herein.
11. All notices, requests, demands and other communications required or
permitted hereby shall be in writing and shall be deemed to have been duly given
if delivered by hand or mail, certified or registered mail (return receipt
requested) with postage prepaid to the addresses of the parties hereto set forth
on below their signature on the signature pages hereof or to such other address
as any party may have furnished to the others in writing in accordance herewith.
12. This Agreement and the relations among the parties hereto arising from
this Agreement shall be governed by and construed in accordance with the laws of
the State of Texas.
[SIGNATURE PAGES FOLLOW]
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
above written.
HORIZON BANCORP, INC.
By:________________________________
Name:______________________________
Title:_____________________________
Address:
5800 North Mopac Boulevard
Austin, Texas 78731
Attention: Douglas B. Kadison
Chairman, President, and
Chief Executive Officer
COMPASS BANCSHARES, INC.
By: _______________________________
Name: _____________________________
Title: ____________________________
Address:
15 South 20th Street
Birmingham, Alabama 35233
Attention: Mr. Daniel B. Graves
Associate General Counsel
4
<PAGE>
SHAREHOLDERS:
___________________________________
___________________________________
Address: _________________________
_________________________
____________ shares of Common Stock
Pledgee: _________________________
Address: _________________________
_________________________
Loan No.: _________________________
5
<PAGE>
EXHIBIT E
________________, 1997
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Dear Sirs:
We have acted as special counsel to Horizon Bank & Trust, SSB (the "Bank") and
Horizon Bancorp, Inc. (the "Company") in connection with the merger of the
Company with and into Compass Texas ("Compass") (the "Merger") pursuant to an
Agreement and Plan of Merger (the "Agreement") by and between Compass
Bancshares, Inc. and the Company dated December ____, 1996 (the "Agreement").
This opinion is furnished to you pursuant to Section 7.2(f) of the Agreement.
Unless otherwise defined herein, all capitalized terms shall have the meanings
attributed to them in the Agreement.
You have requested our opinion regarding certain matters in connection with the
Merger. In our capacity as special counsel for the Company and the Bank, we
have examined the originals or copies of such certificates, documents and
corporate records upon which we have relied regarding our opinion expressed
below. We have assumed the genuineness of all signatures, the authenticity of
all items submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies. We have further assumed the due
authorization of such documents by all parties other than the Company and the
Bank and the taking of all requisite action respecting such documents, the due
execution and delivery of such documents by each party and have additionally
assumed that all agreements are the valid and binding agreement of all parties
to such agreements, other than the Company and the Bank. The opinions
hereinafter expressed are subject to the assumption that the Agreement contains
the entire agreement between the parties with respect to the transactions
contemplated thereby and supersede all prior arrangements or understandings with
respect thereto, written or oral, other than documents referred to therein.
Wherever a statement herein is qualified by "to our knowledge," or a similar
phrase, it is intended to indicate that, during the course of our representation
of the Company and the Bank, no information has been provided to those
shareholders and attorneys in this firm who have had substantive involvement in
rendering legal services in connection with the representation described in the
introductory paragraph of this opinion letter that would give us knowledge of
the inaccuracy of such statement.
The opinions hereinafter expressed are subject to the following qualifications:
(a) Our opinions in paragraph (i) below as to the good standing and valid
existence of the Company and the Bank, and the charter of the Bank are based
solely upon certificates from public officials, dated on or before
_____________, 1997 as to the good standing and valid
<PAGE>
Compass Bancshares, Inc.
__________________, 1997
Page 2
existence of the Company and the Bank, and the charter of the Bank, copies of
which are attached hereto.
(b) Our opinions below are limited to the matters expressly set forth in
this opinion letter, and no opinion is to be implied or may be inferred beyond
the matters expressly so stated. Without limiting the foregoing, we express no
opinion as to the antifraud provisions of federal and state securities laws.
(c) We disclaim any obligation to update this opinion letter for events
occurring after the date of this opinion letter.
(d) Our opinions below are limited to the effect of the laws of Texas and
the federal laws of the United States of America. We express no opinion with
respect to the effect of the laws of any other jurisdiction.
(e) In rendering this opinion, we have relied as to all matters of fact on
certificates of responsible officers of the Holding Company and the Bank and of
public officials, copies of which are attached hereto.
