<PAGE> 1
As filed with the Securities and Exchange Commission on December 23, 1999.
REGISTRATION NO. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMPASS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 6711 63-0593897
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
15 SOUTH 20TH STREET
BIRMINGHAM, ALABAMA 35223
(205) 933-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JERRY W. POWELL, ESQUIRE
GENERAL COUNSEL
COMPASS BANCSHARES, INC.
15 SOUTH 20TH STREET
BIRMINGHAM, ALABAMA 35233
(205) 933-3960
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable following the effective date of this
Registration Statement
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Title of each class Amount to Proposed Proposed Amount of
of securities be maximum offering maximum aggregate registration
to be registered registered (1) price per share offering price (3) fee
------------------- -------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock, $2.00 par value 3,370,000 (2) $73,113,934 $20,326
</TABLE>
(1) This amount is based upon the maximum number of shares anticipated to
be issued pursuant to an Agreement and Plan of Merger dated as of
November 4, 1999 between the Registrant and MegaBank Financial
Corporation.
(2) Not applicable.
(3) Computed in accordance with Rule 457(f)(1) under the Securities Act of
1933, as amended, based on $9.25, the average of the high and low
prices for a share of common stock of MegaBank Financial Corporation,
as reported on the Nasdaq National Market on December 17, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
MEGABANK FINANCIAL CORPORATION COMPASS BANCSHARES, INC.
PROXY STATEMENT PROSPECTUS
This document is being sent to you by the Board of
Directors of MegaBank Financial Corporation. The Board is
asking for proxies to be voted at the Special Meeting of
shareholders to be held at _______ local time, on
_____________, _____________, 2000 at the offices of MegaBank
at 8100 Arapahoe Road, Englewood, Colorado 80112.
At the Special Meeting, you will vote on the merger
of MegaBank and Compass Bancshares. In the merger, MegaBank
shareholders will get a total of 3,370,000 shares of Compass
common stock in exchange for their shares of MegaBank common
stock. After the merger, MegaBank will be subsidiary of
Compass.
Compass common stock and MegaBank common stock are
publicly traded in the over-the-counter market and quoted on
the Nasdaq National Market System. Compass' trading symbol is
"CBSS" and MegaBank's trading symbol is "MBFC."
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS EITHER APPROVED OR DISAPPROVED OF THE COMPASS COMMON STOCK TO BE
ISSUED IN THE MERGER OR DETERMINED IF THIS DOCUMENT IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMPASS COMMON STOCK OFFERED BY THIS DOCUMENT ARE NOT SAVINGS
ACCOUNTS OR BANK DEPOSITS, ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING
OR NON-BANKING AFFILIATE OF COMPASS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
DATED JANUARY ___, 2000 AND FIRST MAILED TO SHAREHOLDERS ON OR ABOUT
JANUARY ___, 2000.
<PAGE> 3
TABLE OF CONTENTS
WHERE YOU CAN FIND MORE INFORMATION................................ 1
SUMMARY............................................................ 2
SELECTED FINANCIAL DATA............................................ 6
MARKET PRICES...................................................... 8
RISK FACTORS....................................................... 9
THE MEGABANK SPECIAL MEETING....................................... 10
General........................................................ 10
Matters to be Considered....................................... 10
Record Date; Shares Entitled to Vote; Quorum................... 10
Votes Required; Voting and Revocation of Proxies,
Effect of Abstention; Non-Votes............................. 10
Solicitation of Proxies........................................ 10
MERGER WITH MEGABANK............................................... 11
General........................................................ 11
Background and Reasons for the Merger.......................... 12
Opinion of Advisors............................................ 13
Financial Opinion of Hovde Financial, Inc.................... 13
Financial Opinion of Howe Barnes Investments, Inc............ 16
Operations after the Merger.................................... 19
Other Terms and Conditions..................................... 19
Modification of Structure...................................... 22
No Solicitation................................................ 22
Empire Title & Escrow Corporation.............................. 23
Exercise of Convertible Securities............................. 23
Additional Agreements.......................................... 23
Voting Agreement and Irrevocable Proxy....................... 23
Employment Agreements........................................ 23
Pooling Transfer Restrictions Agreements..................... 23
LLC Merger Agreements........................................ 24
Business Pending Effective Time................................ 24
Amendment...................................................... 24
Termination.................................................... 24
Exchange of Shares............................................. 26
Dissenters' Rights............................................. 26
Federal Income Tax Consequences................................ 27
Accounting Treatment........................................... 28
GOVERNMENT APPROVALS............................................... 29
SUPERVISION AND REGULATION......................................... 29
General........................................................ 29
Compass........................................................ 29
The Subsidiary Banks........................................... 31
Other.......................................................... 32
DESCRIPTION OF COMPASS COMMON AND PREFERRED STOCK.................. 33
Compass Common Stock........................................... 33
Dividends.................................................... 33
Preemptive Rights............................................ 33
Voting Rights................................................ 33
Liquidation.................................................. 34
Compass Preferred Stock........................................ 34
COMPARISON OF RIGHTS OF SHAREHOLDERS OF MEGABANK AND COMPASS....... 34
Charter and Bylaw Provisions Affecting Compass Stock........... 34
Certain Differences Between the Corporation Laws of
Colorado and Delaware and Corresponding Charter
and Bylaw Provisions....................................... 34
Mergers...................................................... 34
Appraisal Rights............................................. 35
Special Meetings............................................. 36
Actions Without a Meeting.................................... 36
Election of Directors........................................ 36
Voting on Other Matters...................................... 36
Preemptive Rights............................................ 36
Dividends And Repurchases Of Shares.......................... 37
Liquidation Rights........................................... 37
Limitation Of Liability and Indemnification.................. 37
Removal Of Directors......................................... 38
Inspection of Books and Records.............................. 38
Antitakeover Provisions...................................... 38
RESALE OF COMPASS STOCK............................................ 39
INFORMATION ABOUT COMPASS.......................................... 39
Incorporation of Certain Documents by Reference................ 39
Interests of Certain Persons................................... 39
Recent Developments............................................ 39
INFORMATION ABOUT MEGABANK......................................... 40
Services, Employees and Loans.................................. 40
Competition.................................................... 40
Properties..................................................... 40
Legal Proceedings.............................................. 42
Beneficial Ownership of MegaBank Common Stock
by MegaBank Management and Principal Shareholders............ 42
Management's Discussion and Analysis of Financial
Condition and Results of Operations of MegaBank.............. 43
Results of Operations.......................................... 44
Net Interest Income.......................................... 44
Other Income................................................. 47
Other Expenses............................................... 48
Federal Income Tax........................................... 48
Financial Condition............................................ 48
Loan Portfolio Composition................................... 48
Loan Maturities.............................................. 49
Nonperforming Loans.......................................... 50
Analysis of Allowance for Loan Losses........................ 51
Investments.................................................. 53
Investment Maturities and Yield.............................. 54
Deposits..................................................... 54
FHLB Borrowings.............................................. 56
Capital Resources.............................................. 56
Liquidity...................................................... 57
Sources of Liquidity......................................... 57
Asset/Liability Management................................... 57
Effects of Inflation and Changing Prices....................... 58
Year 2000 Compliance........................................... 59
Interests of Certain Persons................................... 59
LLC Mergers.................................................. 59
Employment Agreements........................................ 60
Indemnification.............................................. 60
RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS......................... 60
EXPERTS............................................................ 61
LEGAL OPINIONS..................................................... 61
INDEMNIFICATION.................................................... 61
OTHER MATTERS...................................................... 61
Appendix I Agreement and Plan of Merger between Compass and MegaBank dated
November 4, 1999, as amended
Appendix II Opinion of Hovde Financial, Inc.
Appendix III Opinion of Howe Barnes Investments, Inc.
<PAGE> 4
WHERE YOU CAN FIND MORE INFORMATION
Compass and MegaBank file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information that the
companies file at the Commission's public reference room in Washington, D.C. at
450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms.
Compass' and MegaBank's public filings are also available to the public
from commercial document retrieval services and at the Internet World Wide
Website maintained by the Commission at "http://www.sec.gov."
Compass has filed the registration statement to register with the
Commission the shares of Compass common stock to be issued to MegaBank
shareholders in the merger. This document is a part of the registration
statement and constitutes a prospectus of Compass and a proxy statement of
MegaBank for the Special Meeting.
Compass common stock and MegaBank common stock are traded on the Nasdaq
Stock Market under the symbols "CBSS" and "MBFC," respectively. Documents filed
by Compass and MegaBank also can be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
As allowed by Commission rules, this document does not contain all the
information that shareholders can find in the registration statement or the
exhibits to the registration statement.
The Commission allows Compass to "incorporate by reference" information
into this document, which means that Compass can disclose important information
to you by referring you to another document filed separately with the
Commission. The information incorporated by reference is deemed to be part of
this document, except for any information superseded by information contained
directly in the document. This document incorporates by reference other
documents which are listed below that Compass has previously filed with the
Commission. The documents contain important information about their businesses
and financial conditions that is not included in or delivered with this
document.
Compass Filings (File No. 0-6032):
- Compass' Annual Report on Form 10-K for the fiscal year ended
December 31, 1998;
- Compass' Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999, June 30, 1999 and September 30, 1999;
- Compass' Current Report on Form 8-K dated March 25, 1999;
- Compass' Current Report on Form 8-K dated August 23, 1999;
- Compass' Proxy Statement dated March 30, 1999, relating to its
annual meeting of shareholders held on April 26, 1999; and
- The description of Compass common stock contained in its Proxy
Statement dated April 16, 1982 relating to its Annual Meeting
held May 17, 1982.
Compass incorporates by reference additional documents that it might
file with the Commission between the date of this document and the date of the
Special Meeting. These include periodic reports, such as Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Compass has supplied all information contained or incorporated by
reference in this document relating to Compass and MegaBank has supplied all
information contained in this document relating to MegaBank.
COPIES OF ANY OF THE DOCUMENTS INCORPORATED BY REFERENCE BY COMPASS
(EXCLUDING EXHIBITS UNLESS SPECIFICALLY INCORPORATED THEREIN) ARE AVAILABLE
WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST FROM ED BILEK AT 15 SOUTH 20TH
STREET, BIRMINGHAM, ALABAMA 35233 (TELEPHONE NO. (205) 558-5740). TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY _____________,
2000.
You should rely only on the information contained or incorporated by
reference in this document in determining how to vote your shares at the Special
Meeting. Compass and MegaBank have not authorized anyone to provide you with
information that is different from what is contained in this document. This
document is dated January ___, 2000. You should not assume that the information
contained in this document is accurate as of any date other than that date, and
neither the mailing of this document to shareholders nor the issuance of
Compass' common stock in the merger shall create any implication to the
contrary.
1
<PAGE> 5
SUMMARY
This summary highlights selected information from this document and may
not contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document, including the
Appendices, and the other documents we have referred you to. For more
information about Compass and MegaBank, see "WHERE YOU CAN FIND MORE
INFORMATION."
PARTIES TO THE MERGER
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<S> <C>
COMPASS BANCSHARES, INC...................... 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 under the Bank Holding Company Act. Most of
Compass' revenues are from its bank subsidiaries located in Alabama,
Texas, Florida and Arizona.
On September 30, 1999, Compass and its subsidiaries had consolidated
assets of $17.7 billion, consolidated deposits of $12.7 billion, and
total shareholders' equity of $1.2 billion. SEE "WHERE YOU CAN FIND MORE
INFORMATION"; "SELECTED FINANCIAL DATA"; AND "INFORMATION ABOUT COMPASS."
Compass' main offices are at 15 South 20th Street, Birmingham, Alabama
35233, and its telephone number is 205/933-3000.
MEGABANK FINANCIAL CORPORATION............... MegaBank is a Colorado corporation which was organized in 1984. It is a
unitary savings and loan holding company under the Home Owners' Loan
Act. MegaBank owns a unitary thrift which was originally chartered in
1983 and converted to a federal savings bank in 1998. The majority of
MegaBank's revenues are generated from this thrift.
On September 30, 1999, MegaBank had total assets of $298.0 million, total
deposits of $238.0 million, and total shareholders' equity of $33.1
million. SEE "WHERE YOU CAN FIND MORE INFORMATION"; "SELECTED FINANCIAL
DATA"; AND "INFORMATION ABOUT MEGABANK."
MegaBank's main offices are at 8100 East Arapahoe Road, Suite 214,
Englewood, Colorado 80112, and its telephone number is 303/740-2265.
THE SPECIAL MEETING
WHEN AND WHERE............................... The Special Meeting of the shareholders of MegaBank will be held on
_____________, _________________, 2000, at ____ local time, at 8100
Arapahoe Road, Englewood, Colorado 80112. SEE "THE MEGABANK SPECIAL
MEETING."
WHY......................................... The purpose of the Special Meeting is to vote on:
(1) the merger in which MegaBank will become a subsidiary of Compass
and you will receive shares of Compass common stock in exchange for
your shares of MegaBank common stock; and
(2) any other business brought up at the Special Meeting.
SEE "THE MEGABANK SPECIAL MEETING" AND "MERGER WITH MEGABANK."
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2
<PAGE> 6
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VOTE REQUIRED............................... Two-thirds of MegaBank shares must vote to approve the merger of MegaBank
and Compass. Compass shareholders do not have to approve the merger.
SEE "THE MEGABANK SPECIAL MEETING."
SHARES ENTITLED TO VOTE..................... Only record holders at the close of business on _____________, 2000 will
get notice of and be allowed to vote at the Special Meeting. On the
record date, there were 7,769,709 shares of MegaBank common stock
outstanding, not including shares issuable upon exercise of options or
warrants or shares issuable to the former shareholders of Empire Title &
Escrow Corporation.
OWNERSHIP OF MANAGEMENT..................... Certain directors and executive officers and other affiliates of MegaBank
have agreed to vote in favor of the MegaBank merger agreement and the
MegaBank merger. In total, 4,474,607 shares, or 57.6% of the outstanding
stock, have agreed to vote in favor of the MegaBank merger agreement and
the MegaBank merger. SEE "SUMMARY -- VOTE REQUIRED" AND "MERGER WITH
MEGABANK -- GENERAL."
MERGER WITH MEGABANK
EFFECTS OF THE MERGER....................... In the merger, you will get shares of Compass common stock in exchange
for your shares of MegaBank common stock. After the merger, MegaBank
will be a subsidiary of Compass. The officers and directors of MegaBank
after the merger will be appointed by Compass. SEE "MERGER WITH MEGABANK
-- GENERAL."
WHAT YOU WILL GET........................... If the merger is completed, MegaBank shareholders will get a total of
3,370,000 shares of Compass common stock.
On the record date, there were 7,904,209 shares of MegaBank common stock
outstanding, on a fully diluted basis. This amount includes:
(1) 7,769,709 shares of MegaBank common stock;
(2) 97,000 shares of MegaBank common stock issuable upon
exercise of options or warrants; and
(3) approximately 37,500 shares of MegaBank common stock reserved
to be issued to the former shareholders of Empire Title & Escrow
Corporation.
This means for each share of MegaBank common stock you own, you will get
approximately 0.426 shares of Compass common stock.
The completion of the merger depends on a number of conditions being
WHEN WILL THE MERGER HAPPEN................. met. No matter what, the merger will not happen before April 1, 2000.
SEE "MERGER WITH MEGABANK -- OTHER TERMS AND CONDITIONS."
OUR REASONS FOR THE MERGER.................. MegaBank's Board of Directors believes the merger gives you the
opportunity to acquire an interest in a larger, more diversified
financial institution, whose shares are more liquid and which does not
depend mainly on the economic conditions in Colorado. SEE "MERGER WITH
MEGABANK -- BACKGROUND AND REASONS FOR THE MERGER."
OUR RECOMMENDATION.......................... MegaBank's Board of Directors believes the terms of the merger are fair
and in your best interests and has unanimously approved the merger
agreement and the merger. THE MEGABANK BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THE MEGABANK MERGER AGREEMENT AND THE
MEGABANK MERGER. SEE "MERGER WITH MEGABANK -- BACKGROUND AND REASONS FOR
THE MERGER."
</TABLE>
3
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OPINION OF FINANCIAL ADVISORS.............. MegaBank retained Hovde Financial, Inc. and Howe Barnes Investments, Inc.
as its financial advisors in connection with the MegaBank merger
agreement to evaluate the financial terms of the MegaBank merger. Hovde
and Howe Barnes delivered opinions to the MegaBank Board of Directors
that the consideration to be received by you in the merger is fair from a
financial point of view. Copies of Hovde's and Howe Barnes' opinions are
attached to this document as Appendices II and III and are incorporated
by reference. SEE "MERGER WITH MEGABANK -- FINANCIAL OPINION OF
MEGABANK'S FINANCIAL ADVISORS."
REGULATORY MATTERS......................... To complete the merger, Compass must receive approvals from the Federal
Reserve System under the Bank Holding Company Act and the Colorado
Division of Banking. SEE "MERGER WITH MEGABANK -- OTHER TERMS AND
CONDITIONS."
TERMINATION................................ MegaBank and Compass can agree at any time to terminate the merger
agreement without completing the merger even if MegaBank's shareholders
have approved it. Under certain circumstances, either Compass or
MegaBank may unilaterally terminate the merger agreement. If the merger
agreement is terminated because MegaBank violates the exclusivity
provisions of the merger agreement or because it receives another
proposal and, as a result, does not consummate the merger, MegaBank must
pay Compass a fee of $4,000,000. SEE "MERGER WITH MEGABANK --
TERMINATION."
INTERESTS OF CERTAIN PERSONS IN THE MERGER. You should be aware that MegaBank officers, directors and employees may
have interests in the merger that are different from, or in addition to,
yours.
In connection with the completion of the merger of MegaBank, Compass
will acquire Osage 3734 LLC, 1996 Newton LLC and Nagrom LLC. Each of the
LLCs leases space to MegaBank or its subsidiaries. Certain members of
the LLCs are also executive officers and directors of MegaBank. In the
acquisitions, the members of the LLCs will receive shares of Compass
common stock. It is a condition to the completion of the merger that
Compass also acquire the LLCs. SEE "INFORMATION ABOUT MEGABANK
--INTERESTS OF CERTAIN PERSONS."
In addition, for five years after the merger, Compass will indemnify the
officers, directors and employees of MegaBank for all liabilities
arising before the merger to the maximum extent permitted by Compass'
Certificate of Incorporation and Bylaws. SEE APPENDIX I.
ACCOUNTING TREATMENT....................... Compass and MegaBank intend that the merger will qualify as a
"pooling-of-interests" for accounting and financial reporting
purposes. SEE "MERGER WITH MEGABANK -- ACCOUNTING TREATMENT."
DISSENTERS' RIGHTS......................... Under Colorado law, you do not have rights to dissent from the merger.
SEE "MERGER WITH MEGABANK -- DISSENTERS' RIGHTS."
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4
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FEDERAL INCOME TAX CONSEQUENCES........... The exchange of shares will be tax-free to you for federal income tax
purposes, except for taxes payable on any cash you receive instead of
fractional shares.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE
MEGABANK MERGER TO YOU WILL DEPEND ON THE FACTS OF YOUR SITUATION. YOU
ARE URGED TO CONSULT YOUR TAX ADVISOR FOR A FULL UNDERSTANDING OF THE
TAX CONSEQUENCES OF THE MERGER TO YOU.
The merger will not be completed if Compass and MegaBank do not receive
an opinion that the merger will be treated for United States federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code. SEE "MERGER WITH MEGABANK --FEDERAL
INCOME TAX CONSEQUENCES."
ADDITIONAL AGREEMENTS
EMPLOYMENT AGREEMENTS...................... Compass Bank, a subsidiary of Compass, and Thomas R. Kowalski, Chairman
of the Board of MegaBank, entered into an employment agreement which will
become effective upon completion of the merger. Under the employment
agreement, Mr. Kowalski will serve as a senior officer of Compass Bank
for three years beginning at the effective time of the merger. Mr.
Kowalski's annual base salary will be $175,000 with merit increases based
upon performance. Mr. Kowalski will also receive benefits available to
Compass Bank employees of equal title and base salary. The employment
agreement also contains noncompetition and confidentiality provisions.
SEE "MERGER WITH MEGABANK -- ADDITIONAL AGREEMENTS."
Larry Olsen, President of MegaBank, and certain other employees of
MegaBank and its subsidiaries also entered into employment agreements
which will become effective upon completion of the merger. The
employment agreements are for two years starting at the effective time
of the merger and each contains noncompetition and confidentiality
provisions. Raymond L. Anilionis entered into a consulting agreement
with Compass Bank which will become effective upon completion of the
merger. The consulting agreement is for one year and contains
noncompetition and confidentiality provisions. SEE "MERGER WITH MEGABANK
-- ADDITIONAL AGREEMENTS."
POOLING TRANSFER RESTRICTIONS AGREEMENTS... Certain principal shareholders of MegaBank entered into Pooling Transfer
Restrictions Agreements in which they have agreed:
(1) not to transfer any of their shares of MegaBank common stock 30
days before the merger;
(2) not to transfer any shares of Compass common stock they receive in
the merger until financial results covering at least 30 days of
post-merger combined operations of MegaBank and Compass are
published; and
(3) not to transfer Compass common stock except in compliance with the
applicable provisions of the Securities Act of 1933 and the
Securities Exchange Act of 1934. SEE "MERGER WITH MEGABANK --
ADDITIONAL AGREEMENTS."
</TABLE>
5
<PAGE> 9
SELECTED FINANCIAL DATA
The following table summarizes, where indicated, certain pro forma
financial data for Compass, giving effect to the acquisition of MegaBank
assuming that the merger had been effective at the beginning of 1994. The
historical data of MegaBank as of and for the years ended December 31, 1998,
1997, 1996, 1995, and 1994 is derived from the audited financial statements of
MegaBank. The historical data of Compass as of and for the years ended December
31, 1998, 1997, 1996, 1995, and 1994 is derived from the audited financial
statements of Compass. The historical data of Compass and MegaBank as of and for
the nine months ended September 30, 1999, is derived from the unaudited
financial statements of Compass and MegaBank, respectively. In the opinion of
management of Compass and MegaBank, all adjustments considered necessary for a
fair presentation have been included in the unaudited interim data. The pro
forma income information does not necessarily indicate the results of operations
had the proposed transaction occurred at the beginning of 1994, nor does it
necessarily indicate the results of future operations. This information should
be read with the historical consolidated financial statements and the related
notes included or incorporated by reference in this document.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
AS OF AND FOR
THE NINE MONTHS
ENDED AS OF AND FOR THE YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
--------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL ASSETS
Compass $17,681,373 $17,288,908 $14,900,748 $13,724,190 $12,374,866 $10,944,505
MegaBank 297,972 230,819 157,880 118,929 102,076 62,649
TOTAL DEPOSITS
Compass 12,744,515 12,013,446 10,907,162 10,933,002 9,592,063 8,665,378
MegaBank 237,968 189,879 141,878 104,661 90,192 53,843
LONG-TERM DEBT
Compass 2,251,061 2,045,980 1,430,253 734,012 623,192 516,822
MegaBank 0 0 0 2,628 3,000 0
TOTAL SHAREHOLDERS'
EQUITY
Compass 1,202,669 1,196,141 1,068,019 952,509 873,479 734,629
MegaBank 33,068 27,391 11,578 8,827 6,393 4,617
NET INTEREST INCOME
Compass 476,247 579,387 539,775 487,566 443,901 412,362
MegaBank 14,087 13,315 10,417 8,228 6,273 4,838
NET INCOME FROM
CONTINUING OPERATIONS
Compass 161,716 180,880 166,242 146,334 132,567 118,598
MegaBank 4,279 3,805 2,834 2,420 1,647 854
NET INCOME
PER COMMON SHARE FROM
CONTINUING OPERATIONS (1)
Compass
Historical (3) 1.41 1.60 1.48 1.32 1.20 1.08
Pro forma 1.41 1.58 1.46 1.30 1.18 1.06
MegaBank
Historical 0.55 0.58 0.44 0.38 0.26 0.13
Equivalent pro forma (2) 0.60 0.67 0.62 0.55 0.50 0.45
</TABLE>
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<PAGE> 10
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
AS OF AND FOR
THE NINE MONTHS
ENDED AS OF AND FOR THE YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------------
1999 1998 1997 1996 1995 1994
----------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CASH DIVIDENDS PER
COMMON SHARE
Compass
Historical (3) 0.60 0.70 0.63 0.57 0.50 0.41
Pro forma 0.58 0.68 0.61 0.55 0.48 0.39
MegaBank
Historical 0 0 0 0 0 0
Equivalent pro forma (2) 0.25 0.29 0.26 0.23 0.21 0.17
SHAREHOLDERS' EQUITY
(BOOK VALUE) PER
COMMON
SHARE
Compass
Historical (3) 10.48 10.30 9.37 8.37 7.68 6.60
Pro forma 10.46 10.23 9.19 8.20 7.51 6.44
MegaBank
Historical 4.26 3.60 1.80 1.38 1.00 0.72
Equivalent pro forma (2) 4.46 4.36 3.92 3.49 3.20 2.75
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
Compass
Historical (3) 113,309 111,295 110,163 108,908 109,402 109,005
Pro forma 116,679 114,665 113,533 112,278 112,772 112,375
MegaBank
Historical 7,713 6,542 6,407 6,407 6,407 6,407
NUMBER OF COMMON
SHARES OUTSTANDING
AT END OF PERIOD
Compass
Historical 113,650 75,567 73,757 48,903 48,703 48,473
Pro forma 117,020 77,814 76,004 50,401 50,201 49,971
MegaBank
Historical 7,770 7,607 6,407 6,407 6,407 6,407
</TABLE>
- ---------------------
(1) Net income per common share from continuing operations
represents basic earnings per share.
(2) MegaBank's Equivalent Pro Forma per share amounts are computed
by multiplying Compass' Pro Forma amounts by the exchange
ratio of 0.42636.
(3) For comparative purposes, data has been restated to reflect
the three-for-two stock split effected in April 1997 and the
three-for-two stock split effected in April 1999.
7
<PAGE> 11
MARKET PRICES
Compass common stock and MegaBank common stock are traded in the
national over-the-counter securities market. Since July 1984, Compass common
stock has been quoted under the symbol "CBSS" on the Nasdaq National Market
System. MegaBank common stock has been quoted on the Nasdaq National Market
System under the symbol "MBFC" since November 1998.
The following table shows the high and low sales prices and dividends
declared for Compass common stock and MegaBank common stock reported through the
Nasdaq National Market System published in The Wall Street Journal. The prices
shown do not include retail mark-ups, mark-downs or commissions. All share
values have been rounded to the nearest 1/8 of one dollar.
<TABLE>
<CAPTION>
COMPASS COMMON STOCK MEGABANK COMMON STOCK
------------------------------------- ---------------------------------------
DIVIDEND DIVIDEND
PERIOD HIGH LOW DECLARED HIGH LOW DECLARED
-------------------------- -------- --------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
1997
First Quarter 21 1/2 17 1/4 0.158 -- -- --
Second Quarter 24 7/8 19 1/2 0.158 -- -- --
Third Quarter 26 1/2 23 0.158 -- -- --
Fourth Quarter 31 1/8 24 3/4 0.158 -- -- --
1998
First Quarter 35 1/2 27 5/8 0.175 -- -- --
Second Quarter 33 1/4 28 0.175 -- -- --
Third Quarter 31 5/8 22 0.175 -- -- --
Fourth Quarter 26 1/4 19 1/4 0.175 11 3/4 9 1/2 --
1999
First Quarter 26 23 0.200 9 5/8 9 --
Second Quarter 30 1/2 23 5/8 0.200 10 1/2 9 1/4 --
Third Quarter 30 1/8 24 7/8 0.200 10 1/8 9 7/8 --
Fourth Quarter (through 28 1/8 20 3/4 0.200 12 9 --
December 17, 1999)
</TABLE>
The following table shows the last reported sales price per share of
Compass common stock and MegaBank common stock, as reported on the Nasdaq
National Market System on November 4, 1999, the last business day before public
announcement of the signing of the merger agreements and January __, 2000, the
latest practicable trading day before the mailing of this document:
<TABLE>
<CAPTION>
COMPASS COMMON STOCK MEGABANK COMMON STOCK
-------------------- ---------------------
<S> <C> <C>
November 4, 1999 27 7/8 11 3/8
January ___, 2000
</TABLE>
You should obtain current market quotations for Compass common stock
since the market price of Compass common stock will continue to fluctuate
between the date of this document and the date on which the merger is completed
and afterwards.
8
<PAGE> 12
RISK FACTORS
YOU WILL NO LONGER CONTROL MEGABANK. You currently control MegaBank
because you have the right to elect the Board of Directors of MegaBank and vote
on other matters affecting MegaBank. The merger will transfer control of
MegaBank from you to Compass. When the merger occurs, you will become a
shareholder of Compass. Because of this, you will no longer be able to control
or influence the management policies of MegaBank's operations, and as a
shareholder of Compass you will not be able to influence the management policies
of Compass because you will hold a small percentage of the voting stock of
Compass.
COMPASS FACES SIGNIFICANT COMPETITION. Compass' bank subsidiaries
compete with other banks on the basis of service, convenience and price. Because
of 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 will probably continue.
CHANGES IN THE ECONOMY MAY AFFECT COMPASS' BUSINESS. General economic
conditions impact the banking industry. The credit quality of Compass' loan
portfolio reflects the general economic conditions where it does business. The
continued financial success of Compass and its subsidiaries depends on things
beyond Compass' control, like national and local economic conditions, the supply
and demand for investable funds, interest rates and federal, state and local
laws. Any deterioration in any of these conditions could have a material adverse
effect on Compass' financial condition and results of operations, which would
probably negatively affect the market price of Compass common stock. SEE "MARKET
PRICES."
COMPASS' CHARTER AND BYLAWS MAY MAKE HOSTILE TAKEOVERS MORE DIFFICULT.
Compass' Restated Certificate of Incorporation and Bylaws contain provisions
which may make Compass a less attractive target for acquisition by anyone who
does not have the support of Compass' Board of Directors. These provisions
include 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 and a staggered Board of
Directors. There is also a limitation that shareholder actions without a meeting
may only be taken by unanimous written shareholder consent. MegaBank's Articles
of Incorporation require a two-thirds vote by the shareholders and directors for
the sale of all of the corporation's assets and the Colorado Business
Corporation Act requires that shareholders may take action without a meeting
only by unanimous written consent. SEE "COMPARISON OF RIGHTS OF SHAREHOLDERS OF
MEGABANK AND COMPASS -- CHARTER AND BYLAW PROVISIONS AFFECTING COMPASS COMMON
STOCK."
COMPASS MAY HAVE DIFFICULTY COMBINING THE OPERATIONS OF ACQUIRED
ENTITIES WITH COMPASS' OWN OPERATIONS. Because the markets and industries in
which Compass operates are highly competitive, and because of the inherent
uncertainties associated with the integration of an acquired company, there can
be no assurance that Compass will be able to realize fully the strategic
objectives and operating efficiencies in all of its acquisitions, including
MegaBank. In addition, Compass may lose key personnel, either from the acquired
entities or from itself, as a result of acquisitions. These factors could
contribute to the benefits expected from acquisitions not being achieved within
expected time frames or not being achieved at all.
THE SHARES YOU GET MAY BE WORTH LESS THAN THEY ARE TODAY. The precise
value of the merger consideration to be paid to MegaBank's shareholders will not
be known at the time of the special meeting. The merger agreement provides that
3,370,000 shares of Compass common stock will be issued in the merger in
exchange for the shares of MegaBank common stock. This amount is fixed and will
not be adjusted to reflect any changes in the value of either MegaBank or
Compass common stock between the date of the merger agreement and the effective
time of the merger. In addition, the value of the Compass common stock will
fluctuate prior to the effective time of the merger and may be higher or lower
than on the date of the merger agreement or the date of the Special Meeting.
SEE "SUPERVISION AND REGULATION" for a description of the regulatory
considerations relating to the ownership of Compass common stock.
9
<PAGE> 13
THE MEGABANK SPECIAL MEETING
GENERAL
MegaBank Financial Corporation, a Colorado corporation ("MegaBank"), is
sending you this document to provide you with information concerning the
Agreement and Plan of Merger dated as of November 4, 1999, as amended, by and
among Compass Bancshares, Inc. ("Compass"), ____________________, a Colorado
corporation and wholly owned subsidiary of Compass ("Merger Sub"), and MegaBank
(the "Merger Agreement") and the merger of Merger Sub with and into MegaBank
(the "Merger") and to solicit your proxy for use at the Special Meeting to be
held on _________________, 2000 at the time and place set forth in the
accompanying notice and at any adjournments thereof.
MATTERS TO BE CONSIDERED
At the Special Meeting, the shareholders of MegaBank will consider and
vote upon a proposal to approve and adopt the Merger Agreement and the Merger.
THE MEGABANK BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT HOLDERS OF MEGABANK COMMON
STOCK VOTE FOR THE MERGER AGREEMENT AND THE MERGER. SEE "MERGER WITH MEGABANK --
BACKGROUND AND REASONS FOR THE MERGER."
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The MegaBank Board of Directors has fixed the close of business on
___________, 2000 as the record date ("Record Date") for determining holders
entitled to notice of and to vote at the Special Meeting. As of the Record Date,
there were 7,769,709 shares of MegaBank common stock, no par value per share
("MegaBank Common Stock"), issued and outstanding, each of which entitled its
holder to one vote. The presence, either in person or by proxy, of the holders
of a majority of the issued and outstanding shares of MegaBank Common Stock
entitled to vote at the Special Meeting is necessary to constitute a quorum for
the transaction of business at the Special Meeting.
VOTES REQUIRED; VOTING AND REVOCATION OF PROXIES; EFFECT OF ABSTENTION;
NON-VOTES
The affirmative vote of the holders of two-thirds of the outstanding
shares of MegaBank Common Stock is required for approval of the Merger and the
Merger Agreement. Any shareholder giving a proxy has the right to revoke it at
any time prior to the Special Meeting by signing another proxy with a later date
or giving notice of such revocation to the Secretary of MegaBank at or prior to
the Special Meeting.
Votes cast by proxy or in person at the Special Meeting will be
tabulated by the election inspectors appointed for the meeting and the election
inspectors will determine whether or not a quorum is present. The election
inspectors will treat abstentions as shares that are present and entitled to
vote for purposes of determining the presence of a quorum but as unvoted for
purposes of determining the approval of any matter submitted to the shareholders
for a vote. The failure to submit a proxy or to vote at the Special Meeting will
have the same effect as a vote against the Merger and the Merger Agreement.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE SHAREHOLDERS OF MEGABANK. ACCORDINGLY, HOLDERS OF MEGABANK
COMMON STOCK ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED
IN THIS DOCUMENT, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED
PROXY IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
SOLICITATION OF PROXIES
Proxies will be solicited by mail, and may also be solicited
personally, by telephone, facsimile transmission or other means by the
directors, officers and employees of MegaBank, 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. Arrangements will also be made with custodians, nominees and
fiduciaries for the forwarding of soliciting material to the beneficial owners
of MegaBank Common Stock held of record by such
10
<PAGE> 14
persons, and MegaBank may reimburse such custodians, nominees and fiduciaries
for reasonable out-of-pocket expenses that they incur in that regard. 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.
MERGER WITH MEGABANK
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 document, 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 MegaBank are urged to read the Merger Agreement in its
entirety.
GENERAL
The Merger Agreement provides for the merger of Merger Sub with and
into MegaBank in accordance with the terms and conditions of the Merger
Agreement. MegaBank will be the surviving entity in the Merger and the separate
existence of Merger Sub will cease. After the effective time of the Merger (the
"Effective Time"), the officers and directors of Merger Sub will be the officers
and directors of the surviving entity.
The Merger Agreement provides that each share of MegaBank Common Stock,
issued and outstanding immediately prior to the Effective Time 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 ("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 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, and shall include, without limitation, shares issuable in
respect of a merger agreement ("Empire Merger Agreement") between MegaBank and
Empire Title & Escrow Corporation ("Empire") and its stockholders upon
consummation of the Merger. SEE "MERGER WITH MEGABANK -- EMPIRE TITLE & ESCROW
CORPORATION."
As Merger Consideration, Compass shall issue to the holders of the
shares an aggregate of 3,370,000 shares of the common stock of Compass, par
value $2.00 per share ("Compass Common Stock").
On the Record Date, there were 7,904,209 shares of MegaBank Common
Stock outstanding, on a fully diluted basis. This amount includes (1) 7,769,709
shares of MegaBank Common Stock issued and outstanding; (2) 97,000 shares of
MegaBank Common Stock issuable prior to consummation of the Merger upon exercise
of options or warrants; and (3) approximately 37,500 shares of MegaBank Common
Stock reserved to be issued to former shareholders of Empire upon consummation
of the Merger. SEE "MERGER WITH MEGABANK -- EMPIRE TITLE & ESCROW CORPORATION."
Assuming that there will be 7,904,209 shares of MegaBank Common Stock
issued and outstanding immediately prior to the Effective Time and the
satisfaction of all conditions to closing, each shareholder of MegaBank will be
entitled to receive approximately 0.426 shares of Compass Common Stock for each
share of MegaBank Common Stock.
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 average of the closing
sale price for Compass Common Stock as reported by the Nasdaq National Market
System for the twenty days of trading preceding the fifth trading day prior to
the Effective Time (the "Average Closing Price").
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 where the
record date or payment date occurs prior to the Effective Time. SEE APPENDIX I.
11
<PAGE> 15
The shares of capital stock of Merger Sub issued and outstanding
immediately before the Effective Time shall be converted into 7,769,709 shares
of common stock of the surviving corporation.
The Merger must be approved by the affirmative vote of the holders of
two-thirds of the outstanding shares of MegaBank Common Stock entitled to vote
thereon. Certain directors and officers and other affiliates of MegaBank (and
their affiliates) owning or otherwise controlling the right to vote 4,474,607
shares of MegaBank Common Stock, comprising approximately 57.6% of the total
shares of MegaBank Common Stock issued and outstanding as of the Record Date,
have agreed, pursuant to a voting agreement ("Voting Agreement"), to vote their
shares in favor of the Merger. SEE "SUMMARY -- VOTES REQUIRED"; "MERGER WITH
MEGABANK -- OTHER TERMS AND CONDITIONS"; AND APPENDIX I.
Merger Sub has ____ shares of common stock 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 sole shareholder of Merger Sub, will approve the Merger Agreement in the
manner prescribed by the Colorado Business Corporation Act ("CBCA"). SEE
"SUMMARY -- VOTES REQUIRED."
The Merger will be effected as soon as practicable following the
receipt of all necessary regulatory approvals and the satisfaction of all
conditions to the consummation of the Merger; provided, however, that the
Effective Time shall not occur prior to April 1, 2000. At the Effective Time, by
operation of law, holders of MegaBank Common Stock will become owners of Compass
Common Stock and will no longer be owners of MegaBank Common Stock. After the
Effective Time, all certificates for MegaBank 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 APPENDIX I.
BACKGROUND AND REASONS FOR THE MERGER
During the normal course of its business, MegaBank has received
inquiries regarding its willingness to consider an acquisition by, or
affiliation with, larger financial institutions. Consistent with its fiduciary
obligations to its shareholders, MegaBank has considered such inquiries and
evaluated them for the level and form of consideration proposed, the seriousness
and specificity which has been conveyed to MegaBank in terms of consideration,
the expected future operation of MegaBank, and other considerations and factors
deemed relevant by MegaBank, in formulating its business plan with the intent to
provide maximum value to its shareholders by enhancing its franchise as the
pre-eminent independent bank serving the Denver metropolitan area. The Board of
Directors of MegaBank consistently evaluates the cost of providing the
increasingly broad array of financial products and alternative delivery channels
to remain competitive in the marketplace, while continuing to deliver excellent
service to its customers and providing exceptional returns to its shareholders.
In considering a possible business combination, MegaBank's Board of Directors
retained Hovde Financial, Inc. ("Hovde") to assist and advise it in exploring
such a transaction and to issue a fairness opinion with respect to such
transaction and Howe Barnes Investments, Inc. ("Howe Barnes") to issue a
fairness opinion with respect to such transaction.
As the nature of banking has become increasingly competitive, larger
organizations have demonstrated a willingness to pay a premium for attractive
franchises in high-growth markets such as Denver. As a result, in September 1999
MegaBank approached Compass and provided them information, pursuant to a
confidentiality agreement, regarding MegaBank. As a result of this initial
contact, MegaBank and Compass commenced extensive negotiations in September
1999.
In evaluating whether to affiliate with Compass, MegaBank considered
the value of Compass Common Stock; competitive conditions in the market served
by MegaBank; MegaBank's ability to provide, on a cost-effective basis, the
ever-increasing and broadening array of financial services products demanded by
customers; the fact that Compass Common Stock is widely-traded, thereby
representing a more liquid investment than MegaBank's Common Stock; the
appreciation in the price of Compass Common Stock over the past ten years; and
Compass' dividend history. In addition, MegaBank believed that affiliating with
Compass, a larger financial institution with significantly greater resources and
expertise, offered expansion opportunities, financial products and services not
otherwise available to MegaBank and its customers which would better enable
MegaBank to compete. MegaBank and its Board of Directors determined that
MegaBank's competitive position and the value of its stock could best be
enhanced through affiliation with Compass.
12
<PAGE> 16
Following arm's-length negotiations between representatives of Compass
and MegaBank, Compass and MegaBank entered into the Merger Agreement. The
aggregate price to be paid to holders of MegaBank Common Stock resulted from
negotiations which considered the historical earnings and dividends of Compass
and MegaBank; the potential growth in MegaBank's market and earnings, both as an
independent entity and as a part of a larger organization such as Compass;
MegaBank's asset quality; and the effect of the Merger on the shareholders,
customers, and employees of MegaBank.