(f) Our opinions below do not consider the effect of any pending or future
legislation on the Bank, the Company or the Merger. No assurance can be given
as to whether any pending or future legislation will be enacted or its final
form and the ultimate impact of such legislation on the Bank, the Holding
Company or the Merger.
(g) This opinion is rendered solely for your information and assistance in
connection with the Closing of the Agreement, the Merger and the transactions
contemplated thereby. You should be aware that principles expressed in cases
decided by Texas courts and federal courts applying Texas law support the
proposition that a lawyer does not owe a duty to a party with whom the lawyer is
not in privity. Your ability to rely upon the opinions expressed herein may be
limited, if not denied, based upon such principles.
(h) We express no opinion as to matters arising under any tax law, rule,
regulation or interpretation.
Based upon and subject to the foregoing and in reliance thereon, and subject to
the assumptions, exceptions and qualifications set forth herein, it is our
opinion that:
(i) The Company is a Texas corporation and a savings and loan holding
company under the Home Owners' Loan Act, as amended, and is duly organized,
validly existing and in good standing under the laws of the State of Texas. The
Bank is a Texas chartered savings bank, duly organized, validly existing and in
good standing under the laws of the State
<PAGE>
Compass Bancshares, Inc.
__________________, 1997
Page 3
of Texas. Each of the Company and the Bank has all requisite corporate power
and authority to carry on its business as we know it to be conducted and to own,
lease and operate its properties and assets as now owned, leased or operated.
Each of the Company and the Bank is duly qualified and in good standing in
Texas;
(ii) The Company has all requisite corporate power and authority to
execute and deliver the Agreement and any other agreements contemplated by the
Agreement (collectively, the "Other Agreements") and to consummate the
transactions contemplated thereby; all acts and other proceedings required to
be taken by or on the part of the Company to execute and deliver the Agreement
and the Other Agreements and to consummate the transactions contemplated therein
have been duly and validly taken; and the Agreement and the Other Agreements
have been duly executed and delivered by, and constitute the valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms, subject to or limited by the effect of (a) any applicable
bankruptcy, insolvency, reorganization moratorium or other law relating to or
affecting creditors' rights generally, (b) general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law) and (c) the rights of creditors of Texas chartered and
federally insured savings banks or savings and loan holding companies;
(iii) The authorized capital stock of the Company consists solely
of 4,000,000 shares of Company Common Stock (as defined in the Agreement) of
which _______ shares are issued and outstanding (none of which are held in the
treasury) and 1,000,000 shares of preferred stock, par value $0.01 per share,
none of which is outstanding or held in treasury; the Company is the record
holder of all the issued and outstanding capital stock of the Bank; all of the
outstanding shares of the Company Common Stock have been validly issued and
fully paid and are nonassessable and all of the capital stock of the Bank has
been validly issued and fully paid and are nonassessable; and to our knowledge,
none of the Company's Common Stock or the Bank's capital stock was issued in
violation of the preemptive rights of any person;
(iv) To our knowledge and except as set forth on Schedule 3.2 to the
Agreement, there are no outstanding subscriptions, options, rights, warrants,
calls, convertible securities, irrevocable proxies or other agreements or
commitments obligating the Company or the Bank to issue any shares of,
restricting the transfer of or otherwise relating to shares of their respective
capital stock of any class;
(v) The execution and delivery by the Company of the Agreement does
not and the consummation of the transactions contemplated thereby will not
contravene or violate any provision of or constitute a default under (a) the
articles of incorporation or association or bylaws of the Company or the Bank,
(b) to our knowledge and except as disclosed in the Agreement, any note,
license, instrument, mortgage, deed of trust or other agreement or
understanding, permit, authorization or contract, order, arbitration award,
judgment or decree or any other restriction of
<PAGE>
Compass Bancshares, Inc.
__________________, 1997
Page 4
any kind or character known to us to which the Company or the Bank is a party or
by which the Company or the Bank or any of their respective assets or properties
is bound which contravention, violation or default in any individual case or in
the aggregate would have a Material Adverse Effect on the Company and (c) to our
knowledge and except as disclosed in the Agreement, any law, regulation, rule,
administrative regulation or decree of any court or any governmental agency or
body whether domestic or foreign applicable to the Company or the Bank, or their
respective assets or properties;
(vi) Except as disclosed in the Agreement and except for such
consents, approvals, authorizations, actions or filings as have already been
obtained by Compass or its affiliates, no consent, approval, authorization,
action or filing with any court, governmental agency or public body is required
in connection with the execution, delivery and performance by the Company of the
Agreement;
(vii) Except as set forth in Schedule 3.12 of the Agreement, to
our knowledge, neither the Company nor the Bank is a party to any Proceeding (as
defined in the Agreement), nor to our knowledge, is any Proceeding threatened
against or affecting the Company or the Bank, which by the terms of the
Agreement would be required to be set forth in Schedule 3.12;
(viii) To our knowledge and except as set forth on Schedule 3.18 to
the Agreement, neither the Company nor the Bank is in default under any law or
regulation, or under any order of any court, commission, board, bureau, agency
or instrumentality wherever located which could have a Material Adverse Effect
on the Company; and
(ix) upon consummation of the transactions contemplated by the
Agreement in accordance with its terms and upon filing of the Articles of Merger
relating to the Merger by the Secretary of State of Texas, and upon filing by
the Secretary of State of Delaware of a Certificate of Merger, the Merger will
have been legally consummated in accordance with the laws of the state of Texas
with the consequences specified in Article 5.06 of the Texas Business
Corporation Act.
This opinion is solely for your benefit and that of your counsel and may not be
relied upon by, nor may copies be delivered to, any other person without our
prior written consent. This opinion is given as of the date thereof and we
assume no obligation to advise you of changes that may hereafter be brought to
our attention.
Very truly yours,
SELMAN & MUNSON, P.C.
<PAGE>
Compass Bancshares, Inc.
__________________, 1997
Page 5
By:____________________________________
Jack A. Selman, President
<PAGE>
EXHIBIT F
RETENTION BONUS, EMPLOYMENT AND CONFIDENTIALITY AGREEMENT
---------------------------------------------------------
THIS RETENTION BONUS, EMPLOYMENT AND CONFIDENTIALITY AGREEMENT
("Agreement") is made and entered into as of this ______ day of December, 1996,
by and between Compass Bank, Houston, Texas (hereinafter referred to as the
"Bank") and ___________________ (the "Employee").
WHEREAS, Employee is an employee of Horizon Bancorp and Horizon Bank and
Trust, SSB (collectively "Horizon") which are being acquired by Compass
Bancshares, Inc. pursuant to an Agreement and Plan of Merger dated as of
December ___, 1996 ("Merger"), and Employee acknowledges that (i) Horizon has
been engaged for a number of years in the business of banking, lending, deposit
taking, and related banking and trust services (the "Business") in the Austin,
Texas area; (ii) Employee is one of a limited number of persons instrumental in
the development of the Business of Horizon; (iii) Employee's work for Horizon
has given him and will continue to give him access to trade secrets and
confidential information concerning the Business and the relationships between
Horizon and its customers; (iv) Employee's employment with the Bank will give
him access to trade secrets and confidential information concerning the business
and customer relationships of the Bank and its affiliates; (v) the agreements
and covenants contained in this Agreement are essential to protect the Business
and goodwill of Horizon being acquired by Compass Bancshares, Inc. and the
business and goodwill of the Bank and its affiliates; and (vi) Compass
Bancshares, Inc. would not acquire Horizon or employ Employee but for such
agreements and covenants.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the receipt and
sufficiency of which are hereby acknowledged, Compass and Employee agree,
effective as of the date of the consummation of the Merger ("Commencement
Date"), as follows:
1. Retention Bonus.
(a) Employee shall be entitled to a retention bonus ("Retention Bonus") of
$____________ which is an amount equal to $1.00 less than three times Employee's
"base amount" of compensation as defined in Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"); provided, however, that the total of all
payments to Employee under this Agreement or any other agreement (which payments
could be deemed parachute payments within the meaning of Section 280G(b)(2) of
the Code) shall not exceed $1.00 less than three times his average compensation
from the Bank over the five most recent taxable years (or, if employed by the
Bank for a shorter period, over the period of his employment by the
<PAGE>
Bank) ("Maximum Payment"). In the event the payment of the Retention Bonus or
any portion thereof would cause Employee to receive an amount in excess of the
Maximum Payment there shall be deducted from the Retention Bonus which has not
been paid to Employee the amount which is in excess of such Maximum Payment, and
in the event of any prior payment of such excess to Employee, Employee shall
immediately pay to the Bank, such excess amount. The Retention Bonus will be
paid from an escrow account bearing an interest rate equal to the one year
certificate of deposit rate of the Bank. The Retention Bonus will be paid in
equal quarterly installments of principal and interest payable over 18 months
with the first installment being paid on the Commencement Date. Employee
acknowledges that the Retention Bonus shall be subject to applicable payroll tax
withholding.