For the reasons set forth above, MegaBank's Board of Directors
unanimously approved the Merger Agreement and the Merger and recommends approval
of the Merger Agreement and the Merger by MegaBank's shareholders.
Subject to satisfaction of certain conditions contained in the Merger
Agreement, MegaBank's Board of Directors believes the Merger to be fair and in
the best interest of MegaBank's shareholders. MEGABANK'S BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT THE MEGABANK SHAREHOLDERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND THE MERGER and has authorized consummation thereof, subject
to approval of MegaBank's shareholders, federal and state bank regulators and
the satisfaction of certain other conditions.
OPINION OF ADVISORS
FINANCIAL OPINION OF HOVDE FINANCIAL, INC.
The full text of the Hovde Financial, Inc. Fairness Opinion (the "Hovde
Fairness Opinion"), which sets forth, among other things, assumptions made,
matters considered and qualifications and limitations on the review undertaken,
is attached hereto as Appendix II and is incorporated herein by reference. Hovde
has confirmed its opinion by delivery of an updated written opinion to the Board
of Directors of MegaBank dated the date of this document. MegaBank's
shareholders are urged to read the Hovde Fairness Opinion in its entirety. The
Hovde Fairness Opinion, which was directed to the MegaBank Board of Directors,
addresses only the fairness to the shareholders of MegaBank, from a financial
point of view, of the Merger Consideration, and does not constitute a
recommendation to any MegaBank shareholder as to how such shareholder should
vote with respect to the Merger. The Hovde Fairness Opinion was rendered to
MegaBank's Board of Directors for its consideration in determining whether to
approve the Merger Agreement. The following summary of the Hovde Fairness
Opinion is qualified in its entirety by reference to the full text of the Hovde
Fairness Opinion.
No limitations were imposed by MegaBank on the scope of Hovde's
investigation or the procedures to be followed by Hovde in rendering the Hovde
Fairness Opinion. Hovde did not make any recommendation to MegaBank's Board of
Directors as to the form or amount of consideration to be paid by Compass to
MegaBank in connection with the Merger, both of which were determined through
arm's-length negotiations between the parties. In arriving at its opinion, Hovde
did not ascribe a specific range of values to Compass or MegaBank, but rather
made its determination as to the fairness, from a financial point of view, of
the Merger Consideration, on the basis of the financial and comparative analyses
described below. Hovde was not requested to opine as to, and the Hovde Fairness
Opinion does not address, MegaBank's underlying business decision to proceed
with or effect the Merger.
During the course of the engagement, Hovde reviewed and analyzed
material bearing upon the financial and operating condition of Compass and
MegaBank and material prepared in connection with the Merger, including the
following: the Merger Agreement; certain publicly available information
concerning Compass and MegaBank, including, as applicable: Compass' and
MegaBank's audited consolidated financial statements for each of the years ended
December 31, 1998, 1997, and 1996 and the quarters ended March 31, 1999, June
30, 1999 and September 30, 1999; documents filed with the Commission, the
Federal Deposit Insurance Corporation, the Federal Reserve and other state or
other regulatory agencies, as applicable and/or appropriate, for the
aforementioned three-year period and for the quarterly periods ended March 31,
1999, June 30, 1999 and September 30, 1999, respectively; as applicable, recent
internal reports and/or financial projections regarding Compass and MegaBank;
the nature and terms of recent sale and merger transactions involving thrifts
and thrift holding companies that Hovde considered relevant; and financial and
other information provided to Hovde by the managements of Compass and MegaBank.
13
<PAGE> 17
In rendering the Hovde Fairness Opinion, Hovde assumed and relied upon
the accuracy and completeness of the financial and other information provided to
it by MegaBank or Compass without assuming any responsibility for independent
verification of such information and further relied upon the assurances of the
managements of Compass and MegaBank that they were not aware of any facts or
circumstances that would make such information, provided by them, inaccurate or
misleading. With respect to financial statements and/or projections to the
extent such were provided by Compass and MegaBank, Hovde assumed that such
financial statements and/or projections were reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
respective managements of Compass and MegaBank. Hovde assumed that the Merger
will be accounted for using the pooling-of-interests method of accounting. In
rendering the Hovde Fairness Opinion, Hovde did not conduct a physical
inspection of the properties and facilities of Compass or MegaBank and did not
make or obtain any evaluations or appraisals of the assets or liabilities of
Compass or MegaBank. In addition, Hovde noted that it is not an expert in the
evaluation of loan portfolios or allowances for loan, lease or real estate owned
losses, and it assumed that the allowances for loan, lease and real estate owned
losses (as currently stated or as adjusted for in connection with the Merger or
otherwise) provided to it by MegaBank and used by it in its analysis and in
rendering its Hovde Fairness Opinion were in the aggregate adequate to cover all
such losses. The Hovde Fairness Opinion was based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date the
Hovde Fairness Opinion.
The following is a summary of the analyses Hovde performed in rendering
the Hovde Fairness Opinion. In connection with the preparation and delivery of
the Hovde Fairness Opinion to the Board of Directors of MegaBank, Hovde
performed a variety of financial and comparative analyses, as described below.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial and comparative analysis and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Furthermore,
in arriving at its opinion, Hovde did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly, Hovde
believes that its analyses must be considered as a whole and that considering
any portion of such analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the process underlying
its opinion. In its analyses, Hovde made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Hovde. Any estimates contained
in these analyses are not necessarily indicative of actual values or predictive
of future results or values, which may be significantly more or less favorable
than as set forth therein. In addition, analyses relating to the value of
businesses did not purport to be appraisals or to reflect the prices at which
businesses may actually be sold.
Merger Value Analysis. Hovde calculated the price-to-tangible book,
price-to-earnings multiple, and deposit premium paid, (defined as the merger
value less the tangible book value of MegaBank, divided by MegaBank's core
deposits), in the Merger using September 30, 1999 financial data for MegaBank
and the trading value of Compass Common Stock as of the close of trading on
November 16, 1999. This analysis yielded an aggregate merger value of
$94,149,375, a price-to-tangible book value multiple of 309.2%, a price-to-last
twelve months' earnings multiple of 17.9x and a deposit premium of 33.3%.
Comparable Company Analysis - Compass. Using publicly available
information, Hovde compared the financial performance and stock market valuation
of Compass with the following selected banking institutions with assets between
$10 and $40 billion (the "Comparable Bank Group") deemed relevant by Hovde: TCF
Financial (MN), Colonial BancGroup (AL), Commerce Bancshares (MO), Synovus (GA),
North Fork Bancorp (NY), Associated (WI), Pacific Century (HI), Hibernia (LA),
BancWest (HI), Old Kent (MI), First Tennessee (TN), AmSouth (AL), M&T Bank (NY),
M&I Corp (WI), Huntington Bancshares (OH), Northern Trust (IL), Fifth Third
(OH), Union Planters (TN), UnionBanCal (CA), Summit (NJ), Comerica (MI), Firstar
(WI), BB&T (NC) and Regions (AL). Indications of such financial performance and
stock market valuation included profitability (return on average assets and
return on average equity for the latest twelve month period ended September 30,
1999, of 1.24% and 17.83%, respectively, for Compass and averages of 1.46% and
17.61%, respectively, for the Comparable Bank Group); the ratio of tangible
equity to tangible assets (5.69% for Compass and an average of 7.05% for the
Comparable Bank Group); the ratio of non-performing assets to total assets
(0.42% for Compass and an average of 0.57% for the Comparable Bank Group);
current stock price to earnings for the latest twelve month period ended
September 30, 1999 (15.3x for Compass and an average of 17.6x for the Comparable
Bank Group); and current
14
<PAGE> 18
stock price to tangible book value as of September 30, 1999 (298.1% for Compass
and an average of 404.4% for the Comparable Bank Group).
Because of the inherent differences in the businesses, operations,
financial conditions and prospects of MegaBank, Compass and the companies
included in the Comparable Bank Group, Hovde believed that a purely quantitative
comparable company analysis would not be particularly meaningful in the context
of the Merger. Hovde believed that the appropriate use of a comparable company
analysis in this instance would involve qualitative judgments concerning the
differences between MegaBank and the companies included in the Comparable Bank
Group which would affect the trading values of the comparable companies.
Comparable Transaction Analysis. Using publicly available information,
Hovde reviewed certain terms and financial characteristics, including historical
price-to-earnings ratio, the price-to-tangible book ratio, and the deposit
premium paid in prior thrift institution merger or acquisition transactions. The
first comparable group ("Comparable Group One") included nationwide thrift
transactions announced since January 1, 1999 with sellers with assets between
$100 million and $1 billion that earned over 1.00% on total assets. Comparable
Group One included 13 transactions. The average price-to-last twelve month
earnings for Comparable Group One was 21.7x, and ranged from 13.7x to 29.3x. The
average price-to-tangible book value for Comparable Group One was 204.2%, and
ranged from 101.6% to 375.4%. The average deposit premium for Comparable Group
One was 19.0%, and ranged from 2.9% to 35.5%.
The second comparable group ("Comparable Group Two") included thrift
transactions announced since January 1, 1998 with sellers located in the
Midwestern and Western United States with assets between $100 million and $1
billion. Comparable Group Two included 19 transactions. The average
price-to-last twelve month earnings for Comparable Group Two was 25.8x, and
ranged from 11.5x to 51.3x. The average price-to-tangible book value for
Comparable Group Two was 168.0%, and ranged from 106.2% to 285.0%. The average
deposit premium for Comparable Group Two was 12.2%, and ranged from 1.8% to
32.8%.
Because the reasons for and circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent differences in
the businesses, operations, financial conditions and prospects of MegaBank,
Compass and the companies included in Comparable Group One and Comparable Group
Two, Hovde believed that a purely quantitative comparable transaction analysis
would not be particularly meaningful in the context of rendering the fairness
opinion. Hovde believed that the appropriate use of a comparable transaction
analysis in this instance would involve qualitative judgments concerning the
differences between the characteristics of these transactions and the Merger
which would affect the acquisition values of the acquired companies and
MegaBank.
Discounted Terminal Value Analysis. Hovde estimated the present value
of the MegaBank Common Stock by assuming a range of discount rates from 13% to
15% and an 15% annual growth rate in earnings through 2004, starting with
earnings of $5.50 million in 1999. In arriving at the value of MegaBank's Common
Stock, Hovde assumed an earnings growth rate of 3.0% from 2005 into perpetuity.
This terminal value was then discounted, along with yearly cash flows for 1999
through 2004, to arrive at the present value for MegaBank's Common Stock. These
rates and values were chosen to reflect different assumptions regarding the
required rates of return of holders or prospective buyers of MegaBank Common
Stock. This analysis and its underlying assumptions yielded a range of value for
MegaBank's shares of approximately $8.88 to $10.86 per share, compared to a
total Merger Consideration of $12.09 per share.
Hovde is a nationally recognized investment banking firm. Hovde, as part of its
investment banking business, is continuously engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
competitive biddings, private placements and valuations for corporate and other
purposes. Pursuant to a letter agreement dated August 25, 1999 and executed by
MegaBank on August 27, 1999, between MegaBank and Hovde (the "Hovde Agreement"),
MegaBank engaged Hovde to advise it with respect to a potential business
combination (the "Transaction") with Compass and, in the event a Transaction was
consummated with Compass, agreed to pay to Hovde a fee in an amount equal to
$750,000; provided, however, that if the Purchase Consideration, (as defined in
the Hovde Agreement), is between $11.00 and $11.99 per share, the fee shall
equal 1.4% of the Purchase Consideration; if the Purchase Consideration is
between $12.00 and $12.99 per share, the fee shall equal 1.5% of the Purchase
Consideration; if the Purchase Consideration is between $13.00 and $13.99 per
share, the fee shall equal 1.6% of the Purchase Consideration; and if the
Purchase Consideration is greater than $13.99 per share,
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<PAGE> 19
the fee shall equal 1.7% of the Purchase Consideration. The Hovde Agreement also
provides for MegaBank to indemnify Hovde and its affiliates against certain
liabilities to which it may become subject to as a result of its services to
MegaBank under the Hovde Agreement, including liabilities under securities laws,
as well as other specified conditions.
FINANCIAL OPINION OF HOWE BARNES INVESTMENTS, INC.
On November 4, 1999, Howe Barnes rendered an opinion to MegaBank's
Board of Directors that, as of the date of such opinion and based upon the
matters set forth in such opinion, the Merger Consideration was fair, from a
financial point of view, to the holders of MegaBank Common Stock. Howe Barnes
has confirmed its November 4, 1999 opinion by delivery of an updated written
opinion to the Board of Directors dated the date of this document stating that,
as of the date hereof and based on the matters set forth in such opinion, the
Merger Consideration is fair, from a financial point of view, to the holders of
MegaBank Common Stock.
The full text of Howe Barnes' opinion, which sets forth assumptions
made, procedures followed, matters considered, and limits on the review
undertaken by Howe Barnes, is attached as Appendix III and is incorporated
herein by reference. The description of the Howe Barnes opinion set forth in
this document is qualified in its entirety by reference to the full text of such
opinion. MegaBank shareholders are urged to read the Howe Barnes opinion in its
entirety.
Howe Barnes' opinion as expressed herein is limited to the fairness,
from a financial point of view, of the Merger Consideration to the holders of
MegaBank Common Stock and does not address MegaBank's underlying business
decision to proceed with the Merger, nor does it express an opinion as to the
prices at which shares of Compass Common Stock issued in the Merger may trade if
and when they are issued or at any future time. The opinion is directed only to
the Merger Consideration in the Merger and does not constitute a recommendation
to any holder of MegaBank Common Stock as to how such holder should vote with
respect to the Merger Agreement at any meeting of holders of MegaBank Common
Stock.
Howe Barnes, as part of its investment banking business, is regularly
engaged in the valuation of banks and bank holding companies, thrifts and thrift
holding companies, and various other financial services companies, in connection
with mergers and acquisitions, initial and secondary offerings of securities,
and valuations for other purposes. The MegaBank Board of Directors selected Howe
Barnes on the basis of its familiarity with the financial services industry, its
qualifications, ability, previous experience, and its reputation with respect to
such matters.
For purposes of its opinion dated the date hereof, in connection with
its review of the proposed transaction with Compass, Howe Barnes, among other
things:
(1) participated in discussions with representatives of MegaBank concerning
MegaBank's financial condition, businesses, assets, earnings,
prospects, and senior management's views as to its future financial
performance;
(2) reviewed the Merger Agreement and the specific terms of the Merger;
(3) reviewed certain publicly available financial statements, both audited
(where available) and unaudited, and related financial information of
MegaBank and Compass, including those included in their respective
Annual Reports on Form 10-K and Form 10-KSB and the respective
Quarterly Reports on Form 10-Q and Form 10-QSB for the periods ended
March 31, 1999, June 30, 1999, and September 30, 1999;
(4) discussed and reviewed certain aspects of the past and current business
operations, financial condition, and future prospects of MegaBank with
certain members of management;
(5) reviewed reported market prices and historical trading activity of
MegaBank and Compass Common Stock;
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<PAGE> 20
(6) reviewed certain aspects of the financial performance of MegaBank and
Compass and compared such financial performance of MegaBank and
Compass, together with stock market data relating to MegaBank and
Compass Common Stock, with similar data available for certain other
financial institutions and certain of their publicly traded securities;
and
(7) reviewed the financial terms, to the extent publicly available, of
certain recent business combinations involving other financial
institutions.
In conducting its review and rendering its opinion, Howe Barnes assumed
and relied, without independent verification, upon the accuracy and completeness
of all of the financial and other information that has been provided to Howe
Barnes by MegaBank, Compass, and their respective representatives, and of the
publicly available information that was reviewed by Howe Barnes. Howe Barnes is
not an expert in the evaluation of allowances for loan losses and has not
independently verified such allowances, and has relied on and assumed that the
aggregate allowances for loan losses set forth in the balance sheets of each of
MegaBank and Compass at September 30, 1999 are adequate to cover such losses and
complied fully with applicable law, regulatory policy, and sound banking
practice as of the date of such financial statements. Howe Barnes was not
retained to and did not conduct a physical inspection of any of the properties
or facilities of MegaBank or Compass, did not make any independent evaluation or
appraisal of the assets, liabilities or prospects of MegaBank or Compass, was
not furnished with any such evaluation or appraisal, and did not review any
individual credit files. Howe Barnes' 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.
The following is a brief summary of the analyses presented by Howe
Barnes to MegaBank's Board of Directors in connection with Howe Barnes' written
opinion.
Comparable Company Analysis. Howe Barnes calculated, reviewed, and
compared selected publicly-available financial data and ratios (at or for the
twelve months ended September 30, 1999) and trading multiples (as of November 4,
1999) for Compass to the corresponding ratios and multiples of publicly-traded
bank holding companies with total assets between $10 and $30 billion (the
"Compass Peer Group") consisting of AmSouth (AL), Associated (WI), BancWest
(HI), Colonial BancGroup (AL), Commerce Bancshares (MO), First Security (UT),
First Tennessee (TN), Hibernia (LA), Huntington Bancshares (OH), M&T Bank (NY),
M&I Corp (WI), North Fork Bancorp (NY), Old Kent (MI), Pacific Century (HI),
Popular (PR), Synovus (GA), TCF Financial (MN), and Zions (UT). The companies in
the Compass Peer Group are similar in size to Compass, and operate in an
economic, geographic, and demographic environment that Howe Barnes deemed to be
similar to the environment in which Compass operates. Comparative financial
statistics were reviewed and particular attention was given to the one-year
period leading up to the date of the fairness opinion.
The financial performance and trading multiples used in comparing
Compass to the Compass Peer Group averages were:
<TABLE>
<CAPTION>
PEER
COMPASS GROUP
------- -----
<S> <C> <C>
Last Twelve Months Return on Average Assets 1.17% 1.26%
Last Twelve Months Return on Average Equity 16.87% 16.26%
PRICE TO:
Book Value 2.63x 2.95x
Tangible Book Value 3.08x 3.58x
Last Twelve Months Earnings per Share 15.84x 18.25x
1999 Est. Earnings per Share 14.58x 16.61x
2000 Est. Earnings per Share 13.06x 14.66x
</TABLE>
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<PAGE> 21
Howe Barnes used earnings estimates as published by the Institutional
Brokers Estimate System ("IBES"), where available, for the companies comprising
the Compass Peer Group. IBES is a data service which monitors and publishes a
compilation of earnings estimates produced by selected research analysts on
companies of interest to investors. Where IBES estimates were not available,
Howe Barnes used consensus earnings estimates from alternate publicly-recognized
earnings estimate services.
Comparable Transaction Analysis. As part of its analyses, the first
comparable transaction group reviewed by Howe Barnes consisted of eight
completed or pending comparable mergers and acquisitions of savings institutions
headquartered throughout the United States announced within the past thirteen
months (from October 15, 1998 to November 4, 1999) in which total assets of the
acquired company were in the approximate range of $200 million to $400 million.
For each transaction for which data was available, Howe Barnes
calculated the multiple of the offer value to the acquired company's: (i)
earnings per share ("EPS") for the twelve months preceding ("LTM"); (ii) premium
to core deposits; (iii) book value per share; (iv) tangible book value per
share; and (v) assets. Howe Barnes compared these multiples with the
corresponding multiples for the Merger, valuing the Merger Consideration at
$93.9 million or $12.09 per share. In calculating the multiples for the Merger,
Howe Barnes used MegaBank's EPS for the twelve months ended September 30, 1999,
and book value per share, tangible book value per share and core deposits as of
September 30, 1999.
<TABLE>
<CAPTION>
PRICE/ CORE PRICE/ PRICE/
LTM EPS DEPOSIT BOOK TANGIBLE BOOK PRICE/
RATIO PREMIUM VALUE VALUE ASSETS
(X) (%) (%) (%) (%)
------- ------- ------ ------------- ------
<S> <C> <C> <C> <C> <C>
High: 30.63 32.32 297.92 360.62 32.86
Low: 16.65 2.62 106.20 106.20 14.95
Mean: 26.01 15.24 181.88 192.91 20.90
Median: 26.61 14.94 175.82 180.81 20.23
MERGER
CONSIDERATION FOR 17.27 29.64 284.08 308.51 31.53
MEGABANK:
</TABLE>
The second comparable transaction group reviewed by Howe Barnes
consisted of 19 completed or pending comparable mergers and acquisitions of
banks and savings institutions headquartered throughout the United States
announced within the past thirteen months (from October 6, 1998 to November 4,
1999) in which total assets of the acquired company were in the approximate
range of $200 million to $400 million, tangible equity to tangible assets were
greater than 8.00%, and returns on average assets were greater than 1.00%.
<TABLE>
<CAPTION>
PRICE/ CORE PRICE/ PRICE/
LTM EPS DEPOSIT BOOK TANGIBLE BOOK PRICE/
RATIO PREMIUM VALUE VALUE ASSETS
(X) (%) (%) (%) (%)
------- ------- ------ ------------- ------
<S> <C> <C> <C> <C> <C>
High: 34.44 39.37 428.14 428.14 38.58
Low: 12.55 9.02 133.24 133.24 16.14
Mean: 21.61 26.26 288.38 297.27 29.70
Median: 21.76 27.29 297.92 305.73 30.61
MERGER
CONSIDERATION FOR 17.27 29.64 284.08 308.51 31.53
MEGABANK:
</TABLE>
No company or transaction used in the above analyses as a comparison is
identical to MegaBank, Compass, or the Merger. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather, it involves
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<PAGE> 22
complex considerations and judgments concerning differences in financial
operating characteristics, including, among other things, differences in revenue
composition and earnings performance among the companies, and other facts that
could affect the public trading value of the companies to which they are being
compared.
Discounted Cash Flow Analysis. Using discounted cash flow analysis,
Howe Barnes estimated the future dividend streams that MegaBank could produce
over the period from January 1, 2000 through December 31, 2004, assuming annual
asset growth rates between 12.00% and 15.00% and further assuming MegaBank
performs in accordance with recent historical trends and the future outlook of
MegaBank management. Howe Barnes calculated terminal values as a perpetuity with
an asset growth rate of 3.0%. The dividend streams and terminal value were
discounted to present values as of December 31, 1999, using discount rates
ranging from 12.00% to 15.00% which reflect different assumptions regarding the
required rates of return to holders and prospective buyers of MegaBank Common
Stock. The range of present values of MegaBank resulting from this analysis was
$72.6 million to $82.4 million compared to the $93.9 million of Merger
Consideration.
The foregoing is a summary of the material financial analyses performed
by Howe Barnes and presented to the MegaBank Board of Directors, but does not
purport to be a complete description of the analyses performed by Howe Barnes.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Furthermore,
in arriving at its opinion, Howe Barnes did not attribute any particular weight
to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Selecting portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Howe Barnes' opinion. The ranges of valuations resulting
from any particular analysis described above should not be taken to be Howe
Barnes' view of the actual value of MegaBank, or the current or future trading
price for Compass Common Stock.
In performing its analyses, Howe Barnes made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of MegaBank and Compass. The
analyses performed by Howe Barnes are not necessarily indicative of actual
values of future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of Howe
Barnes' analysis of the fairness of the Merger Consideration, from a financial
point of view, to the holders of MegaBank Common Stock. The analyses do not
purport to be appraisals or to reflect the prices at which a company or its
securities may actually be bought or sold.
Pursuant to the terms of a letter agreement dated October 12, 1999,
MegaBank agreed to pay Howe Barnes $100,000 for rendering its opinion. In
addition, MegaBank agreed to indemnify Howe Barnes against certain liabilities
arising out of its engagement, including liabilities under the federal
securities laws. Howe Barnes acted as lead manager for MegaBank in its initial
public offering of common stock in November of 1998. In addition, in the
ordinary course of its business, Howe Barnes acts as a market maker, buying and
selling MegaBank Common Stock for its own account and for the accounts of
customers.
OPERATIONS AFTER THE MERGER
Compass and MegaBank intend that following consummation of the Merger,
MegaBank's wholly-owned subsidiary, MegaBank (the "Bank") through one or more
transactions, will merge with and into Compass Bank ("Subsequent Merger").
Following the Subsequent Merger, the separate existence of the Bank will cease,
and Compass Bank 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:
(1) The receipt of regulatory approvals which approvals shall not
have imposed any condition or requirement which in the
reasonable judgment of Compass would adversely impact the
economic or business benefits of the transactions contemplated
by the Merger Agreement or otherwise would in the judgment of
Compass be so burdensome as to
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<PAGE> 23
render inadvisable the consummation of the Merger, and the
expiration of any applicable waiting periods with respect
thereto. SEE "GOVERNMENT APPROVALS";
(2) The closing of the Merger will not violate any injunction,
order or decree of any court or governmental body having
competent jurisdiction;
(3) The approval of the Merger Agreement by MegaBank's
shareholders entitled to vote at the Special Meeting;
(4) The registration statement covering the Compass Common Stock
to be issued in the Merger shall be effective under the
Securities Act of 1933, as amended ("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;
(5) The shares of Compass Common Stock to be issued in the Merger
shall have been approved for listing on the Nasdaq, subject to
official notice of issuance;
(6) All representations and warranties of MegaBank 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;
(7) MegaBank and Compass 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;
(8) There shall not have occurred a material adverse effect with
respect to MegaBank or its subsidiaries, or Compass;
(9) The directors of MegaBank and its subsidiaries shall have
delivered to Compass an instrument dated the Effective Time
releasing MegaBank and its subsidiaries from any and all
claims of such directors (except as to their deposits and
accounts and as to rights of indemnification pursuant to the
Merger Agreement, the Articles of Incorporation, Association
or Bylaws of MegaBank and its subsidiaries) and shall have
delivered to Compass their resignations as directors of
MegaBank and its subsidiaries;
(10) The executive officers of MegaBank and its subsidiaries shall
have delivered to Compass an instrument dated the Effective
Time releasing MegaBank and its subsidiaries from any and all
claims of such executive officers (except as to deposits and
accounts and accrued compensation permitted by their
respective agreements with MegaBank or its subsidiaries and to
the rights of indemnification pursuant to the Merger
Agreement, the Articles of Incorporation, Association or
Bylaws of MegaBank and its subsidiaries);
(11) Compass and MegaBank shall have received the opinions of
counsel to MegaBank, Compass and Merger Sub acceptable to
them;
(12) Compass shall have received a letter from Arthur Andersen, LLP
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 the Merger
Agreement;
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<PAGE> 24
(13) The aggregate amount of all MegaBank indebtedness (excluding
deposits) shall not exceed $50,000,000;
(14) Compass shall have received from holders of MegaBank Common
Stock receiving at least 50% of the total Merger Consideration
a representation that they have no present plan or intention
to sell or otherwise dispose of shares of MegaBank Common
Stock prior to and in connection with the Merger to MegaBank
or any party related to MegaBank or Compass and shares of
Compass Common Stock received pursuant to the Merger to
Compass or any party related to Compass;
(15) Compass and MegaBank shall have received an opinion of counsel
that the Merger will qualify as a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"); SEE "SUMMARY -- FEDERAL INCOME TAX CONSEQUENCES" AND
"MERGER WITH MEGABANK -- FEDERAL INCOME TAX CONSEQUENCES";
(16) Compass shall have determined in its sole reasonable judgment
that certain liabilities and obligations of MegaBank do not
have a material adverse effect;
(17) All software, firmware, hardware, equipment, microprocessing
chips and other data processing devices and services (both as
a recipient and as a provider), capabilities and facilities
utilized by, and material to the business operations or
financial condition of, MegaBank and its subsidiaries shall
have been able to record and process all calendar dates since
the date of the Merger Agreement correctly and shall have been
able to communicate with other applicable systems in a manner
that resolves any ambiguities as to century in a properly
defined manner;
(18) All critical third parties of MegaBank and its subsidiaries
and Compass are Year 2000 Compliant (as defined in the Merger
Agreement) in all material respects;
(19) The transactions contemplated by those certain Agreements and
Plans of Merger between Nagrom LLC, Osage 3734 LLC and 1996
Newton LLC, respectively, and Compass shall have been
consummated simultaneously with the Merger;
(20) Certain real estate subsidiaries of MegaBank shall not have
commenced any operations or acquired any assets;
(21) The Consulting Agreement dated March 3, 1997 between First
Fidelity Service Corp. and the Bank shall have been terminated
without cost to MegaBank or its subsidiaries;
(22) The Amended and Restated Stock Purchase Agreement by and among
MegaBank, Thomas R. Kowalski, the Ryan R. Kowalski Trust, the
Realtek Company Employee's Profit Sharing Plan and Trust,
Thomas Investment Partnership and Orchard Valley Financial
Corporation dated as of December 4, 1997 and as further
amended on September 1, 1998 shall have been terminated
without cost to MegaBank or its subsidiaries;
(23) The Key Man Life Insurance Policy in the amount of $3,000,000
on the life of Thomas R. Kowalski shall have been cancelled;
(24) MegaBank and its subsidiaries shall have accrued and paid all
professional fees incurred in connection with the Merger and
all change of control payments to employees of Empire prior to
the Effective Time;
(25) United General Title Insurance Company ("United") shall have
consented to the change of controlling interest in Empire and
waived its right to terminate that certain Title Policy
21
<PAGE> 25
Issuing Agreement ("United Agreement") dated March 1, 1999
between United and Empire to the extent such consent and
waiver is required under the United Agreement;
(26) MegaBank shall have obtained all necessary consents to
continue access to information maintained by Colorado Record
Data, LLC;
(27) MegaBank or Empire shall have obtained clarification from
First American Title Insurance Company ("First American")
under the Underwriting Agreement dated July 1, 1995 to the
effect that the amount of fees Empire shall remit to First
American is 15% of the total amount of fees for First American
title policies issued through Empire's offices;
(28) Section 3.3 of the Empire Merger Agreement shall have been
amended to provide that such Section 3.3 shall terminate as of
the Effective Time;
(29) MegaBank shall have received immediately prior to the filing
of the registration statement, the opinions of Hovde and Howe
Barnes to the effect that the Merger and the Merger
Consideration to be received by the shareholders of MegaBank
in connection with the Merger is fair to such shareholders
from a financial point of view;
(30) All warrants, options, rights, convertible debentures or other
securities entitling the holder thereof to acquire MegaBank
Common Stock shall have been exercised or converted, or shall
have expired, lapsed or terminated, prior to the Effective
Time;
(31) MegaBank and its subsidiaries shall have delivered to the
directors and executive officers of MegaBank and its
subsidiaries an instrument dated the Effective Time releasing
such directors from any and all claims of MegaBank and its
subsidiaries (except as to indebtedness or other contractual
liabilities); provided, however, that such releases shall not
release an action against such directors and executive
officers by Compass or Merger Sub in connection with the
transactions contemplated by the Merger Agreement; and
(32) Compass and MegaBank shall have received certificates of the
other as to certain items described above.
Any condition to the consummation of the Merger may be waived in
writing by the party to the Merger Agreement entitled to the benefit of such
condition. SEE APPENDIX I.
MODIFICATION OF STRUCTURE
Compass may elect with the prior written consent of MegaBank (such
consent not to be unreasonably withheld), subject to the filing of all necessary
applications and the receipt of all required regulatory approvals, to modify the
structure of the transactions contemplated by the Merger Agreement so long as
(1) there are no adverse federal income tax consequences to the shareholders of
MegaBank as a result of the modifications, (2) the consideration to be paid to
the shareholders of MegaBank under the Merger Agreement is not thereby changed
in kind or reduced in amount solely because of such modification, (3) such
modification will not be likely to materially delay or jeopardize receipt of any
required regulatory approvals, and (4) such modification will not adversely
affect the rights, privileges and performances of the Company Subordinated
Debentures (as defined in the Merger Agreement). SEE APPENDIX I.
NO SOLICITATION
MegaBank has agreed under Section 6.6 of the Merger Agreement not to
solicit or encourage inquiries or proposals with respect to, or engage in any
negotiations concerning, or provide any confidential information to, or have any
discussions with, any person relating to any offer to acquire MegaBank or its
subsidiaries. In addition, MegaBank shall immediately cease any such discussions
or negotiations conducted prior to the date of the Merger Agreement and shall
promptly advise Compass following the receipt by MegaBank or any of its
subsidiaries of any such proposal. However, the Board of Directors of MegaBank
is not prohibited from furnishing information to, or
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<PAGE> 26
entering into discussions, negotiations or an agreement with, any person or
entity that makes an unsolicited proposal if the Board, after consultation with
and based upon the written opinion of outside counsel, concludes in good faith
that such action is necessary for the Board of Directors of MegaBank to comply
with its fiduciary duties to its shareholders under applicable law.
If MegaBank violates its obligations set forth in Section 6.6 of the
Merger Agreement and the Merger Agreement is terminated, MegaBank must pay to
Compass an aggregate termination fee of $4,000,000 in cash at the time of such
termination. SEE APPENDIX I.
EMPIRE TITLE & ESCROW CORPORATION
On April 1, 1999, MegaBank acquired Empire pursuant the Empire Merger
Agreement. The Empire Merger Agreement provides that for three years following
the closing of the Empire merger, the stockholders of Empire are eligible to
receive certain earnout amounts (the "Earnout") if Empire achieves certain goals
set forth in the Empire Merger Agreement. The Empire Merger Agreement provides
that upon the occurrence of a Change of Control (as defined in the Empire Merger
Agreement), the stockholders shall be entitled to receive payment of the Earnout
for the period in which such Change of Control occurs and all subsequent
periods, without regard to the actual earnings of Empire. The Merger will
constitute a Change of Control and, as a result, the stockholders of Empire will
be entitled to receive the Earnout upon consummation of the Merger. The Earnout
is payable by MegaBank to the stockholders of Empire, 50% in cash and 50% in
MegaBank Common Stock.
EXERCISE OF CONVERTIBLE SECURITIES
MegaBank has agreed under Section 6.15 of the Merger Agreement to use
its best efforts to cause all outstanding warrants, options, rights, or
convertible debentures to be exercised or converted in full prior to the
Effective Time. SEE APPENDIX I.
ADDITIONAL AGREEMENTS
VOTING AGREEMENT AND IRREVOCABLE PROXY. Certain directors and officers
and other affiliates of MegaBank (and their affiliates) owning or otherwise
controlling the right to vote 4,474,607 shares of MegaBank Common Stock,
comprising approximately 57.6% of the total shares of MegaBank Common Stock
issued and outstanding as of the Record Date, have agreed, pursuant to the
Voting Agreement and Irrevocable Proxy, to vote their shares in favor of the
Merger.
EMPLOYMENT AGREEMENTS. Compass Bank, a subsidiary of Compass, and
Thomas R. Kowalski, Chairman of the Board of MegaBank, entered into an
employment agreement which will become effective upon completion of the Merger.
Under the employment agreement, Mr. Kowalski will serve as a senior officer of
Compass Bank for three years beginning at the Effective Time of the Merger. Mr.
Kowalski's annual base salary will be $175,000 with merit increases based upon
performance. Mr. Kowalski will also receive benefits available to Compass Bank
employees of equal title and base salary. The agreement also contains
noncompetition and confidentiality provisions.
Larry Olsen, President of MegaBank, and certain other employees of
MegaBank and its subsidiaries also entered into employment agreements which will
become effective upon completion of the Merger. The employment agreements are
for two years starting at the Effective Time of the Merger and each contains
noncompetition and confidentiality provisions. Raymond L. Anilionis entered into
a consulting agreement with Compass Bank which will become effective upon
completion of the Merger. The consulting agreement is for one year and contains
noncompetition and confidentiality provisions.
POOLING TRANSFER RESTRICTIONS AGREEMENTS. The directors, executive
officers and certain principal shareholders of MegaBank have entered into
Pooling Transfer Restrictions Agreements with Compass and MegaBank pursuant to
which they have agreed, among other things, (1) not to transfer any of their
respective shares of MegaBank Common Stock within 30 days prior to the Effective
Time, (2) 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 MegaBank and Compass, except for
shareholder pledges to secure loans,
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provided the lender agrees to be bound by the terms of the Pooling Transfer
Restrictions Agreement, and (3) not otherwise to transfer such Compass Common
Stock except in compliance with the applicable provisions of the Securities Act
and the Exchange Act of 1934, as amended ("Exchange Act"), and the respective
rules and regulations thereunder.
LLC MERGER AGREEMENTS. In addition to the Merger Agreement, Compass has
entered into agreements and plans of merger (the "LLC Agreements") with each of
Osage 3734 LLC, 1996 Newton LLC and Nagrom LLC, affiliates of MegaBank
(collectively, the "LLCs"). It is a condition to the consummation of the Merger
that the transactions contemplated by the LLC Agreements (the "LLC Mergers")
shall be consummated simultaneously with the Merger. SEE "MERGER WITH MEGABANK
- -- OTHER TERMS AND CONDITIONS"; "INFORMATION WITH RESPECT TO MEGABANK --
INTERESTS OF CERTAIN PERSONS" AND APPENDIX I.
The LLC Agreements provide for the merger of each LLC with and into a
newly formed subsidiary of Compass ("LLC Merger Sub"). LLC Merger Sub will be
the surviving entity in the LLC Mergers and the separate existences of the LLCs
will cease. After the effective time of the LLC Mergers, the managers of LLC
Merger Sub will be the managers of the surviving entity. Compass shall not be
deemed a party to the LLC Mergers for purposes of the Colorado Limited Liability
Company Act.
The LLC Agreements provide that the membership interests of each LLC
issued and outstanding immediately prior to the effective time of the LLC
Mergers, shall, by virtue of the LLC Mergers 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 ("LLC Merger Consideration") to the
holder of record thereof, without interest thereon.
As LLC Merger Consideration, Compass shall issue to the members of the
LLCs, an aggregate number of shares of Compass Common Stock based on the
members' equity in the LLCs as set forth on the LLCs' balance sheets dated as of
the day preceding the closing (the "Closing Balance Sheets") and the fair market
value of the LLCs' property and improvements as set forth on the Closing Balance
Sheets. Notwithstanding the foregoing, the number of shares of Compass Common
Stock to be issued to the all members of the LLCs pursuant to the LLC Agreements
shall not exceed 150,000 in the aggregate. In the event the number of shares of
Compass Common Stock to be issued pursuant to the LLC Agreements exceeds
150,000, then the number of shares of Compass Common Stock to be issued pursuant
to the LLC Agreements shall be reduced on a pro rata basis among the recipients
thereof so that the total number of shares of Compass Common Stock to be issued
equals 150,000. SEE "INFORMATION ABOUT MEGABANK -- INTERESTS OF CERTAIN
PERSONS."
BUSINESS PENDING EFFECTIVE TIME
The Merger Agreement imposes certain limitations on the conduct of
MegaBank's business pending consummation of the Merger. Among other things,
MegaBank must conduct its businesses only in the ordinary course, consistent
with prudent banking practices. SEE "MERGER WITH MEGABANK -- OTHER TERMS AND
CONDITIONS"; AND APPENDIX I.
AMENDMENT
The Merger Agreement may be amended or supplemented at any time, before
or after the Special Meeting, by an instrument in writing duly executed by all
the parties thereto. However, no change which reduces the Merger Consideration
or materially and adversely affects the rights of MegaBank's shareholders can be
made after the Special Meeting without the required approval of MegaBank's
shareholders. SEE APPENDIX I.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
at any time notwithstanding approval thereof by the shareholders of MegaBank,
but prior to the Effective Time:
(1) by mutual written consent duly authorized by the Boards of
Directors of Compass and MegaBank;
(2) by Compass:
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- if Compass learns or becomes aware of a state or
series of facts or one or more breaches or
inaccuracies of any representation or warranty of
MegaBank contained in Article III of the Merger
Agreement which constitutes a material adverse
effect;
- pursuant to Section 6.10 of the Merger Agreement
relating to environmental matters;
- if Compass learns or becomes aware of a state or
series of facts or one or more breaches or
inaccuracies of any representation or warranty with
respect to Empire and/or its subsidiaries such that,
in Compass' reasonable discretion, Compass or Empire
and/or its or their subsidiaries may be subject to
potential financial losses or potential liabilities
in excess of $300,000 in the aggregate not including
compensation payable to employees of Empire pursuant
to certain employment agreements and the Empire
Merger Agreement;
- if any of the conditions to closing contained in the
Merger Agreement are not satisfied or waived in
writing by Compass;
- if there shall have been a breach of Section 6.6 of
the Merger Agreement regarding exclusivity; or
- if at anytime, MegaBank shall have failed to
recommend to its shareholders that they approve the
Merger Agreement and the Merger, withdrawn such
recommendation or modified or changed such
recommendation in a manner adverse in any respect to
the interests of Compass;
(3) by Compass or MegaBank:
- if the Effective Time shall not have occurred on or
before July 4, 2000 or such later date agreed to in
writing by Compass and MegaBank;
- 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; or
- in the event one or more of the LLC Agreements are
terminated; or
(4) by MegaBank:
- if any of the conditions to closing contained in the
Merger Agreement are not satisfied or waived in
writing by MegaBank;
- if MegaBank learns or becomes aware of a state or
series of facts or one or more breaches or
inaccuracies of any representation or warranty of
Compass contained in Article IV of the Merger
Agreement which constitutes a material adverse
effect;
- in the event MegaBank enters into an agreement with
respect to an acquisition proposal in accordance with
the provisions of Section 6.6(b) of the Merger
Agreement; or
- if at any time during the two business day period
following the fifth trading day prior to the closing,
if both of the following conditions are satisfied:
(1) the Average Closing Price is less than
$23.00; and
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(2) (i) the number obtained by dividing the
Average Closing Price by the last reported
sale price per share of Compass Common Stock
on November 4, 1999 shall be less than (ii)
the number obtained by dividing the Average
Index Value by the Index Value on November
4, 1999 and subtracting 0.15 from the
quotient in this clause.