(b) In the event of the disability of Employee, the payment of the
Retention Bonus will be accelerated and Employee will be entitled to all
remaining sums due under the Retention Bonus. If Employee dies the payment of
the Retention Bonus will be accelerated and the Bank shall pay to the estate of
Employee all remaining sums due to Employee under the Retention Bonus. If
Employee is terminated by the Bank for any reason other than for "good cause" as
defined by Section 1(c) below or Employee terminates his employment for "good
reason" as defined by Section 1(e) below, Employee is entitled to all remaining
sums due under the Retention Bonus. If Employee resigns or is terminated for
"good cause" as defined by Section 1(c) below, by the Bank, Employee shall
forfeit all remaining unpaid sums due under the Retention Bonus and shall repay
to the Bank all principal and interest theretofore paid to Employee for the
Retention Bonus which have not been earned by Employee as of the date of such
resignation or termination. The Retention Bonus shall be deemed proportionately
earned over the eighteen months following the Commencement Date. For example,
the first installment, which is payable on the Commencement Date, shall be
deemed earned on the payment date of the second installment. For any portion of
a quarter, the Retention Bonus deemed earned shall be prorated based on the
number of days worked in the quarter.
(c) For purposes of Section 1(b) only and not for any other purpose under
this Agreement, "good cause" shall include, without limitation, a willful and
material violation of applicable banking laws and regulations; dishonesty;
theft; fraud; embezzlement; the conviction of a felony or a crime involving
moral turpitude; violation of the Bank's drug and alcohol policy; material
conduct disloyal to the Bank or its affiliates; willful disregard of lawful
instructions or directions of the officers or directors of the Bank or its
affiliates relating to a material matter; or any other material breach of this
or any other agreement between Employee and the Bank.
2
<PAGE>
(d) For purposes of Section 1(b) only and not for any other purpose under
this Agreement, Employee shall be deemed to have a physical or mental disability
if Employee is unable to perform the essential functions of Employee's duties
and satisfies the criteria for such disability under the disability plan
maintained by the Bank.
(e) For purposes of Section 1(b) only and not for any other purpose under
this Agreement, "good reason" shall mean (i) the Bank's material breach of this
Agreement, or (ii) the relocation of Employee, without his consent, outside
Travis County or Williamson County, Texas.
2. Employment.
(a) Effective as of the Commencement Date, the Bank agrees to employ
Employee as a senior officer of the Bank. Employee accepts employment upon the
terms and conditions set forth in this Agreement. Employee will perform such
services for the Bank as are customarily performed by persons situated in
similar executive capacities, and shall have such other powers and duties as may
from time to time be prescribed by the Board of Directors of the Bank. Employee
shall devote his full business time and attention to the business and affairs of
the Bank and its subsidiaries and affiliated companies. Nothing in this Section
2(a), however, will prevent the Employee from engaging in additional activities
in connection with personal investments and community affairs that are not
inconsistent with the Employee's duties under this Agreement and the Compass
Bancshares, Inc. Code of Conduct.
(b) The Bank shall pay Employee for all services and agreements of
Employee pursuant to this Agreement, and any other duties assigned to him by the
Bank, an annual base salary of $_______ per year with merit increases in
accordance with the Bank's salary administration program based upon performance,
which shall be payable in accordance with the Bank's customary payroll practices
with respect to time and manner of payment. The Bank shall provide Employee
such benefits, including incentive bonus plans, as are made generally available
to employees of equal title and base salary on the same basis as the Bank makes
such benefits available to the Bank's other employees, including participation
in the Compass Bancshares, Inc. retirement plan, which in no event are less than
the benefits provided to employees of the Company under the Merger Agreement.
(c) The Bank agrees to pay on Employee's behalf the monthly lease payment,
the monthly insurance payment and the monthly operating costs (including repairs
and maintenance) for the automobile presently provided to Employee by Horizon
until the expiration of the existing lease term for such automobile, but not
thereafter (the "Lease Term"). Subsequent to the expiration of the
3
<PAGE>
Lease Term, the Bank agrees to pay to Employee a car allowance in accordance
with the Bank's policy, currently $500 per month.