For purposes hereof, "Average Index Value" means the average of the
Index Values for the twenty days of trading preceding the fifth trading day
prior to the Effective Time; "Index Value" on a given date means the Index Value
of the Nasdaq Index Banks as published by Nasdaq.
If MegaBank either (1) violates the exclusivity provision of the Merger
Agreement and the Merger Agreement is thereby terminated, or (2) prior to
termination of the Merger Agreement receives any acquisition proposal and the
Merger Agreement is thereby terminated, then MegaBank shall pay to Compass an
aggregate fee of $4,000,000 in cash at the time of such termination. SEE
APPENDIX I.
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 with Continental Stock Transfer & Trust
Company (the "Exchange Agent"), (1) the shares of Compass Common Stock required
to effect the exchange of Compass Common Stock for MegaBank Common Stock, and
(2) cash in an aggregate amount estimated to be sufficient to make cash payments
to MegaBank's shareholders in lieu of fractional shares of Compass Common Stock.
Promptly after the Effective Time, the Exchange Agent will furnish each
holder of record of MegaBank Common Stock as of the Effective Time with
transmittal materials for use in exchanging certificates representing MegaBank
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 delivery of MegaBank
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 MegaBank Common Stock otherwise entitled
to receive such fractional share. Such cash payment shall be based on the
Average Closing Price. SEE "MERGER WITH MEGABANK -- FEDERAL INCOME TAX
CONSEQUENCES" AND APPENDIX I.
Former shareholders of MegaBank shall be entitled to vote after the
Effective Time at any meeting of Compass shareholders the number shares of
Compass Common Stock into which their shares are converted, regardless of
whether such shareholders have exchanged their certificates. Immediately after
the Effective Time, shareholders of MegaBank shall be entitled to dividends with
respect to shares of Compass Common Stock received by them in the Merger,
provided that, no dividend will be disbursed with respect to the shares of
Compass Common Stock until the holder's shares of MegaBank Common Stock are
surrendered in exchange therefor.
Upon the Effective Time of the Merger, former MegaBank shareholders
will cease to have any rights as shareholders of MegaBank, and MegaBank's
shareholders shall have only the right to receive the Merger Consideration
specified in the Merger Agreement. SEE "MERGER WITH MEGABANK -- DISSENTERS'
RIGHTS."
DISSENTERS' RIGHTS
Shareholders of a corporation that is proposing to merge or consolidate
with another entity are sometimes entitled under relevant state laws to
appraisal or dissenters' rights in connection with the proposed transaction
depending on the circumstances. These rights generally confer on shareholders
who oppose a merger or the consideration to be received in a merger the right to
receive, in lieu of the consideration being offered in the merger, the fair
value for their shares as determined in a judicial appraisal proceeding. SEE
"COMPARISON OF RIGHTS OF SHAREHOLDERS OF MEGABANK AND COMPASS."
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MegaBank shareholders are not entitled to appraisal or dissenters'
rights under Colorado law in connection with the Merger because MegaBank Common
Stock was listed on the Nasdaq National Market on the Record Date and the
Compass Common Stock that MegaBank shareholders will be entitled to receive in
the Merger will be listed on the Nasdaq National Market upon completion of the
Merger.
FEDERAL INCOME TAX CONSEQUENCES
The following sets forth the opinion of Locke Liddell & Sapp LLP
("Locke Liddell & Sapp"), counsel to Compass, based upon current law, as to
certain federal income tax consequences of the Merger to Compass, Merger Sub,
MegaBank and holders of MegaBank Common Stock, assuming the Merger is
consummated as contemplated herein.
This discussion is based upon existing provisions of the Code,
applicable U.S. Treasury regulations promulgated or proposed thereunder,
administrative rulings by the Internal Revenue Service (the "IRS") and judicial
authority as of the date hereof, all of which are subject to change, possibly
with retroactive effect. Any such change could affect the continuing validity of
this discussion. This discussion assumes the holders of MegaBank Common Stock
hold their MegaBank Common Stock as capital assets within the meaning of Section
1221 of the Code. This discussion is based upon certain assumptions discussed
below, including that certain representations will be made by Compass, Merger
Sub, MegaBank, certain MegaBank shareholders and others as appropriate. If any
of these representations cannot be made or are inaccurate, the tax consequences
of the Merger could differ from those described herein. This discussion does not
address all aspects of income taxation that may be relevant to any particular
holder of MegaBank Common Stock in light of such holder's specific circumstances
or to certain types of holders subject to special treatment under the U.S.
federal income tax laws (for example, foreign persons, dealers in securities,
banks and other financial institutions, insurance companies, tax-exempt
organizations, holders who acquired MegaBank Common Stock pursuant to the
exercise of options or otherwise as compensation or through a tax-qualified
retirement plan and persons holding MegaBank Common Stock as part of a straddle
or conversion transaction), and it does not discuss any aspect of state, local,
foreign or other tax law. No ruling has been (or will be) sought from the IRS as
to the anticipated tax consequences of the Merger.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS INCLUDED HEREIN
FOR GENERAL INFORMATION ONLY. HOLDERS OF MEGABANK COMMON STOCK SHOULD CONSULT
THEIR OWN TAX ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.
Based upon the foregoing, the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Code, Compass, Merger Sub and MegaBank will each be a party to the
reorganization within the meaning of Section 368(b) of the Code and,
accordingly, the Merger will result in the following federal income tax
consequences:
1. Compass, Merger Sub and MegaBank will not recognize any gain
or loss as a result of the Merger;
2. No gain or loss will be recognized by holders of MegaBank
Common Stock who exchange their MegaBank Common Stock solely
for Compass Common Stock;
3. Any cash received by a holder of MegaBank Common Stock in lieu
of a fractional share of Compass Common Stock in the Merger
will be treated as received in exchange for such fractional
share and not as a dividend. As a result, a holder of MegaBank
Common Stock generally will recognize a capital gain or loss
with respect to the cash payment received in lieu of a
fractional share equal to the difference between the cash
received and the portion of the MegaBank shareholder's basis
in MegaBank Common Stock allocable to such fractional share,
unless such payment, under each such MegaBank shareholder's
particular facts and circumstances, is deemed to have the
effect of a dividend distribution and not a redemption treated
as an exchange under the principles of Section 302 of the
Code. Such gain or loss will be long-term capital gain or loss
to
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<PAGE> 31
the extent that the MegaBank Common Stock allocable to such
fractional share was held for more than one year as of the
Effective Time of the Merger;
4. Each holder's aggregate tax basis in the Compass Common Stock
received in the Merger will equal his or her aggregate tax
basis in the MegaBank Common Stock exchanged therefore,
decreased by the amount of any tax basis allocable to any
fractional share interest for which cash is received; and
5. The holding period of the Compass Common Stock received in the
Merger will include the holding period of the MegaBank Common
Stock exchanged therefore.
It is a condition to the consummation of the Merger that Compass and
MegaBank receive the above opinions at the Effective Time of the Merger. These
opinions will not bind the IRS or the courts, and there can be no assurance that
the IRS or the courts will not take a contrary position. The opinions of Locke
Liddell & Sapp will be expressly based and conditioned upon customary
limitations set forth therein and upon the accuracy of certain assumptions and
the receipt of and the truth and accuracy of certain representations made at the
Effective Time of the Merger to such counsel by Compass, Merger Sub, MegaBank,
certain MegaBank shareholders and others as appropriate. SEE "MERGER WITH
MEGABANK -- OTHER TERMS AND CONDITIONS."
ACCOUNTING TREATMENT
Compass expects to account for the Merger using the
"pooling-of-interests" method of accounting. Compass and MegaBank have received
a letter from Compass' independent public accountants which will be updated as
of the Effective Time, to the effect that, based on information provided to its
independent public accountants and assuming that the Merger is consummated in
accordance with the terms of the Merger Agreement, the Merger will qualify for
pooling-of-interests accounting treatment. Under this accounting method, at the
Effective Time, MegaBank'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. SEE "SELECTED FINANCIAL DATA" AND
"MERGER WITH MEGABANK -- OTHER TERMS AND CONDITIONS."
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GOVERNMENT APPROVALS
Consummation of the Merger is subject to approval by the shareholders
of MegaBank, the receipt by Compass of required regulatory approvals from the
Federal Reserve under the Bank Holding Company Act of 1956, as amended, ("BHC
Act") and the Colorado Division of Banking (the "Division of Banking"), and the
satisfaction or waiver of a number of other conditions. In addition,
consummation of the Subsequent Merger of the Bank into Compass Bank is subject
to approval by the Federal Reserve, the Alabama Superintendent of Banks (the
"Superintendent"), the Division of Banking and the Office of Thrift Supervision.
Applications under the BHC Act and the Colorado Banking Code of 1957
for the Merger were filed by Compass with the Federal Reserve and the Division
of Banking on November 30, 1999. An application under the Bank Merger Act for
the Subsequent Merger was also filed on December 15, 1999 with the Federal
Reserve, the Superintendent, the Division of Banking and the FDIC. The Merger
and the Subsequent Merger cannot be consummated until the expiration of a 15 to
30 day waiting period following such approval during which the Justice
Department, pursuant to the BHC Act and the Bank Merger Act, may bring an action
opposing the Merger and the Subsequent Merger.
No Justice Department objection or adverse action is anticipated with
respect to the Merger or the Subsequent Merger.
Article 6.4 of the Colorado Banking Code of 1957 allows out-of-state
bank holding companies to acquire thrift holding companies that own or control
depository institutions located within Colorado. SEE "MERGER WITH MEGABANK --
TERMINATION" AND "SUPERVISION AND REGULATION."
SUPERVISION AND REGULATION
GENERAL
Bank holding companies and banks are regulated extensively under both
federal and state law. Compass is subject to regulation by the Federal Reserve
and its bank subsidiaries (the "Subsidiary Banks") are subject to regulation by
the Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC") and
the appropriate state banking departments. Compass' Subsidiary Banks are Compass
Bank, an Alabama state bank headquartered in Birmingham, Alabama, and Central
Bank of the South, an Alabama state bank headquartered in Anniston, Alabama.
Compass' wholly-owned commercial bank subsidiaries conduct a general,
full-service commercial and consumer banking business in Alabama, Texas, Florida
and Arizona. 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. The deposits of each of the Subsidiary Banks
are insured by the FDIC. 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 "WHERE YOU CAN FIND MORE
INFORMATION."
COMPASS
Compass is a bank holding company within the meaning of the BHC Act and
is registered as such with the Federal Reserve. As a bank holding company,
Compass is 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 Federal Reserve may also make examinations of 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 5% 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 5% 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 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). 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 (1)
the default of a commonly controlled FDIC-insured depository institution, or (2)
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 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.
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
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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, 1999, the Subsidiary Banks were "well capitalized",
and were not subject to any of the foregoing restrictions, including, without
limitation, those relating to brokered deposits. If the Subsequent Merger was
consummated as of September 30, 1999, Compass Bank would have been
well-capitalized. 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 Act of 1996 (the "Funds 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 Gramm-Leach-Bliley Act ("GLBA"), which was enacted on November 12,
1999, among other things, expands the BHC Act framework to permit bank holding
companies with subsidiary banks meeting certain capital and management
requirements to elect to become "financial holding companies." Beginning March,
2000, financial holding companies may engage in a full range of financial
activities, including not only banking, insurance and securities activities, but
also merchant banking and additional activities determined to be "financial in
nature." The GLBA also provides that the list of permissible activities will be
expanded as necessary for a financial holding company to keep abreast of
competitive and technological change.
Although it preserves the Federal Reserve as the umbrella supervisor of
financial holding companies, the GLBA adopts an administrative approach to
regulation that defers to the actions and paperwork requirements of the
"functional" regulators of insurers, broker-dealers, investment companies, and
banks. Thus, the various state and federal regulators of a financial holding
company's operating subsidiaries would retain their jurisdiction and authority
over such operating entities. As the umbrella supervisor, however, the Federal
Reserve has the potential to affect the operations and activities of financial
holding companies' subsidiaries through its power over the financial holding
company parent. In addition, the GLBA contains numerous trigger points related
to legal noncompliance and other serious problems affecting bank affiliates that
could lead to direct Federal Reserve involvement and to the possible exercise of
remedial authority affecting both financial holding companies and their
affiliated operating companies.
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
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regulated and examined by the Federal Reserve. The Subsidiary Banks, as
participants in the BIF and the SAIF of the FDIC, are subject to the provisions
of the Federal Deposit Insurance Act and to examination by and regulations of
the FDIC.
The 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. As members of the Federal Reserve System, Compass Bank is
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 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, Arizona 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. 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.
Albrecht & Associates, Inc., a wholly-owned subsidiary of Compass Bank, is a
financial advisor specializing in the divestment of oil and gas properties and
is subject to examination by the Superintendent.
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 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 incorporated by
reference to the registration statement of which this document is a part.
COMPASS COMMON STOCK
Compass is incorporated under the Delaware General Corporation Law
("GCL"). Compass is authorized to issue 200,000,000 shares of Compass Common
Stock, of which 113,662,563 shares were issued and outstanding on November 30,
1999. 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 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 MEGABANK 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 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. As of the date of
this document, Compass Bank has surplus in excess of this amount. As a member of
the Federal Reserve System, Compass Bank is also subject to dividend limitations
imposed by the Federal Reserve that are similar to those applicable to national
banks. SEE "WHERE YOU CAN FIND MORE INFORMATION"; "MERGER WITH MEGABANK --
BACKGROUND AND REASONS FOR THE MERGER"; "RISK FACTORS"; "SELECTED FINANCIAL
DATA"; "MARKET PRICES"; "COMPARISON OF RIGHTS OF SHAREHOLDERS OF MEGABANK 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 MegaBank's 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
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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 MEGABANK 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.
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. As of December 17,
1999, no shares of Compass preferred stock were issued and outstanding. SEE
"MERGER WITH MEGABANK"; "RISK FACTORS" AND "COMPARISON OF RIGHTS OF SHAREHOLDERS
OF MEGABANK AND COMPASS -- DIVIDENDS."
COMPARISON OF RIGHTS OF
SHAREHOLDERS OF MEGABANK AND COMPASS
CHARTER AND BYLAW PROVISIONS AFFECTING COMPASS STOCK
Compass' Certificate of Incorporation 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 corporation 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. MegaBank's Articles of Incorporation require a two-thirds vote by each
of the shareholders and directors for the sale of all of the corporation's
assets and the CBCA requires that shareholders may take action without a meeting
only by unanimous written consent.
The foregoing summary is qualified in its entirety by reference to
Compass' Certificate of Incorporation 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 MegaBank, which are available upon
request from MegaBank and are on file with the Commission. SEE "WHERE YOU CAN
FIND MORE INFORMATION" AND "RISK FACTORS."
In addition to the foregoing differences between MegaBank's and
Compass' charters, as a result of the Merger, MegaBank's shareholders, whose
rights are governed by the CBCA, 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 COLORADO AND DELAWARE AND
CORRESPONDING CHARTER AND BYLAW PROVISIONS
Certain differences between the GCL and the CBCA, as well as a
description of the corresponding provisions contained in Compass' and MegaBank's
respective charter and bylaws, 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 to the provisions of the CBCA and the
GCL and applicable charter and bylaw provisions.
MERGER
The GCL generally permits a merger to become effective without the
approval of the surviving corporation's shareholders if the certificate of
incorporation of the surviving corporation does not change following
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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.
The CBCA does not require a shareholder vote of the surviving
corporation in a merger if the merger agreement does not amend the existing
articles of incorporation, each shareholder of the surviving corporation whose
shares were outstanding immediately before the merger will hold the same number
of shares, with identical designations, preferences, limitations and relative
rights, immediately after the merger, the number of voting shares outstanding
immediately after the merger, plus the number of voting shares issuable as a
result of the merger or by the exercise of rights and warrants issued pursuant
to the merger, will not exceed by more than 20% the total number of shares of
the surviving corporation outstanding immediately before the merger, and the
number of participating shares outstanding immediately after the merger, plus
the number of participating shares issuable as a result of the merger either by
the conversion of securities issued pursuant to the merger or by the exercise of
rights and warrants issued pursuant to the merger, will not exceed by more than
20% the total number of participating shares outstanding immediately before the
merger.
Where shareholder approval is required under Colorado law, and except
as provided below, a merger must be approved by the holders of a majority of the
shares entitled to vote thereon, unless any class of shares is entitled to vote
thereon as a class in which event the merger shall be approved by the
affirmative vote of the holders of a majority of the shares of each class
entitled to vote as a class. 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 of Incorporation requires supermajority approval by its Board of
Directors and shareholders in certain cases, as described above.
The CBCA provides that certain different requirements apply to
corporations in existence on June 30, 1994 ("Existing Corporations").
Specifically, unless the articles of incorporation of an Existing Corporation
otherwise provide, a merger must be approved by each voting group entitled to
vote separately on the merger by two-thirds of all votes entitled to vote. SEE
"RISK FACTORS" AND "COMPARISON OF RIGHTS OF SHAREHOLDERS OF MEGABANK AND COMPASS
- -- CHARTER AND BYLAW PROVISIONS AFFECTING COMPASS STOCK."
APPRAISAL RIGHTS
Under both Delaware and Colorado law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal rights by which such shareholder may
receive cash in the amount of the fair market value of his or her shares in lieu
of the consideration he or she would otherwise receive in the transactions.
Under both Delaware and Colorado law, such fair market value is determined
exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation.
The CBCA provides that dissenters' rights are not available (a) with
respect to the sale of all or substantially all of the assets of the corporation
or a merger if no vote of the shareholders is required to approve the
transaction under Colorado law or (b) to shareholders of shares which either
were listed on a national securities exchange registered under the Securities
Exchange Act of 1934 or on the national market system of the National
Association of Securities Dealers Automated System or were held of record by
more than 2,000 holders if such shareholders receive only shares of the
surviving corporation or shares of any other corporation that are either listed
on a national securities exchange registered under the Securities Exchange Act
of 1934 or on the national market system of the National Association of
Securities Dealers Automated Quotation System or held of record by more than
2,000 holders plus cash in lieu of fractional shares.
Under Delaware law, appraisal rights are not available (a) with respect
to the sale of all or substantially all of the assets of a corporation, (b) with
respect to a merger or consolidation by a corporation the shares of which are
either listed on a national securities exchange, designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or are held of record by more than 2,000 holders if
such shareholders receive only shares of the surviving corporation or shares of
any other corporation that are either listed on a national securities exchange,
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000
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holders, plus cash in lieu of fractional shares of such corporation, or (c) to
shareholders of a corporation surviving a merger if no vote of the shareholders
of the surviving corporation is required to approve the merger under Delaware
law. SEE "MERGER WITH MEGABANK -- DISSENTERS' RIGHTS" AND APPENDIX II.
SPECIAL MEETINGS
Colorado law provides that special meetings of the shareholders may be
called by a corporation's Board of Directors, the person or persons authorized
by the bylaws or resolution of the Board of Directors to call such a meeting or
by the record holders of at least 10% of all shares entitled to vote at the
meetings. MegaBank's Bylaws provide that special meetings of the shareholders
may be called by the President or by the Board of Directors, or by the record
holders of at least 25% of all shares entitled to vote at the meetings.
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. Compass' Certificate of
Incorporation prohibits shareholders from calling special meetings. SEE "RISK
FACTORS."
ACTIONS WITHOUT A MEETING
Colorado law and MegaBank's Bylaws provide that any action to be taken
at a meeting of the shareholders may be taken without a meeting if a consent in
writing is signed by all of the shareholders entitled to vote with respect to
the subject matter thereof.
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 of Incorporation prohibits shareholder action by written consent
except where such action is taken unanimously. SEE "RISK FACTORS."
ELECTION OF DIRECTORS
Colorado law provides that a corporation's articles of incorporation
may provide that shares otherwise entitled to vote cumulatively may not so vote.
MegaBank's Articles of Incorporation do not allow cumulative voting in the
election of directors. MegaBank's Bylaws also provide that by the unanimous vote
of all the shareholders represented at a meeting, the secretary of the meeting
may be authorized and instructed to cast a single ballot for one or more of all
the directors to be elected. Holders of Compass 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
Both Delaware and Colorado law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets,
unless otherwise provided in the corporation's charter or bylaws. MegaBank's
Articles of Incorporation require a two-thirds vote of the Board of Directors,
as well as a two-thirds vote of shareholders in order to sell, lease, exchange,
or convey all of its property and assets. Compass' Certificate of Incorporation
does not provide for a different vote than that required by Delaware law.
Both Colorado and Delaware law generally do not require class voting,
except in certain transactions involving an amendment to the certificate of
incorporation that adversely affects a specific class of shares or where the
class of securities designates such a right.
PREEMPTIVE RIGHTS
Under Colorado law, shareholders of a corporation in existence on June
30, 1994 have a preemptive right to acquire unissued shares except to the extent
the articles of incorporation limit or deny preemptive rights.
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MegaBank's Articles of Incorporation provide that shareholders do not possess
any preemptive rights. Shareholders of Compass do not possess such preemptive
rights.
DIVIDENDS AND REPURCHASES OF SHARES
Colorado law dispenses with the concepts of par value of shares as well
as statutory definitions of capital, surplus and the like. The concepts of par
value, capital and surplus are retained under Delaware law. Colorado law permits
a corporation to declare and pay dividends unless, after giving it effect, the
corporation would not be able to pay its debts as they become due in the usual
course of business, or the corporation's total assets would be less than the sum
of its total liabilities plus (unless the articles of incorporation permit
otherwise) the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those
receiving the distribution.
MegaBank's Bylaws allow the Board of Directors to, from time to time,
in the manner permitted by the CBCA, declare, and the corporation to pay,
dividends in cash, property, or its own shares.
Delaware law permits a corporation to declare and pay dividends out of
surplus or if there is no surplus, out of net profits for the fiscal year as
long as the amount of capital of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having preference
upon the distribution of assets. In addition, Delaware law generally provides
that a corporation may redeem or repurchase its shares only if the capital of
the corporation is not impaired and such redemption or repurchase would not
impair the capital of the corporation.
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.
SEE "WHERE YOU CAN FIND MORE INFORMATION"; "SELECTED FINANCIAL DATA";
"MARKET PRICES"; AND "DESCRIPTION OF COMPASS COMMON AND PREFERRED STOCK."
LIQUIDATION RIGHTS
MegaBank's Bylaws provide that all outstanding shares of common stock
are equally entitled to receive their pro rata portion of remaining assets upon
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.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Delaware and Colorado have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a corporation to adopt a
provision in its articles of incorporation or certificate of incorporation, as
the case may be, eliminating the liability of a director to the corporation or
its shareholders for monetary damages for breach of the director's fiduciary
duty. There are nonetheless certain differences between the laws of the two
states respecting indemnification and limitation of liability.
MegaBank's Articles of Incorporation eliminate the liability of
directors to the corporation to the fullest extent permissible under Colorado
law. Colorado law does not permit the elimination of monetary liability where
such liability is based on breaches of the director's duty of loyalty to the
corporation or its stockholders, acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, in the case of
conduct in an official capacity with the corporation, acts or omissions not in
the best interests of the corporation, and in all other cases, acts or omissions
contrary to the best interests of the corporation, receipt of an improper
personal benefit, or liability for improper distributions, loans or guarantees.
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MegaBank's Articles of Incorporation and Bylaws authorize indemnification
of officers, directors and others to the fullest extent permitted by Colorado
law.
Under Compass' Certificate of Incorporation, a director will not be liable
to Compass or its shareholders for monetary damages for any breach of fiduciary
duty as a director, except (1) for breach of a director's duty of loyalty, (2)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) unlawful payment of dividend or unlawful stock
purchase or redemption, or (4) any transaction from which the director derived
an improper personal benefit. Compass' Certificate of Incorporation authorizes
indemnification of officers, directors and others to the fullest extent
permitted by Delaware law.
Both Colorado and Delaware law require indemnification when the individual
has defended successfully the action on the merits or otherwise.
Expenses incurred by an officer or director in defending an action may be
paid in advance, under Colorado law and Delaware law, if such director or
officer undertakes to repay such amounts if it is ultimately determined that he
or she is not entitled to indemnification. In addition, the laws of both states
authorize a corporation's purchase of indemnity insurance for the benefit of its
officers, directors, employees and agents whether or not the corporation would
have the power to indemnify against the liability covered by the policy. SEE
"WHERE YOU CAN FIND MORE INFORMATION."
REMOVAL OF DIRECTORS
A director of a Colorado corporation that does not have a staggered board
of directors or cumulative voting may be removed with or without cause with the
approval of a majority of the outstanding shares entitled to vote at an election
of directors. In the case of a Colorado corporation having cumulative voting, if
less than the entire board is to be removed, a director may not be removed if
the number of shares voted against such removal would be sufficient to elect the
director under cumulative voting. MegaBank does not have a staggered board or
cumulative voting.
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 provides that the directors are classified
and elected for staggered terms, and any such removal must be for cause after a
supermajority vote (80%) of the shareholders.
INSPECTION OF BOOKS AND RECORDS
Under Colorado law, a shareholder is entitled to inspect and copy, during
regular business hours at the corporation's principal office, the records of the
corporation, if the shareholder gives the corporation written demand at least
five business days before the date on which the shareholder wishes to inspect
and copy such records. Under Delaware law, a shareholder has such right upon
written demand stating the purpose of such inspection.
ANTITAKEOVER PROVISIONS
Delaware has enacted antitakeover legislation. Compass has opted out of
such provisions as provided by the GCL. Certain provisions of Compass'
Certificate of Incorporation and Bylaws limiting a takeover without the support
of its Board of Directors are described in "COMPARISON OF RIGHTS OF SHAREHOLDERS
OF WESTERN BANCSHARES AND COMPASS -- CHARTER AND BYLAW PROVISIONS AFFECTING
COMPASS STOCK." Colorado has not enacted similar legislation.
Although certain of the specific differences between the voting and other
rights of MegaBank's 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 Colorado and Delaware law, or the
rights of such persons under the respective charters and Bylaws of Compass and
MegaBank. 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 CBCA and the
GCL, and the specific provisions of
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Compass' Certificate of Incorporation and Bylaws, and MegaBank's Articles of
Incorporation and Bylaws, as amended.
RESALE OF COMPASS STOCK
The Compass Common Stock to be issued to holders of MegaBank 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
MegaBank within the meaning of Rule 145 under the Securities Act. 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 already delivered to Compass a written agreement providing
that each such affiliate will not (1) sell, pledge, transfer or otherwise
dispose of any of such affiliate's MegaBank Common Stock within 30 days prior to
the effective time of the merger; (2) 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 MegaBank
and Compass, except for pledges by such affiliates of all or part of such
affiliate's Compass Common Stock acquired in the merger, provided the lender
agrees to be bound by the terms of such written agreement; or (3) transfer any
Compass Common Stock except in compliance with Rule 145 promulgated by the
Commission under the Securities Act and any new requirements imposed by the
Commission or the Financial Accounting Standards Board for Compass' accounting
of the Merger as a pooling of interests. SEE "SUMMARY -- ACCOUNTING TREATMENT";
"MERGER WITH MEGABANK -- ACCOUNTING TREATMENT"; AND APPENDIX I.
It is a condition to Compass' obligations to consummate the Merger that
holders of shares of MegaBank Common Stock that will be entitled to receive at
least 50% of the aggregate Merger Consideration have represented to Compass that
they have no plan or intention to sell or otherwise dispose of (1) shares of
MegaBank prior to and in connection with the merger to MegaBank or any party
related to MegaBank or Compass and (2) the shares of Compass Common Stock
received in the Merger to Compass or any party related to Compass. SEE "MERGER
WITH MEGABANK -- OTHER TERMS AND CONDITIONS."
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, 1998 and Compass'
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999, June 30,
1999 and September 30, 1999, are incorporated herein by reference. SEE "WHERE
YOU CAN FIND MORE INFORMATION."
INTERESTS OF CERTAIN PERSONS
No director or executive officer of Compass has any material direct or
indirect financial interest in MegaBank or the Merger, except as a director,
executive officer or shareholder of Compass or its subsidiaries.
RECENT DEVELOPMENTS
Compass' strategy for growth includes strengthening its presence in core
markets, expanding into contiguous markets and broadening its product offerings.
In July, 1999, Compass entered into an agreement to acquire Western
Bancshares of Albuquerque, Inc. ("Western") located in Albuquerque, New Mexico.
On September 30, 1999, Western had total assets of $304.8 million, total
deposits of $245.9 million, and total shareholders' equity of $34.7 million.
Western has nine full-service branches and one motor bank branch location. The
shareholders of Western approved the merger at a special meeting held on
December 15, 1999. The merger is currently anticipated to be completed in
January, 2000.
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INFORMATION ABOUT MEGABANK
SERVICES, EMPLOYEES AND LOANS
MegaBank was founded in 1984 by its Chairman and Chief Executive Officer,
Thomas R. Kowalski, with the objective of building a banking franchise in the
Denver, Colorado metropolitan area that would deliver a broad based package of
products and services to businesses and individuals. The Bank was organized in
1983. Since the advent of branch banking in Colorado in 1993, the Bank has
opened eight additional banking locations throughout the Denver area, for a
total of nine locations.
Since inception, the Bank has specialized its lending practice in the
residential construction industry. Mr. Kowalski has extensive experience in the
home building industry and has expanded the Bank's lending practice to date such
that the Bank is a leading originator of land development and residential
construction loans to small-and medium-sized homebuilders. Currently, the Bank
can finance a builder or developer from the acquisition and development loan
process, including assistance with special district financing, through the
construction loan phase. During the three years ended December 31, 1998, 1997
and 1996, the Bank originated over $715 million in total loans. While some of
these loans remain on MegaBank's balance sheet, most have been repaid,
refinanced or participated out to other financial institutions.
As of September 30, 1999, MegaBank and its subsidiaries had 194 employees
of which 166 were full time employees. Management considers its relationship
with the employees to be good.
MegaBank has the ability to provide a broad range of commercial and retail
lending services. However, the vast majority of the Bank's loans are residential
construction loans. MegaBank follows a uniform credit policy which sets forth
underwriting and loan administration criteria, including levels of loan
commitment, loan types, credit criteria, concentration limits, loan
administration, loan review and grading and related matters. In addition,
MegaBank provides ongoing loan officer training and review, obtains outside
independent loan reviews, operates a centralized processing, underwriting and
servicing center for consumer loans and manages problem assets centrally. At
September 30, 1999, substantially all loans outstanding were to customers within
MegaBank's market area.
COMPETITION
MegaBank faces a high degree of competition. In its marketplace, there are
numerous small banks and several larger national and regional financial banking
groups. MegaBank also competes with insurance companies, savings and loan
associations, credit unions, leasing companies, mortgage companies, and other
financial service providers. Many of the banks and other financial institutions
with which MegaBank competes have capital resources and legal lending limits
substantially in excess of the capital resources and legal lending limits of
MegaBank.
MegaBank competes for loans and deposits principally based on the range
and quality of services provided, interest rates, loan fees and office
locations. MegaBank actively solicits deposit customers and competes by offering
them high quality customer service and a complete product line. Over the past
few years, competition has increased as a result of changes in Colorado banking
laws that permit statewide branching and allow out-of-state holding companies to
acquire Colorado-based financial institutions. MegaBank believes its customer
service, broad product line and banking franchise enable it to compete in its
market area.
MegaBank will also face significant competition from other financial
institutions in any potential acquisitions. Many of these competitors have
substantially greater resources than MegaBank as well as the ability to issue
marketable equity securities that can be used as part of the purchase price.
PROPERTIES
The principal offices of both MegaBank and the Bank are located in a
three-story building at 8100 East Arapahoe Road, Englewood, Colorado, and its
telephone number is (303) 740-2265. The Bank maintains eight other full service
banking facilities in the Denver metropolitan area. The Bank also leases a
building for its central processing center for the Bank and its branch system.
Information concerning these properties, as of September 30, 1999, is presented
in the following table:
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<TABLE>
<CAPTION>
APPROXIMATE
DESCRIPTION AND YEAR OWNED OR SQUARE
ADDRESS OPENED LEASED (1) FOOTAGE
------- ------ ---------- -------
<S> <C> <C> <C>
Principal offices 1983 Leased 22,300
8100 E. Arapahoe Road
Englewood, CO
Processing center 1999 Leased 6,390
3734 Osage Street
Denver, CO
Branch Offices:
North 1995 Owned 3,000
4988 Federal Boulevard
Denver, CO
Monaco 1996 Owned 3,000
777 S. Monaco Parkway
Denver, CO
South Broadway 1997 Owned 3,000
4600 South Broadway
Englewood, CO
West Highland 1997 Leased 2,600
3804 W. 32nd Avenue
Denver, CO
Greenwood Village 1985 Leased 850
6300 S. Syracuse
Englewood, CO
Lower Downtown ("LoDo") 1993 Leased 3,400
1401 17th Street
Denver, CO
Northglenn 1998 Owned 5,200
480 E. 120th Avenue
Northglenn, CO
Westminster 1999 Owned 5,200
7377 Federal Boulevard
Westminster, CO
Other:
Northland Shopping Center (2) Owned 32,000
88th and Washington Street
Thornton, CO
</TABLE>
- -------------
(1) All of the leased properties are leased from affiliated entities with the
exception of the Greenwood Village and LoDo branches. See "Merger with
MegaBank -- Additional Agreements."
41
<PAGE> 45
(2) Site originally purchased in 1998 for future branch but the future of the
space is currently unknown.
LEGAL PROCEEDINGS
MegaBank and its subsidiaries are from time to time parties to various
legal actions arising in the normal course of business. Management believes that
there is no proceeding threatened or pending against MegaBank or any of its
subsidiaries which, if determined adversely, would have a material adverse
effect on the financial condition or results of operations of MegaBank.
BENEFICIAL OWNERSHIP OF MEGABANK COMMON STOCK BY MEGABANK MANAGEMENT AND
PRINCIPAL SHAREHOLDERS
At the close of business on the Record Date, directors and executive
officers of MegaBank (nine persons) and their affiliates beneficially owned and
were entitled to vote approximately 3,768,107 shares of MegaBank Common Stock,
which represented approximately 48.5% of the shares of MegaBank Common Stock
outstanding on that date. Each of those directors and executive officers has
indicated his or her present intention to vote, or cause to be voted, the shares
of MegaBank Common Stock owned by him or her for the proposal to approve the
Merger Agreement and the Merger including the related issuance of shares of
Compass Common Stock.
The following table sets forth certain information regarding beneficial
ownership of MegaBank Common Stock, as of January ___, 2000, by (i) each
shareholder known by MegaBank to be the beneficial owner of more than 5% of the
outstanding MegaBank Common Stock, and (ii) each director of MegaBank and
certain executive officers, and (iii) all directors and executive officers as a
group. Unless otherwise indicated, based on information furnished by such
owners, management believes that the shareholders listed below have sole
investment and voting power with respect to their shares.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER OWNED OF CLASS
- ---------------- ------------ ----------
<S> <C> <C>
Thomas R. Kowalski 2,970,192 (1) 38.2%
8100 East Arapahoe Road
Englewood, Colorado 80112
Ryan R. Kowalski 76,890 (2) 1.0%
8100 East Arapahoe Road
Englewood, Colorado 80112
Raymond L. Anilionis 642,780 (3) 8.3%
9034 East Easter Place, Suite 202
Englewood, Colorado 80112
Warren P. Cohen 707,500 (4) 9.1%
595 South Broadway, Suite 200
Denver, Colorado 80209
Realtek Company Employees' Profit 614,820 (5) 7.9%
Sharing Plan and Trust
8100 East Arapahoe Road,
Suite 214
Englewood, Colorado 80112
Vernon J. Purdy 468,750 6.0%
1900 East Girard, Suite 509
Englewood, Colorado 80110
</TABLE>
42
<PAGE> 46
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER OWNED OF CLASS
- ---------------- ----- ----------
<S> <C> <C>
Larry A. Olsen 151,590 2.0%
8100 East Arapahoe Road
Englewood, Colorado 80112
Susan A. Putland 545 *
8100 East Arapahoe Road
Englewood, Colorado 80112
Hiram J. Welton 1,000 *
8100 East Arapahoe Road
Englewood, Colorado 80112
Dr. Donald B. Brown -- --
4545 East Ninth Avenue
Denver, Colorado 80220
William F. Sievers 2,000 *
26 West Dry Creek
Circle, Suite 750
Littleton, Colorado 80120
Roger L. Morgan -- --
1615 Country Club Road
Ft. Collins, Colorado 80524
All executive officers and
directors as a group (nine
persons) 3,768,107 48.5%
</TABLE>
- ------------
(1) Of this amount, 1,343,232 shares are owned directly, and all other
shares are owned indirectly through entities or persons controlled
by Mr. Kowalski.
(2) Ryan R. Kowalski owns 76,890 shares through the Ryan R. Kowalski
Trust, however Mr. Kowalski disclaims beneficial ownership of such
securities. Since Thomas R. Kowalski is the trustee of the Ryan R.
Kowalski Trust, these shares are included in the ownership of Thomas
R. Kowalski in the table.
(3) Of this amount, 399,000 shares are owned by Mr. Anilionis directly,
and all other shares are owned by entities controlled by Mr.
Anilionis.
(4) Of this amount, 455,473 shares are owned by Mr. Cohen directly, and
all other shares are owned by an entity controlled by Mr.
Cohen.
(5) Due to Thomas R. Kowalski's significant beneficial ownership of the
named entity, these shares are included in the ownership of Thomas
R. Kowalski in the table.
* Less than 1.0%
The persons listed above will receive the same Merger Consideration
described in "Merger with MegaBank-General" as the other MegaBank shareholders
for each share of MegaBank Common Stock held at the Effective Time. Certain of
the persons listed above have ownership interests in Osage 3734 LLC, 1996 Newton
LLC and Nagrom LLC, which will be acquired by Compass in connection with the
Merger. SEE "THE MERGER -- INTERESTS OF CERTAIN PERSONS."
Directors and executive officers and other affiliates of MegaBank (and
their affiliates) owning or otherwise controlling 4,474,607 shares of MegaBank
Common Stock, comprising approximately 57.6% of the total shares of MegaBank
Common Stock issued and outstanding as of the Record Date, have agreed to vote
their shares in favor of the Merger Agreement and the Merger. SEE "SUMMARY -
VOTE REQUIRED" AND "THE MERGER -- GENERAL."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF MEGABANK
The following discussion provides certain information regarding the
financial condition and results of operations of MegaBank. This discussion
should be read in conjunction with MegaBank's Consolidated Financial
43
<PAGE> 47
Statements and Notes to Consolidated Financial Statements presented elsewhere in
this document. SEE "INDEX TO MEGABANK CONSOLIDATED FINANCIAL STATEMENTS."
Information herein contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, which can be identified
by words such as "may," "will," "expect," "anticipate," "believe," "estimate,"
or "continue," or comparable words. In addition, all statements other than
statements of historical facts that address activities that MegaBank expects or
anticipates will or may occur in the future are forward-looking statements.
Actual results may vary materially from those anticipated by management due to a
variety of reasons including those listed under "RISK FACTORS."
RESULTS OF OPERATIONS
NET INTEREST INCOME. MegaBank's net income is derived primarily from net
interest income. Net interest income is the difference between interest income,
principally from loans, investment securities and funds sold, and interest
expense, principally on customer deposits. Changes in net interest income result
from changes in volume, net interest spread and net interest margin. Volume
refers to the average dollar levels of interest-earning assets and
interest-bearing liabilities. Net interest spread refers to the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin refers to net interest income
divided by average interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
The following tables set forth the average balances, net interest income
and expense and average yields and rates for MegaBank's earning assets and
interest-bearing liabilities for the indicated periods on a tax-equivalent basis
assuming a 34% tax rate.