(d) Employee agrees to observe and comply with the rules and regulations
of the Bank and its affiliates as adopted by the Bank with respect to the
performance of Employee's duties, and to carry out and to perform orders, rules,
directions, and policies announced to Employee by the Bank, unless such orders,
rules, directions, or policies violate applicable laws or regulations.
(e) Employee may cease his employment with the Bank at any time at his
option. The Bank may terminate Employee's employment with the Bank at any time
and for any or no reason, and Employee expressly covenants that notwithstanding
any provision hereof, including without limitation, Section 1 hereof, he remains
an "at-will" employee. In the event Employee is terminated by the Bank, he will
be entitled to severance pay in accordance with the policies of the Bank then in
existence.
3. Confidentiality; Nonsolicitation.
(a) Employee recognizes and acknowledges that he has and will have access
to confidential information of a special and unique value concerning the Bank
and its affiliates which may include, without limitation, books and records
relating to operations, customer names and addresses, customer service
requirements, customer financial statements and other financial, business and
personal information relating to the Bank and its affiliates, their customers,
markets, officers and employees, cost of providing service and equipment,
operating and maintenance costs, and pricing criteria. Employee also recognizes
that a portion of the business of the Bank and its affiliates is dependent upon
trade secrets, including techniques, methods, systems, processes, data and other
confidential information. The protection of these trade secrets and
confidential information against unauthorized disclosure or use is of critical
importance to the Bank. Employee therefore agrees that, without prior written
authorization from the Chief Executive Officer of the Bank, he will not at any
time, either while employed by the Bank or afterwards, make any independent use
of, or disclose to any other person, any trade secrets or confidential
information of the Bank or its affiliates or Horizon. The agreements contained
in this Section 3(a) shall survive the termination of this Agreement.
Employee's commitment hereunder shall not extend to any part of such
confidential information which is or becomes generally known to the public
subsequent to disclosure to Employee through no wrongful act of Employee or any
other person. Employee may disclose confidential information described herein
as may be required by law, as may be reasonably required in any proceeding
pursuant to this Agreement or the Merger, or as may reasonably be required in
any litigation proceeding; provided, however, that Employee shall notify the
Bank prior to any such disclosure.
4
<PAGE>
(b) All records, files, memoranda, reports, price lists, customer lists,
documents, and other information (together with all copies thereof) which relate
to the Bank, its affiliates, or Horizon, and which Employee, either prior to or
during the Term, has obtained or obtains, uses, prepares, or comes in contact
with shall remain the sole property of the Bank and its affiliates. Upon the
termination of Employee's employment by the Bank, or upon the prior demand of
the Bank, all such materials and all copies thereof shall be returned to Horizon
(or its successors by merger) immediately.
(c) In furtherance of the agreements contained in Section 3(a) hereof,
from the date hereof and for a period of one year after Employee's employment
with the Bank is terminated for any reason, Employee, on behalf of himself and
his present and future affiliates and employers (other than Horizon or its
successors by merger), agrees not to and shall not directly or indirectly (i)
hire, employ or engage any past, present or future employee of the Bank, its
affiliates or Horizon, without the prior written permission of the Chief
Executive Officer of the Bank; (ii) compete for or solicit banking, lending,
deposit taking or any other banking services business for or on behalf of any
federally insured depository institution or holding company thereof with a place
of business within Travis County or Williamson County, Texas, or own, operate,
participate in, undertake any employment with or have any interest in any
federally insured depository institution or holding company thereof within
Travis County or Williamson County, Texas, except owning publicly traded stock
for investment purposes only in which Employee owns less than 5%; (iii) compete
for or solicit banking, lending, deposit taking or any other banking services
business from any customer of Horizon (or its successors by merger); or (iv) use
in any competition, solicitation or marketing effort any proprietary list of or
other information concerning customers of Horizon, the Bank or its affiliates
developed by Horizon, the Bank or its affiliates.
(d) In the event of a breach or threatened breach by Employee of the
provisions of this Section 3, the Bank shall be entitled to temporary or
permanent injunctions and other appropriate relief restraining Employee from
using or disclosing, in whole or in part, trade secrets and confidential
information or violating the other provisions hereof. Employee hereby waives
any requirement that the Bank post any bond in connection with obtaining any
such relief. Nothing herein shall be construed as prohibiting the Bank from
pursuing any other remedies available to it.