44
<PAGE> 48
<TABLE>
<CAPTION>
AS AND FOR NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD AVERAGE EARNED YIELD
BALANCE OR PAID OR COST BALANCE OR PAID OR COST
--------- --------- ------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities:
Taxable $ 8,293 $ 460 7.40% $ 6,524 $ 317 6.48%
Tax exempt (tax equivalent) 9,542 944 13.19% 8,402 850 13.49%
Funds sold and interest-bearing deposits 1,654 61 4.92% 10,815 430 5.30%
Loans (1) 218,536 19,321 11.79% 142,481 13,448 12.58%
Allowance for loan losses (2,915) -- -- (2,243) -- --
--------- --------- ---- --------- --------- ----
Total interest-earning assets $ 235,110 $ 20,786 11.79% $ 165,979 $ 15,045 12.09%
========= ========= ==== ========= ========= ====
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand, interest-bearing $ 72,890 $ 2,010 3.68% $ 67,185 $ 2,290 4.54%
Savings 6,860 113 2.20% 5,088 127 3.33%
Certificates of deposit:
Under $100,000 44,749 1,781 5.31% 30,040 1,299 5.77%
$100,000 and over 34,285 1,400 5.44% 10,762 448 5.55%
--------- --------- ---- --------- --------- ----
Total interest-bearing deposits 158,784 5,304 4.45% 113,075 4,164 4.91%
Advances from the Federal Home Loan
Bank and federal funds purchased (3) 6,336 247 5.20% $ 1,177 82 9.29%
Notes payable/Trust preferred securities(4) 12,000 812 9.02% 10,333 707 9.12%
Repurchase agreements 493 15 4.06% 766 30 5.22%
--------- --------- ---- --------- --------- ----
Total interest-bearing liabilities $ 177,613 $ 6,378 4.79% $ 125,351 $ 4,983 5.30%
========= ========= ==== ========= ========= ====
Net interest income (tax equivalent) $ 14,408 $ 10,062
========= =========
Net interest margin (2) 8.17% 8.08%
Net interest spread 7.00% 6.79%
Ratio of average interest-bearing liabilities
to average interest-earning assets 75.54% 75.52%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD AVERAGE EARNED YIELD
BALANCE OR PAID OR COST BALANCE OR PAID OR COST
--------- --------- ------- --------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities:
Taxable $ 5,290 $ 318 6.02% $ 4,486 $ 286 6.38%
Tax exempt (tax equivalent) 8,347 1,126 13.49% 6,667 897 13.45%
Funds sold and interest-bearing deposits 11,502 643 5.59% 12,876 699 5.43%
Loans (1) 150,951 18,464 12.23% 109,167 13,806 12.65%
Allowance for loan losses (2,318) -- -- (1,446) -- --
--------- --------- ---- --------- --------- ----
Total interest-earning assets $ 173,772 $ 20,551 11.83% $ 131,750 $ 15,688 11.91%
========= ========= ==== ========= ========= ====
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand, interest-bearing $ 68,948 $ 3,039 4.41% $ 53,370 $ 2,453 4.60%
Savings 5,488 170 3.10% 4,775 160 3.35%
Certificates of deposit:
Under $100,000 32,098 1,850 5.76% 25,295 1,444 5.71%
$100,000 and over 12,354 683 5.52% 9,749 578 5.93%
--------- --------- ---- --------- --------- ----
Total interest-bearing deposits 118,888 5,742 4.83% 93,189 4,635 4.97%
Advances from the Federal Home Loan
Bank and federal funds purchased (3) 1,094 99 9.05% 2,281 152 6.66%
Notes payable/Trust preferred securities(4) 11,167 978 8.76% 2,250 179 7.96%
Repurchase agreements 693 35 5.05% -- -- --
--------- --------- ---- --------- --------- ----
Total interest-bearing liabilities $ 131,842 $ 6,854 5.20% $ 97,720 $ 4,966 5.08%
========= ========= ==== ========= ========= ====
Net interest income (tax equivalent) $ 13,697 $ 10,722
========= =========
Net interest margin (2) 7.88% 8.14%
Net interest spread 6.63% 6.83%
Ratio of average interest-bearing liabilities
to average interest-earning assets 75.87% 74.17%
</TABLE>
(1) Loans are net of unearned discount. Nonaccrual loans are included in
average loans outstanding. Loan fees are included in interest income as
follows: September 30, 1999 - $3,187,351; September 30, 1998 - $2,085,668;
December 31, 1998 - $3,566,820; December 31, 1997 - $2,723,678.
(2) Net interest margin is net interest income divided by average total earning
assets.
(3) Includes a one-time prepayment penalty incurred on the early retirement of
FHLB advances which management determined was advantageous to MegaBank
compared to the cost of such funds.
(4) Interest earned or paid includes interest paid to MegaBank on the common
securities held.
45
<PAGE> 49
Net interest income on a tax equivalent basis was $14.4 million for the
nine months ended September 30, 1999, an increase of $4.3 million from $10.1
million for the same period in 1998. Interest income for the nine months ended
September 30, 1999 and 1998 was $20.5 million and $14.8 million, respectively.
The increases were due to higher balances of interest earning assets resulting
from internal growth.
Net interest income, on a tax-equivalent basis, was $13.7 million for the
year ended December 31, 1998, an increase of $3.0 million from $10.7 million in
1997. Interest income increased $4.9 million to $20.6 million in 1998 from $15.7
million in 1997. A significant component of interest earned on loans consists of
loan fees. Because the majority of the construction loans are real estate loans
with terms of one year or less, any decrease in real estate loan production can
be expected to have an adverse effect on loan fees. See "Loan Maturities." This
increase resulted primarily from an increase of $42.0 million in average
interest-earning assets to $173.8 million in 1998 from $131.8 million in 1997.
The majority of the asset growth was due to growth in the loan portfolio.
Average loans increased $68.1 million or 45.1% to $219.1 for the nine months
ended September 30, 1999 from $151.0 million for the year ended December 31,
1998 and $41.8 million or 38.28% from $109.2 million in 1997, due primarily to
MegaBank's continuing growth. The change in the relative mix of interest-earning
assets other than loans was due primarily to MegaBank's objective of maximizing
its yield on funds not used for loans, including investing in double tax exempt
securities. The average yield on interest-earning assets decreased to 11.76% for
the nine months ended September 30, 1999 from 11.83% in 1998 and 11.91% in 1997
on a tax equivalent basis.
Interest expense for the nine months ended September 30, 1999 was $6.4
million compared to $5.0 million for the same period in 1998. Additional
interest bearing deposits contributed to the increase in interest expense.
Interest expense increased $1.9 million to $6.9 million in 1998 from $5.0
million in 1997. A $15.6 million increase in interest-bearing demand deposits
accounted for $0.6 million of the increase. These deposits increased due to
MegaBank's growth, including the addition of new branches in 1998 and 1999.
Changes in the relative mix of average interest-bearing liabilities included a
$1.2 million decrease in advances from the FHLB. The cost of interest-bearing
liabilities for the nine months ended September 30, 1999 was 4.79% and for the
years ended December 31, 1998 and 1997 was 5.20% and 5.08%, respectively, and,
when combined with noninterest-bearing deposits, the cost of funds was 3.67% for
the nine months ended September 30, 1999 compared to 3.86% in 1998 and 3.72% in
1997. The net interest margin, on a tax-equivalent basis, increased to 8.15% for
the nine months ended September 30, 1999 due to an increase in the prime lending
rate. The net interest margin decreased to 7.88% in 1998 from 8.14% in 1997,
primarily as a result of lower interest earning asset yields and a higher cost
of funds.
The following table illustrates, for the periods indicated, the changes in
MegaBank's net interest income (on a tax-equivalent basis) due to changes in
volume and changes in interest rates. Changes in net interest income due to both
volume and rate have been allocated to volume and rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
46
<PAGE> 50
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30, 1999 COMPARED TO 1998
---------------------------
INCREASE (DECREASE) IN
NET INTEREST INCOME
DUE TO CHANGE IN
---------------------------
VOLUME RATE TOTAL
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning securities
Taxable $ 98 $ 131 $ 229
Tax exempt (tax equivalent) 113 (19) 94
Funds sold (338) (117) 455
Loans 6,757 (884) 5,873
------ ----- -------
Total interest-earning assets 6,630 (889) 5,741
------ ----- -------
Interest-bearing liabilities:
Demand, interest bearing 157 (437) (280)
Savings 29 (43) (14)
Certificates of deposit:
Under $100,000 585 (103) 482
$100,000 and over 961 (9) 952
Advances from the Federal Home
Loan Bank and federal funds purchased 201 (36) 165
Notes payable/Trust preferred securities 113 (8) 105
Repurchase agreement (8) (7) (15)
------ ----- -------
Total interest-bearing liabilities 2,038 (643) 1,395
------ ----- -------
Net increase (decrease) in net interest
income (tax equivalent) $4,592 $(246) $ 4,346
====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 COMPARED TO 1997 1997 COMPARED TO 1996
-------------------------- --------------------------
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
NET INTEREST INCOME NET INTEREST INCOME
DUE TO CHANGE IN DUE TO CHANGE IN
-------------------------- -------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------ ----- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning securities
Taxable $ 48 $( 16) $ 32 $(168) $(33) $(201)
Tax exempt (tax equivalent) 227 2 229 523 0 523
Funds sold (77) 22 (55) 511 (27) 484
Loans 5,111 (453) 4,658 3,661 (265) 3,396
------ ----- ------ ------ ----- ------
Total interest-earning assets 5,309 (445) 4,864 4,527 (325) 4,202
------ ----- ------ ------ ----- ------
Interest-bearing liabilities:
Demand, interest bearing 687 (101) 586 707 29 736
Savings 22 (12) 10 (22) (4) (26)
Certificates of deposit:
Under $100,000 392 14 406 894 28 922
$100,000 and over 144 (39) 105 170 39 209
Advances from the Federal Home
Loan Bank and federal funds purchased (107) 54 (53) 34 21 55
Notes payable/Trust preferred securities 722 77 799 (113) 51 (61)
Repurchase agreement 35 0 35 --- --- ---
------ ----- ------ ------ ----- ------
Total interest-bearing liabilities 1,895 (7) 1,888 1,670 164 1,835
------ ----- ------ ------ ----- ------
Net increase (decrease) in net
income (tax equivalent) $3,414 $(438) $2,976 $2,857 $(490) $2,367
====== ====== ====== ====== ====== ======
</TABLE>
OTHER INCOME. The following table sets forth MegaBank's other income for the
indicated periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- -----------------------
1999 1998 1998 1997
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Title Fees $1,872 $ -- $ -- $ --
Service charges 398 106 144 68
Bank charges 363 285 394 267
Building rent 73 79 118 130
Gain on sale of investment securities 135 25 46 341
Other 436 201 291 190
------ ---- ---- ----
Total other income $3,277 $696 $993 $996
====== ==== ==== ====
</TABLE>
Other income generated for the nine months ended September 30, 1999
increased to approximately $3.3 million as compared to $696,000 for the same
period in 1998. Most of the increase was attributed to additional fee income as
a result of an increase in service charges and title fees from Empire. In
addition, MegaBank received compensation for relinquishing its rights to the
ticker symbol "MFC" for its Trust Preferred Securities, which now trade under
the symbol "MFC.PR.A."
Other income for the year ended December 31, 1998 compared to 1997
decreased slightly due primarily to recognition of gain following the sale of
investment securities in 1997.
47
<PAGE> 51
OTHER EXPENSES. The following table sets forth MegaBank's operating expenses for
the indicated periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED,
SEPTEMBER 30, DECEMBER 31
------------------ ------------------
1999 1998 1998 1997
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and employee benefits $5,567 $3,183 $4,100 $3,135
Occupancy expense of premises 928 688 971 708
Furniture and equipment expense 524 337 447 342
Service fees 142 173 252 135
Legal fees 107 60 99 191
Indemnification and guarantee fees -- -- 350 329
Settlement with related company -- -- 355 --
Other expenses 2,638 1,448 1,479 1,587
----- ----- ----- -----
Total other expenses $9,906 $5,889 $8,053 $6,427
====== ====== ====== ======
</TABLE>
During the nine months ended September 30, 1999 total operating expenses
were $9.9 million compared to $5.9 million for the same period in 1998. The
increase was primarily due to additional employee and occupancy expenses
required by internal growth and additional expenses from Empire.
During the year ended December 31, 1998 total operating expenses increased
$1.7 million to $8.1 million from $6.4 million in 1997, with increases occurring
among the various components of salaries and occupancy related expenses due to
MegaBank's continued growth. MegaBank paid $350,000 in indemnification and
guarantee fees in accordance with an Indemnification Agreement that terminated
in February 1998 with the repayment of the underlying loan. MegaBank also
reimbursed an entity related through common ownership $355,000 for its income
tax liability incurred due to the involuntary sale of MegaBank's stock.
FEDERAL INCOME TAX. MegaBank's consolidated income tax rate varies from
statutory rates principally due to interest income from tax-exempt securities
and loans. MegaBank recorded income tax expenses totaling $1.9 million in 1998
and $1.3 million in 1997.
FINANCIAL CONDITION
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of MegaBank's loan portfolio by type of loan at the dates indicated. Management
believes that the balance sheet information as of the dates indicated should be
read in conjunction with the average balance information in the tables above
under "--Net Interest Income." As indicated above, MegaBank specializes its
lending practice in the residential construction industry. Depending on life
cycles of real estate development, balances of MegaBank's commercial loans and
construction loans may fluctuate significantly. Therefore, the data below is not
necessarily indicative of trends within a particular category.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31,
---------------------- ----------------------------------------------------
1998 1997
-------------------- ------------------------
Amount % Amount % Amount %
------ --- ------ ---- ------ ----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land development and construction $ 193,928 77.9% $ 136,243 72.9% $ 88,825 71.7%
Commercial 52,288 21.0 47,225 25.3 33,530 27.0
Installment and other 8,331 3.4 7,910 4.2 4,710 3.8
Mortgage -- -- -- -- -- --
Loans held for sale -- -- -- -- -- --
--------- ----- --------- ----- --------- -----
Total face amount of loans 254,547 102.3 191,378 102.4 127,065 102.5
Deferred loan fees, discounts
and costs, net (2,261) (0.9) (1,776) (1.0) (978) (0.8)
--------- ----- --------- ----- --------- -----
Loans 252,286 101.4 189,602 101.4 126,087 101.7
Less allowance for loan losses (3,382) (1.4) (2,610) (1.4) (2,083) (1.7)
--------- ----- --------- ----- --------- -----
Net loans $ 248,904 100.0% $ 186,992 100.0% $ 124,004 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
48
<PAGE> 52
Loans as of September 30, 1999 were up $62.7 million compared to December
31, 1998 and loans as of December 31, 1998 were up $63.5 million compared to
December 31, 1997, principally due to greater amounts of construction and
commercial loans, which reflect MegaBank's growth discussed above. The weighted
average interest rate of the loan portfolio at September 30, 1999 was 9.72%.
MegaBank's two primary categories of loans, land development and
construction loans and commercial loans, trended upward as indicated. At
September 30, 1999, these loans as a group were $246.2 million compared to
$183.5 million as of December 31, 1998.
Installment loans increased slightly with a balance of $8.3 million at
September 30, 1999 compared to $7.9 million as of December 31, 1998 and compared
to $4.7 million as of December 31, 1997, again due to MegaBank's growth.
Mortgage loans have comprised less than 1% of MegaBank's loan portfolio
since year-end 1994. As discussed earlier, MegaBank primarily makes land
development and residential construction loans rather than residential mortgage
loans.
Although the risk of non-payment exists for a variety of reasons with
respect to all loans, certain other more specific risks are associated with each
type of loan. Several risks are present in land development and construction
loans, including economic conditions in the home building industry, fluctuating
land values, the failure of the contractor to complete the work and the
borrower's inability to repay. The primary risks of land loans include a general
slowdown in the market resulting in fewer building permits and lower absorption
of newly developed sites to major homebuilders, building moratoriums by
municipalities, the general economy, and the fiscal condition of the developer.
Risks associated with commercial loans are quality of the borrower's management
and the impact of local economic factors. Installment loans also have risks
associated in a single type of loan. Installment loans additionally face the
risk of a borrower's unemployment as a result of deteriorating economic
conditions as well as the personal circumstances of the borrower.
MegaBank believes that its philosophy in extending credit is relatively
conservative in nature, with a presumption that most credit should have both a
primary and a secondary source of repayment, and that the primary source should
generally be operating cash flows, while the secondary source should generally
be disposition of collateral. MegaBank engages in limited unsecured lending, and
generally requires personal guarantees of principals for business obligations.
MegaBank practices a system of concurrence in the approval of commercial credit
whereby the documented concurrence of the loan committee is obtained in addition
to that of the recommending loan officer.
At September 30, 1999, net loans totaled approximately 104.6% of total
deposits and approximately 83.5% of total assets.
LOAN MATURITIES. The following tables present, at September 30, 1999 and
December 31, 1998 and 1997, loans by maturity in each major category of
MegaBank's portfolio based on contractual repricing schedules. Actual maturities
may differ from the contractual repricing maturities shown below as a result of
renewals and prepayments. Loan renewals are evaluated in the same manner as new
credit applications.
49
<PAGE> 53
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR -------------------------- -------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
------- ---------- ------------- ---------- ------------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land development and construction $ 192,930 $ 954 $ -- $ 44 $ -- $ 193,928
Commercial 37,119 12,722 -- 2,447 -- 52,288
Installment and other 5,490 2,747 -- 94 -- 8,331
Mortgage -- -- -- -- -- --
--------- -------- ------ ------- ------ ---------
Total face amount of loans $ 235,539 $ 16,423 $ -- $ 2,585 $ -- $ 254,547
Deferred loans fees (2,113) (126) -- (22) -- (2,261)
--------- -------- ------ ------- ------ ---------
Total loans $ 233,426 $ 16,297 $ -- $ 2,563 $ -- $ 252,286
========= ======== ====== ======= ====== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR ------------------------- --------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
------- ---------- ------------- ---------- ------------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land development and construction $ 132,583 $ 2,307 $ -- $ 1,353 $ -- $ 136,243
Commercial 30,049 13,460 115 3,601 -- 47,225
Installment and other 4,469 3,354 -- 87 -- 7,910
Mortgage -- -- -- -- -- --
--------- -------- ------ ------- ------ ---------
Total face amount of loans $ 167,101 $ 19,121 $ 115 $ 5,041 $ -- $ 191,378
Deferred loans fees (1,551) (178) -- (47) -- (1,776)
--------- -------- ------ ------- ------ ---------
Total loans $ 165,550 $ 18,943 $ 115 $ 4,994 $ -- $ 189,602
========= ======== ====== ======= ====== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR --------------------------- -------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
------- ---------- ------------- ---------- ------------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land development and construction $ 88,516 $ 309 $ -- $ -- $ -- $ 88,825
Commercial 24,504 7,823 -- 1,203 -- 33,530
Installment and other 1,455 3,255 -- -- -- 4,710
Mortgage -- -- -- -- -- --
--------- -------- ------ ------- ------ ---------
Total face amount of loans $ 114,475 $ 11,387 $ -- $ 1,203 $ -- $ 127,065
Deferred loans fees (777) (190) -- (11) -- (978)
--------- -------- ------ ------- ------ ---------
Total loans $ 113,698 $ 11,197 $ -- $ 1,192 $ -- $ 126,087
========= ======== ====== ======= ====== =========
</TABLE>
NONPERFORMING LOANS. Nonperforming loans consist of loans 90 days or more
delinquent and still accruing interest, nonaccrual loans and restructured loans.
When, in the opinion of management, a reasonable doubt exists as to the
collectibility of interest, regardless of the delinquency status of a loan, the
accrual of interest income is discontinued and interest accrued during the
current year is reversed through a charge to current year's earnings. While the
loan is on nonaccrual status, interest income is recognized only upon receipt
and then only if, in the judgment of management, there is no reasonable doubt as
to the collectibility of the principal balance. Loans 90 days or more delinquent
generally are changed to nonaccrual status unless the loan is in the process of
collection and management determines that full collection of principal and
accrued interest is probable.
Restructured loans are those for which concessions, including the
reduction of interest rates below a rate otherwise available to the borrower or
the deferral of interest or principal, have been granted due to the borrower's
weakened financial condition. Interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur. MegaBank did not have any restructured loans as of September 30,
1999, December 31, 1998 or December 31, 1997.
50
<PAGE> 54
The following table sets forth information concerning the nonperforming
assets of MegaBank at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31,
---------------------- ---------------------
(DOLLARS IN THOUSANDS) 1998 1997
---------------------- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans $ 2,079 $ 3,388 $ 1,604
Other loans 90 days past due -- -- --
Other real estate -- -- --
--------- --------- ---------
Total nonperforming loans $ 2,079 $ 3,388 $ 1,604
========= ========= =========
Ratio of nonaccrual and other loans 90
days past due to total loans 0.82% 1.81% 1.27%
Ratio of nonperforming assets to total loans
plus other real estate 0.82 1.81 1.27
Ratio of nonperforming assets to total assets 0.70 1.47 1.02
</TABLE>
Of the amount of nonaccrual loans as of September 30, 1999 and December
31, 1998, approximately $1.2 million is the Bank's portion of five related loans
totaling approximately $4.1 million, which are subject to a Chapter 11
bankruptcy proceeding. The loans were originated by the Bank and were made at
various times during 1994, 1995 and 1997 in connection with a real estate
development on which the developer had constructed a residential building
assembly plant. The loans are secured by real estate, certificates of deposit,
and two personal guarantees from the owners of the developer, as well as a
guarantee by a related limited partnership.
In addition to the above, the Bank has approximately $2.1 million of two
loans totaling $2.8 million that were placed on nonaccrual status just prior to
December 31, 1998. The loans were originated as acquisition and development
loans and are secured by real estate and a personal residence. Foreclosure
proceedings have been filed. Subsequent to December 31, 1998, one loan in the
amount of $178,000 was paid off. During the quarter ended June 30, 1999, the
loan was paid down to approximately $923,000 and the interest brought current.
The loan matured July 31, 1999 and was placed back on non-accrual. The Bank has
total principal outstanding of approximately $890,000 as of September 30, 1999.
Subsequent to September 30, 1999, foreclosure proceedings were once again
initiated.
As of September 30, 1999, there was no significant balance of loans
excluded from nonperforming loans set forth above, where known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with the present loan repayment
terms and which may result in such loans becoming nonperforming.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses
represents management's recognition of the risks of extending credit and its
evaluation of the quality of the loan portfolio. The allowance is maintained at
a level considered adequate to provide for anticipated loan losses based on
management's assessment of various factors affecting the loan portfolio,
including a review of problem loans, business conditions, historical loss
experience, evaluation of the quality of the underlying collateral and holding
and disposal costs. The allowance is increased by additional charges to
operating income and reduced by loans charged off, net of recoveries.
The following table sets forth information regarding changes in the
allowance for loan losses of MegaBank for the periods indicated.
51
<PAGE> 55
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------
SEPTEMBER 30, 1999 1998 1997
--------------------- ---- ----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average total loans $ 218,536 $ 150,951 $ 109,167
========= ========= =========
Total loans at end of period $ 252,286 $ 189,602 $ 126,087
========= ========= =========
Allowance at beginning of year $ 2,610 $ 2,083 $ 1,150
Charge-offs:
Land development and construction -- -- --
Commercial and industrial (65) (2) (1)
Installment -- (8) (7)
Mortgage -- -- --
Other (4) -- (1)
--------- --------- ---------
Total charge-offs (69) (10) (9)
Recoveries:
Land development and construction -- --
---------
Commercial and industrial -- 3 --
Installment 1 4 62
Mortgage -- -- --
Other -- -- --
--------- --------- ---------
Total recoveries 1 7 62
--------- --------- ---------
Net (charge-offs) recoveries (68) (3) 53
Provisions for loan losses 840 530 880
--------- --------- ---------
Allowance at end of period $ 3,382 $ 2,610 $ 2,083
========= ========= =========
Ratio of net (charge-offs) recoveries
to average total loans 0.03% 0.00% 0.05%
Allowance to total loans at end of period 1.34% 1.38% 1.65%
Allowance to nonperforming loans 162.67% 77.04% 129.92%
</TABLE>
Net charge offs during the nine months ended September 30, 1999 totaled
approximately $68,000 or .03% of average loans. Net charge offs during 1998
totaled approximately $3,000 or less than .01% of average loans compared to net
recoveries of approximately $53,000 or .05% of average loans in 1997.
MegaBank's lending personnel are responsible for continuous monitoring of
the quality of loan portfolios. The loan portfolios are also monitored and
examined by MegaBank loan review personnel. These reviews assist in the
identification of potential and probable losses, and also in the determination
of the level of the allowance for loan losses. The allowance for loan losses is
based primarily on management's estimates of loan losses from the foregoing
processes and historical experience. These estimates involve ongoing judgments
and may be adjusted over time depending on economic conditions and changing
historical experience.
State and federal regulatory agencies, as an integral part of their
examination process, review MegaBank's loans and its allowance for loan losses.
Management believes that MegaBank's allowance for loan losses is adequate to
cover anticipated losses. There can be no assurance, however, that management
will not determine a need to increase the allowance for loan losses or that
regulators, when reviewing MegaBank's loan portfolios in the future, will not
require MegaBank to increase such allowance, either of which could adversely
affect MegaBank's earnings. Further, there can be no assurance that MegaBank's
actual loan losses will not exceed its allowance for loan losses.
The following tables set forth an allocation of the allowance for loan
losses by loan category as of the dates indicated. Portions of the allowance
have been allocated to categories based on analysis of the status of particular
loans; however, a portion of the allowance is utilized as a single unallocated
allowance available for all loans. The allocation table should not be
interpreted as an indication of the specific amounts, by loan classification, to
be charged to the allowance. Management believes that the table may be a useful
device for assessing the adequacy of the allowance as a whole. The table has
been derived in part by applying historical loan loss ratios to both internally
52
<PAGE> 56
classified loans and the portfolio as a whole in determining the allocation of
the loan losses attributable to each category of loans.
When determining the adequacy of the allowance for loan losses, management
considers changes in the size and character of the loan portfolio, changes in
nonperforming and past due loans, historical loan loss experience, the existing
risk of individual loans, concentrations of loans to specific borrowers or
industries and current and projected economic conditions. The portion of the
allowance that has not been identified by MegaBank as related to specific loan
categories has been allocated to the individual loan categories on a pro rata
basis for purposes of the following table only.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
SEPTEMBER 30, 1999 1998 1997
--------------------------- --------------------------- -----------------------------
LOANS IN LOANS IN LOANS IN
AMOUNT OF CATEGORY AS A AMOUNT OF CATEGORY AS A AMOUNT OF CATEGORY AS A
GROSS PERCENTAGE OF GROSS PERCENTAGE OF GROSS PERCENTAGE OF
ALLOWANCE(1) TOTAL LOANS ALLOWANCE(1) TOTAL LOANS ALLOWANCE(1) TOTAL LOANS
------------ ------------- ------------ ------------- ------------ ---------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land development and construction $2,358 69.7% $1,463 56.1% $1,403 67.4%
Commercial and industrial 934 27.6 1,058 40.5 598 28.7
Installment and other 90 2.7 89 3.4 82 3.9
------ ----- ------ ----- ------ -----
Total $3,382 100.0% $2,610 100.0% $2,083 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
(1) For purposes of this table only, the portion of the allowance that has
not been identified by MegaBank as related to specific loan categories has been
allocated to the individual loan categories on a pro rata basis.
As of September 30, 1999, MegaBank increased its net loan reserve by
$772,000 compared to December 31, 1998 as a result of increased loan growth. The
total loan loss reserve at September 30, 1999 was $3.4 million or 1.34% of total
loans and 162.67% of nonperforming assets.
As of December 31, 1998, MegaBank increased its net loan loss reserve by
$527,000 compared to December 31, 1997 due to the significant increase in loan
production of $115 million over the amount originated in 1997. The total loan
loss reserve at December 31, 1998 was $2.6 million or 1.38% of total loans and
77.04% of nonperforming assets. The majority of the loan loss reserve increase
at December 31, 1998 compared to December 31, 1997 was included in the
commercial category.
INVESTMENTS. MegaBank's investment policy is designed to ensure liquidity
for cash-flow requirements; to help manage interest rate risk; to ensure
collateral is available for public deposits, Federal Home Loan Bank ("FHLB")
advances and repurchase agreements; and to manage asset quality diversification.
Investments are managed centrally to maximize compliance and effectiveness of
overall investing activities. Ongoing review of the performance of the
investment portfolio, market values, market conditions, current economic
conditions, profitability, capital ratios, liquidity needs, collateral position
with the FHLB and other matters related to investing activities is made.
MegaBank's investment portfolio at September 30, 1999 was comprised of
U.S. Treasury bonds and bills, corporate equity and debt securities, and general
obligation and revenue municipal bonds. Although the municipal securities are
non-rated and were privately placed, none of these investments are derivatives,
structured notes or similar instruments that are classified as "High-Risk
Securities" as defined by the Federal Financial Institutions Examinations
Counsel. In accordance with the principles of the Financial Accounting Standards
Board ("FASB") in its Statement of Financial Accounting Standards No. 115 ("FASB
115"), Accounting for Certain Investment in Debt and Equity Securities, all
investments are accounted for as "Available for Sale."
The following table sets forth the estimated market value of the available
for sale securities and the amortized cost basis of held to maturity securities
in MegaBank's investment portfolio by type at the dates indicated, with the
exception of the trading account.
53
<PAGE> 57
<TABLE>
<CAPTION>
DECEMBER 31,
------------
SEPTEMBER 30, 1999 1998 1997
------------------ ---- ----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury securities $ 4,006 $ 4,549 $ 4,774
Corporate debt securities 1,852 2,741 --
Corporate equity securities 1,306 405 454
Municipal securities (1) 11,029 7,982 8,403
------- ------- -------
Total $18,193 $15,677 $13,631
======= ======= =======
</TABLE>
- -----------
(1) Exempt from both federal and state income taxation.
INVESTMENT MATURITIES AND YIELD. The following table sets forth the
estimated market value and approximate yield of the securities in the investment
portfolio by type and maturity at September 30, 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
TYPE AND MATURITY AMOUNT YIELD
----------------- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. TREASURY SECURITIES:
One year or less $ 1,506 6.21%
Over one through five years 2,500 4.61
Over five through 10 years -- --
Over 10 years -- --
------- ----
Total $ 4,006 5.21%
======= ====
CORPORATE DEBT SECURITIES:
One year or less $ -- --
Over one through five years -- --
Over five through 10 years -- --
Over 10 years 1,852 7.73
------- ----
Total $ 1,852 7.73%
======= ====
MUNICIPAL SECURITIES:
One year or less $ -- --
Over one through five years 1,113 9.05%
Over five through 10 years 638 9.00
Over 10 years 9,278 8.61
------- ----
Total $11,029 8.68%
======= ====
TOTAL INVESTMENT IN SECURITIES:
One year or less $ 1,506 6.21%
Over one through five years 3,613 5.98
Over five through 10 years 638 9.00
Over 10 years 11,130 8.46
------- ----
Total $16,887 7.75%
======= ====
</TABLE>
DEPOSITS. MegaBank's primary source of funds has historically been
customer deposits, and deposits have experienced significant growth in recent
years with average deposits increasing to $209.0 million for the nine months
ended September 30, 1999 from $157.3 million for the nine months ended September
30, 1998 and to $164.4 million for the year ended December 31, 1998 from $128.9
million for the year ended December 31, 1997. These increases are primarily a
result of internal growth with the opening of one new branch in 1999, one new
branch in 1998, and two branches in 1997. At September 30, 1999,
noninterest-bearing deposits comprised 23.0% of total deposits. Management
believes this ratio may decrease as the mix of deposits in new branches tend to
be more interest-bearing rather than noninterest-bearing due to start up
marketing activities.
54
<PAGE> 58
The following table presents the average balances for each major category
of deposits and the weighted average interest rates paid for interest-bearing
deposits for the period indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
NINE MONTHS ENDED ---- ----
SEPTEMBER 30, 1999 AVERAGE AVERAGE
AVERAGE AVERAGE AVERAGE INTEREST AVERAGE INTEREST
BALANCE INTEREST COST BALANCE COST BALANCE COST
------- ------------- ------- ---- ------- ----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand, interest-bearing $ 72,980 3.68% $ 68,948 4.41% $ 53,370 4.60%
Savings 6,860 2.20 5,488 3.10 4,775 3.35
Certificates of deposit under $100,000 44,749 5.31 32,098 5.76 25,295 5.71
Certificates of deposit $100,000 and over 34,285 5.44 12,354 5.52 9,749 5.93
-------- -------- --------
Total interest-bearing demand deposits 158,784 4.45 118,888 4.83 93,189 4.97
Noninterest-bearing demand deposit 50,178 45,545 35,683
-------- -------- --------
Total Deposits $208,962 $164,433 $128,872
======== ======== ========
</TABLE>
The decreases in average costs were due primarily to a lower interest rate
environment.
The following table sets forth the amount of certificates of deposits at
their stated rates as of September 30, 1999:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
3.99% or less $ 1,218
4.00% to 4.99% 10,309
5.00% to 5.99% 83,788
6.00% and above 10,744
---------
Total $ 106,059
=========
Weighted average interest rate 5.36%
</TABLE>
At September 30, 1999, the scheduled maturities of certificates of deposit
were are follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999 $ 19,770
2000 80,352
2001 4,284
2002 1,422
2003 129
Thereafter 102
-----------
Total $ 106,059
==========
</TABLE>
The following table sets forth the amount and maturity of certificates of
deposit that had balances of more than $100,000 at September 30, 1999.
<TABLE>
<CAPTION>
REMAINING MATURITY (IN THOUSANDS)
<S> <C>
Less than three months $12,481
Three months up to six months 6,081
Six months up to one year 31,401
One year and over 8,760
Total $58,723
=======
</TABLE>
55
<PAGE> 59
FHLB BORROWINGS. The Bank is a member of the FHLB of Topeka, which is one
of 12 regional FHLB's. The FHLB system functions as a central bank providing
credit for members. As a member of the FHLB, the Bank is entitled to borrow
funds from the FHLB and is required to own FHLB stock in an amount determined by
a formula based upon the Bank's total assets and its FHLB borrowings. The Bank
may use FHLB borrowings to supplement deposits as a source of funds. SEE
"LIQUIDITY--ASSET/LIABILITY MANAGEMENT." Average FHLB borrowings for the nine
months ended September 30, 1999 were $1.0 million (excluding $1.6 million
average borrowings on the FHLB line of credit) compared to $409,000 for the year
ended December 31, 1998 and compared to $2.0 million for the year ended December
31, 1997. At September 30, 1999, based on its FHLB stockholdings, the Bank's
total available and unused borrowing capacity based on the Bank's current FHLB
stockholdings was approximately $12.5 million, which was available through a
line of credit and term advances. FHLB borrowings are collateralized by the
Bank's FHLB stock, other investment securities and certain loans.
A variety of borrowing terms and maturities can be chosen from the FHLB.
Maturities available range generally from one day to 10 years. Interest rates
can be either fixed or variable and prepayment options are available if desired.
The FHLB offers both amortizing and nonamortizing advances. To date, FHLB stock
has been redeemable at the preset price of $100 per share, but there can be no
assurance that this will continue to be the case.
CAPITAL RESOURCES
MegaBank monitors compliance with federal regulatory capital requirements,
focusing primarily on risk-based capital guidelines. Under the risk-based
capital method of capital measurement, the ratio computed is dependent upon the
amount and composition of assets recorded on the balance sheet, and the amount
and composition of off-balance sheet items, in addition to the level of capital.
The following tables set forth MegaBank's capital ratios as of the
indicated dates.
<TABLE>
<CAPTION>
CAPITAL RATIOS
DECEMBER 31, DECEMBER 31,
SEPTEMBER 30, 1999 1998 1997
------------------ --------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Core (Tier 1) capital $33,299 11.48% $ 28,410 12.53% $ 12,579 8.02%
Core (Tier 1) capital minimum requirement (1) 11,605 4.00 9,069 4.00 4,707 3.00
------- ----- -------- ----- -------- ----
Excess $21,694 7.48% $19,341 8.53% $ 7,872 5.02%
======= ===== ======== ===== ======== ====
Tangible capital $33,299 11.48% $ 28,410 12.53% $ 12,579 8.02%
Tangible capital minimum requirement (1) 4,352 1.50 3,401 1.50 2,354 1.50
------- ----- -------- ----- -------- ----
Excess $28,947 9.98% $ 25,009 11.03% $ 10,225 6.52%
======= ===== ======== ===== ======== ====
Adjusted tangible assets $290,137 $226,731 $156,909
======== ======== ========
</TABLE>
- -----------------
(1) Based on risk-based capital guidelines of the Office of Thrift
Supervision, a savings association is required to maintain a Core
(Tier 1) capital requirement of 4% of adjusted tangible assets and a
tangible capital requirement of 1.5% of tangible assets.
56
<PAGE> 60
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
DECEMBER 31, DECEMBER 31,
SEPTEMBER 30, 1999 1998 1997
-------------------- ------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital $ 36,350 13.54% $ 30,315 15.38% $ 14,321 10.30%
Minimum requirement (1) 21,480 8.00 15,766 8.00 11,122 8.00
-------- ---- -------- ---- -------- ----
Excess $ 14,870 5.54% $ 14,549 7.38% $ 3,199 2.30%
======== ==== ======== ==== ======== ====
Total risk-based assets $268,495 $197,077 $139,023
======== ======== ========
</TABLE>
- -----------
(1) Based on risk-based capital guidelines of the Office of Thrift
Supervision, a savings association generally is required to maintain
a total capital to risk-based assets ratio of 8%.
LIQUIDITY
SOURCES OF LIQUIDITY. MegaBank manages its liquidity in order to satisfy
cash flow requirements of depositors and borrowers and allow MegaBank to meet
its own cash flow needs. MegaBank has two basic sources of liquidity. The first
is its retail deposit market served by its banking offices. MegaBank has
increased core deposits through growth of its existing deposits and through
promotions directed at existing and potential customers. Average deposits
increased by $44.5 million, or 27.1% in the nine months ended September 30, 1999
compared to December 31, 1998 and $35.6 million, or 27.6% in 1998 over 1997.
The second source of MegaBank's liquidity is FHLB advances and the Bank's
lines of credit. FHLB advances are used in the cash management function both to
fund a portion of the investment portfolio and to manage the day-to-day
fluctuations in liquidity resulting from needs of depositors and borrowers. At
September 30, 1999, MegaBank had borrowed $11.2 million from the FHLB and its
other lenders and had available $12.5 million of unused borrowing capacity from
the FHLB and $11.8 million from its other lenders. During the third quarter of
1999, since interest rates were fluctuating, MegaBank elected to borrow
short-term funds in addition to seeking additional deposits from customers and
other sources. MegaBank anticipates that it will continue to rely primarily upon
customer deposits, FHLB borrowings, other lending sources, loan repayments, loan
sales and retained earnings to provide liquidity, and will use funds so provided
primarily to make loans and to purchase investment securities.
ASSET/LIABILITY MANAGEMENT. A principal function of asset/liability
management is to coordinate the levels of interest-sensitive assets and
liabilities to minimize net interest income fluctuations in times of fluctuating
market interest rates. Interest-sensitive assets and liabilities are those that
are subject to repricing in the near term, including both variable rate
instruments and those fixed-rate instruments which are approaching maturity.
Changes in net yield on interest-sensitive assets arise when interest rates on
those assets (e.g. loans and investment securities) change in a different time
period from that of interest rates on liabilities (e.g. time deposits). Changes
in net yield on interest-sensitive assets also arise from changes in the mix and
volumes of earning assets and interest-bearing liabilities.
The following table sets forth the interest rate sensitivity of MegaBank's
assets and liabilities as of September 30, 1999, and sets forth the repricing
dates of MegaBank's interest-earning assets and interest-bearing liabilities as
of that date, as well as MegaBank's interest rate sensitivity gap percentages
for the periods presented. The table is based upon assumptions as to when assets
and liabilities will reprice in a changing interest rate environment, and since
such assumptions can be no more than estimates, certain assets and liabilities
indicated as maturing or otherwise repricing within a stated period may, in
fact, mature or reprice at different times and at different volumes than those
estimated. Also, the renewal or repricing of certain assets and liabilities can
be discretionary and subject to competitive and other pressures. Therefore, the
following table does not and cannot necessarily indicate the actual future
impact of general interest rate movements on MegaBank's net interest income.
57
<PAGE> 61
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING AT SEPTEMBER 30, 1999
-----------------------------------------------------
THREE MONTHS
LESS THAN TO LESS THAN ONE TO OVER
THREE MONTHS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------ ------------ ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Funds sold and interest-bearing deposits $ 83 $ -- $ -- $ -- $ 83
Investment securities available for sale 505 1,001 3,613 11,768 16,887
Loans 229,256 4,170 16,297 2,562 252,285
-------- -------- ------- ------- --------
Total interest-earning assets $229,844 $ 5,171 $19,910 $14,330 $269,255
======== ======== ======= ======= ========
Interest-bearing liabilities:
Deposits:
Demand, interest-bearing $ 69,751 $ -- $ -- $ -- $ 69,751
Savings 7,376 -- -- -- 7,376
Certificates of deposit
under $100,000 7,289 35,427 4,546 74 47,336
$100,000 and over 12,481 37,482 8,760 -- 58,723
Federal Home Loan Bank borrowings 7,500 1,000 -- -- 8,500
Federal funds purchased 2,725 -- -- -- 2,725
Trust preferred securities 0 -- -- 12,000 12,000
Repurchase agreements 685 -- -- -- 685
-------- -------- ------- ------- --------
Total interest-bearing liabilities $107,807 $ 73,909 $13,306 $12,074 $207,096
Interest rate gap $122,037 $(68,738) $ 6,604 $ 2,256 $ 62,159
======== ======== ======= ======= ========
Cumulative interest rate gap at
December 31, 1998 $122,037 $ 53,299 $59,903 $62,159
======== ======== ======= =======
Cumulative interest rate gap
to total assets 40.96% 17.89% 20.10% 20.86%
======== ======== ======= =======
</TABLE>
Due to the volume of loans that reprice with changes in the prime
lending rate and the volume of noninterest-bearing deposits, MegaBank has
experienced a positive gap in assets and deposits that reprice or mature in less
than three months. Of the total interest-earning assets at September 30, 1999,
85.4% reprice or mature in less than three months while 52.1% of all
interest-bearing liabilities reprice or mature in that same time frame. The
Bank's positive interest rate gaps indicate that the Bank's net income would
increase in the event of rising interest rates and would decrease in the event
of decreasing interest rates. In the highly unlikely event of an immediate,
parallel and sustained shift of market interest rates of 200 basis points,
management estimates that the Bank's net income during the 12 months ending
December 31, 1999 would likely increase greater than 10% compared to the prior
like 12-month period if interest rates rose by 200 basis points and likely fall
by greater than 10% compared to the prior like 12-month period if rates fell of
the same amount. These are good faith estimates assuming all other factors do
not change materially, and, in management's belief, are not necessarily
indicative of what actually could occur in the event of immediate interest rate
increases or decreases of this magnitude. Management believes that it is highly
unlikely that such changes would occur in a short time period. As
interest-bearing assets and liabilities reprice at different time frames and
proportions to market interest rate movements, various assumptions must be made
based on historical relationships of these variables in reaching any conclusion.
Since these correlations are based on competitive and market conditions, future
results could, in management's belief, be materially different from the
foregoing estimates.
EFFECTS OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services, increases in inflation generally have resulted in increased
interest rates. Over short periods of time interest rates may not move in the
same direction or magnitude as inflation.
58
<PAGE> 62
YEAR 2000 COMPLIANCE
As the year 2000 approaches, a significant business issue has emerged
regarding existing application software programs and operating systems and their
ability to accommodate the date value for the year 2000. Many existing software
application products, including products used by the Bank, its suppliers and
customers, were designed to accommodate only a two-digit date value, which
represents the year. For example, information relating to the year 1996 is
stored in the system as "96." As a result, the year 1999 (i.e., "99") could be
the maximum date value that these systems will be able to process accurately. In
response to concerns about this issue, regulatory agencies have begun to monitor
holding companies' and banks' readiness for the year 2000 as part of the regular
examination process.
MegaBank presently believes that with modifications it has made to
existing software and conversion to new software, the year 2000 issue will not
pose significant operational problems for MegaBank's computer systems or
business operations. Implementation of MegaBank's plan to test in-house and
out-sourced software has been underway since the first quarter of 1998. Testing
of applications considered to be "mission critical" was completed in the first
quarter of 1999 and modifications and changes necessary have been completed and
tested. Management currently estimates that such total compliance will cost
approximately $150,000. Costs incurred through September 30, 1999 were
approximately $44,100. The team for the plan is responsible for the
implementation of the plan and reports to MegaBank's Board of Directors.
The year 2000 issue could have a material adverse impact on the
operations of MegaBank. Because of the factors discussed below, management
cannot estimate with any reasonable degree of certainty the magnitude of lost
revenues should management's reasonable worst case scenario develop in which
MegaBank would need to use an outside vendor to become year 2000 compliant and
noncompliant customers were unable to repay their loans.
Even though MegaBank's "mission critical" systems have tested year
2000 compliant, MegaBank has in place a business resumption contingency plan in
the event of an unforeseen problem in its computer systems. This plan details
actions to be taken in the unlikely event of problems in the change over to the
millennium. This process of validation is in accordance with Federal Financial
Institutions Examination Council guidelines.
The Bank has sent statements to its customers regarding the year 2000
issue and the need for readiness, pursuant to guidelines of the banking industry
regulators. Management intends to continue to solicit customer response on this
matter. The Bank has also instituted a policy requiring a loan applicant to sign
a year 2000 acknowledgement certificate at closing as part of a loan package.
Failure of MegaBank's customers to prepare for year 2000 compatibility could
have a significant adverse effect of customers' operations and profitability,
thus inhibiting their ability to repay loans and adversely affecting MegaBank's
operations. MegaBank does not have sufficient information accumulated from
customers to enable MegaBank to assess the degree to which customers' operations
are susceptible to potential problems relating to the year 2000 issue or,
further, to quantify the potential lost revenue to MegaBank in this case.
INTERESTS OF CERTAIN PERSONS
You should be aware that MegaBank officers, directors and employees
may have interests in the Merger that are different from, or in addition to,
yours.
LLC MERGERS
In connection with the consummation of the Merger, Compass will
acquire Osage 3734 LLC, 1996 Newton LLC and Nagrom LLC. It is a condition to the
completion of the merger that Compass also acquire the LLCs.
Osage 3734 LLC, a Colorado limited liability company, leases space to
the Bank for its new centralized processing center at 3734 Osage Street, Denver.
Osage 3734 LLC is owned equally by KLA/4 Family Limited Partnership RLLLP, an
entity controlled by Raymond L. Anilionis, Ryan R. Kowalski, Vice President and
director of the Bank and director of MegaBank and son of Thomas R. Kowalski, and
Respond Corp., an entity owned by Thomas R. Kowalski. Rent is approximately
$48,000 per annum and incrementally increases to $60,000 for years
59
<PAGE> 63
five through ten under the terms of a ten-year triple net lease. The Board of
Directors of MegaBank believes that the leasing terms are comparable to those
that could be obtained from unaffiliated third parties.
Nagrom LLC, a Colorado limited liability company, owns the building
and land in which MegaBank's principal office is located. The Bank leases office
space in the building. The lease began in 1995 and is for a period of 10 years.
The rent for 1998 was approximately $334,000, and will increase 3.5% per year.
The Board of Directors of MegaBank believes that the rates are comparable to
those that could be obtained from unaffiliated third parties. Nagrom LLC is
beneficially owned by Kowalski Capital LLC, a Colorado limited liability company
(71.0%), Raymond L. Anilionis (13.0%), an officer and director of MegaBank, and
MED Partnership, an entity controlled by Warren P. Cohen (16.0%), a director of
the Bank. Kowalski Capital LLC is owned 95.0% by the Thomas R. Kowalski
Irrevocable Trust. The beneficiaries of the trust are Ryan R. Kowalski (the
adult son of Thomas R. Kowalski) and Ryan R. Kowalski's minor daughter. The
remaining 5.0% of Kowalski Capital LLC is owned by Respond Corp., of which
Thomas R. Kowalski is the sole shareholder.
1996 Newton LLC, a Colorado limited liability company, leases space
to the Bank for its branch at 32nd Avenue and Newton, Denver. 1996 Newton LLC is
owned by Kowalski Capital LLC (50.0%), Raymond L. Anilionis (25.0%) and the
Warren P. Cohen Beneficial Trust (25.0%). The lease commenced in May 1996 and
runs for a period of ten years. Rent is approximately $31,000 per annum, and
incrementally increases to $36,000 per year for the last five years of the
lease. The Board of Directors of MegaBank believes that the rates are comparable
to those that could be obtained from unaffiliated third parties. SEE "MERGER
WITH MEGABANK -- ADDITIONAL AGREEMENTS."
EMPLOYMENT AGREEMENTS
Compass Bank and Thomas R. Kowalski, Chairman of the Board of
MegaBank, entered into an employment agreement which will become effective upon
completion of the merger. Under the employment agreement, Mr. Kowalski will
serve as a senior officer of Compass Bank for three years beginning at the
effective time of the merger. Mr. Kowalski's annual base salary will be $175,000
with merit increases based upon performance. Mr. Kowalski will also receive
benefits available to Compass Bank employees of equal title and base salary. The
employment agreement also contains noncompetition and confidentiality
provisions.
Larry Olsen, the President of MegaBank, and certain other employees
of MegaBank and its subsidiaries also entered into employment agreements which
will become effective upon completion of the Merger. The employment agreements
are for two years starting at the effective time of the merger and each contains
noncompetition and confidentiality provisions. Raymond L. Anilionis entered into
a consulting agreement with Compass Bank which will become effective upon
completion of the Merger. The consulting agreement is for one year and contains
noncompetition and confidentiality provisions. SEE "MERGER WITH MEGABANK --
ADDITIONAL AGREEMENTS."
INDEMNIFICATION
In addition, after the Merger, and for five years after, Compass will
indemnify the officers, directors and employees of MegaBank for all liabilities
arising before the Merger to the maximum extent permitted. SEE APPENDIX I.
RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS
Compass' Board of Directors appointed KPMG Peat Marwick LLP as
independent auditors for Compass for the year ending December 31, 1998. KPMG
Peat Marwick LLP served as Compass' independent auditors continuously from 1971
to August 1999. On August 16, 1999 Compass' Board of Directors appointed Arthur
Andersen LLP as independent auditors for Compass.
MegaBank's Board of Directors appointed Fortner, Bayens, Levkulich &
Co., P.C., as independent auditors for MegaBank for the year ending December 31,
1999. Fortner, Bayens, Levkulich & Co., P.C has served as MegaBank's and the
Bank's independent auditors continuously since 1989.
60
<PAGE> 64
Compass has been advised by Arthur Andersen LLP that Arthur Andersen
LLP has no direct financial interest or any material indirect financial interest
in Compass other than arising from that firm's employment as auditor for
Compass.
MegaBank has been advised by Fortner, Bayens, Levkulich & Co., P.C
that Fortner, Bayens, Levkulich & Co., P.C has no direct financial interest or
any material indirect financial interest in MegaBank other than arising from
that firm's employment as auditor for MegaBank.
EXPERTS
The consolidated financial statements of Compass Bancshares, Inc. and
subsidiaries as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998, 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
upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of MegaBank Financial
Corporation as of December 31, 1998 and 1997 and for each of the years then
ended included in this document and elsewhere in the registration statement have
been audited by Fortner, Bayens, Levkulich & Co., P.C., independent certified
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
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 document and certain other matters. As of October
31, 1999, Mr. Powell was the beneficial owner of an aggregate of approximately
154,433 shares of Compass Common Stock. Locke 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. Slivka Robinson
Waters & O'Dorisio, P.C. and Locke Liddell & Sapp are also expected to render
legal opinions as to certain matters acceptable to MegaBank and Compass,
respectively.
INDEMNIFICATION
Compass' Bylaws 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 MEGABANK AND COMPASS -- CERTAIN DIFFERENCES BETWEEN THE
CORPORATION LAWS OF COLORADO AND THE CORPORATION LAWS OF DELAWARE AND
CORRESPONDING CHARTER AND BYLAW 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
MegaBank's Board of Directors does not know of any matters to be
presented at the Special Meeting other than those set forth above. If any other
matters are properly brought before the Special Meeting or any adjournment
thereof, the enclosed proxy will be voted in accordance with the recommendations
of MegaBank's Board of Directors unless "Authority Withheld" is indicated in the
appropriate box on the proxy.
61
<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
OF
MEGABANK FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Auditors' Report regarding the December 31, 1998 and 1997
Consolidated Financial Statements F-1
2. Consolidated Balance Sheets as of December 31, 1998 F-2
3. Consolidated Statements of Income for the Years Ended
December 31, 1998 and 1997 F-3
4. Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998 and 1997 F-4
5. Consolidated Statements of Shareholders' Equity for the Two
Years Ended December 31, 1998 F-5
6. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 F-6
7. Notes to Consolidated Financial Statements F-7
8. Consolidated Balance Sheets (unaudited) as of September 30, 1999 and
December 31, 1998 F-28
9. Consolidated Statements of Income and Comprehensive Income
(unaudited) for the Three and Nine Months Ended
September 30, 1999 and 1998 F-29
10. Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended September 30, 1999 and 1998 F-30
11. Notes to Consolidated Financial Statements (unaudited) F-31
</TABLE>
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
Board of Directors
MegaBank Financial Corporation
Englewood, Colorado
We have audited the consolidated balance sheet of MegaBank Financial
Corporation and Subsidiaries as of December 31, 1998 and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MegaBank Financial Corporation and Subsidiaries at December 31, 1998 and the
consolidated results of their operations and consolidated cash flows for each of
the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/Fortner, Bayens, Levkulich and Co., P.C.
Denver, Colorado
February 19, 1999
F-1
<PAGE> 67
MegaBank Financial Corporation
CONSOLIDATED BALANCE SHEET
December 31, 1998
(Amounts in thousands)
<TABLE>
<S> <C>
ASSETS
Cash and due from banks $ 10,326
Federal funds sold 5,625
Other interest-bearing deposits 128
---------
Cash and cash equivalents 16,079
Investment securities available for sale 15,677
Loans 189,602
Less allowance for loan losses (2,610)
---------
186,992
Federal Home Loan Bank stock, at cost 482
Bank premises, leasehold improvements
and equipment, net 8,846
Accrued interest receivable 1,104
Deferred tax asset 718
Trust preferred securities issuance costs, net 729
Other assets 192
---------
$ 230,819
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 189,879
Securities sold under agreements to repurchase 443
Income taxes payable 71
Accrued interest payable 434
Other liabilities 601
---------
Total liabilities 191,428
Company obligated manditorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated Debentures 12,000
Commitments (notes I, J, and L)
Shareholders' equity
Preferred stock; no par value, 10,000,000 shares authorized, none
issued --
Common stock; no par value, 50,000,000 shares authorized,
7,607,340 shares issued and outstanding 13,974
Retained earnings 13,383
Accumulated other comprehensive income 34
---------
27,391
---------
$ 230,819
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-2
<PAGE> 68
MegaBank Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Interest income
Loans, including fees $18,464 $13,806
Taxable investment securities 318 286
Nontaxable investment securities 743 592
Funds sold 463 636
Other interest 181 63
------- -------
Total interest income 20,169 15,383
Interest expense
Deposits 5,742 4,635
Borrowed funds 134 152
Trust preferred securities 959 --
Notes payable 19 179
------- -------
Total interest expense 6,854 4,966
------- -------
Net interest income 13,315 10,417
Provision for loan losses 530 880
------- -------
Net interest income after provision for loan losses 12,785 9,537
Other income
Service charges on deposit accounts 538 335
Gain on sale of investment securities 46 341
Other income 409 320
------- -------
Total other income 993 996
Other expenses
Salaries and employee benefits 4,100 3,135
Occupancy expenses of premises 971 708
Furniture and equipment expense 447 342
Service fees 252 135
Legal fees 99 191
Indemnification and guarantee fees (note L) 350 329
Settlement with related company (note L) 355 --
Other expenses 1,479 1,587
------- -------
Total other expenses 8,053 6,427
------- -------
Income before income taxes 5,725 4,106
Income tax expense 1,920 1,272
------- -------
NET INCOME $ 3,805 $ 2,834
======= =======
Income per share
Basic $ 0.58 $ 0.44
======= =======
Diluted $ 0.58 $ 0.44
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 69
MegaBank Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net income $ 3,805 $ 2,834
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available for sale (5) (83)
------- -------
Other comprehensive income (loss) (5) (83)
------- -------
Comprehensive income $ 3,800 $ 2,751
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 70
MegaBank Financial Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Two years ended December 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Accumulated
other
Common Retained comprehensive
stock earnings income Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 1,961 $ 6,744 $ 122 $ 8,827
Net income -- 2,834 -- 2,834
Other comprehensive income (loss) -- -- (83) (83)
-------- -------- -------- --------
Balance at December 31, 1997 1,961 9,578 39 11,578
Issuance of 1,200,000 shares of common
stock initial public offering at $11 per
share, less selling expenses of $1,187,000 12,013 -- -- 12,013
Net income -- 3,805 -- 3,805
Other comprehensive income (loss) -- -- (5) (5)
-------- -------- -------- --------
Balance at December 31, 1998 $ 13,974 $ 13,383 $ 34 $ 27,391
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 71
MegaBank Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,805 $ 2,834
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 530 880
Depreciation and amortization of fixed assets 486 325
Amortization of preferred securities issuance costs 23 --
Net discount accretion on investment securities (13) (29)
Stock dividend (32) (16)
Gain on sale of investment securities available for sale (46) (341)
Deferred income taxes (82) (336)
Changes in deferrals and accruals
Accrued interest receivable (206) (217)
Accrued interest payable 282 46
Income taxes payable (61) 23
Other, net (174) 700
-------- --------
Net cash provided by operating activities 4,512 3,869
Cash flows from investing activities
Purchase of securities available for sale (4,482) (6,214)
Proceeds from maturities of securities available for sale 1,250 3,160
Proceeds from sales of securities available for sale 1,158 495
Net increase in loans (63,518) (31,061)
Expenditures for bank premises and equipment (4,533) (2,494)
-------- --------
Net cash used in investing activities (70,125) (36,114)
Cash flows from financing activities
Net increase in deposits 48,001 37,217
Trust preferred securities issuance costs (497) (255)
Decrease in Federal Home Loan Bank borrowings (1,423) (849)
Increase in securities sold under repurchase agreements 443 --
Proceeds from issuance of trust preferred securities 12,000 --
Principal payments on notes payable (2,000) (628)
Sale of common stock 12,013 --
-------- --------
Net cash provided by financing activities 68,537 35,485
-------- --------
Net increase in cash and cash equivalents 2,924 3,240
Cash and cash equivalents at beginning of year 13,155 9,915
-------- --------
Cash and cash equivalents at end of year $ 16,079 $ 13,155
======== ========
Supplemental disclosures of cash flow information Cash paid during the
year for:
Interest expense $ 6,572 $ 4,920
Income taxes 2,062 1,499
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 72
NOTE A - SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS
MegaBank Financial Corporation ("the Company") owns the shares of and acts
as parent holding company for MegaBank ("the Bank") and MB Capital I. The
Bank provides a full range of banking services to individual and corporate
customers principally in the Denver metropolitan area. A majority of the
Bank's loans are related to real estate (principally residential
construction) and commercial activities. The Bank is subject to competition
from other financial institutions for loans and deposit accounts. The Bank
is also subject to regulation by certain governmental agencies and
undergoes periodic examinations by those regulatory agencies. In connection
with an offering of Cumulative Trust Preferred Securities in 1998, the
Company formed MB Capital I, which is treated as a wholly owned subsidiary
of the Company.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. 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. In connection with the determination of the allowance for loan
losses, management obtains independent appraisals for significant
properties and assesses estimated future cash flows from borrowers'
operations and the liquidation of loan collateral.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, changes in
economic conditions may necessitate revisions in future years. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additional losses based on their
judgments about information available to them at the time of their
examination.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, MegaBank and, in 1998, MB Capital I. All intercompany
accounts and transactions have been eliminated in the consolidated
financial statements.
INVESTMENT SECURITIES
Management determines the classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Bank has the
positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held to maturity are classified as
available for sale. Available for sale securities are stated at fair value,
with the unrealized gains and losses, net of tax, reported as a component
of retained earnings in shareholders' equity.
F-7
<PAGE> 73
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES (CONTINUED)
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for amortization of premiums and accretion
of discounts to maturity or, in the case of mortgage-backed securities,
over the estimated life of the security. Such amortization and accretion is
included as an adjustment to interest income from investments. Realized
gains and losses and declines in value judged to be other-than-temporary
are included in net securities gains (losses). The cost of securities sold
is based on the specific identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
The accrual of interest on loans is discontinued when management believes
that interest or principal may not be collectible or recoverable.
Generally, loans that are 90 days past due as to interest, principal, or
both; loans that are not 90 days past due but where the likelihood of
collecting the interest, principal, or both within 90 days is unlikely; and
loans which have been partially charged off will be placed on nonaccrual
status. When placing a loan in nonaccrual status, interest accrued to date
is generally reversed. When such a reversal is made, interest accrued
during prior years is charged to the allowance for loan losses. All other
interest reversed on nonaccrual loans is charged against current year
interest income. Payments received on a loan on nonaccrual status are
charged against the balance of the loan. A loan is returned to accrual
status when principal and interest are no longer past due and
collectibility is no longer doubtful. Restructured loans are those on which
concessions in terms have been made as a result of deterioration in a
borrower's financial condition. Interest on these loans is accrued under
the new terms.
Impaired loans are all specifically identified loans for which it is
probable that the Company will not collect all amounts due according to the
contractual terms of the loan agreement. Included in impaired loans are all
nonaccrual and restructured loans. Loan impairment is measured based on the
present value of expected future cash flows discounted at the loan's
original effective interest rate. As practical expedient, impairment may be
measured based on the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance. The valuation
allowance is a component of the allowance for loan losses. Any excess of
the carrying value of impaired loans over amounts realized from the
liquidation of collateral and other sources is charged to the allowance for
loan losses.
Loan origination fees, net of certain direct origination costs, are
deferred and amortized on a basis that approximates level yield over the
contractual lives of the underlying loans. In addition, fees for a
commitment to originate or purchase loans are offset against direct loan
origination costs incurred to make such commitments. The net amounts are
deferred and, if the commitment is exercised, recognized over the life of
the related loan as a yield adjustment or, if the commitment expires
unexercised, recognized as income upon expiration of the commitment. When a
loan is placed on nonaccrual status, no income is recognized on the
unamortized balance of loan origination fees until the loan is returned to
accrual status or is repaid.
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the
principal is unlikely or, with respect to consumer installment loans,
according to an established delinquency schedule. The allowance is an
amount that management believes will be adequate to absorb losses inherent
in existing loans, leases and commitments to extend credit, based on
evaluations of the collectibility and prior loss experience of loans,
leases and commitments to extend credit. The evaluations take into
consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations,
F-8
<PAGE> 74
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
specific problem loans, leases and commitments, and current and anticipated
economic conditions that may affect the borrowers' ability to pay.
Recoveries realized on loans previously charged off are credited to the
allowance for loan losses.
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost. Depreciation is
provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives, principally on the
straight-line method.
TRUST PREFERRED SECURITIES ISSUANCE COSTS
Direct costs incurred in connection with the issuance of Trust Preferred
Securities have been capitalized. These costs are amortized on a
straight-line basis through the maturity date of the securities.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for
the current year (after exclusion of non-taxable income such as interest on
state and municipal securities) and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and
between the tax bases of assets and liabilities and their reported amounts
in the financial statements. Deferred tax assets and liabilities are
included in the financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and liabilities
are expected to be realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
CASH AND CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include cash and due from banks, other interest-bearing
deposits and federal funds sold. Generally federal funds sold are held for
one day.
PER SHARE COMPUTATIONS
Basic earnings per share is based on the weighted average number of common
shares outstanding during each year. Share amounts have been adjusted to
reflect a thirty-for-one common stock split which took place in September
1998. Diluted earnings per share is computed by dividing net earnings by
the weighted average number of common shares outstanding during the year
plus the common share equivalents related to outstanding stock options.
Weighted average common shares outstanding and diluted shares deemed
outstanding for 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Weighted average common shares outstanding 6,542,135 6,407,340
Common share equivalents related to outstanding stock options 12,187 --
--------- ---------
6,554,322 6,407,340
========= =========
</TABLE>
F-9
<PAGE> 75
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, (APB 25) and related
interpretations in accounting for any stock options issued to employees.
Under APB 25, no compensation expense is recorded for any stock options
for which the exercise price equals the market price of the underlying
stock on the date of the grant. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123).
RECENT ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
The Company adopted Financial Accounting Standards Board Statement No.
130, Reporting Comprehensive Income, (SFAS No. 130), effective January 1,
1998. SFAS No. 130 establishes standards for reporting comprehensive
income and its components (revenues, expenses, gains, and losses).
Components of comprehensive income are net income and all other non-owner
changes in equity. The statement requires an enterprise to classify items
of other comprehensive income by their nature in the financial statements
and to display the accumulated balance of other comprehensive income
separately from other components of equity in the balance sheet. The only
component of comprehensive income consists of net unrealized holding gains
and losses on available for sale securities, less the related tax effects.
Reclassification of financial statements for earlier periods, provided for
comparative purposes, is required.
The Company has disclosed comprehensive income in a separate income
statement.
OPERATING SEGMENTS
The Company adopted Financial Accounting Standards Board Statement No.
131, Disclosures about Segments of an Enterprise and Related Information,
(SFAS No. 131) effective January 1, 1998. This statement establishes
standards for reporting information about segments in annual and interim
financial statements. SFAS No. 131 introduces a new model for segment
reporting called the "management approach". The management approach is
based on the way the chief operating decision-maker organizes segments
within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services,
geography, legal structure, management structure and any other in which
management disaggregates a company. Based on the "management approach"
model, the Company has determined that its business is comprised of a
single operating segment and that SFAS No. 131 therefore has no impact on
its financial statements.
DERIVATIVE INSTRUMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities,
(SFAS No. 133). This statement requires the recognition of all derivative
financial instruments as either assets or liabilities in the balance sheet
and measurement of those instruments at fair value. The accounting for
gains and losses associated with changes in the fair value of a derivative
and the effect on the consolidated financial statements will depend on its
hedge designation and whether the hedge is highly effective in achieving
offsetting changes in the fair value or cash flows of the asset or
liability hedged. Under the provisions of SFAS No. 133, the method that
will be used for assessing the effectiveness of a hedging derivative, as
well as the measurement approach for determining the ineffective aspects
of the hedge, must be established at the inception of the hedge. The
methods must be consistent with the entity's approach to managing risk.
F-10
<PAGE> 76
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
DERIVATIVE INSTRUMENTS (CONTINUED)
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, with initial application as of the beginning of an
entity's fiscal quarter. On that date, hedging relationships must be
designated anew and documented pursuant to the provisions of this
statement. Earlier application is encouraged, but is permitted only as of
the beginning of any fiscal quarter beginning after June 15, 1999.
Retroactive application to financial statements of prior periods is
prohibited. The Company does not currently have any derivative instruments
nor is it involved in hedging activities.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform with the presentation adopted in 1998.
NOTE B - INVESTMENT SECURITIES
At December 31, 1998, the Company had securities with the following amortized
cost and estimated fair market values (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury securities $ 4,497 $ 52 $ -- $ 4,549
State and political subdivisions 7,891 91 -- 7,982
Corporate debt securities 2,740 150 (149) 2,741
Corporate equity securities 495 -- (90) 405
-------- -------- -------- --------
$ 15,623 $ 293 $ (239) $ 15,677
======== ======== ======== ========
</TABLE>
The amortized cost and estimated market value of debt securities at December
31, 1998 by contractual maturity are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
------- -------
<S> <C> <C>
Due in one year or less $ 2,998 $ 3,023
Due after one year through five years 1,499 1,526
Due after five years through ten years 636 638
Due after ten years 9,995 10,085
------- -------
$15,128 $15,272
======= =======
</TABLE>
F-11
<PAGE> 77
NOTE B - INVESTMENT SECURITIES (CONTINUED)
Securities included in the accompanying balance sheet at December 31, 1998
with a carrying amount of $5,920,000 have been pledged as collateral for
public deposits and for other purposes as required or permitted by law.
Available for sale securities were sold in 1998 and 1997 and are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Gains realized $ 46 $341
Losses realized -- --
---- ----
$ 46 $341
==== ====
</TABLE>
NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES
The components of the loan portfolio at December 31, 1998 are summarized as
follows (in thousands):
<TABLE>
<S> <C>
Land development and construction $ 136,243
Commercial 47,225
Installment and other 7,910
---------
191,378
Less unearned loan fees (1,776)
---------
$ 189,602
=========
</TABLE>
Transactions in the allowance for loan losses for 1998 and 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Balance at beginning of year $ 2,083 $ 1,150
Provision for loan losses 530 880
Recoveries 7 62
Loans charged off (10) (9)
------- -------
Balance at end of year $ 2,610 $ 2,083
======= =======
</TABLE>
There were no accruing loans having payments delinquent more than ninety days
at December 31, 1998 and 1997.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $3,388,000 and $1,604,000 at December 31, 1998 and 1997,
respectively.
F-12
<PAGE> 78
NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Information related to impaired loans is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Total impaired loans at end of year $3,388 $1,604
Average impaired loans during the year 1,529 1,600
Allowance for loan loss relative to impaired loans 551 85
</TABLE>
No interest income was recognized during the periods that loans were deemed
to be impaired. The Company is not committed to lend additional funds to
debtors whose loans are impaired.
No loans were transferred to foreclosed real estate in 1998 or 1997.
NOTE D - BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
At December 31, 1998, bank premises, leasehold improvements and equipment,
less accumulated depreciation and amortization, consisted of the following
(in thousands):
<TABLE>
<S> <C>
Buildings and improvements $ 4,761
Leasehold improvements 450
Equipment 3,205
Land 2,060
--------
10,476
Less accumulated depreciation and amortization (1,630)
========
$ 8,846
========
</TABLE>
NOTE E - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1998 is summarized as follows (in
thousands):
<TABLE>
<S> <C>
Loans $ 868
Investment securities and interest-bearing deposits 236
------
$1,104
======
</TABLE>
F-13
<PAGE> 79
NOTE F - DEPOSITS
Deposits are summarized at December 31, 1998 as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Weighted
average
interest
Balance Percent rate
-------- ------ ------
<S> <C> <C> <C>
Demand, noninterest-bearing $ 54,093 28.49% --%
NOW accounts 7,992 4.21 3.21
Money market deposit accounts 64,452 33.94 4.59
Savings deposits 6,271 3.30 3.10
Certificates of deposit
Under $100,000 37,138 19.56 5.76
$100,000 and over 19,933 10.50 5.52
-------- ------ ------
$189,879 100.00% 3.49%
======== ====== ======
</TABLE>
Interest expense on deposits for 1998 and 1997 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
NOW accounts $ 239 $ 157
Money market deposit accounts 2,800 2,296
Savings deposits 170 160
Certificates of deposit
Under $100,000 1,850 1,444
$100,000 and over 683 578
------ ------
$5,742 $4,635
====== ======
</TABLE>
As of December 31, 1998, the Company has brokered deposits totaling
$3,240,000.
At December 31, 1998, the scheduled maturities of certificates of deposit are
as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
Rate 1999 2000 2001 2002 2003 Thereafter Total
--------------- ------- ------ ---- ------ ---- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
3.99% or less $ 745 $ -- $ -- $ -- $ -- $ -- $ 745
4.00% to 4.99% 6,504 505 5 -- 1 77 7,092
5.00% to 5.99% 36,013 7,051 92 -- 5 -- 43,161
6.00% to 6.99% 2,338 1,599 567 1,380 118 71 6,073
------- ------ ---- ------ ---- ---- -------
$45,600 $9,155 $664 $1,380 $124 $148 $57,071
======= ====== ==== ====== ==== ==== =======
</TABLE>
F-14
<PAGE> 80
NOTE G - BORROWING COMMITMENTS
As of December 31, 1998, the Bank had lines of credit with Federal Home Loan
Bank, Bankers' Bank of the West, and the Federal Reserve Bank of $9,000,000,
$14,500,000, and $500,000, respectively. There were no advances outstanding
on these lines of credit as of December 31, 1998.
NOTE H - COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
In February 1998, MB Capital I, a special-purpose wholly-owned Delaware trust
subsidiary of the Company, completed an offering of 1,200,000 shares (issue
price of $10 per share) totaling $12.0 million of fixed-rate 8.75% Cumulative
Trust Preferred Securities (Preferred Securities), which are guaranteed by
the Company. MB Capital I invested the total proceeds it received in 8.75%
Junior Subordinated Deferrable Interest Debentures (Debentures) issued by the
Company. Interest paid on the Debentures will be distributed to the holders
of the Preferred Securities. As a result, under current tax law,
distributions to the holders of the Preferred Securities will be tax
deductible by the Company. Distributions payable on the Preferred Securities
are recorded as interest expense in the consolidated statements of income.
These Debentures are unsecured and rank junior and are subordinate in right
of payment to all senior debt of the Company.
The distribution rate payable on the Preferred Securities is cumulative and
payable quarterly in arrears and commenced on April 15, 1998. The Company has
the right, subject to events of default, to defer payments of interest on the
Debentures at any time by extending the interest payment period for a period
not exceeding 20 consecutive quarters with respect to each deferral period,
provided that no extension period may extend beyond the redemption or
maturity date of the Debentures. The Preferred Securities are subject to
mandatory redemption upon repayment of the Debentures. The Debentures mature
on February 9, 2028, which may be shortened to not earlier than February 9,
2003, if certain conditions are met, or at any time upon the occurrence and
continuation of certain changes in either the tax treatment or the capital
treatment of MB Capital I, the Debentures or the Preferred Securities. The
Company has the right to terminate MB Capital I and cause the Debentures to
be distributed to the holders of the Capital Securities in liquidation of
such trust, all subject to the Company having received prior approval of the
Office of Thrift Supervision, if required.
NOTE I - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and stand-by letters of credit.
Those instruments involve, to a varying degree, elements of credit risk in
excess of the amount recognized in the statement of financial position. The
contract amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
stand-by letters of credit is represented by the contractual notional amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Financial instruments whose contract amounts represent credit risk as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Commitments to extend credit $99,761
Stand-by letters of credit 12,779
</TABLE>
F-15
<PAGE> 81
NOTE I - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon or be participated to other financial
institutions, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's
credit-worthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Company upon
extension of credit is based on management's credit evaluation. Collateral
held varies, but may include accounts receivable, inventory, property, plant
and equipment and income-producing commercial properties.
Stand-by letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
NOTE J - LEASE COMMITMENTS
Future minimum rental and lease payments under noncancellable operating
leases for premises, expiring at various dates through 2006 are as follows
(in thousands):
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1999 $ 476
2000 476
2001 474
2002 476
2003 469
Thereafter 751
------
$3,122
======
</TABLE>
Total lease expense for all operating leases was $445,000 and $436,000 in
1998 and 1997, respectively.
F-16
<PAGE> 82
NOTE K - INCOME TAXES
The provision for income taxes for 1998 and 1997 consists of the following
(in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current
Federal $1,749 $1,406
State 253 202
------ ------
2,002 1,608
Deferred
Federal (71) (299)
State (11) (37)
------ --------
(82) (336)
------ --------
$1,920 $1,272
====== ======
</TABLE>
The effective income tax rate varies from the statutory federal rate because
of several factors, the most significant being nontaxable interest income
earned on obligations of state and municipalities. The following table
reconciles the Company's effective tax rate to the statutory federal rate.
<TABLE>
<CAPTION>
1998 1997
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Tax expense at statutory rate $1,946 34.0% $1,396 34.0%
Increase (decrease) in taxes due to:
Tax exempt municipal interest (235) (4.1) (187) (4.5)
State tax, net of federal tax effect 167 2.9 122 3.0
Other 42 .7 (59) (1.5)
------ ----- ------ ----
Total provision for income taxes $1,920 33.5% $1,272 31.0%
====== ===== ====== ====
</TABLE>
Deferred tax assets and liabilities are recorded based on the differences
between financial statement and tax basis of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. Timing
differences in the recognition of revenue and expense for tax and financial
reporting purposes resulted in a deferred tax asset as of December 31, 1998
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets
Provision for loan losses $833
Recognition of loan fees 13
----
Total deferred tax assets 846
Deferred tax liabilities
Depreciation (86)
Market value adjustment to investment securities
available for sale (20)
Other (22)
----
Total deferred tax liabilities (128)
----
Net deferred tax asset $718
====
</TABLE>
F-17
<PAGE> 83
NOTE L - RELATED PARTY TRANSACTIONS
As discussed in note P, the Company, as of September 1, 1998, became a
unitary thrift holding company, and as such, has the power to engage in
activities not currently allowed under the Bank Holding Company Act. Orchard
Valley Financial Corporation ("OVFC"), a bank holding company related to the
Company through common ownership, was notified that it would either be
required to reduce its ownership in the Company to less than 5% or the
Company would be prevented from exercising its powers under its new
regulations. OVFC agreed to reduce its ownership of the Company to under 5%.
The Company paid OVFC $355,000 in 1998 to reimburse it for the income tax
liability incurred due to the involuntary sale of the Company's stock.
The Company has entered into certain loan participations with First State
Bank of Hotchkiss, a financial institution related through common ownership.
Approximate loan principal balances outstanding under these participations
at December 31, 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Participations sold $9,703
Participations purchased 1,346
</TABLE>
The Company has also sold loan participations to other related parties
(shareholders, directors, family members, businesses related through common
ownership). At December 31, 1998 the participations sold to related parties
were approximately $4,018,000.
The following is an analysis of loans that were made to shareholders,
directors and executive officers of the Company, and to corporations and
others associated with those individuals (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1998 $ 553
New loans 1,202
Repayments (450)
------
Balance at December 31, 1998 $1,305
======
</TABLE>
Certain officers, directors, and shareholders of the Company personally
guaranteed a note payable which was repaid in 1998. In return for the
guarantee, the Company agreed to indemnify the guarantors for all
liabilities, costs or expenses relating to the guarantee and to provide
additional compensation to the guarantors. The additional compensation has
consisted of an aggregate fee equal to 1.5% of the outstanding balance of
the loan on each anniversary date plus a performance bonus based on earnings
of the Bank as specified in the agreement. Total fees paid to the guarantors
were $350,000 and $329,000 in 1998 and 1997, respectively.
In March 1997, the Company entered into a consulting agreement with a
company owned by an individual who is an officer, director and shareholder
of the Company. Payments by the Company under the agreement are $5,000 per
month. The term of the agreement is for one year, but automatically renews
unless explicitly terminated by either party.
NOTE M - EMPLOYEE BENEFITS
Through June 30, 1998, the Bank had an IRA contribution plan available for
all personnel who have been employed at least nine months. In 1998, the
Board of Directors of the Bank approved the MegaBank 401(k) Savings Plan.
The Plan was effective July 1, 1998. Employees who have completed three
months of service, and meet other conditions, are eligible for the Plan. The
Bank will match 50% of the first 6% of compensation which employees
contribute to the Plan. The Bank's contributions to the Plan vest ratably
over six years. The Plan replaces the IRA contribution plan. Contributions
in 1998 and 1997 were $21,000 and $32,000, respectively.
F-18
<PAGE> 84
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company's
financial instruments as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial assets
Cash and due from banks $ 10,326 $ 10,326
Federal funds sold 5,625 5,625
Other interest-bearing deposits 128 128
Investment securities available for sale 15,667 15,667
Federal Home Loan Bank stock 482 482
Loans, less allowance for loan losses 186,992 187,163
Accrued interest receivable 1,104 1,104
Financial liabilities
Deposits
Non-interest bearing 54,092 54,092
Interest bearing 135,785 136,146
Accrued interest payable 434 434
Short-term borrowings 443 443
Company obligated manditorily redeemable
preferred securities of subsidiary trust holding
solely Junior Subordinated Debentures 12,000 11,250
Unrecognized financial instruments (net
of contract amount)
Commitments to extend credit 99,761 99,761
Standby letters of credit 12,779 12,779
</TABLE>
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments. The Company
operates as a going concern and except for its investment portfolio, no
active market exists for its financial instruments. Much of the information
used to determine fair value is highly subjective and judgmental in nature
and, therefore, the results may not be precise. The subjective factors
include, among other things, estimates of cash flows, risk characteristics,
credit quality and interest rates, all of which are subject to change.
Since the fair value is estimated as of the date, the amounts which will
actually be realized or paid upon settlement or maturity of the various
financial instruments could be significantly different.
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
F-19
<PAGE> 85
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INVESTMENTS
For securities held as investments, fair value equals quoted market
price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
The carrying amount of accrued interest receivable approximates its
fair value.
LOANS
The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities. For variable rate loans, the carrying amount is a
reasonable estimate of fair value. For loans where collection of
principal is in doubt, an allowance for losses has been estimated.
Loans with similar characteristics were aggregated for purposes of the
calculations. The carrying amount of accrued interest approximates its
fair value.
DEPOSITS
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the
reporting date (i.e. their carrying amount). The fair value of fixed
maturity time deposits is estimated using a discounted cash flow
calculation that applies the rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest
payable approximates its fair value.
SHORT-TERM BORROWINGS
For short-term borrowings, the carrying amount is a reasonable estimate
of fair value.
LONG-TERM BORROWINGS
The fair value of long-term borrowings is estimated by discounting the
future cash flows using the current rate at which a similar loan could
be financed.
TRUST PREFERRED SECURITIES
For Trust Preferred Securities, the fair value is determined based on
the quoted market price.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND LINES OF CREDIT
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of
the counterparts. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit and lines of
credit is based on fees currently charged for similar agreements or on
the estimated cost to terminate them or otherwise settle the
obligations with the counterparts at the reporting date.
F-20
<PAGE> 86
NOTE O - EQUITY TRANSACTIONS AND AGREEMENTS
AUTHORIZED CAPITAL AND REVERSE STOCK SPLIT
Effective January 15, 1998, the Company increased its authorized
capital stock to 50 million shares of Common Stock and authorized 10
million shares of Preferred Stock. The increase was made to provide for
possible future needs of the Company. In 1998, the Company effected a
thirty-for-one stock split. References in the accompanying financial
statements to numbers of shares and per share amounts have been
retroactively restated to reflect the stock split.
STOCK PURCHASE AGREEMENT
The Company has a Stock Purchase Agreement with certain of its
shareholders. This agreement, as amended and restated, provides that
upon the death of the Company's Chairman of the Board of Directors, the
shareholders will have the option to require the Company to purchase a
pro rata portion of their shares of the Company's stock to the extent
the Company receives proceeds from a life insurance policy on the life
of the Chairman. These shareholders currently hold an aggregate of
2,709,650 shares of common stock. Based on an amendment to the
agreement in 1998, the purchase price of the common stock would be
based on the greater of 80% of its average closing bid price on any
recognized quotation system for a designated period or its appraised
value. The Company has purchased a life insurance policy in the amount
of $3,000,000 on the Chairman.
STOCK INCENTIVE PLAN
In August 1998, the Company adopted the 1998 Long-Term Incentive Plan
(the "Incentive Plan"). The purpose of the Incentive Plan is to provide
continuing incentives to the Company's and its subsidiaries' key
employees, which may include officers and members of the Board of
Directors. The Incentive Plan provides for an authorization of 500,000
shares of common stock for issuance thereunder. Under the Incentive
Plan, the Company may grant to participants awards of stock options,
restricted stock, stock appreciation rights, performance shares or any
combination thereof.
The Incentive Plan is administered by the Board of Directors or a
Compensation Committee of the Board of Directors composed of at least
two non-employee members. Subject to the terms of the Incentive Plan,
the Board or Compensation Committee determines, among other matters,
the persons to whom awards are granted and the terms of the awards.