(e) Employee has read and considered the provisions of this Section 3 and,
having done so, agrees, states, and covenants that the restrictions on
competition set forth herein are fair and reasonable as to time, geographical
area, and scope of activities to be restrained, and are reasonably required for
the protection of the Business, goodwill and other business interests of the
Bank and
5
<PAGE>
its affiliates and Horizon. In the event a court of competent jurisdiction
determines as a matter of law that any of the terms of Section 3 are
unreasonable or overbroad, the parties expressly allow such court to reform this
agreement to the extent necessary to make it reasonable as a matter of law and
to enforce it as so reformed.
4. Notices. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing mailed or delivered as follows:
If to Employee:
____________________________
____________________________
____________________________
If to the Bank:
Charles E. McMahen
Compass Bank
24 Greenway Plaza
Suite 1401
Houston, Texas 77046
5. Entire Agreement. This Agreement contains the entire agreement of the
parties regarding the subject matter herein contained and supersedes any prior
agreement, arrangement or understanding, whether oral or written, between the
Bank and Employee concerning the subject matter herein contained.
6. Choice of Law. This Agreement shall be governed by, and enforced
according to, the laws of the State of Texas. The invalidity of any provision
shall be automatically reformed to the extent permitted by applicable law and
shall not affect the enforceability of the remaining provisions hereof.
7. Modification; Termination. This Agreement may be modified only by
written agreement signed by Employee and by a duly authorized officer of the
Bank. The failure to insist upon compliance with any provision hereof shall not
be deemed a waiver of such provision or any other provision hereof. This
Agreement shall terminate if the Merger Agreement shall be terminated, provided
however, Employee agrees that if this Agreement is terminated he will keep
confidential any confidential information received from the Bank or its
affiliates prior to such termination.
8. Counterparts. This Agreement may be executed in several identical
counterparts, and by the parties hereto on separate counterparts, and each
counterpart, when so executed and delivered, shall constitute an original
instrument, and all such separate counterparts shall constitute but one and the
same instrument.
6
<PAGE>
PROVISIONS OF THE TEXAS BUSINESS CORPORATION ACT
RELATING TO
RIGHTS OF DISSENTING STOCKHOLDERS
ART. 5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and the
shareholder holds shares of a class or series that was entitled to vote thereon
as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation requiring the special
authorization of the shareholders as provided by this Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the shareholder are
to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if (1) the shares held by the shareholder are part of a class
shares of which are listed on a national securities exchange, or are held of
record by not less than 2,000 holders, on the record date fixed to determine the
shareholders entitled to vote on the plan of merger or the plan of exchange, and
(2) the shareholder is not required by the terms of the plan of merger or the
plan of exchange to accept for his shares any consideration other than (a)
shares of a corporation that, immediately after the effective time of the merger
or exchange, will be part of a class or series of shares of which are (i)
listed, or authorized for listing upon official notice of issuance, on a
national securities exchange, or (ii) held of record by not less than 2,000
holders, and (b) cash in lieu of fractional shares otherwise entitled to be
received.
ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:
(1) (a) With respect to proposed corporate action that is submitted to a
vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action, setting
out that the shareholder's right to dissent will be exercised if the action is
effective and giving the shareholder's address, to which notice thereof shall be
delivered or mailed in that event. If the action is effected and the
shareholder shall not have voted in favor of the action, the corporation, in the
case of action other than a merger, or the surviving or new corporation (foreign
or domestic) or other entity that is liable to discharge the shareholder's right
of dissent, in the case of a merger, shall, within ten (10) days after the
action is effected, deliver or mail to the shareholder written notice that the
action has been effected, and the shareholder may, within ten (10) days from the
delivery or mailing of the notice, make written demand on the existing,
surviving, or new corporation (foreign or domestic) or other entity, as the case
may be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the
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shareholder and the fair value of the shares as estimated by the shareholder.
Any shareholder failing to make demand within the ten (10) day period shall be
bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the case
of action other than a merger, and the surviving or new corporation (foreign or
domestic) or other entity that is liable to discharge the shareholder's right of
dissent, in the case of a merger, shall, within ten (10) days after the date the
action is effected, mail to each shareholder of record as of the effective date
of the action notice of the fact and date of the action and that the shareholder
may exercise the shareholder's right to dissent from the action. The notice
shall be accompanied by a copy of this Article and any articles or documents
filed by the corporation with the Secretary of State to effect the action. If
the shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice, make
written demand on the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was delivered
to the corporation pursuant to Section A of Article 9.10 of this Act, excluding
any appreciation or depreciation in anticipation of the action. The demand
shall state the number and class of shares owned by the dissenting shareholder
and the fair value of the shares as estimated by the shareholder. Any
shareholder failing to make demand within the twenty (20) day period shall be
bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate action
was effected, the value of the shares is agreed upon between the shareholder and
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, payment for the shares shall be made within ninety
(90) days after the date on which the action was effected and, in the case of
shares represented by certificates, upon surrender of the certificates duly
endorsed. Upon payment of the agreed value, the shareholder shall cease to have
any interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
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petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The
appraisers shall have power to examine any of the books and records of the
corporation the shares of which they are charged with the duty of valuing, and
they shall make a determination of the fair value of the shares upon such
investigation as to them may seem proper. The appraisers shall also afford a
reasonable opportunity to the parties interested to submit to them pertinent
evidence as to the value of the shares. The appraisers shall also have such
power and authority as may be conferred on Masters in Chancery by the Rules of
Civil Procedure or by the order of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, pursuant to the
payment of the agreed value of the shares or pursuant to payment of the judgment
entered for the value of the shares, as in this Article provided, shall, in the
case of a merger, be treated as provided in the plan of merger and, in all other
cases, may be held and disposed of by the corporation as in the case of other
treasury shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of a merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by
this Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action.
If the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right
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to receive payment for his shares pursuant to the provisions of those articles
and the right to maintain an appropriate action to obtain relief on the ground
that the corporate action would be or was fraudulent, and the respective shares
for which payment has been demanded shall not thereafter be considered
outstanding for the purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder,
the corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
Appendix II
4
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ALEX SHESHUNOFF & CO. INVESTMENT BANKING
December 4, 1996
Board of Directors
Horizon Bancorp, Inc.
5800 N. Mopac Boulevard
Austin, Texas 78731
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the outstanding shares of common stock of Horizon
Bancorp, Inc. ("Horizon"), of the consideration (the "Merger Consideration") to
be received by such holders pursuant to the Agreement and Plan of Merger dated
as of December 4, 1996 (the "Merger Agreement") in a negotiated transaction
(initiated by Compass Bancshares, Inc. on an unsolicited basis but subject to
exclusivity) which provides for the merger (the "Merger") of Horizon with and
into Compass Texas, a wholly owned subsidiary of Compass Bancshares, Inc.
("Compass"). Pursuant to the Merger Agreement, Compass shall establish Compass
Texas as a wholly owned subsidiary, and shall cause Compass Texas to be merged
with and into Horizon. In consideration for the merger, the shareholders of
Horizon will receive 888,889 shares of common stock of Compass of exchange for
their shares of Horizon Common Stock. As of December 4, 1996, we calculated the
aggregate deal value to be $34.06 million utilizing Compass' December 4, 1996
closing stock price. For the purposes of this opinion, the per share
transaction price available to current Horizon shareholders shall be computed on
a fully diluted basis assuming all options are exercised.
In connection with our opinion, we have: (i) analyzed certain internal
financial statements and other financial and operating data concerning Horizon
prepared by the management of Horizon; (ii) analyzed certain publicly available
financial statements, both audited and unaudited, of Horizon including those
included in their annual reports for the three years ended April 30, 1996,
quarterly report for the period ended July 31, 1996, and interim statements as
of September 30, 1996; (iii) analyzed certain publicly available financial
statements, both audited and unaudited, of Compass including those included in
their annual reports for the three years ended December 31, 1995, their
quarterly reports for the periods ended March 31, 1996, June 30, 1996 and
September 30, 1996; (iv) analyzed certain internal financial statements and
other financial and operating data concerning Horizon prepared by the management
of Horizon; (v) analyzed certain financial projections of Horizon prepared by
the management of Horizon; (vi) discussed certain aspects of the past and
current business operations, financial condition and future prospects of Horizon
with certain members of its management; (vii) reviewed reported market prices
and historical trading activity of Horizon' and Compass' common stock; (vii)
compared the financial performance of Compass and the prices and trading
activity of Compass' common stock with that of certain other comparable
publicly traded companies and their securities; (ix) reviewed certain security
analysis reports of Compass' common stock prepared by various investment banking
firms; (x) reviewed the financial terms, to the extent publicly available, of
certain comparable precedent transactions; (xi) reviewed the Merger Agreement;
and (xii) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. We have not made an independent evaluation of the assets or
liabilities of Horizon, nor have we been furnished with any such appraisals.