Under the stock option component of the Incentive Plan, the Company may
grant both incentive stock options ("incentive stock options") intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and options which are not qualified as incentive
stock options. Incentive stock options may not be granted at an
exercise price of less than the fair market value of the common stock
on the date of grant, while non-qualified stock options may be granted
at any exercise price. The exercise price may be paid in cash, in
shares of common stock (valued at fair market value at the date of
exercise) or by a combination of such means of payment, as may be
determined by the Board or Compensation Committee.
Under the restricted component of the Incentive Plan, the Company may
award shares of restricted stock upon payment of consideration as
determined by the Board or Compensation Committee. Upon the award, a
restriction period (not to exceed ten years) and/or performance goals
may be set. Subject to the terms of each individual award, the
recipient forfeits a restricted stock award upon termination of
employment during the restriction period and any consideration paid by
the participant is returned.
F-21
<PAGE> 87
NOTE O - EQUITY TRANSACTIONS AND AGREEMENTS (CONTINUED)
STOCK INCENTIVE PLAN (CONTINUED)
An award of a stock appreciation right allows a recipient to receive a
cash payment or shares of common stock to the extent of any
appreciation in the book value or the fair market value of the common
stock of the Company over a specified period of time. Stock
appreciation rights may also be awarded in tandem with stock options,
and recipients of such tandem awards may elect to exercise the award as
a stock option or as a stock appreciation right.
Under the performance share component of the Incentive Plan, recipients
are awarded a specified number of shares of common stock of the Company
subject to the recipient or the Company attaining specified performance
goals as the Board or Compensation Committee may determine. The Board
or Compensation Committee, under certain circumstances, may waive or
modify performance criteria on existing performance share awards.
The Incentive Plan will be discontinued in the event of the dissolution
or liquidation of the Company or in the event of a reorganization (such
as a merger, consolidation, or sale of substantially all of the assets
of the Company) in which the Company is not the surviving or acquiring
company, or in which the Company is or becomes a wholly-owned
subsidiary of another company after the effective date of the
reorganization and no plan or agreement respecting the reorganization
is established which specifically provides for the continuation of the
Incentive Plan and the change, conversion, or exchange of the common
stock relating to existing awards under the Incentive Plan for
securities of another corporation. Upon the dissolution of the
Incentive Plan, all awards will become fully vested and all outstanding
options and stock appreciation rights will become immediately
exercisable by the holder thereof.
On September 1, 1998, the Company granted options to purchase up to
108,500 shares of common stock to directors and employees of the
Company, exercisable as follows:
<TABLE>
<CAPTION>
Options Exercise price
granted per share
------- ---------
<S> <C>
58,500 $10
50,000 11
</TABLE>
These options were issued at the completion of the Company's public
stock offering.
Of the 108,500 options issued, 15,000 were nonqualified stock options
and 93,500 were incentive stock options. The exercise price of the
options was the estimated fair market value of the Company's common
stock as of the date granted. Options must be exercised within a
ten-year period. Options to purchase shares of common stock are
exercisable as follows:
<TABLE>
<CAPTION>
Exercisable
On or after options
----------- -------
<S> <C>
September 1, 2000 10,000
September 1, 2001 32,550
September 1, 2002 65,950
-------
108,500
=======
</TABLE>
F-22
<PAGE> 88
NOTE O - EQUITY TRANSACTIONS AND AGREEMENTS (CONTINUED)
STOCK INCENTIVE PLAN (CONTINUED)
The Stock Incentive Plan is accounted for under APB Opinion No. 25 and
related interpretations. Accordingly, no compensation cost is
recognized for the Plan. Had compensation cost for the Plan been
determined consistent with the fair value method of SFAS No. 123, the
Company's net income and income per share for the year ended December
31, 1998 would not have been materially effected.
NOTE P - REGULATORY MATTERS
The Company received permission from the Office of Thrift Supervision,
Department of Treasury, to change its status to a savings and loan holding
company within the meaning of the Home Owners' Loan Act of 1933 ("HOLA"), as
amended. The Company was registered with the Office of Thrift Supervision
("OTS") and subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the Bank received permission from the
Office of Thrift Supervision to convert the Bank's charter from a
state-chartered stock institution to a federal stock savings bank. Management
believes that the Bank's balance sheet is currently more reflective of a
thrift than a commercial bank, and that the flexibility and opportunities
with a thrift charter are more in line with the long range plans of the Bank
than those that are available under its present charter. The Company effected
both of the conversions on September 1, 1998. In connection with its charter
conversion, the Bank changed its name from MegaBank of Arapahoe to MegaBank.
The Bank is subject to various regulatory capital requirements administered
by the OTS. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that,
if undertaken, could have a direct material effect on the 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 classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets (as
defined), and of Tier 1 (core) capital and tangible capital to adjusted total
assets. Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
F-23
<PAGE> 89
NOTE P - REGULATORY MATTERS (CONTINUED)
The Bank is well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, institutions must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 (core)
ratios as set forth in the table below as of December 31, 1998:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital
(to risk-weighted assets) $30,315 15.38% $15,766 =>8.0% $19,708 =>10.0%
Tier 1 risk-based capital
(to risk-weighted assets) 28,410 14.42% 7,883 =>4.0% 11,825 =>6.0%
Core capital
(to adjusted tangible assets) 28,410 12.53% 6,802 =>3.0% 11,337 =>5.0%
Tangible capital
(to tangible assets) 28,410 12.53% 3,401 =>1.5% N/A N/A
</TABLE>
Cash dividends paid to the Company by the Bank amounted to $1,000,000 in
1997. The Bank paid no dividends in 1998. The payment of dividends to the
Company by the Bank is subject to various regulatory limitations.
F-24
<PAGE> 90
NOTE Q - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY
The following presents the condensed balance sheet as of December 31, 1998
and statements of income and cash flows for each of the two years in the
period ended December 31, 1998 for MegaBank Financial Corporation:
MegaBank Financial Corporation
BALANCE SHEET
December 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and interest bearing deposits $ 6,927
Investment securities available for sale 1,746
Investment in bank subsidiary 28,872
Investment in trust subsidiary 371
Property and equipment 1,233
Trust preferred securities issuance cost, net 728
Other assets 153
-------
Total assets $40,030
=======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Accrued interest and other liabilities $ 268
Company obligated manditorily redeemable
preferred securities of subsidiary trust holding
solely Junior Subordinated Debentures 12,371
Shareholders' equity 27,391
-------
Total liabilities and shareholders' equity $40,030
=======
</TABLE>
F-25
<PAGE> 91
NOTE Q - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY (CONTINUED)
MegaBank Financial Corporation
STATEMENTS OF INCOME
Years ended December 31,
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Income
Dividends from subsidiary $ -- $ 1,000
Interest 148 12
Rental income from subsidiary 407 341
Other rental income 121 137
Gain on sale of investment securities 34 341
Miscellaneous income 6 --
------- -------
Total income 716 1,831
Expenses
Interest 981 179
Occupancy and equipment expense 513 362
Other 853 463
------- -------
Total expenses 2,347 1,004
------- -------
Income (loss) before income taxes and equity
in undistributed net income of subsidiaries (1,631) 827
Income tax benefit 605 64
------- -------
Income (loss) before undistributed net
income of subsidiaries (1,026) 891
Equity in undistributed net income of subsidiaries 4,831 1,943
------- -------
Net income $ 3,805 $ 2,834
======= =======
</TABLE>
F-26
<PAGE> 92
NOTE Q - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY (CONTINUED)
MegaBank Financial Corporation
STATEMENTS OF CASH FLOWS
Years ended December 31,
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,805 $ 2,834
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 19 3
Amortization of preferred securities issuance costs 23 --
Equity in undistributed net income of subsidiaries (4,831) (1,942)
Gain on sale of investment securities available for sale (34) (341)
(Increase) decrease in other assets (73) (67)
Increase (decrease) in accrued expenses and other liabilities (62) 268
-------- --------
Net cash provided by (used in) operating activities (1,153) 755
Cash flows from investing activities
Purchase of securities available for sale (2,145) (466)
Proceeds for sales of securities available for sale 661 495
Investment in property and equipment (1,250) --
Capital investment in bank subsidiary (11,000) --
Investment in trust subsidiary (371) --
-------- --------
Net cash provided by (used in) investing activities (14,105) 29
Cash flows from financing activities
Preferred securities issuance costs (495) (255)
Principal payments on note payable (2,000) (500)
Proceeds from issuance of preferred securities 12,371 --
Proceeds from sale of stock 12,013 --
-------- --------
Net cash provided by (used in) financing activities 21,889 (755)
-------- --------
Net increase in cash 6,631 29
Cash at beginning of year 296 267
-------- --------
Cash at end of year $ 6,927 $ 296
======== ========
</TABLE>
F-27
<PAGE> 93
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,305 $ 10,326
Interest-bearing deposits 83 128
Federal funds sold -- 5,625
--------- ---------
Cash and cash equivalents 13,388 16,079
Investment securities available for sale 17,268 15,677
Loans 252,286 189,602
Less allowance for loan losses (3,382) (2,610)
--------- ---------
248,904 186,992
Federal Home Loan Bank stock, at cost 925 482
Real estate held for investment 524 --
Bank premises, leasehold improvements and equipment, net 10,323 8,846
Accrued interest receivable 1,758 1,104
Accounts receiveable 120 --
Deferred tax asset 781 718
Preferred securities issuance costs, net 709 729
Goodwill 2,619 --
Other 653 192
--------- ---------
Total assets $ 297,972 $ 230,819
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing $ 54,782 $ 54,093
Demand, interest bearing 69,751 72,444
Savings 7,376 6,271
Time 106,059 57,071
--------- ---------
Total deposits 237,968 189,879
Federal Funds Borrowings 2,725 --
Federal Home Loan Bank borrowings 8,500 --
Securities sold under agreement to repurchase 685 443
Income taxes payable 74 71
Accrued interest payable 796 434
Other 1,961 601
--------- ---------
Total liabilities 252,709 191,428
Company obligated manditorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated Debentures 12,000 12,000
Minority interest in subsidiary 195 --
Shareholders' equity
Preferred stock; no par value, 10,000,000 shares authorized,
none issued -- --
Common stock; no par value, 50,000,000 shares authorized,
7,769,709 and 7,607,340 shares issued and outstanding in 1999
and 1998 15,473 13,974
Retained earnings 17,662 13,383
Accumulated other comprehensive income (67) 34
--------- ---------
Total shareholders' equity 33,068 27,391
--------- ---------
Total liabilities and shareholders' equity $ 297,972 $ 230,819
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE> 94
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 6,969 $ 5,166 $ 19,321 $ 13,448
Taxable investment securities 210 89 460 231
Nontaxable investment securities 240 187 623 561
Funds sold 9 74 26 381
Other interest 26 47 35 135
----------- ----------- ----------- -----------
Total interest income 7,454 5,563 20,465 14,756
Interest expense
Deposits 2,000 1,499 5,304 4,164
Borrowed funds 118 28 262 112
Trust preferred securities 287 270 812 688
Note payable -- -- -- 19
----------- ----------- ----------- -----------
Total interest expense 2,405 1,797 6,378 4,983
----------- ----------- ----------- -----------
Net interest income 5,049 3,766 14,087 9,773
Provision for loan losses 250 190 840 410
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 4,799 3,576 13,247 9,363
Other income
Title fees 851 -- 1,872 --
Service charges on deposit accounts 257 142 745 391
Gain on sale of investment securities 135 -- 135 25
Other income 320 92 525 280
----------- ----------- ----------- -----------
Total other income 1,563 234 3,277 696
Other expenses
Salaries and employee benefits 2,273 1,279 5,567 3,183
Occupancy expenses of premises 330 301 928 688
Furniture and equipment expense 177 108 524 337
Other expenses 1,154 501 2,887 1,681
----------- ----------- ----------- -----------
Total other expenses 3,934 2,189 9,906 5,889
----------- ----------- ----------- -----------
Income before income taxes 2,428 1,621 6,618 4,170
Income tax expense 901 514 2,339 1,348
----------- ----------- ----------- -----------
Net income $ 1,527 $ 1,107 $ 4,279 $ 2,822
Other comprehensive income, net of tax
Unrealized gains (losses) on investment
securities available for sale 173 (61) (101) (40)
----------- ----------- ----------- -----------
Comprehensive income $ 1,700 $ 1,046 $ 4,178 $ 2,782
=========== =========== =========== ===========
Income per share
Basic earnings per share $ .20 $ .17 $ .55 $ .44
=========== =========== =========== ===========
Weighted average common shares
outstanding 7,769,709 6,407,340 7,713,207 6,407,340
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE> 95
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,279 $ 2,822
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for loan losses 840 410
Depreciation and amortization 542 350
Amortization of preferred securities issuance costs 20 16
Gain on sale of investment securities available for sale (135) (25)
Net discount accretion on investment activities -- (12)
Federal Home Loan Bank stock dividend (29) (23)
Amortization of goodwill 49 --
Deferred income taxes (2) (126)
Minority interest 61 --
Changes in deferrals and accruals
Interest receivable (654) (278)
Accounts receivable (122) --
Interest payable 362 247
Income taxes payable 3 --
Other, net 1,306 105
-------- --------
Net cash provided by operating activities 6,520 3,486
Cash flows from investing activities
Purchase of securities available for sale (5,368) (4,476)
Purchase of Federal Home Loan Bank stock (414) --
Proceeds from maturities of investment securities available for sale 3,000 1,250
Proceeds from sales of securities available for sale 750 616
Acquisition of company under the purchase method of accounting,
net of cash acquired (1,500) --
Net (increase) in loans (62,752) (40,624)
Expenditures for bank premises and equipment (2,483) (3,525)
-------- --------
Net cash used in investing activities (68,767) (46,759)
Cash flows from financing activities
Net increase in deposits 48,089 47,016
Net increase (decrease) in advances from Federal Home Loan Bank 11,225 (1,423)
Net increase in repurchase agreements 242 556
Proceeds from trust preferred securities -- 12,000
Trust preferred securities issuance costs -- (495)
Principal payments on notes payable -- (2,000)
-------- --------
Net cash provided by financing activities 59,556 55,654
-------- --------
Net increase (decrease) in cash and cash equivalents (2,691) 12,381
Cash and cash equivalents at beginning of period 16,079 13,155
-------- --------
Cash and cash equivalents at end of period $ 13,388 $ 25,536
======== ========
Supplemental disclosures of cash flow information
Cash paid year to date for:
Interest expense $ 6,016 $ 4,735
Income taxes 2,375 1,408
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE> 96
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1. UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been
prepared in accordance with the instructions for Form 10-QSB and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. All adjustments, that are in the
opinion of management of a normal recurring nature necessary to a fair statement
of results for the interim periods presented, have been made. The results of
operations for such interim periods are not necessarily indicative of results of
operations for a full year. The statements should be read in conjunction with
the summary of significant accounting policies and notes to consolidated
financial statements included in the Form 10-KSB for the year ended December 31,
1998.
In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the financial position of
the Company at September 30, 1999, and the results of operations and cash flows
for the quarters and nine months ended September 30, 1999 and 1998.
The consolidated financial statements include the accounts of the
Company's respective subsidiaries. All material intercompany transactions have
been eliminated.
2. NATURE OF OPERATIONS
MegaBank Financial Corporation (the "Company") was founded in 1984 with
the objective of building a banking franchise in the Denver, Colorado
metropolitan area that would deliver a broad based package of products and
services to businesses and individuals. The Company's banking subsidiary,
MegaBank (the "Bank"), was organized in 1983. Since the advent of branch banking
in Colorado in 1993, the Bank has opened eight additional banking locations
throughout the Denver area for a total of nine locations, with one more branch
in the planning phase.
On April 5, 1999, the Company purchased Empire Title and Escrow
Corporation and subsequently merged it with MB Title Company. The consideration
paid to the stockholders of Empire Title and Escrow Corporation consisted of the
Company's common stock and cash. MB Title Company then changed its name to
Empire Title and Escrow Corporation ("Empire"). The purchase price for Empire
includes the potential for additional consideration based upon the future
performance of Empire during the three years following the purchase (the
"Post-Effective Time Consideration"). Empire provides a full range of title
insurance products and services to the real estate community including
homebuilders and real estate firms. Management expects that this acquisition
will provide Empire the resources necessary to accelerate its expansion plans
while continuing to provide services to the Colorado real estate community. This
acquisition also allows the Company to offer a broader array of financial
products and services to its customers. Empire operates as a subsidiary of the
Company and accordingly, the accounts of the subsidiary are included in the
consolidated financial statements of the Company.
3. TRUST PREFERRED SECURITIES
On February 9, 1998 the Company and its wholly-owned subsidiary, MB
Capital I (the "Trust"), completed the sale of $12.0 million of 8.75% Cumulative
Trust Preferred Securities of the Trust. Net proceeds were approximately $11.2
million after payment of sales commissions and other offering costs, and were
invested in Junior Subordinated Debentures maturing February 9, 2028, issued by
the Company to the Trust in connection with the public offering. Interest on the
Junior Subordinated Debentures will be paid by the Company to the Trust, will be
the sole revenues of the Trust and the source for distributions by the Trust to
the holders of the Trust Preferred Securities.
F-31
<PAGE> 97
For financial reporting purposes, the Trust is treated as a subsidiary
of the Company, and accordingly, the accounts of the Trust are included in the
consolidated financial statements of the Company. The Trust Preferred Securities
are presented as a separate line item in the consolidated balance sheet under
the caption "Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated Debentures." For financial
reporting purposes, the Company records distributions payable on the Trust
Preferred Securities as interest expense in the consolidated statements of
income.
The Junior Subordinated Debentures are unsecured and rank junior and
are subordinate to all senior debt of the Company and constitute a full and
unconditional guarantee on a subordinated basis by the Company of the
obligations of the Trust under the Preferred Securities.
F-32
<PAGE> 98
APPENDIX I
MERGER AGREEMENT
<PAGE> 99
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Amendment to Agreement and Plan of Merger (this "Amendment") dated
as of December ___, 1999 is entered into by and among Compass Bancshares, Inc.
("Compass"), ________________ ("_________") and MegaBank Financial Corporation
(the "Company").
WHEREAS, Compass and the Company entered into an Agreement and Plan of
Merger dated as of November 4, 1999 (the "Merger Agreement");
WHEREAS, the Merger Agreement requires that a new subsidiary of Compass
shall be merged with the Company with the Company being the surviving entity;
WHEREAS, ___________ is such new subsidiary;
WHEREAS, Section 8.3(b) of the Merger Agreement requires Compass and
the Company to amend the Merger Agreement for the purpose of making
__________ a party thereto; and
WHEREAS, the parties desire to otherwise amend the Merger Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and in the Merger Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. Capitalized terms used herein and not defined herein shall
have the meanings set forth in the Merger Agreement.
2. Upon execution of this Amendment, ____________ shall become
a party to the Merger Agreement, shall be deemed to be Merger Sub as defined in
the Merger Agreement, and shall succeed to the rights and become subject to the
obligations of Merger Sub as provided in the Merger Agreement.
3. Section 1.6(a) of the Merger Agreement is hereby amended in
its entirety to read in full as follows:
(a) Each share of the Company's common stock, no par value per
share ("Company Common Stock" or "Shares"), issued and outstanding
immediately prior to the Effective Time ("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 Common Shares 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,
<PAGE> 100
option, convertible debenture or other security entitling the holder
thereof to acquire Shares which is in effect or outstanding immediately
prior to the Effective Time and shall include, without limitation,
Shares issuable in respect of the Empire Merger Agreement (as defined
in Section 10.13(g) hereof) due to the consummation of the Merger. At
the Closing, the Company shall calculate and certify to Compass the
Common Shares Outstanding.
4. Article II of the Merger Agreement is hereby amended in its
entirety to read in full as follows:
ARTICLE II.
EXCHANGE OF SHARES
SECTION 2.1 Exchange of Shares.
(a) At or prior to the Effective Time pursuant to an exchange
agent agreement in substantially the form attached hereto as Exhibit B
(the "Exchange Agreement"), Compass shall (i) deposit with Continental
Stock Transfer and Trust Company (the "Exchange Agent") the shares of
Compass Common Stock in the amounts provided in Section 1.6 to effect
the exchange of Compass Common Stock for certificates formerly
representing shares of Company Common Stock; and (ii) deposit or cause
to be deposited with the Exchange Agent, 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 (such amount 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 2.1(b) hereof. The
Exchange Fund shall not be used for any other purpose, except as
provided in this Agreement.
(b) Promptly after 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 hereof,
and such Certificate shall forthwith be canceled. 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
2
<PAGE> 101
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
2.1, each Certificate shall represent for all purposes the right to
receive the Merger Consideration without any interest thereon.
(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.
5. Section 3.27 of the Merger Agreement is hereby amended in
its entirety to read in full as follows:
SECTION 3.27 Dissenting Shareholders. No shareholder
of the Company is entitled to make written demand for payment
of the fair value of such shareholder's Shares in the manner
provided in Article 113 of the CBCA, so long as the Compass
Common Stock constituting the Merger Consideration is listed
on the national market system of the National Association of
Securities Dealers Automated Quotation System or held of
record by more than two thousand shareholders.
6. Section 7.2(g) of the Merger Agreement is hereby amended to
read in its entirety as follows:
(g) [INTENTIONALLY DELETED]
7. Exhibit B to the Merger Agreement is hereby amended in its
entirety to read in full as Exhibit A attached hereto.
8. Exhibit J to the Merger Agreement is hereby amended in its
entirety to read in full as Exhibit B attached hereto.
3
<PAGE> 102
9. The execution of this Amendment shall not relieve Compass
of its obligations under the Merger Agreement.
10. Except as herein provided, the terms of the Merger
Agreement shall remain in full force and effect.
11. This Amendment may be executed in several counterparts,
and by the parties on separate counterparts, and all such counterparts, when so
executed and delivered, shall constitute but one and the same agreement.
[Signature Page Follows]
4
<PAGE> 103
IN WITNESS WHEREOF the parties have executed this Amendment as of the
date first written above.
ATTEST: COMPASS BANCSHARES, INC.
By:________________________________ By:_________________________________
Its: Its:
ATTEST: ____________________________________
By:________________________________ By:_________________________________
Its: Its:
ATTEST: MEGABANK FINANCIAL
CORPORATION
By:________________________________ By:_________________________________
Its: Its:
5
<PAGE> 104
EXHIBIT A
EXHIBIT B
EXCHANGE AGENT AGREEMENT
This Exchange Agent Agreement, dated as of _____, 2000, is made and
entered into by and among Compass Bancshares, Inc., a Delaware corporation
("Compass"), _____________________, a Colorado corporation ("Merger Sub"),
MegaBank Financial Corporation, a Colorado corporation ("Company"), and
Continental Stock Transfer & Trust Company, a New York banking corporation
("Exchange Agent").
PREAMBLE:
Pursuant to the Agreement and Plan of Merger dated as of ________, 1999
("Merger Agreement") among Compass, Merger Sub and the Company, the Company
shall, at the Effective Time, be merged with Merger Sub. The name of the
surviving corporation shall be MegaBank Financial Corporation ("Surviving
Corporation").
After the Effective Time, the outstanding shares of the Common Stock,
no par value 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).
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:
1. Appointment of Exchange Agent. Continental Stock Transfer & 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.
<PAGE> 105
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 the executed Letters of
Transmittal accompanied by Certificates which are surrendered in
accordance with the provisions of the Merger Agreement. Such
Certificates and Letters of Transmittal shall only be accepted 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, subject to the following
sentence, if the person or persons surrendering such Certificates and
Letters of Transmittal appear as a holder of record of the number of
shares surrendered on the list of shareholders ("Shareholder List")
supplied and certified to the Exchange Agent by the Company 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,
2
<PAGE> 106
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) From time to time as requested by Compass, the Exchange
Agent shall provide Compass 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 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.
15 South 20th Street
Birmingham, Alabama 35233
Attn: Daniel B. Graves
Telephone No. (205) 933-3880
(c) Exchange Fund. In order to provide for payment of the
Merger Consideration in accordance with the terms of the Merger
Agreement, Compass, prior to the Effective Time, shall deposit or cause
to be deposited with the Exchange Agent (i) a sufficient number of
shares of Compass Common Stock pursuant to Section 1.6 of the Merger
Agreement to exchange Compass Common Stock for Company Common Stock,
and (ii) 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. Merger Sub 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 Merger Sub and the Company as follows:
(i) Company Common Stock. Each holder of Company
Common Stock shall receive Merger Consideration equal to
______ shares of Compass
3
<PAGE> 107
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 $_____.
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 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 transfer of the Company Common Stock and the
proper maintenance of the Company's and Compass' shareholder books and
4
<PAGE> 108
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, provided that such instructions do not cause a reduction in the amount
or eliminate the opportunity of any shareholder to receive his or her portion of
the Merger Consideration.
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. 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.
8. Investment of Exchange Fund. The Exchange Agent shall deposit
portions of the Exchange Fund only as directed or consented to in writing by the
Surviving Corporation.
9. 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.
10. Section Headings. The section headings used herein are for
convenience of reference only and shall not define or limit the provisions of
this Agreement.
5
<PAGE> 109
11. 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 NEW YORK AND SHALL INURE TO THE BENEFIT OF AND BE BINDING UPON THE SUCCESSORS
AND ASSIGNS OF THE PARTIES HERETO.
12. 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:
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:
Continental Stock Transfer & Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Attn: Steven G. Nelson
Chairman of the Board
If to the Company prior to the Effective Time:
MegaBank Financial Corporation
8100 East Arapahoe Road, Suite 214
Englewood, Colorado 80112
Attn.: Thomas R. Kowalski
Chairman and Chief Executive Officer
If to Merger Sub or, following
the Effective Time, the
Surviving Corporation:
-------------------------
c/o Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Attn: Daniel B. Graves
6
<PAGE> 110
13. 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.
14. 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.
15. Defined Terms. Capitalized terms not defined herein have the
meanings ascribed to them in the Merger Agreement.
[SIGNATURE PAGE FOLLOWS]
7
<PAGE> 111
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: _____________________________________
MEGABANK FINANCIAL CORPORATION
By: _____________________________________
CONTINENTAL STOCK TRANSFER & TRUST
COMPANY
By: _____________________________________
________________________________________
By: _____________________________________
Exhibit A - Form of Letters of Transmittal
Exhibit B - Shareholder List
8
<PAGE> 112
EXHIBIT B
EXHIBIT J
_____ __, 2000
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
MegaBank Financial Corporation
8100 East Arapahoe Road, Suite 214
Englewood, Colorado 80112
The Shareholders of
MegaBank Financial Corporation
Gentlemen:
We have acted as counsel to Compass Bancshares, Inc., a Delaware
corporation ("Compass"), in connection with the planned merger (the "Merger ")
of ___________, a Colorado corporation ("Merger Sub") and a wholly-owned
first-tier subsidiary of Compass, with and into MegaBank Financial Corporation,
a Colorado corporation ("MegaBank"), pursuant to an Agreement and Plan of
Merger, dated as of November __, 1999, as amended, between Compass, Merger Sub
and MegaBank (the "Merger Agreement"), pursuant to which the stockholders of
MegaBank (the "Stockholders") will receive solely Compass Common Stock in
exchange for their MegaBank Common Stock. This opinion is being rendered to the
parties to whom this letter is addressed pursuant to Sections 7.1(f) of the
Merger Agreement. All capitalized terms, unless otherwise specified, have the
meaning assigned to them in the Merger Agreement.
For purposes of the opinion set forth below, we have reviewed and
relied upon (i) the Merger Agreement, (ii) the Proxy Statement included in the
Registration Statement and (iii) such other documents, records and instruments
as we have deemed necessary or appropriate in order to enable us to render our
opinion. In addition, in rendering our opinion, we have relied upon certain
statements and representations made by certain Stockholders of MegaBank and
certain officers of Compass, Merger Sub and MegaBank (the "Certified
Representations") as well as statements and representations contained in the
Merger Agreement, which we have neither investigated nor verified. We have
assumed that all such statements and representations are true, correct, complete
and not breached, and that no actions that are or would be inconsistent with
such statements and representations have been or will be taken. We have also
assumed that all
<PAGE> 113
representations made "to the knowledge of" any person or entity will be true,
correct and complete as if made without such qualification.
In addition, we have assumed that (i) the Merger will be consummated in
accordance with the Merger Agreement (including satisfaction of all covenants
and conditions to the obligations of the parties without amendment or waiver
thereof), (ii) the Merger will qualify as a merger under the applicable laws of
the State of Colorado, (iii) each of Compass, Merger Sub and MegaBank will
comply with all reporting obligations with respect to the Merger required under
the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury
Regulations promulgated thereunder and (iv) the Merger Agreement and all of the
documents and instruments referred to therein are valid and binding in
accordance with their terms. Any inaccuracy in, or breach of, any of the
aforementioned statements, representations and assumptions could adversely
affect our opinion.
Our opinion is based upon existing provisions of the Code, Treasury
Regulations promulgated or proposed thereunder, and interpretations thereof by
the Internal Revenue Service ("IRS") and the courts, all of which are subject to
change with prospective or retroactive effect, and our opinion could be
adversely affected or rendered obsolete by any such change. No ruling has been
or will be sought from the IRS by Compass, Merger Sub or MegaBank as to the
federal income tax consequences of any aspect of the Merger. The opinion
expressed herein is not binding on the IRS or any court, and there can be no
assurance that the IRS or a court of competent jurisdiction will not disagree
with such opinion.
Based upon and subject to the foregoing as well as the limitations set
forth below, it is our opinion that (i) the Merger of Merger Sub with and into
MegaBank will qualify as a reorganization within the meaning of Section 368(a)
of the Code and (ii) Compass, Merger Sub and MegaBank will each be a party to
the reorganization within the meaning of Section 368(b) of the Code.
Accordingly, the Merger will have the following United States federal
income tax consequences:
1. Compass, Merger Sub and MegaBank will not recognize any gain or loss as
a result of the Merger;
2. No gain or loss will be recognized by holders of MegaBank Common Stock
who exchange their MegaBank Common Stock solely for Compass Common
Stock;
3. Any cash received by a holder of MegaBank Common Stock in lieu of a
fractional share of Compass Common Stock in the Merger will be treated
as received in exchange for such fractional share and not as a
dividend. As a result, a holder of MegaBank Common Stock generally will
recognize a capital gain or loss with respect to the cash payment
received in lieu of a fractional share equal to the difference between
the cash received and the portion of the MegaBank shareholder's basis
in MegaBank Common Stock allocable to such fractional share, unless
such payment, under each such MegaBank shareholder's particular
<PAGE> 114
facts and circumstances, is deemed to have the effect of a dividend
distribution and not a redemption treated as an exchange under the
principles of Section 302 of the Code. Such gain or loss will be
long-term capital gain or loss to the extent that the MegaBank Common
Stock allocable to such fractional share was held for more than one
year as of the Effective Time of the Merger;
4. Each holder's aggregate tax basis in the Compass Common Stock received
in the Merger will equal his or her aggregate tax basis in the MegaBank
Common Stock exchanged therefore, decreased by the amount of any tax
basis allocable to any fractional share interest for which cash is
received; and
5. The holding period of the Compass Common Stock received in the Merger
will include the holding period of the MegaBank Common Stock exchanged
therefore.
No opinion is expressed as to any matter not specifically addressed
above. Specifically, no opinion is expressed as to the tax consequences of (i)
the merger of an existing or to-be-formed wholly-owned subsidiary ("Merger Sub")
of Compass with Nagrom LLC, a Colorado limited liability company ("Nagrom"),
pursuant to that certain Agreement and Plan of Merger, dated as of November __,
1999, as amended, between Compass, Merger Sub and Nagrom, (ii) the merger of an
existing or to-be-formed wholly-owned subsidiary ("Merger Sub") of Compass with
1996 Newton, L.L.C., a Colorado limited liability company ("Newton"), pursuant
to that certain Agreement and Plan of Merger, dated as of November __, 1999, as
amended, between Compass, Merger Sub and Newton and (iii) the merger of an
existing or to-be-formed wholly-owned subsidiary ("Merger Sub") of Compass with
Osage 3734, L.L.C., a Colorado limited liability company ("Osage"), pursuant to
that certain Agreement and Plan of Merger, dated as of November __, 1999 as
amended, between Compass, Merger Sub and Osage, the consummations of which are
conditions precedent to the Merger. Also, no opinion is expressed as to the tax
consequences of the Merger under any foreign, state or local tax law.
Furthermore, our opinion is based on current federal income tax law and
administrative practice, and we do not undertake to advise you as to any changes
after the Effective Time of the Merger in federal income tax law or
administrative practice that may affect our opinion. This opinion is being
furnished only to you in connection with Merger and solely for your benefit in
connection therewith and may not be used or relied upon for any other purpose
and may not be circulated, quoted or otherwise referred to for any other purpose
without our express written consent.
Very truly yours,
<PAGE> 115
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
COMPASS BANCSHARES, INC.
AND
MEGABANK FINANCIAL CORPORATION
Dated as of November 4, 1999
================================================================================
<PAGE> 116
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE I. THE MERGER..........................................................................................1
SECTION 1.1 The Merger..........................................................................1
SECTION 1.2 Effective Time......................................................................1
SECTION 1.3 Certain Effects of the Merger.......................................................2
SECTION 1.4 Articles 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...............................................................3
SECTION 1.8 Registration of the Compass Common Stock............................................3
SECTION 1.9 Tax Consequences....................................................................4
SECTION 1.10 Closing.............................................................................4
SECTION 1.11 Modification of Structure...........................................................5
ARTICLE II. DISSENTING SHARES; EXCHANGE OF SHARES..............................................................5
SECTION 2.1 Dissenting Shares...................................................................5
SECTION 2.2 Exchange of Shares..................................................................5
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................................................6
SECTION 3.1 Organization and Qualification......................................................7
SECTION 3.2 Company Capitalization..............................................................7
SECTION 3.3 Subsidiary Capitalization; Other Securities.........................................7
SECTION 3.4 Authority Relative to the Agreement.................................................8
SECTION 3.5 No Violation........................................................................8
SECTION 3.6 Consents and Approvals..............................................................9
SECTION 3.7 Regulatory Reports..................................................................9
SECTION 3.8 Securities Issuances................................................................9
SECTION 3.9 Financial Statements................................................................9
SECTION 3.10 Absence of Certain Changes.........................................................10
SECTION 3.11 Company Indebtedness...............................................................12
SECTION 3.12 Litigation.........................................................................12
SECTION 3.13 Tax Matters........................................................................12
SECTION 3.14 Employee Benefit Plans.............................................................13
SECTION 3.15 Employment Matters.................................................................16
SECTION 3.16 Leases, Contracts and Agreements...................................................16
SECTION 3.17 Related Company Transactions.......................................................17
SECTION 3.18 Compliance with Laws...............................................................17
SECTION 3.19 Insurance..........................................................................17
SECTION 3.20 Loans..............................................................................17
SECTION 3.21 Fiduciary Responsibilities.........................................................17
SECTION 3.22 Patents, Trademarks and Copyrights.................................................18
SECTION 3.23 Environmental Compliance...........................................................18
SECTION 3.24 Regulatory Actions.................................................................19
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
SECTION 3.25 Title to Properties; Encumbrances..................................................19
SECTION 3.26 Shareholder List...................................................................20
SECTION 3.27 Dissenting Shareholders............................................................20
SECTION 3.28 Takeover Laws......................................................................20
SECTION 3.29 Employee Stock Options.............................................................20
SECTION 3.30 Accounting Matters.................................................................20
SECTION 3.31 Year 2000 Representation...........................................................20
SECTION 3.32 Title Companies....................................................................21
SECTION 3.33 Representations Not Misleading.....................................................21
ARTICLE IV. REPRESENTATIONS AND WARRANTIES....................................................................21
SECTION 4.1 Organization and Authority.........................................................21
SECTION 4.2 Authority Relative to Agreement....................................................21
SECTION 4.3 Financial Reports..................................................................22
SECTION 4.4 Capitalization.....................................................................23
SECTION 4.5 Consents and Approvals.............................................................23
SECTION 4.6 Availability of the Compass Common Stock...........................................23
SECTION 4.7 Regulatory Actions.................................................................23
SECTION 4.8 Takeover Laws......................................................................23
SECTION 4.9 Accounting Matters.................................................................24
SECTION 4.10 Representations Not Misleading.....................................................24
SECTION 4.11 Litigation.........................................................................24
SECTION 4.12 Absence of Certain Changes.........................................................24
ARTICLE V. COVENANTS OF THE COMPANY...........................................................................24
SECTION 5.1 Affirmative Covenants of the Company...............................................24
SECTION 5.2 Negative Covenants of the Company..................................................26
ARTICLE VI. ADDITIONAL AGREEMENTS.............................................................................28
SECTION 6.1 Access To, and Information Concerning, Properties and Records......................28
SECTION 6.2 Filing of Regulatory Approvals.....................................................28
SECTION 6.3 Miscellaneous Agreements and Consents..............................................29
SECTION 6.4 Company Indebtedness...............................................................29
SECTION 6.5 Best Good Faith Efforts............................................................29
SECTION 6.6 Exclusivity........................................................................29
SECTION 6.7 Public Announcement................................................................30
SECTION 6.8 Employee Benefit Plans.............................................................30
SECTION 6.9 Merger of Bank.....................................................................31
SECTION 6.10 Environmental Investigation; Right to Terminate Agreement..........................31
SECTION 6.11 Proxies............................................................................33
SECTION 6.12 Exchange Agreement.................................................................33
SECTION 6.13 Year 2000 Investigation............................................................34
SECTION 6.14 Director and Officer Indemnification...............................................34
SECTION 6.15 Exercise of Convertible Securities.................................................35
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
SECTION 6.16 Actions Respecting Debentures......................................................35
SECTION 6.17 Publication of 30 Days of Post Combination Results.................................35
SECTION 6.18 Notification of Related Party Transactions.........................................36
ARTICLE VII. CONDITIONS TO CONSUMMATION OF THE MERGER.........................................................36
SECTION 7.1 Conditions to Each Party's Obligation to Effect the Merger.........................36
SECTION 7.2 Conditions to the Obligations of Compass and Merger Sub
to Effect the Merger...............................................................37
SECTION 7.3 Conditions to the Obligations of the Company to Effect the Merger..................39
ARTICLE VIII. TERMINATION; AMENDMENT; WAIVER..................................................................40
SECTION 8.1 Termination........................................................................40
SECTION 8.2 Effect of Termination..............................................................42
SECTION 8.3 Amendment..........................................................................42
SECTION 8.4 Extension; Waiver..................................................................42
SECTION 8.5 Termination Fee....................................................................42
ARTICLE IX. SURVIVAL..........................................................................................42
SECTION 9.1 Survival of Representations and Warranties.........................................42
ARTICLE X. MISCELLANEOUS......................................................................................43
SECTION 10.1 Expenses...........................................................................43
SECTION 10.2 Brokers and Finders................................................................43
SECTION 10.3 Entire Agreement; Assignment.......................................................43
SECTION 10.4 Further Assurances.................................................................43
SECTION 10.5 Enforcement of the Agreement.......................................................44
SECTION 10.6 Severability.......................................................................44
SECTION 10.7 Notices............................................................................44
SECTION 10.8 Governing Law......................................................................45
SECTION 10.9 Descriptive Headings...............................................................45
SECTION 10.10 Parties in Interest................................................................45
SECTION 10.11 Counterparts.......................................................................45
SECTION 10.12 Incorporation by References........................................................45
SECTION 10.13 Certain Definitions................................................................45
</TABLE>
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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. Opinion of Counsel for Compass and Merger Sub
G. Representations Certificate
H. Release
I. Release
J. Tax Opinion
LIST OF SCHEDULES
Schedule 3.2 Company Capitalization
Schedule 3.3 Subsidiary 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
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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
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 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 6.11 List of Proxy Holders Voting Affirmatively for the
Agreement
Schedule 10.13(f) List of Officers with Knowledge
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of November 4,
1999, by and between Compass Bancshares, Inc. a Delaware corporation
("Compass"), and MegaBank Financial Corporation, a Colorado corporation
("Company").
WHEREAS, Compass desires to affiliate with the Company and its wholly
owned subsidiary, MegaBank, a federal 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 a to-be-formed subsidiary ("Merger Sub") of Compass
incorporated under the laws of the State of Colorado 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, Compass, Merger Sub and the Company intend the Merger to
qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder; and
WHEREAS, the respective boards of directors of the Company and Compass
have 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 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 Colorado Business Corporation Act (the
"CBCA"), Merger Sub shall be merged with and into the Company (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, the Company
shall continue as the surviving corporation (the "Surviving Corporation") and
the separate corporate existence of Merger Sub shall cease. Compass shall not be
deemed a party to the Merger for the purposes of Section 7-111-106 of the CBCA.
SECTION 1.2 EFFECTIVE TIME. The Merger shall be consummated by the
filing by the Colorado Secretary of State of Articles of Merger, in the form
required by and executed in accordance with the relevant provisions of the CBCA,
and by the issuance of a Certificate of Merger by the Secretary of State of
Colorado. (The date of such issuance and filing or such
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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 7-111-106 of the CBCA.
SECTION 1.4 ARTICLES OF INCORPORATION AND BY-LAWS. The Articles of
Incorporation and the By-Laws of the Company, in each case as in effect at the
Effective Time, shall be the Articles of Incorporation and By-Laws of the
Surviving Corporation.
SECTION 1.5 DIRECTORS AND OFFICERS. The directors and officers of
Merger Sub 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 Articles 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, no par value per share
("Company Common Stock" or "Shares"), issued and outstanding immediately prior
to the Effective Time ("Common Shares Outstanding"), other than Dissenting
Shares (as defined in Section 2.1), 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 Common Shares 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 immediately prior to the Effective Time and shall
include, without limitation, Shares issuable in respect of the Empire Merger
Agreement (as defined in Section 10.13(g) hereof) due to the consummation of the
Merger. At the Closing, the Company shall calculate and certify to Compass the
Common Shares Outstanding.