With respect to financial forecasts, we have assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgment of management of Horizon as to the future financial performance of
Horizon. We have assumed such forecasts and projections will be realized in the
amounts and at the times contemplated thereby. With respect to Compass, we
relied solely upon publicly available data regarding Compass' financial
condition and performance. We did not meet with or discuss this publicly
available information with the management of Compass. We did not conduct any
independent evaluation or appraisal of the assets, liabilities or business
prospects of Compass, we were not furnished with any evaluations or appraisals,
and we did not review any individual credit files of Compass. We are not
experts in the evaluation of loan portfolios for the purposes of assessing the
adequacy of the allowance for losses
<PAGE>
with respect thereto and have assumed that such allowances for each of the
companies are in the aggregate, adequate to cover such losses.
Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof. Events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion.
Our opinion is limited to the fairness, from a financial point of view, to
the holders of Horizon common stock of the Merger Consideration received as
stated in the Merger Agreement and does not address Horizon's underlying
business decision to undertake the Merger. Moreover, this letter, and the
opinion expressed herein, does not constitute a recommendation to any
shareholder as to any approval of the Merger or the Merger Agreement. It is
understood that this letter is for the information of the Board of Directors of
Horizon and may not be used for any other purpose without our prior written
consent, except that this opinion may be included in its entirety in any filing
made by Horizon with the Securities and Exchange Commission with respect to the
Merger.
Based on the foregoing and such other matters we have deemed relevant, we
are of the opinion as of the date hereof that the Merger Consideration is fair,
from a financial point of view, to the holders of Horizon common stock.
Very truly yours,
ALEX SHESHUNOFF & CO. INVESTMENT BANKING
<PAGE>
PROXY HORIZON BANCORP, INC. PROXY
REVOCABLE PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
MARCH 11, 1997
The undersigned hereby appoints Douglas B. Kadison, Charles Nichols,
Jr. and Paul A. Antrim, and each of them, with or without the other, proxies,
with full power of substitution, to vote all shares of common stock that the
undersigned is entitled to vote at the Special Meeting of the Shareholders of
Horizon Bancorp, Inc. to be held at the offices of Horizon Bank & Trust, SSB,
5800 MoPac Expressway in Austin, Texas, on Tuesday, March 11, 1997, at 10:00
a.m., Central time, and at all adjournments thereof as follows:
(1) Approval, ratification, confirmation and adoption of the Agreement
and Plan of Merger, dated as of December 4, 1996, by and between Compass
Bancshares, Inc. and Horizon Bancorp, Inc., as amended, and the transactions
contemplated thereby.
[ ] For [ ] Against [ ] Abstain
(2) In their discretion, upon any other business which may properly
come before said meeting or any adjournments thereof.
The Board of Directors recommends a vote "FOR" the listed proposals.
This Proxy will be voted as you specify above. If no specification is
made, the Proxy will be voted FOR proposal (1) above. Receipt of the Notice of
Special Meeting and the Proxy Statement/Prospectus dated February 6, 1997 is
hereby acknowledged.
THIS PROXY IS SOLICITED BY THE HORIZON BANCORP, INC. BOARD OF
DIRECTORS.
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE PROXY CARD USING
THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
Should the undersigned be present and elect to vote at the Meeting,
and after notification to the Secretary of Horizon at the Meeting of the
shareholder's decision to terminate this proxy, then the power of such attorneys
and proxies shall be deemed terminated and of no further force and effect.
Please sign your name, exactly as it appears below. Joint owners must each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as it appears hereon. If held by a corporation, please
sign in full corporate name by the president or other authorized officer. If
held by a partnership, please sign in the partnership's name by an authorized
partner or officer.
Dated__________________________________, 1997
_____________________________________________
Signature
_____________________________________________
Signature, if held jointly, or office or
title held