(b) Each holder of Company Common Stock shall receive for each share of
Company Common Stock held immediately prior to the Effective Time Merger
Consideration equal to the quotient of 3,370,000 shares of Compass Common Stock,
par value $2.00 per share ("Compass Common Stock") divided by the Common Shares
Outstanding. In no event, however, shall Compass be obligated to issue any more
than 3,370,000 shares of Compass Common Stock in exchange for all Common Shares
Outstanding. The ratio of the 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 with respect to Compass Common Stock,
where 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 average of the closing sale price for
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Compass Common Stock as reported by the NASDAQ National Market System for the
twenty days of trading preceding the fifth trading day prior to the Effective
Time ("Average Closing Price").
(d) Each share of capital stock of Merger Sub issued and outstanding
immediately before the Effective Time shall be converted into 7,769,709 shares
of common 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 after the
Registration Statement (as defined herein) is declared effective by the
Securities and Exchange Commission ("SEC") for the purpose of approving and
adopting this Agreement;
(b) require no greater than the minimum vote required by applicable
law, or its Articles of Incorporation, if greater, of each class of the Shares
in order to approve the Merger;
(c) include in the Proxy Statement (defined in Section 1.8(a)) below)
the unanimous recommendation of its Board of Directors that the shareholders of
the Company vote in favor of the approval and adoption of this Agreement; and
(d) use its best efforts to 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 or its Articles of Incorporation, if greater.
SECTION 1.8 REGISTRATION OF THE COMPASS COMMON STOCK.
(a) Compass shall prepare a registration statement on Form S-4 (the
"Registration Statement") to be filed by Compass with the 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,
including the proxy statement and prospectus and other proxy solicitation
materials of the Company constituting a part thereof (the "Proxy Statement").
The Company agrees to cooperate, and to cause its Subsidiaries to cooperate,
with Compass, its counsel and its accountants, in the preparation of the
Registration Statement and the Proxy Statement; and provided that the Company
and its Subsidiaries have cooperated as required above, Compass agrees to file
the Registration Statement with the SEC as promptly as reasonably practicable
and shall use reasonable efforts to cause such filing to occur within 50 days
after execution of this Agreement, subject to the receipt of all necessary
information on the part of the Company for inclusion in the Registration
Statement and Proxy Statement. Each of the Company and Compass agrees to use all
reasonable efforts to cause the Registration Statement to be declared effective
under the Securities Act as promptly as reasonably practicable after filing
thereof. Compass also agrees to use all reasonable efforts to obtain, prior to
or at the effective date of the Registration Statement, all necessary state
securities law or "Blue Sky" permits and approvals required to carry out the
Merger contemplated by this Agreement. The
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Company agrees to furnish to Compass all information concerning the Company, its
Subsidiaries, officers, directors and stockholders as may be requested in
connection with the foregoing.
(b) Each of the Company and Compass agrees, as to itself and its
Subsidiaries, that none of the information supplied or to be supplied by it for
inclusion or incorporation by reference in (i) the Registration Statement will,
at the time the Registration Statement and each amendment or supplement thereto,
if any, becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statement therein not misleading, and (ii) the
Proxy Statement and any amendment or supplement thereto will not, at the date of
mailing to the Company stockholders and at the time of the Shareholders' Meeting
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading or any statement which, in the light of the circumstances under
which such statement is made will be false or misleading, with respect to any
material fact, or which will omit to state any material fact necessary in order
to make the statements therein not false or misleading or necessary to correct
any statement in any earlier statement in the Proxy Statement or any amendment
or supplement thereto. Each of the Company and Compass further agrees that if it
shall become aware prior to the Effective Time of any information furnished by
it that would cause any of the statements in the Proxy Statement to be false or
misleading with respect to any material fact, or to omit to state any material
fact necessary to make the statements therein not false or misleading to
promptly inform the party thereof and to take the necessary steps to correct the
Proxy Statement.
(c) Compass agrees to advise the Company promptly after Compass
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of Compass Common Stock for
offering or sale in any jurisdiction, of the initiation or threat of any
proceeding for any such purpose or of any request by the SEC for the amendment
or supplement of the Registration Statement.
(d) Within 30 days after the date hereof, the Company shall enter into
and cause each Company shareholder who is an "affiliate" (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 TAX CONSEQUENCES. It is intended by the parties hereto that
the Merger shall constitute a reorganization within the meaning of Section
368(a) of the Code, and the parties hereto hereby adopt this Agreement as a
"plan of reorganization" within the meaning of Sections 1.368-2(g) and
1.368-3(a) of the United States Treasury Regulations.
SECTION 1.10 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, the Company and Merger Sub shall execute and deliver the
Articles 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; provided,
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however, that the Effective Time shall not occur prior to April 1, 2000, unless
otherwise agreed. Prior to the filing referred to in this Section, a closing
(the "Closing") will be held at the office of Locke Liddell & Sapp LLP in
Houston, Texas (or such other place as the parties may agree) for the purpose of
confirming all of the foregoing.
SECTION 1.11 MODIFICATION OF STRUCTURE. Notwithstanding any provision
of this Agreement to the contrary, Compass may elect with the prior written
consent of the Company (such consent not to be unreasonably withheld), subject
to the filing of all necessary applications and the receipt of all required
regulatory approvals, to modify the structure of the transactions contemplated
hereby so long as (i) there are no adverse federal income tax consequences to
the shareholders of the Company as a result of such modification, (ii) the
consideration to be paid to holders of Company Common Stock under this Agreement
is not thereby changed in kind or reduced in amount solely because of such
modification, (iii) such modification will not be likely to materially delay or
jeopardize receipt of any required regulatory approvals, and (iv) adversely
affect the rights, privileges, and preferences of the Company Subordinated
Debentures (as defined herein).
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 113 of the CBCA (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 CBCA. 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) At or prior to the Effective Time pursuant to an exchange agent
agreement in substantially the form attached hereto as Exhibit B (the "Exchange
Agreement"), Compass shall (i) deposit with Continental Stock Transfer and Trust
Company (the "Exchange Agent") the shares of Compass Common Stock in the amounts
provided in Section 1.6 to effect the exchange of Compass Common Stock for
certificates formerly representing shares of Company Common Stock; and (ii)
deposit or cause to be deposited with the Exchange Agent, 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 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
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payments in lieu of fractional shares out of the Exchange Fund upon surrender of
Shares in accordance with Section 2.2(b) hereof. Payments to dissenting
shareholders shall be made as required by Article 113 of the CBCA. The Exchange
Fund shall not be used for any other purpose, except as provided in this
Agreement.
(b) Promptly after 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 hereof, and such Certificate shall forthwith be
canceled. 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.
(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
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Compass and Merger Sub with supplemental Schedules reflecting any changes
thereto between the date of such Schedules and the date of the Closing.
SECTION 3.1 ORGANIZATION AND QUALIFICATION. The Company is a Colorado
corporation and a unitary 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 Colorado and all laws, rules, and
regulations applicable to unitary savings and loan holding companies. The Bank
is a federal savings bank, duly organized, validly existing and in good standing
under the laws of the United States of America, and is not a member of the
Federal Reserve System. Each of the Company and its Subsidiaries (as defined in
Section 10.13(a)) 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) other than the Bank. True and correct copies of the Articles of
Incorporation or Association, Bylaws and charter documents of the Company and
its Subsidiaries, with all amendments thereto through the date of this
Agreement, have been delivered by the Company to Compass. The Company's
Subsidiaries are duly qualified or licensed to do business and are in good
standing in the State of Colorado. The nature of the business of the Company and
its Subsidiaries 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 Colorado.
SECTION 3.2 COMPANY CAPITALIZATION. As of the date hereof, the
authorized capital stock of the Company consists solely of (a) 50,000,000 shares
of Company Common Stock, of which 7,769,709 shares are issued and outstanding,
of which 99,000 shares are subject to option, and none of which are held in
treasury, and (b) 10,000,000 shares of Preferred Stock, no par value per share,
none of which 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 its Subsidiaries to purchase or otherwise acquire
any security of or equity interest in the Company or its Subsidiaries. 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 CBCA and applicable banking laws and regulations and all
dividends declared prior to the date hereof have been paid.
SECTION 3.3 SUBSIDIARY CAPITALIZATION; OTHER SECURITIES. All of the
issued and outstanding shares of the capital stock of the Company's Subsidiaries
(i) are duly authorized, validly issued, fully paid and nonassessable, (ii)
except as referred to in Schedule 3.3 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
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shares of capital stock to any person. Except as set forth on Schedule 3.3
hereto, the Company owns, directly, all of the issued and outstanding capital
stock of its Subsidiaries. Set forth on Schedule 3.3 hereto is a list of all
equity ownership by the Company or its Subsidiaries for the account of the
Company or its Subsidiaries in any other person other than the Bank (the "Other
Securities"). The Company or its Subsidiaries own 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. Neither Empire/MB Real Estate Corporation nor Empire/MB
Land Company (the "Real Estate Subsidiaries") has commenced operations or has
any assets other than its initial capitalization by the Company.
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. 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 its Subsidiaries.
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 Office of Thrift Supervision ("OTS"), the Board of Governors of the
Federal Reserve System ("FRB"), the Federal Deposit Insurance Corporation
("FDIC"), the Commissioner for the Colorado Division of Banking ("Commissioner")
and the Alabama Superintendent of Banks ("Superintendent") and any required
notification to the Colorado Division of Insurance ("Insurance Division") 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 its Subsidiaries 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 its Subsidiaries
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 its Subsidiaries 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 its Subsidiaries,
threatened, against the Company, its Subsidiaries 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,
instrumentality or other person which may result in liability
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to Compass or Merger Sub 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 its Subsidiaries 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 unanimously determined that the Merger
is fair to the Company's shareholders and has unanimously 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 its Subsidiaries, except the filing
of the Articles of Merger under the CBCA, and such approvals as may be required
from the SEC, the FRB, the OTS, the Superintendent, the Commissioner and holders
of Shares under the CBCA and notification to the Insurance Division.
SECTION 3.7 REGULATORY REPORTS. Except as set forth on Schedule 3.7,
the Company and its Subsidiaries have filed all reports, registrations and
statements, together with any amendments required to be made thereto, that are
required to be filed with the FRB, the OTS, the Commissioner, the FDIC, or any
other regulatory authority having jurisdiction over any such persons, other than
plans, reports or information listed on Schedule 3.7.
SECTION 3.8 SECURITIES ISSUANCES. All issuances of securities by the
Company and its Subsidiaries have been registered under the Securities Act, the
Securities Act of the State of Colorado, and all other applicable laws or were
exempt from any such registration requirements. The Company and its Subsidiaries
have made all filings required to be made in compliance with the Exchange Act of
1934, as amended (the "Exchange Act"). None of the information contained in any
filing by the Company or any Subsidiary 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 misleadings.
SECTION 3.9 FINANCIAL STATEMENTS. The Company has provided Compass with
a true and complete copy of the audited consolidated statement of financial
position of the Company and its Subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, shareholders' equity and
changes in cash flows for the years ended December 31, 1998 and 1997, plus
management prepared consolidating financial statements of the Company's
Subsidiaries, and the consolidated statements of financial position of the
Company and its Subsidiaries as of March 31 and June 30 1999 and the related
consolidated statements of income, shareholders' equity and changes in cash
flows for the three- and six- month periods ended March 31 and June 30, 1999,
and promptly following their availability the Company will provide Compass with
the Company's audited consolidated statement of financial position of the
Company and its Subsidiaries as of December 31, 1999 and the related
consolidated statements of income, shareholders' equity and changes in cash flow
for the year
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ended December 31, 1999 (such consolidated statements of financial position and
the related consolidated statements of income, shareholders' equity and changes
in cash flows are collectively referred to herein as the "Consolidated Financial
Statements"), plus all management prepared consolidating financial statements
for its Subsidiaries (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 position and the related consolidated statements of income,
shareholders' equity and changes in cash flows (including the related notes
thereto) of the Company and its Subsidiaries, fairly present the financial
position of the Company and its Subsidiaries as of the dates thereof and the
results of operations and changes in consolidated financial position of the
Company and its Subsidiaries 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 in the case of unaudited interim
financial statements and management prepared consolidating financial statements,
to 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 its Subsidiaries. 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 FRB, the OTS, the Commissioner, and the FDIC.
Neither the Company nor its Subsidiaries 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 its
Subsidiaries as of the end of each month hereafter, prepared on a basis
consistent with prior periods and promptly following their availability, the
Company will provide Compass with the Thrift Financial Reports of its
Subsidiaries for all periods ending after June 30, 1999. The Company and its
Subsidiaries 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 June 30, 1999 (the "Balance Sheet Date")
neither the Company nor any of its Subsidiaries 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) 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;
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(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 for regular salary increases granted in the ordinary course
of business within the Company's or its Subsidiaries' 1999 budgets and
consistent with prior practices, granted any increase in compensation or paid or
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 its Subsidiaries, for the directors, employees or former
employees of the Company or its Subsidiaries ("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 its Subsidiaries;
(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
its Subsidiaries 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;
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(l) made any or acquiesced with any change in any accounting methods,
principles or practices;
(m) experienced any change in relations with customers or clients of
the Company or its Subsidiaries which could have a Material Adverse Effect on
the Company or its Subsidiaries;
(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 representation would not be true in all
material respects as of the Closing.
SECTION 3.11 COMPANY INDEBTEDNESS. The Company has delivered to Compass
true and complete copies of all loan documents ("Company Loan Documents")
related to indebtedness of the Company and its Subsidiaries, other than deposits
("Company Indebtedness"), and made available to Compass all material
correspondence concerning the status of Company Indebtedness.
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 its Subsidiaries, threatened
against the Company or any of its Subsidiaries 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 its
Subsidiaries other than mechanics liens arising in the ordinary course of
business in respect of the loan assets of the Company and its Subsidiaries.
SECTION 3.13 TAX MATTERS. The Company and its Subsidiaries have duly
filed all tax returns that they were required to file (the "Filed Returns"). All
such Filed Returns were correct and complete in all material respects. The
Company and its Subsidiaries 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.
None of the Company or its Subsidiaries currently is the beneficiary of any
extension of time within which to file any tax return. With respect to the
periods for which returns have not yet been filed, the Company and its
Subsidiaries 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 its Subsidiaries 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. There are no liens for any taxes
on any assets of the Company or its Subsidiaries except for liens for taxes not
yet due or for taxes being
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contested in good faith and for which adequate reserves have been established in
accordance with GAAP. 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 other Subsidiaries. Set forth on Schedule 3.13 are the
dates of filing of all Filed Returns for all fiscal years since and including
January 1, 1990 and any amendments thereto which relate to federal or state
income or franchise taxes. Neither the Company nor its Subsidiaries 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 its Subsidiaries, nor are there any outstanding agreements or
waivers extending the statutory period of limitation applicable to any tax
assessment or deficiency against the Company or its Subsidiaries for any period.
The Company and its Subsidiaries have withheld and paid over all taxes to the
proper governmental authorities required to be so withheld and paid over in
connection with amounts paid or owing to any employee, independent contractor,
creditor, stockholder or other third party. The Company and its Subsidiaries are
neither obligated to make any payments nor are they parties to any agreement
that under certain circumstances could obligate them to make any payments that
will not be deductible under Section 280G of the Code. Except as disclosed in
Schedule 3.13, the Company and its Subsidiaries have never agreed to make, nor
is the Company or its Subsidiaries required to make, any adjustment under
Section 481(a) of the Code by reason of a change in the method of accounting or
otherwise. The Company and its Subsidiaries have not, with regard to any assets
held, acquired or to be acquired, filed a consent to the application of Section
341(f) of the Code. None of the Company and its Subsidiaries has been a United
States real property holding corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period specified in Section 897(c)(1)(A)(ii)
of the Code. None of the Company and its Subsidiaries (i) has been a member of
an affiliated group filing a consolidated federal income tax return (other than
a group the common parent of which was the Company) or (ii) has any liability
for the taxes of any person (other than any of the Company and its Subsidiaries)
under Reg. Section 1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise. Neither
the Company nor any of its Subsidiaries has any reason to believe that any
conditions exist that might prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code. For the
purposes of this Agreement, the term "tax" shall include all federal, state,
local and foreign 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 its Subsidiaries
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 its Subsidiaries or any
entity which is a member of a controlled group or affiliated service group with
the Company or any of its Subsidiaries under ERISA Section 4001 or Section 414
of the Code (such Subsidiaries and entities collectively, "ERISA Affiliates") or
to which the Company or ERISA Affiliates contribute or are 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
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amount of any liability of the Company or ERISA Affiliates 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 an ERISA Affiliate or to which the Company
or ERISA Affiliates contribute or are 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 for illness or other reasons) maintained by the Company or ERISA
Affiliates (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, in all
material respects, 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 all material respects 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) Neither the Company, any Company Subsidiary nor any plan fiduciary
of any Welfare Benefit Plan or Pension Benefit Plan has ever engaged in any
transaction in violation of
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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 nor any ERISA Affiliate 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 or any ERISA Affiliate 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 any
ERISA Affiliate (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 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 three most recent plan years, have been made available 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, to
the knowledge of Company and its Subsidiaries 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
any ERISA Affiliate (including, without limitation, severance, unemployment
compensation, golden parachute (defined in Section 280G
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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 any Company Subsidiary is a party to any 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. There are no unfair labor practice complaints
pending against the Company or any Company Subsidiary 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 any Company Subsidiary, nor of
any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with
respect to any such employees. The Company and its Subsidiaries 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 its Subsidiaries are engaged in any
unfair labor practice.
SECTION 3.16 LEASES, CONTRACTS AND AGREEMENTS. Schedule 3.16 sets forth
an accurate and complete description of all leases, subleases, licenses,
contracts and agreements to which the Company or any Company Subsidiary is a
party or by which the Company or any Company Subsidiary is bound which obligate
or may obligate the Company or any Company Subsidiary for an amount in excess of
$50,000 per lease, sublease, license, contract or agreement over the entire term
of any such agreement or any leases, subleases, licenses, contracts or
agreements with a current term of one year or longer (the "Contracts"). The
Company has made available 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 its Subsidiaries, but does include unfunded loan
commitments and letters of credit issued by the Company or its Subsidiaries
where the borrowers' total direct and indirect indebtedness to its Subsidiaries
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 its
Subsidiaries. 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 are in full force and effect. Except as described in Schedule
3.16, all rent and other payments by the Company and its Subsidiaries under the
Contracts are current, there are no existing defaults by the Company or its
Subsidiaries 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. The
Company and each of its Subsidiaries has a good and valid leasehold interest in
each parcel of real property leased by it free and clear of all mortgages,
pledges, liens, encumbrances and security interests.
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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 its Subsidiaries). 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 any of its Subsidiaries is in default in respect
to or is in violation of (i) any judgment, order, writ, injunction or decree of
any court, or (ii) in any material respect, 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 OTS or the FDIC, and the consummation of the
transactions contemplated by this Agreement will not constitute such a default
or violation as to the Company or any of its Subsidiaries. The Company and its
Subsidiaries 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 its Subsidiaries have in effect
the insurance coverage (including fidelity bonds) described in Schedule 3.19 and
have had similar insurance in force for the last 5 years. There have been no
claims under such bonds within the last 5 years and neither the Company nor its
Subsidiaries is aware of any facts which would form the basis of a claim under
such bonds. Neither the Company nor its Subsidiaries has any reason to believe
that the existing fidelity coverage would not be renewed by its carrier on
substantially the same terms. The Company has made available to Compass true and
accurate copies of the policies and declaration pages evidencing such insurance
coverage.
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 Company's Subsidiaries do not have in their
portfolios any loan exceeding their legal lending limit, and except as disclosed
on Schedule 3.20, the Company's Subsidiaries have no known significant
delinquent, substandard, doubtful, loss, nonperforming or problem loans.
SECTION 3.21 FIDUCIARY RESPONSIBILITIES. The Company and its
Subsidiaries 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 material respects with all applicable laws, regulations, orders,
agreements, instruments and common law standards.
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SECTION 3.22 PATENTS, TRADEMARKS AND COPYRIGHTS. Except as set forth in
Schedule 3.22, neither the Company nor its Subsidiaries 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 its Subsidiaries. The Company and its Subsidiaries 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, its Subsidiaries and any Property owned or operated by
any of them have been and are in compliance with all applicable Environmental
Laws (as defined in Section 10.13(c)). There is no past or present event,
condition or circumstance that could (1) interfere with the conduct of the
business of the Company or its Subsidiaries in the manner now conducted relating
to such entity's compliance with Environmental Laws, (2) constitute a violation
of, or serve as the basis of liability pursuant to, any Environmental Law or (3)
which could have a Material Adverse Effect upon the Company or any Company
Subsidiary;
(b) The Company, its Subsidiaries, and their Properties have not been,
and are not now subject to any actual, or, to the knowledge of the Company or
any Company Subsidiary, any potential or threatened Proceeding pursuant to any
Environmental Law and neither the Company nor any Company Subsidiary has
received any notice (whether from any regulatory body or private person) of any
actual or alleged violation of, or liability pursuant to, any Environmental Law;
(c) There is no Property for which the Company or any Company
Subsidiary is or was required to obtain any permit, license, or other
authorization under RCRA, FWPCA, TSCA, CAA, or any state or local counterparts
to any of the foregoing.
(d) Neither the Company nor any Company Subsidiary has generated any
Hazardous Substances for which it was required under an Environmental Law to
execute any hazardous waste disposal manifest;
(e) There are no underground or above ground storage tanks on or under
any Property nor any Hazardous Substances (except for asbestos containing
material ("ACM")) at, in, on, under or emanating from any Property in any
quantity or concentration exceeding any standard or limit established pursuant
to any Environmental Law;
(f) There is no ACM present in any Controlled Property except
non-friable ACM which can be managed in place in compliance with Environmental
Laws without air monitoring, removal or encapsulation and which is managed under
and in compliance with an operations and maintenance program.
(g) For purposes of this Section 3.23 and Section 6.10, "Property"
includes (1) any property (whether real or personal) which the Company or any
Company Subsidiary currently or in the past has leased, 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
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Company or any Company Subsidiary or property currently proposed as security for
loans or other credit the Company or any Company Subsidiary 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. With respect to any
Controlled Property formerly leased, operated, owned or managed by the Company
or any Company Subsidiary, the representations of this Section 3.23 shall be
construed to relate to conditions, events, facts or circumstances which existed,
occurred or commenced prior to the latest date of any leasehold interest,
operation, ownership or management of such Controlled Property by the Company or
any Company Subsidiary.
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 its Subsidiaries, threatened against the Company or its Subsidiaries by or
before the OTS, the FDIC, the Environmental Protection Agency, the Colorado
Department of Health and Environment 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 Company nor any
of its Subsidiaries are 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 any of its Subsidiaries have 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 its Subsidiaries 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
its Subsidiaries, 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, in notes to the Financial Statements, or for such encumbrances
arising by operation of law, the Company and each of its Subsidiaries has
unencumbered, 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. 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 its Subsidiaries in favor of the Company
or its Subsidiaries, whichever is applicable. The Company has made available to
Compass all of the files and information in the possession of the Company or its
Subsidiaries concerning such properties, including any title exceptions which
might affect indefeasible title or value of such property. The Company and its
Subsidiaries 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
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been identified in public records or should have been recorded or so identified
as containing Hazardous 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 and the
holders of any outstanding warrant, option, convertible debenture or other
security entitling the holder thereof to acquire Shares as of September 30, 1999
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, and in any event prior to the mailing of the Proxy
Statement, advise Compass of any significant changes thereto.
SECTION 3.27 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 113 of the CBCA.
SECTION 3.28 TAKEOVER LAWS. This Agreement and the Merger contemplated
hereby are not subject to the requirements of any "moratorium," "control share,"
"fair price," "affiliate transactions," "business combination" or other
antitakeover laws and regulations of any state applicable to the Company or any
of its Subsidiaries.
SECTION 3.29 EMPLOYEE STOCK OPTIONS. Except as set forth on Schedule
3.29, 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 any Company
Subsidiary.
SECTION 3.30 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 3.31 YEAR 2000 REPRESENTATION. All software, firmware,
hardware, equipment, microprocessing chips and other data processing devices and
services (both as a recipient and as a provider), capabilities and facilities
utilized by, and material to the business operations or financial condition of,
the Company and its Subsidiaries are or will be able to record and process all
calendar dates (whether before, in or after the year 2000) correctly and will be
able to communicate with other applicable systems in a manner that resolves any
ambiguities as to century in a properly defined manner (collectively, "Year 2000
Compliant"). The Company and its Subsidiaries have adequately assessed the Year
2000 Compliant status of all vendors, suppliers, service providers, customers
and business partners or venturers ("Critical Third Parties") whose goods,
services or business activities are material to the business operations or
financial condition of the Company or its Subsidiaries. The Company and its
Subsidiaries have developed adequate contingency plans to prevent material loss
to or liability of the Company and its Subsidiaries in the event the Company's
or its Subsidiaries' property or services or any Critical Third Party (or their
respective critical suppliers, vendors, service providers, customers and
business partners and venturers) fails to be Year 2000 Compliant. The Company
has contingency plans for cash availability and liquidity sources.
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SECTION 3.32 TITLE COMPANIES. Each Subsidiary of the Company which is a
title insurance or escrow company has (i) paid to its underwriters all premiums
to which each underwriter is entitled, and (ii) complied in all material
respects with all requirements set forth in the underwriting agreements to which
such Subsidiary is a party, including without limitation, all underwriting and
title examination guidelines. No Company Subsidiary which is a title insurance
or escrow company has used escrow or trust funds as collateral for loans or for
other corporate purposes.
SECTION 3.33 REPRESENTATIONS NOT MISLEADING. No representation or
warranty by the Company in this Agreement, or in any exhibit or schedule
furnished to Compass or Merger Sub by the Company or its Subsidiaries under and
pursuant to 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.
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 at the Closing 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.
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, all of which have been duly and validly
authorized by Compass' Board of Directors. 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,
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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, 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 and its Subsidiaries taken as a whole.
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 FDIC, the Commissioner and the
Superintendent and any notification to the Insurance Division will (i) conflict
with or result in any violation or breach of or default under its Certificate of
Incorporation or Bylaws; (ii) 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 (iii) 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
its Subsidiaries 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 1998 Annual Report to Shareholders,
which report (the "Compass 1998 Annual Report") includes, among other things,
consolidated balance sheets of Compass and its Subsidiaries as of December 31,
1998 and 1997, the related consolidated statements of income, shareholders'
equity and cash flows for the years ended December 31, 1998, 1997 and 1996 and
(ii) Compass' quarterly reports on Form 10-Q for the quarters ended March 31 and
June 30, 1999 (the "Quarterly Reports") which reports include among other things
unaudited balance sheets of Compass and its Subsidiaries as of March 31 and June
30, 1999 and 1998, respectively, and the related unaudited consolidated
statements of income and cash flows for the three- and six-month periods ending
March 31 and June 30, 1999 and 1998. The financial statements contained in the
Compass 1998 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,
1998 and
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1997 contained in the Compass 1998 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, 1999 and 1998, 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 1998 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 July 31, 1999, Compass had 113,629,765 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 its Subsidiaries, except the filing of Articles of Merger under the
CBCA and such approvals as may be required from the SEC, the FRB, the OTS, the
Commissioner, the Superintendent and the FDIC and any notification to the
Insurance Division.
SECTION 4.6 AVAILABILITY OF THE 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 the Compass Common Stock
to pay the Merger Consideration.
SECTION 4.7 REGULATORY ACTIONS. Neither Compass nor any of its
Subsidiaries have 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.
SECTION 4.8 TAKEOVER LAWS. This Agreement and the Merger contemplated
hereby are not subject to the requirements of any "moratorium," "control share,"
"fair price," "affiliate transactions," "business combination" or other
antitakeover laws and regulations of any state applicable to Compass or any of
its Subsidiaries.
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SECTION 4.9 ACCOUNTING MATTERS. Neither Compass 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 4.10 REPRESENTATIONS NOT MISLEADING. No representation or
warranty by Compass in this Agreement nor exhibit or schedule furnished to the
Company under and pursuant to 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.
SECTION 4.11 LITIGATION. There are no material Proceedings pending, or
to the knowledge of Compass or its Subsidiaries, threatened against Compass or
its Subsidiaries or involving any of their respective properties or assets which
are required to be disclosed, but have not been so disclosed, in filings
required to be made with the SEC pursuant to the Exchange Act.
SECTION 4.12 ABSENCE OF CERTAIN CHANGES. Since June 30, 1999, no event
has occurred or circumstances arisen that, individually, or taken together, with
all other facts, circumstances and events, would have required a filing with the
SEC pursuant to the Exchange Act which has not been so filed.
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 (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;
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(e) in good faith and in a timely manner (i) cooperate with Compass and
Merger Sub in satisfying the conditions in this Agreement, (ii) assist Compass
and Merger Sub in obtaining as promptly as possible all consents, approvals,
authorizations and rulings, whether regulatory, corporate or otherwise, as are
necessary for Compass and Merger Sub 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, and the FDIC, all financial statements
and other reports required to be so filed by 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) shall continue to have contingency plans for cash availability and
liquidity sources;
(m) promptly notify Compass of any material change or inaccuracies in
any data previously given or made available to Compass or Merger Sub pursuant to
this Agreement; and
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(n) provide access, to the extent that the Company or its Subsidiaries
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;
(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;
(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 its
Subsidiaries' 1999 budgets 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,
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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;
(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;
(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 $100,000 in the aggregate;
(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 any of its Subsidiaries;
(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, amend, waive or extend either the Company Loan Documents or
any rights under such agreements;
(s) 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;
(t) sell or contract to sell any part of the Company's or its
Subsidiaries' premises;
(u) change any fiscal year or the length thereof;
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(v) 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;
(w) prepay in whole or in part the Company Indebtedness;
(x) commence operations or acquire any assets into the Real Estate
Subsidiaries; or
(y) 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 its Subsidiaries 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 its Subsidiaries 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
and upon reasonable advance notice, throughout the period prior to the Closing,
to all of the Company's and its Subsidiaries' 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 its
Subsidiaries and their affairs as Compass may reasonably request. All
information disclosed by the Company to Compass which is confidential and is so
identified to Compass as confidential shall be held confidential by Compass and
its representatives, except to the extent counsel to Compass, in its reasonable
opinion, has advised it such information is required to or should be disclosed
in filings with regulatory agencies or governmental authorities or in proxy
materials delivered to shareholders of the Company. 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.
SECTION 6.2 FILING OF REGULATORY APPROVALS. Compass and the Company
shall use their reasonable efforts to file all notices and applications to the
FRB, the OTS, the Superintendent, the Commissioner, the FDIC and the Insurance
Division which Compass deems necessary or appropriate to complete the
transactions contemplated herein, including the merger of the Bank and Compass
Bank ("Compass Bank") on or before December 1, 1999. Compass will deliver to the
Company and its counsel, and the Company will deliver to Compass and its
counsel, copies of all non-confidential portions of any such applications.
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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 COMPANY INDEBTEDNESS. Prior to the Effective Time, the
Company shall pay all regularly scheduled payments on all Company Indebtedness
and shall cooperate with Compass in taking such actions as are reasonably
appropriate or necessary in connection with the redemption, prepayment,
modification, satisfaction or elimination of any outstanding indebtedness of the
Company or its Subsidiaries with respect to which a consent is required to be
obtained to effectuate the Merger and the transactions contemplated by this
Agreement and has not been so obtained.
SECTION 6.5 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 and other transactions provided
herein and to satisfy the other conditions to Closing contained herein.
SECTION 6.6 EXCLUSIVITY. (a) The Company agrees that it shall not, and
shall cause its Subsidiaries and its and its Subsidiaries' officers, directors,
agents and advisors and affiliates not to, solicit or encourage inquiries or
proposals with respect to, or engage in any negotiations concerning, or provide
any confidential information to, or have any discussions with, any person
relating to, any Acquisition Proposal. It shall immediately cease and cause to
be terminated any activities, discussions or negotiations conducted prior to the
date of this Agreement with any parties. The Company shall promptly advise
Compass following the receipt by the Company or any of its Subsidiaries of any
Acquisition Proposal and the substance thereof (including the identity of the
person making such Acquisition Proposal), and advise Compass of any developments
with respect to such Acquisition Proposal immediately upon the occurrence
thereof. For purposes of this Section 6.6 an "Acquisition Proposal" means any
tender or exchange offer, proposal for a merger, consolidation or other business
combination or similar transaction involving the Company or its Subsidiaries or
any proposal or offer to purchase or acquire in any manner all or a majority of
the voting ownership, beneficial ownership or right to vote securities in, or a
majority of the assets or deposits of the Company or any of its Subsidiaries,
other than the transaction contemplated by this Agreement, provided, however,
that nothing contained in this Section 6.6 shall prohibit the Board of Directors
of the Company from furnishing information to, or entering into discussions,
negotiations or an agreement with, any person or entity that makes an
unsolicited Acquisition Proposal after the date hereof if, and only to the
extent that the Board of Directors of the Company, after consultation with and
based upon the written opinion of outside counsel, concludes in good faith that
such action is necessary for the Board of Directors of the Company, to comply
with its fiduciary duties to its shareholders under applicable law.
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(b) The Board of Directors of the Company shall not (i) withdraw or
modify the approval or recommendation by such Board of Directors of this
Agreement or the Merger, (ii) approve or recommend an Acquisition Proposal or
(iii) enter into any agreement with respect to any Acquisition Proposal, unless
the Company receives an Acquisition Proposal and the Board of Directors of the
Company concludes in good faith, after consultation with and based upon the
written opinion of outside counsel, that in order to comply with its fiduciary
duties to its shareholders under applicable law it is necessary for the Board of
Directors to withdraw or modify its approval or recommendation of this Agreement
or the Merger, approve or recommend such Acquisition Proposal or enter into an
agreement with respect to such Acquisition Proposal. Notwithstanding anything
contained in this Agreement to the contrary, any action by the Board of
Directors permitted by this Section 6.6(b) shall not constitute a breach of this
Agreement by the Company.
SECTION 6.7 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.
SECTION 6.8 EMPLOYEE BENEFIT PLANS. Compass presently intends that,
after the Effective Time, Compass, the Company and its Subsidiaries will not
make additional contributions to the employee benefit plans that were sponsored
by the Company or an ERISA Affiliate immediately prior to the Effective Time.
Compass agrees that the employees of the Company and its Subsidiaries who are
retained as employees of Compass or Compass 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 its Subsidiaries'
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 its Subsidiaries retained by Compass will be entitled to credit for
prior service with the Company and its Subsidiaries 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 any of its Subsidiaries
sponsored a similar type of plan which the Company or Company Subsidiary
employee participated in immediately prior to the Effective Time. To the extent
permitted under Compass' existing insurance contracts, any waiting period and
preexisting condition exclusion applicable to such plans and programs shall be
waived with respect to any such Company or Company Subsidiary employee. For
purposes of determining each Company or Company Subsidiary employee's benefit
for the year in which the Merger occurs under the Compass vacation program, any
vacation taken by a Company or Company Subsidiary employee preceding the
Effective Time for the year in which the Merger occurs will be deducted from the
total Compass vacation benefit available to such employee for such year. Compass
agrees that for purposes of determining the number of vacation days available
with respect to each Company employee for the year in which the Merger occurs,
that the number of vacation days for such
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year shall be determined under the Company or its Subsidiaries vacation policies
in effect as of January 1, 1999.
(ii) Employee Pension Benefit Plans: Each Company and Company
Subsidiary employee retained by Compass shall be entitled to credit for past
service with the Company and its Subsidiaries 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 its Subsidiaries with respect to any defined
benefit pension plans sponsored (or contributed to) by Compass; instead, Company
and Company Subsidiary 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.
The Company shall take such actions as may be necessary to terminate
the 401(k) plan sponsored by the Company effective immediately prior to the
Effective Time.
SECTION 6.9 MERGER OF BANK. Compass presently intends to cause the Bank
to merge into Compass Bank immediately after the Effective Time, and the Company
agrees to cause the Bank and its other Subsidiaries 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 6.10 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 its Subsidiaries have such
right, but not the obligation or responsibility, to inspect any Controlled
Property, upon reasonable advance notice, including, without limitation, for the
purpose of conducting asbestos surveys and sampling, and other environmental
assessments and investigations ("Environmental Inspections"). Compass' right to
conduct Environmental Inspections shall include the right to sample and analyze
air, sediment, soil and groundwater of any Controlled Property to the same
extent that the Company or its Subsidiaries have such right. Compass may conduct
such Environmental Inspections at any time subject to Section 6.10(d) below.
(b) Using an approach and scope which is equivalent to the written
environmental policies of Compass, a copy of which has been delivered to the
Company, the Company and its Subsidiaries shall cause to be performed, and
subsequently evaluate the results of, an environmental investigation of any
Property acquired, leased, foreclosed, managed or controlled by the Company or
its Subsidiaries, or in which the Company or its Subsidiaries acquires a
security interest, in each case between the date hereof and the Closing Date,
and the scope and results of which shall be acceptable to Compass in its sole
reasonable discretion. The Company shall not be required to conform its
commitment language to customers to the commitment language used by Compass,
subject to the Company's compliance with the foregoing sentence.
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(c) Compass shall notify the Company of any Environmental Inspections
of Controlled 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 Controlled Property upon which it intends to
conduct such physical inspections, the Company and its Subsidiaries shall notify
the owner of such Controlled Property and use their reasonable best efforts to
secure access to such Controlled Property for Compass. Compass shall notify the
Company on or prior to January 15, 2000 of any Controlled Properties that, in
the sole discretion of Compass, are not acceptable and require further
assessment, remediation, correction, or monitoring ("Environmental Response").
Compass shall order Phase I environmental reports within 15 days of the
execution of this Agreement.
(d) (1) With respect to any Controlled Property that Compass has
notified the Company is not acceptable and requires Environmental Response, the
Company shall promptly prepare a remediation plan acceptable to Compass, and use
best efforts to obtain approval of such remediation plan by the Colorado
Department of Public Health and Environment or any other appropriate
governmental authority ("Environmental Regulatory Authority"), if approval is
necessary, and implement the same on or prior to Closing.
(2) 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 $500,000 in connection
with Environmental Response, preparing and obtaining approval by the appropriate
Environmental Regulatory Authority of remediation plans with respect to
Controlled Properties (the "Aggregate Environmental Expense Limit"); provided,
however, that the determination of the Aggregate Environmental Expense Limit
shall include the aggregate expenses in connection with Environmental Response
and preparing and obtaining approval by the appropriate Environmental Regulatory
Authority of remediation plans with respect to Controlled Property (as defined
under the Ancillary Agreements as defined herein), under this Agreement and the
Ancillary Agreements.
(e) Each party hereto agrees to indemnify and hold harmless the other
party for any claims for damage to the Controlled Property or injury or death to
persons in connection with any Environmental Inspection of the Controlled
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.
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, 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 for making
any report of such results to any governmental authority.
(f) Compass shall have the right to terminate this Agreement in the
following circumstances:
(i) the factual substance of any warranties set forth in
Section 3.23 is not true and accurate irrespective of the knowledge or lack of
knowledge of the Company, and
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losses, damages, Environmental Response costs, liabilities (INCLUDING WITHOUT
LIMITATION STRICT LIABILITIES), fines, penalties, costs and expenses which might
arise therefrom could reasonably be expected to exceed the Aggregate
Environmental Expense Limit;
(ii) if the Environmental Inspection identifies any
past or present event, condition or circumstance that, based on the reasonable
estimates of the environmental professionals referred to in this Section 6.10,
may currently or in the future require expenditures by the Company or its
Subsidiaries, in connection with (1) Environmental Response 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,
or (3) any violations of applicable Environmental Laws, which expenditures
individually or in the aggregate may exceed the Aggregate Environmental Expense
Limit;
(iii) Compass is not permitted to conduct an
Environmental Inspection of any currently Controlled Property and Property that
becomes Controlled Property after the date hereof to the extent it deems
appropriate, consistent with the provisions of Section 6.10(a);
(iv) If on or before Closing, for each Controlled
Property identified by Compass as unacceptable and requiring Environmental
Response, the Company does not deliver to Compass written evidence acceptable to
Compass that the Company has used best efforts to develop a remediation plan
approved by the applicable Environmental Regulatory Authority, and implemented
the same.
(g) 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 in its possession
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 Company with a copy of all
environmental reports prepared by its consultants as a result of the
Environmental Inspections.
SECTION 6.11 PROXIES. The Company acknowledges that the persons listed
in Schedule 6.11 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 6.12 EXCHANGE AGREEMENT. Immediately prior to the Effective
Time, the Company and Compass agree to enter into, and Compass agrees to cause
Merger Sub to enter into, the Exchange Agreement with the Exchange Agent, or if
the Exchange Agent refuses to
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serve as exchange agent, such other exchange agent as shall mutually agreed to
by the Company and Compass.
SECTION 6.13 YEAR 2000 INVESTIGATION.
(a) Using an approach and scope which is equivalent to the Year 2000
risk management policies and procedures for Year 2000 credit exposure of Compass
previously delivered to the Company ("Year 2000 Inspection"), the Company and
its Subsidiaries shall cause to be performed, and subsequently evaluate the
results of, a Year 2000 Inspection of issuers of municipal investment securities
where the investment in the securities of any one issuer equals or exceeds
$125,000, in each case between the date hereof and the Closing Date, and the
scope and results of which shall be acceptable to Compass in its sole reasonable
discretion.
(b) The Company shall provide to Compass on or before December 15,
1999, its initial assessment of all municipal issuers and their appropriate
contracting parties or providers subject to Year 2000 Inspections.
(c) The Company shall use its best efforts to remediate any borrowers
or municipal issuers which are assessed as high risk as a result of Year 2000
Inspections.
(d) The Company agrees to (i) charge-off prior to the Effective Time
securities with respect to municipal issuers, and (ii) add in, prior to the
Effective Time, to the Company's and its Subsidiaries' loan loss reserves 110%
of the collateral deficit for borrowers, as to each such issue or loan
determined to be high risk and of uncertain collectibility and are not capable
of remediation each as a result of Year 2000 Inspections. The borrowers and the
amount of the collateral deficit for any such borrower shall be determined
jointly between the Company and Compass, each party to be reasonable in its
making a determination.
(e) The Company has performed unit tests on deposit, loan, ACH, fund
transfer, federal line, and telecom switches to determine their Year 2000
Compliant status and has taken remedial action or shall take remedial action as
required by the results of such tests in a manner reasonably satisfactory to
Compass.
SECTION 6.14 DIRECTOR AND OFFICER INDEMNIFICATION.
(a) Following the Effective Time and for a period of five years
thereafter, Compass shall indemnify, defend, and hold harmless the present and
former directors, officers and employees of the Company and its Subsidiaries
(each, an "Indemnified Party") against all costs or expenses, including
reasonable attorneys' fees, judgments, fines, losses, claims, damages or
liabilities incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative, or investigative,
arising out of actions or omissions accruing at or prior to the Effective Time)
including, without limitation, the transactions contemplated by this Agreement)
to the fullest extent that the Company and its Subsidiaries are permitted to
indemnify (and advance expenses to) its directors, officers and employees under
the Company's and its Subsidiaries' Articles of Incorporation or Association,
the Company's and the Subsidiaries' By-laws and indemnification agreements
between the Company and any of its
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Subsidiaries and their respective directors and officers, as in effect on the
date hereof; provided that any determination required to be made with respect to
whether an officer's, director's, or employee's conduct complies with the
standard set forth under the Company's Articles, the Company's and the
Subsidiaries' By-laws, and other indemnification agreements between the Company
or its Subsidiaries and their respective directors and officers shall be made by
independent counsel (which shall not be counsel that provides material services
to Compass, the Company or the person seeking indemnification hereunder)
selected by Compass and reasonably acceptable to such officer or director or
employee. The indemnification provisions currently contained in the Articles of
Incorporation or Association, Bylaws and written agreements of the Company and
its Subsidiaries shall not be amended after the date hereof.
(b) Compass agrees that the Company and its Subsidiaries may obtain
extended reporting coverage (otherwise known as "tail coverage") under the
Company and its Subsidiaries' existing directors and officers liability policy
or other similar coverage for two years; provided, however, that the premium
expense for such coverage shall not exceed $30,000 in the aggregate over such
two-year period.
(c) Any Indemnified Party wishing to claim indemnification under
Section 6.14(a) upon learning of any action, claim, suit, proceeding or
investigation described above shall promptly notice Compass thereof; provided,
that the failure to so notify shall not affect the obligations of Compass under
Section 6.13(a) unless and to the extent that Compass is actually prejudiced as
a result of such failure.
(d) If Compass or any of its successors or assigns shall consolidate
with or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any entity, then and in each case, proper provisions shall
be made so that the successors and assigns of Compass shall assume the
obligations set forth in this Section 6.13.
SECTION 6.15 EXERCISE OF CONVERTIBLE SECURITIES. The Company shall use
its best efforts to cause each holder of outstanding warrants, options, rights,
convertible debentures or other securities entitling the holder thereof to
acquire Shares (collectively, the "Convertible Securities") to exercise or
convert such Convertible Securities in full prior to the Effective Time.
SECTION 6.16 ACTIONS RESPECTING DEBENTURES. Compass and the Company
agree to take such actions as are necessary to satisfy the requirements of the
Indenture relating to the MB Capital I 8.75% Junior Subordinated Debentures
("Company Subordinated Debentures") in the event of a business combination
between the Company and Compass.
SECTION 6.17 PUBLICATION OF 30 DAYS OF POST COMBINATION RESULTS.
Compass shall publish at the earliest opportunity combined financial results of
Compass and the Company covering the first 30 days after the Effective Time so
as to permit Company Affiliates and Compass Affiliates to sell immediately after
such publication shares of Compass Common Stock under the rules applicable to
"pooling of interests" accounting treatment; provided, however, that Compass
shall not be required to so publish financial results if the Effective Time
occurs in the second month of any calendar quarter other than its regular
quarterly press release.
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SECTION 6.18 NOTIFICATION OF RELATED PARTY TRANSACTIONS. The Company
shall notify Compass in writing of, and provide Compass a reasonable opportunity
to object to, the entering into any new transactions with Affiliates of the
Company, other than origination of loans and the sale of loan participations to
First State Bank of Hotchkiss each in the ordinary course of business and in
accordance with prudent banking practices.
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 reasonable judgment of Compass
would adversely impact the economic or business benefits of the transactions
contemplated by this Agreement or otherwise would in the judgment of Compass be
so burdensome as to render inadvisable the consummation of the Merger, and the
expiration of any applicable waiting period with respect thereto;
(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;
(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;
(e) the shares of Compass Common Stock to be issued in the Merger shall
have been approved for listing on the NASDAQ, subject to official notice of
issuance; and
(f) Compass and the Company shall have received an opinion of counsel
from counsel to Compass in substantially the form attached hereto as Exhibit J
to the effect that on the basis of certain facts, representations, and opinions
set forth in such opinion that the Merger will qualify as a reorganization under
Section 368(a) of the Code. In rendering such opinion, such counsel may require
and rely upon and may incorporate by reference representations and covenants,
including those contained in certificates of officers and/or directors of
Compass, Merger Sub, the Company and others.
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SECTION 7.2 CONDITIONS TO THE OBLIGATIONS OF COMPASS AND MERGER SUB TO
EFFECT THE MERGER. The obligations of Compass and Merger Sub 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 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 its Subsidiaries;
(d) the directors of the Company and its Subsidiaries shall have
delivered to Compass an instrument in the form of Exhibit H attached hereto
dated the Effective Time releasing the Company and its Subsidiaries from any and
all claims of such directors (except as to their deposits and accounts, and as
to their rights of indemnification pursuant to the Articles of Incorporation,
Association or Bylaws of the Company and the Bank) and shall have delivered to
Compass their resignations as directors of the Company and its Subsidiaries;
(e) the executive officers of the Company and its Subsidiaries shall
have delivered to Compass an instrument in the form of Exhibit H attached hereto
dated the Effective Time releasing the Company and its Subsidiaries from any and
all claims of such officers (except as to deposits and accounts and accrued
compensation permitted by their respective agreements with the Company or its
Subsidiaries and as to their rights of indemnification pursuant to the Articles
of Incorporation, Association or Bylaws 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 D attached hereto;
(g) the holders of no more than the lesser of (i) 10% of the Shares or
(ii) such number of Shares that shall not disqualify the Merger for
pooling-of-interest accounting treatment, 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 Arthur Andersen, LLP,
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) the aggregate principal amount of all Company Indebtedness shall
not exceed $50,000,000;
(j) Compass shall have received from holders of the Company's capital
stock receiving at least 50% of the total Merger Consideration a representation
that they have no plan or intention to sell or otherwise dispose of (i) shares
of the Company prior to and in connection
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with the Merger to the Company or any party related to the Company or Compass
and (ii) shares of Compass Common Stock received pursuant to the Merger to
Compass or any party related to Compass.
(k) Compass shall have determined, in its sole reasonable judgment,
that the liabilities and obligations set forth on Schedule 5.1(k) do not have a
Material Adverse Effect;
(l) all warrants, options, rights, convertible debentures or other
securities entitling the holder thereof to acquire Shares shall have been
exercised or converted, or shall have expired, lapsed or terminated, prior to
the Effective Time;
(m) all software, firmware, hardware, equipment, microprocessing chips
and other data processing devices and services (both as a recipient and as a
provider), capabilities and facilities utilized by, and material to the business
operations or financial condition of, the Company and its Subsidiaries shall
have been able to record and process all calendar dates since the date of this
Agreement correctly and shall have been able to communicate with other
applicable systems in a manner that resolves any ambiguities as to century in a
properly defined manner;
(n) all Critical Third Parties of the Company and its Subsidiaries are
Year 2000 Compliant in all material respects;
(o) the transactions contemplated by those certain Agreements and Plans
of Merger of even date herewith between Nagrom LLC, Osage 3734 LLC and 1996
Newton LLC, respectively, and Compass ("Ancillary Agreements") shall have been
simultaneously consummated herewith;
(p) The Real Estate Subsidiaries shall not have commenced any
operations or acquired any assets;
(q) that certain Consulting Agreement dated March 3, 1997 between First
Fidelity Service Corp. and the Bank shall have been terminated without cost to
the Company or its Subsidiaries;
(r) that certain Amended and Restated Stock Purchase Agreement by and
among the Company, Thomas R. Kowalski, the Ryan R. Kowalski Trust, the Realtek
Company Profit Sharing Plan and Trust, Thomas Investment Partnership and Orchard
Valley Financial Corporation dated as of December 4, 1997 and as further amended
on September 1, 1998 shall have been terminated without cost to the Company or
its Subsidiaries;
(s) the Key Man Life Insurance Policy in the amount of $3,000,000 on
the life of Thomas R. Kowalski shall have been cancelled;
(t) the Company and its Subsidiaries shall have accrued and paid all
professional fees incurred in connection with this transaction and all change of
control payments to employees of Empire Title and Escrow Corporation ("Empire")
prior to the Effective Time;
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(u) United General Title Insurance Company ("United") shall have
consented to the change of controlling interest in Empire and waived its right
to terminate that certain Title Policy Issuing Agreement ("United Agreement")
dated March 1, 1999 between United and Empire to the extent such consent and
waiver is required under the United Agreement;
(v) the Company shall have obtained all necessary consents to continue
access to information maintained by Colorado Record Data, LLC;
(w) The Company or Empire shall have obtained clarification from First
American Title Insurance Company ("First American") under the Underwriting
Agreement dated July 1, 1995 to the effect that the amount of fees Empire shall
remit to First American is 15% of the total amount of fees for First American
title policies issued through Empire's offices;
(x) Section 3.3 of the Empire Merger Agreement shall have been amended
to provide that such Section 3.3 shall terminate as of the Effective Time; and
(y) Compass shall have received certificates dated the Closing executed
by the Chairman of the Board of the Company and by the Chairman of the Board of
its Subsidiaries, and the Secretary or Cashier of the Company and its
Subsidiaries, respectively, certifying in such reasonable detail as Compass may
reasonably request, to the effect described in Sections 7.2(a), (b), (c), (g),
(i), (l) and (p).
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 Merger Sub 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 Merger Sub acceptable to it, as to the matters set forth on Exhibit E
attached hereto;
(d) the Company and its Subsidiaries shall have delivered to the
directors and executive officers of the Company and its Subsidiaries an
instrument in the form of Exhibit I attached hereto dated the Effective Time
releasing such directors from any and all claims of the Company and its
Subsidiaries (except as to indebtedness or other contractual liabilities);
provided, however, that such releases shall not release an action against such
directors by Compass or Merger Sub in connection with the transactions
contemplated by this Agreement;
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(e) the Company shall have received certificates dated the Closing,
executed by an appropriate officers of Compass and Merger Sub, respectively,
certifying, in such detail as the Company may reasonably request, to the effect
described in Sections 7.3(a) and (b);
(f) there shall not have occurred a Material Adverse Effect with
respect to Compass; and
(g) the Company shall have received immediately prior to the filing of
the Registration Statement, the opinion of Hovde Financial, Inc. and Howe Barnes
Investment, Inc. to the effect that the Merger and the Merger Consideration to
be received by the shareholders of the Company in connection with the Merger is
fair to such shareholders from a financial point of view.
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;
(b) by Compass (i) if Compass learns or becomes aware of a state or
series of facts or one or more breaches or inaccuracies of any representation or
warranty of the Company contained in Article III which constitutes a Material
Adverse Effect, (ii) pursuant to Section 6.10, (iii) if Compass learns or
becomes aware of a state or series of facts or one or more breaches or
inaccuracies of any representation or warranty with respect to Empire Title and
Escrow Corporation and/or its Subsidiaries such that, in Compass' reasonable
discretion, Compass or Empire Title and Escrow Corporation and/or its or their
Subsidiaries may be subject to potential financial losses or potential
liabilities in excess of $300,000 in the aggregate; provided, however, that any
such losses or liabilities shall not include for these purposes compensation
payable to employees of Empire pursuant to those certain Employment Agreements
dated April 5, 1999 and additional merger consideration payable to shareholders
of Empire pursuant to the Empire Merger Agreement; or (iv) if any of the
conditions to Closing contained in Section 7.1 or 7.2 are not satisfied or
waived in writing by Compass;
(c) by the Company if the conditions to Closing contained in Section
7.1 or 7.3 are not satisfied or waived in writing by the Company;
(d) by Compass or the Company if the Effective Time shall not have
occurred on or before the expiration of eight months from the date of this
Agreement or such later date agreed to in writing by Compass and the Company;
(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
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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 in the event one or more of the Ancillary
Agreements are terminated;
(g) by the Company if the Company learns or becomes aware of a state or
series of facts or one or more breaches or inaccuracies of any representation or
warranty of Compass contained in Article IV which constitutes a Material Adverse
Effect;
(h) by the Company in the event the Company enters into an agreement
with respect to an Acquisition Proposal in accordance with the provisions of
Section 6.6(b) of this Agreement; provided, however, that the Company may only
terminate this Agreement pursuant to this subsection (h) if it simultaneously
with such termination delivers to Compass the termination fee provided for in
Section 8.5 hereof;
(i) by Compass (a) if there shall have been a breach of Section 6.6
hereof, or (b) if at anytime, the Company shall have failed to make its
recommendation referred to in Section 1.7 hereof, withdrawn such recommendation
or modified or changed such recommendation in a manner adverse in any respect to
the interests of Compass; or
(j) by the Company at any time during the two business day period
following the fifth trading day prior to the Closing, if both of the following
conditions are satisfied:
(1) the Average Closing Price is less than $23.00; and
(2) (i) the number obtained by dividing the Average Closing
Price by the Starting Price shall be less than (ii) the number obtained by
dividing the Average Index Value by the Index Value on the Starting Date and
subtracting 0.15 from the quotient in this clause 2(ii).
For purposes of this Section 8.1(f), the following terms shall
have the meanings indicated:
"Average Index Value" means the average of the Index Values
for the twenty days of trading preceding the fifth trading day prior to the
Effective Time.
"Index Value" on a given date means the Index Value of the
NASDAQ Index Banks as published by NASDAQ.
"Starting Date" means November 4, 1999.
"Starting Price" shall mean the last reported sale price per
share of Compass Common Stock on the Starting Date, as reported by
NASDAQ/National Market System.
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<PAGE> 162
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 6.1 (as it pertains to confidentiality), 6.10, 8.2, 8.5,
10.1 and 10.8 of this Agreement. 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, Merger Sub 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 Merger Sub 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, Merger Sub shall deliver to the Company a
certificate in substantially the form of Exhibit G 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 (x) violates its
obligations set forth in Section 6.6 hereof and this Agreement is terminated
pursuant to Section 8.1(i)(a), or (y) prior to termination of this Agreement
receives any Acquisition Proposal and this Agreement is thereafter terminated
pursuant to Sections 8.1(h) or 8.1(i) as a result of receipt of such Acquisition
Proposal, then the Company shall pay to Compass an aggregate fee of $4,000,000
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.
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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 its
Subsidiaries, shall be paid by the party incurring such costs 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, the Company agrees to pay Compass in the event that the Company's
shareholders do not approve the Merger and there is no Acquisition Proposal,
$200,000 in cash; provided, however, that the Company shall not be required to
make payment under this Section 10.1(b) if the Company is required to pay a
termination fee pursuant to Section 8.5. In the event that each of the
conditions to Closing contained in Sections 7.1 and 7.2 are fully satisfied and
Compass fails to consummate the Merger, Compass shall pay to the Company an
amount equal to $200,000.
SECTION 10.2 BROKERS AND FINDERS. Other than Hovde Financial, Inc. and
Howe Barnes Investments, Inc. which have been engaged by the Company, all
negotiations on behalf of Compass and the Company relating to this Agreement and
the transactions 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,
Merger Sub, the Company or its Subsidiaries 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 (a)
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes 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 Merger
Sub to any direct or indirect, wholly-owned, subsidiary of Compass, but no such
assignment shall relieve Compass of its obligations hereunder.
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 its Subsidiaries, 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 or its Subsidiaries' title to and possession of, all of their
respective property, interests, assets, rights, privileges, immunities, powers,
franchises and authority, as shall be reasonably necessary or
43
<PAGE> 164
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 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 Merger Sub:
Charles E. McMahen
Vice Chairman
Compass Bank
24 Greenway Plaza
Houston, Texas 77046
Telecopy No.: (713) 993-8535
Daniel B. Graves
Associate General Counsel
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Telecopy No.: (205) 933-3043
with a copy to:
Annette L. Tripp
Locke Liddell & Sapp LLP
3400 Chase Tower, 600 Travis
Houston, Texas 77002
Telecopy No.: (713) 223-3717
44
<PAGE> 165
if to the Company:
Thomas R. Kowalski
MegaBank Financial Corporation
8100 East Arapahoe Road, Suite 214
Englewood, Colorado 80112
Telecopy No.: (303) 741-4473
with a copy to:
Ernest J. Panasci
Slivka Robinson Waters & O'Dorisio, A Professional Corporation
1099 18th Street, Suite 2600
Denver, Colorado 80202-1926
Telecopy No: (303) 297-2750
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 Colorado, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
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" or "Subsidiaries" shall mean, when used with reference
to an entity, any corporation, fifty percent of the outstanding voting
securities of which are owned directly or indirectly by such entity or any
partnership, joint venture, business trust, or other enterprise in which any
entity has, directly or indirectly, any equity interest.
45
<PAGE> 166
(b) "Material Adverse Effect" shall mean any material adverse
circumstance, event or series of events or circumstances with respect to the
financial condition, assets, liabilities (absolute, accrued, contingent or
otherwise), reserves, business or results of operations of the Company and its
Subsidiaries 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, common law, 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, or exposure to, Hazardous 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, as amended ("FWPCA"), Clean Air Act
("CAA"), and any and all regulations promulgated pursuant to any of the
foregoing, as amended.
(d) "Hazardous Substances" shall mean those substances included within
the statutory or regulatory definitions, listings or descriptions of
"pollutant," "hazardous material," "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 Colorado establish a meaning for "hazardous
substance," "hazardous waste," "hazardous material," "solid waste," "pollutant,"
"contaminant," "regulated substance," or "toxic waste," which is broader than
that specified in any of CERCLA, SARA, RCRA, HSWA, HMTA, TSCA, OSHA or any other
Environmental Law 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 have "known" a
particular fact or other matter if any individual who is serving, or who has at
any time served, as
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<PAGE> 167
a director or officer serving in the capacities set forth on Schedule 10.13(f)
hereto (or in any similar capacity) of the corporation or bank, has, or at any
time had, knowledge of such fact or other matter.
(g) "Empire Merger Agreement" shall mean that certain Agreement and
Plan of Merger dated as of April 1, 1999 among the Company, MB Title Company,
Empire Title and Escrow Corporation, John P. Dwyer, Jr., James A. Cimino, Brian
R. Gray, Linda J. Kelsey, Roger W. Smith, Jr., Gregory C. Erpelding and Lynn T.
Cisneros.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
ATTEST: COMPASS BANCSHARES, INC.
By /s/ Daniel B. Graves By /s/ Garrett R. Hegel
-------------------------------- ---------------------------------
Its: Assistant Secretary Its: Chief Financial Officer
ATTEST: MEGABANK FINANCIAL CORPORATION
By /s/ Susan A. Putland By /s/ Thomas R. Kowalski
-------------------------------- ---------------------------------
Its: Vice President and Secretary Its Chairman, C.E.O.
<PAGE> 169
SCHEDULE 4.2
COMPASS PRIOR CONSENTS
NONE
<PAGE> 170
SCHEDULE 4.2
COMPASS PRIOR CONSENTS
NONE
<PAGE> 171
EXHIBIT A
POOLING TRANSFER RESTRICTIONS AGREEMENT
---------------------------------------
This Pooling Transfer Restrictions Agreement (this "Agreement") is
executed and delivered this ____ day of _________, 1999 by and between Compass
Bancshares, Inc. ("Compass"), MegaBank Financial Corporation (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 _________, 1999 ("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, no par value 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 Act"), the Securities Exchange Act of 1934 (the "Exchange
Act"), 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 except in
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<PAGE> 172
compliance with the applicable provisions of the Securities Act, the Exchange
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 _______ __, 1999 which restricts
any sale or other transfer of such shares prior to the earlier to occur
of (i) public release by Compass Bancshares, Inc. of 30 days of
post-merger combined operations of MegaBank Financial Corporation and
Compass Bancshares, Inc., or (ii) [insert due date of next Quarterly
Report on Form 10-Q or Annual Report on Form 10-K that will contain
required financial results.] 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.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the undersigned set his hand effective as of the
day first written above.
COMPASS BANCSHARES, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
MEGABANK FINANCIAL CORPORATION
By:_________________________________
Name:_______________________________
Title:______________________________
____________________________________
Signature of Shareholder
____________________________________
Printed Name of Shareholder
3
<PAGE> 174
EXHIBIT B
EXCHANGE AGENT AGREEMENT
------------------------
This Exchange Agent Agreement, dated as of _____, 2000, is made and
entered into by and among Compass Bancshares, Inc., a Delaware corporation
("Compass"), _____________________, a Colorado corporation ("Merger Sub"),
MegaBank Financial Corporation, a Colorado corporation ("Company"), and
Continental Stock Transfer & Trust Company, a New York banking corporation
("Exchange Agent").
PREAMBLE:
Pursuant to the Agreement and Plan of Merger dated as of ________, 1999
("Merger Agreement") among Compass, Merger Sub and the Company, the Company
shall, at the Effective Time, be merged with Merger Sub. The name of the
surviving corporation shall be MegaBank Financial Corporation ("Surviving
Corporation").
After the Effective Time, the outstanding shares of the Common Stock,
no par value 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:
1. APPOINTMENT OF EXCHANGE AGENT. Continental Stock Transfer & 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.
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<PAGE> 175
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 the executed Letters of
Transmittal accompanied by Certificates which are surrendered in
accordance with the provisions of the Merger Agreement. Such
Certificates and Letters of Transmittal shall only be accepted 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, subject to the following
sentence, if the person or persons surrendering such Certificates and
Letters of Transmittal appear as a holder of record of the number of
shares surrendered on the list of shareholders ("Shareholder List")
supplied and certified to the Exchange Agent by the Company 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
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<PAGE> 176
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) From time to time as requested by Compass, the Exchange
Agent shall provide Compass 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 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.
15 South 20th Street
Birmingham, Alabama 35233
Attn: Daniel B. Graves
Telephone No. (205) 933-3880
(c) EXCHANGE FUND. In order to provide for payment of the
Merger Consideration in accordance with the terms of the Merger
Agreement, Compass, prior to the Effective Time, shall deposit or cause
to be deposited with the Exchange Agent (i) a sufficient number of
shares of Compass Common Stock pursuant to Section 1.6 of the Merger
Agreement to exchange Compass Common Stock for Company Common Stock,
(ii) cash in an amount reasonably believed to be sufficient to make any
required payments to dissenting shareholders, and (iii) cash in an
amount sufficient to make payments in lieu
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<PAGE> 177
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. Merger Sub 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 Merger Sub 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 $_____.
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 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
-4-
<PAGE> 178
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 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, provided that such instructions do not cause a reduction in the amount
or eliminate the opportunity of any shareholder to receive his or her portion of
the Merger Consideration.
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 Colorado 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 out of the Exchange Fund.
-5-
<PAGE> 179
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.
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. The Exchange Agent shall deposit
portions of the Exchange Fund only as directed or consented to in writing 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 NEW YORK 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:
-6-
<PAGE> 180
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:
Continental Stock Transfer & Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Attn: Steven G. Nelson
Chairman of the Board
If to the Company prior
to the Effective Time:
MegaBank Financial Corporation
8100 East Arapahoe Road, Suite 214
Englewood, Colorado 80112
Attn.: Thomas R. Kowalski
Chairman and Chief Executive Officer
If to Merger Sub 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.
-7-
<PAGE> 181
16. DEFINED TERMS. Capitalized terms not defined herein have the
meanings ascribed to them in the Merger Agreement.
[SIGNATURE PAGE FOLLOWS]
-8-
<PAGE> 182
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: _____________________________________
MEGABANK FINANCIAL CORPORATION
By: _____________________________________
CONTINENTAL STOCK TRANSFER & TRUST
COMPANY
By: _____________________________________
_________________________________________
By: _____________________________________
Exhibit A - Form of Letters of Transmittal
Exhibit B - Shareholder List
-9-
<PAGE> 183
EXHIBIT A
LETTER OF TRANSMITTAL
For Shares of Common Stock of MegaBank Financial Corporation
Delivered Pursuant to the Agreement and Plan of Merger dated as of _______, 1999
<TABLE>
<CAPTION>
<S> <C>
By Mail or Overnight Delivery Service to the Exchange Agent: Continental Stock Transfer & Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Attention: Reorganization Department
</TABLE>
DESCRIPTION OF SHARES SURRENDERED
---------------------------------
Gentlemen:
I, as the registered holder of the below described Shares of MegaBank
Financial Corporation ("Company") hereby surrender to Compass Bancshares, Inc.
("Compass"), such Shares pursuant to the Agreement and Plan of Merger dated as
of ______________, as amended ("Merger Agreement"), by and between Compass,
______________________________ ("Merger Sub"), and the Company in exchange for
____ shares of Compass Common Stock for each Share so surrendered. I hereby
acknowledge receipt of the Proxy Statement dated__________, 1999, which
described the merger ("Merger") provided by the Merger Agreement.
I represent and warrant to Compass and Merger Sub 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 Continental Stock Transfer & 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Name, Address and Social Security Number of Registered Holders Certificate(s) Surrendered
(correct if wrong)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Certificate Number(s) Total Number of Shares
Represented
by Certificate(s)
_____________________ ____________________
_____________________ ____________________
_____________________ ____________________
Total Shares ____________________
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 in the space below
Signatures ____________________ Date_______________
____________________ Date_______________
Printed Name(s) ____________________ TIN or SSN#_______________
Capacity (Full Title) ______________________
Address ______________________
(Include Zip Code) ______________________ Area Code and Telephone No.______
================================================================================
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 ( 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.) (Assignees must
execute the Substitute W-9 enclosed):
Name and Address of Assignee
----------------------------
Name:_______________________________ Taxpayer I.D. No. or
(Type or print full name) Social Security No.:_____________________
Address:_______________________________________________________________________
City, State, Zip Code:_________________________________________________________
================================================================================
GUARANTEE OF SIGNATURES (See Instruction 1.)
--------------------
Authorized Signature ______________________ Date_______________, 2000
Printed Name ______________________
Title ______________________ PLACE MEDALLION GUARANTY IN SPACE
BELOW Name of Firm ______________________
Address __________________________ Area Code and Telephone No.________________
================================================================================
<PAGE> 184
================================================================================
PLEASE COMPLETE SUBSTITUTE FORM W-9. IT IS THE LAST FORM IN THIS PACKAGE
================================================================================
LETTER OF TRANSMITTAL INSTRUCTIONS
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; SIGNATURES;
SIGNATURE GUARANTEES. Please send all certificates for Shares to the 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 a participant in a Securities Transfer
Association recognized signature program. If Compass wishes to have your
signature guaranteed, 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 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 tendered certificates are owned of record
by two or more joint owners, each of you must sign the Letter of Transmittal.
Questions regarding evidence of authority, requests for assistance or additional
copies of the Letter of Transmittal may be referred to the Reorganization
Department of the Exchange Agent, at (212) 509-4000, extension 535.
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 AND PAYMENT FOR FRACTIONAL SHARES.
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. 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.
3. TRANSFERS. If the certificate(s) representing the Shares transmitted
hereby are registered in your name and the 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.
4. 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.
5. Lost Certificates. If your share certificates are lost, contact the
Exchange Agent in writing for further instructions.
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. 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. 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 in which event Compass will be required to withhold 31% of
any payments made to the shareholder.
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.
<PAGE> 185
COMPASS BANCSHARES, INC.
SUBSTITUTE FORM W-9
Department of the Treasury
Internal Revenue Service
Part 1 - PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER IN THE BOX BELOW
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.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
Signature:___________________________________Date:_____________________________
PrintedName:_________________________________
Address:_____________________________________
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.
- --------------------------------------------------------------------------------
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 SOCIAL Give the EMPLOYER
For this type of account: SECURITY number For this type of account: IDENTIFICATION
of______ number of______
- ------------------------------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
1. An individual's account The individual 9. A valid trust, estate, The legal entity (Do
or pension trust not furnish the
2. Two or more individuals The actual owner of identifying number of
(joint account) the account or, if the personal
combined funds, any one representative or
of the individuals (1) trustee unless the
legal entity itself is
not designated in the
3. Husband and wife (joint The actual owner of account title.) (5)
account) the account or, if
joint funds, either
person(1)
4. Custodian account of a The minor(2) 10. Corporate account The corporation
minor (Uniform Gift to
Minors Act)
</TABLE>
<PAGE> 186
<TABLE>
<CAPTION>
<S> <C> <C> <C>
5. Adult and minor (joint The adult or, if the 11. Religious, The organization
account) minor is the only charitable, or
contributor, the educational
minor(1) organization
account
12. Partnership account The partnership
held in the name
of the business
6. Account in the name of The ward, minor, or 13. Association, club, or The organization
guardian or committee for incompetent person (3) other tax-exempt
designated ward, minor, or organization
incompetent person
7. a The usual revocable The grantor-trustee(1) 14. A broker or registered The broker or nominee
savings trust account nominee
(grantor is also trustee)
b So-called trust account The actual owner(1) 15. Account with the The public entity
that is not a legal Department of
or valid trust Agriculture
under State law in the name of a
public entity (such
8. Sole proprietorship The owner(4) as a State or local
account government, school
district, or prison)
that receives
agricultural
program payments
</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.
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). o 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
correct 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
<PAGE> 187
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> 188
(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> 189
EXHIBIT D
VOTING AGREEMENT AND IRREVOCABLE PROXY
--------------------------------------
This Voting Agreement and Irrevocable Proxy (this "Agreement")
dated as of ________ __, 1999 is executed by and among MegaBank Financial
Corporation, a Colorado 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 _______ ___, 1999 (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 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
1
<PAGE> 190
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 7-107-302 of the Colorado 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 the event the Shareholders do not vote in favor of the
approval of the Merger Agreement as set forth in Section 1 hereof.
2
<PAGE> 191
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 Colorado.
[SIGNATURE PAGES FOLLOW]
3
<PAGE> 192
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date above written.
MEGABANK FINANCIAL CORPORATION
By:____________________________________
Name:__________________________________
Title:_________________________________
Address:
8100 East Arapahoe Road, Suite 214
Englewood, Colorado 80112
Attention: Thomas R. Kowalski
COMPASS BANCSHARES, INC.
By: ___________________________________
Name: _________________________________
Title: ________________________________
Address:
15 South 20th Street
Birmingham, Alabama 35233
Attention: Mr. Daniel B. Graves
Associate General Counsel
4
<PAGE> 193
SHAREHOLDERS:
_______________________________________
_______________________________________
Address: ______________________________
______________________________
____________ shares of Common Stock
Pledgee: ______________________________
Address: ______________________________
______________________________
Loan No.:______________________________
5
<PAGE> 194
EXHIBIT E
OPINIONS REQUIRED FROM COUNSEL
TO THE COMPANY AND THE BANK
---------------------------
(i) the Company and its Subsidiaries, other than the Bank and MB
Capital I are Colorado corporations and are duly organized, validly existing and
in good standing under the laws of the State of Colorado. The Company is a
savings and loan holding company under the Home Owners' Loan Act, as amended.
The Bank is a federal savings bank, duly organized, validly existing and in good
standing under the laws of the United States of America. MBCapital I is a
Delaware statutory business trust. The Company and its Subsidiaries have all
requisite corporate power and authority to carry on their business as we know
them to be conducted and to own, lease and operate their properties and assets
as now owned, leased or operated. The Company and its Subsidiaries are duly
qualified and in good standing in Colorado;
(ii) the Company has all requisite 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 (corporate or otherwise) 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 the effect of (a) any applicable
bankruptcy, insolvency, reorganization or other law relating to or affecting
creditors' rights generally and (b) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law);
(iii) the authorized capital stock of the Company consists solely of
50,000,000 shares of Company Common Stock (as defined in the Agreement) of which
_________ shares are issued and outstanding (__________ of which are held in the
treasury) and 10,000,000 shares of Preferred Stock, none of which are issued and
outstanding; the Company is the record holder of all of the issued and
outstanding capital stock of the Company's Subsidiaries, other than MB Capital
I, Empire Southeast LLC and Colorado Record Data, LLC; the Company is the record
holder of all of the issued and outstanding common voting securities of
MBCapital I; Empire is the record holder of 50% of the outstanding voting
securities of Empire Southeast LLC and Colorado Record Data, LLC; all of the
outstanding shares of the Company Common Stock are, to our knowledge, validly
issued, and are fully paid and nonassessable and all of the capital stock of the
Company's Subsidiaries is validly fully paid and nonassessable; and to the best
of our knowledge, none of such stock was issued in violation of the preemptive
rights of any person;
(iv) to the best of 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
-1-
<PAGE> 195
its Subsidiaries 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 its
Subsidiaries, (b) to the best of 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 any kind or
character known to us to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries or any of their respective
assets or properties is bound, the breach of which could reasonably be expected
to have Material Adverse Effect on the Company and its Subsidiaries taken as a
whole, and (c) to the best of 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 any of its Subsidiaries, 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 Merger Sub, 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 to the Agreement, to the
best of our knowledge, neither the Company nor any of its Subsidiaries is a
party to any Proceeding (as defined in the Agreement), nor to the best of our
knowledge, is any Proceeding threatened against or affecting the Company or any
of its Subsidiaries, which by the terms of the Agreement would required to be
set forth in Schedule 3.12;
(viii) to the best of our knowledge and except as set forth on Schedule
3.18 to the Agreement, neither the Company nor any of its Subsidiaries is in
material default under any law or regulation, or under any order of any court,
commission, board, bureau, agency or instrumentality wherever located; 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 Colorado, and upon filing by
the Secretary of State of Colorado of a Certificate of Merger the Merger will
have been legally consummated in accordance with the laws of the State of
Colorado with the consequences specified in Section 7-111-106 of the Colorado
Business Corporation Act.
-2-
<PAGE> 196
EXHIBIT F
OPINIONS REQUIRED FROM COUNSEL
TO COMPASS AND MERGER SUB
-------------------------
(i) Compass is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and Compass is a bank
holding company under the Bank Holding Company Act of 1956, as amended. Merger
Sub is a Colorado corporation, duly organized, validly existing and in good
standing under the laws of the state of Colorado. Compass and Merger Sub have
all requisite corporate power and authority to carry on their business as now
being conducted and to own, lease and operate their properties as now owned,
leased or operated. Compass and Merger Sub are duly qualified and in good
standing in the respective states where such qualification is required;
(ii) Compass and Merger Sub each have all requisite power and
authority to execute and deliver the Agreement and to consummate the
transactions contemplated thereby; all acts (corporate or otherwise) and other
proceedings required to be taken by or on the part of Compass and Merger Sub (or
either of them) to execute and deliver the Agreement and to consummate the
transactions contemplated therein have been duly and validly taken; and the
Agreement has been duly executed and delivered by, and constitutes the valid and
binding obligation of each of Compass and Merger Sub enforceable against Compass
and Merger Sub in accordance with its terms, subject to the effect of (a) any
applicable bankruptcy, insolvency, reorganization or other law relating to or
affecting creditors' rights generally and (b) general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law);
(iii) the shares of Compass Common Stock to be issued pursuant to
the Agreement are validly issued, fully paid and nonassessable; and, to the best
of our knowledge and except as contemplated by the Agreement, the shares of
Compass Common Stock issued pursuant to the Agreement are not subject to any
agreements or understandings to which Compass is a party with respect to the
voting or transfer of such shares, are not subject to any agreements or
understandings among any other parties with respect to the voting or transfer of
such shares, and have not been issued in violation of the preemptive rights of
any person;
(iv) the execution and delivery by Compass and Merger Sub 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 certificate of incorporation or bylaws of Compass or Merger Sub, (b) to
the best of 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 of decree, or any other restriction of any kind known to us to which
Compass or Merger Sub is a party or by which Compass or Merger Sub or any of
their assets or properties is bound, the breach or violation of which could have
a material adverse effect on Compass and its Subsidiaries taken as a whole, and
(c) to the best of our knowledge and except as disclosed in the Agreement, any
law,
<PAGE> 197
regulation, rule, administrative regulation or decree of any court or any
governmental agency or body applicable to Compass or Merger Sub or their
respective assets or properties;
(v) except as disclosed in the Agreement and except for such consents,
approvals, authorizations, actions or filings as have already been obtained, 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 Compass and Merger Sub of the Agreement;
(vi) to the best of our knowledge, neither Compass nor Merger Sub is in
violation of or default under the respective Certificates of Incorporation or
Bylaws of Compass or Merger Sub or any agreement, document or instrument under
which Compass or Merger Sub is obligated or bound, or any law, order, judgment,
or regulation applicable to Compass or Merger Sub or any of their Subsidiaries,
the violation of which could have a material adverse effect on Compass and its
Subsidiaries taken as a whole;
(vii) the shares of Compass Common Stock to be issued pursuant to the
Agreement have been registered under the Securities Act of 1933, as amended; and
(viii) Except as set forth in the Schedules to the Agreement, to the
best of our knowledge, neither Compass nor any of its Subsidiaries is a party to
any Proceeding (as defined in the Agreement), nor to our knowledge is any
Proceeding threatened against Compass or its Subsidiaries which is required to
be disclosed, but has not been disclosed in filings required to be made with the
SEC pursuant to the Exchange Act.
2
<PAGE> 198
EXHIBIT G
---------
REPRESENTATIONS CERTIFICATE
____________ ("Merger Sub") hereby represents and warrants to the
Company as follows. Capitalized terms not otherwise defined herein shall have
the meanings ascribed to them in the Agreement and Plan of Merger dated
_________________, 1999 by and between Compass Bancshares, Inc. and MegaBank
Financial Corporation (the "Agreement").
1. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Colorado, 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 the Agreement.
2. Merger Sub has full corporate power and authority and no further
corporate proceedings on the part of Merger Sub are necessary to execute and
deliver the Amendment to Agreement and Plan of Merger dated ___________, 199_
("Amendment") and to consummate the transactions contemplated thereby, all of
which have been duly and validly authorized by Merger Sub's Board of Directors.
The Amendment has been duly executed and delivered by Merger Sub and is a duly
authorized, valid, legally binding and enforceable obligation of Merger Sub,
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
Merger Sub as may be required by statute or regulation. Except as set forth on
the Schedule attached hereto, neither the execution, delivery nor performance of
the Amendment in its entirety, nor the consummation of all the transactions
contemplated thereby, following the receipt of such approvals as may be required
from the SEC, the OTS, the FRB, the FDIC, and the Superintendent will 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 Merger Sub.
3. No representation or warranty by Merger Sub in the Amendment, nor
any statement or exhibit furnished to the Company or the Bank under and pursuant
to, or in anticipation of the Amendment, 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 not misleading.
IN WITNESS WHEREOF, Merger Sub has executed this Certificate this _____
day of ____________, 1999.
______________________________________
By:___________________________________
Name:_________________________________
Title:________________________________
<PAGE> 199
EXHIBIT H
RELEASE OF CLAIMS
-----------------
THIS RELEASE OF CLAIMS ("Release") dated the __ day of ______, 2000, is
executed and delivered by the person executing below to MEGABANK FINANCIAL
CORPORATION, a Colorado corporation (the "Company"), MEGABANK, a federal savings
bank, and EMPIRE TITLE AND ESCROW CORPORATION.
WHEREAS, Compass Bancshares, Inc. ("Compass") is to acquire the Company
pursuant to that certain Agreement and Plan of Merger dated as of _____________,
1999, by and between Compass and the Company, as amended (the "Agreement"),
whereby the Company will be merged with a wholly-owned subsidiary of Compass;
and
WHEREAS, Compass has required as a condition to such acquisition that
the undersigned execute and deliver this Release to confirm the absence of any
claims by the undersigned against the Company or its subsidiaries, including the
Bank ("Subsidiaries");
NOW, THEREFORE, in consideration of the premises contained herein and
ten dollars and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned hereby agrees as
follows:
Section 1. RELEASE. The undersigned hereby RELEASES and FOREVER
DISCHARGES the Company and its Subsidiaries from all manners of action, causes
of action, suits, debts, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements, premises,
variances, trespasses, damages, judgments, executions, claims and demands
whatsoever in law or in equity which the undersigned ever had, now has, or
hereafter can, shall or may have against the Company or its Subsidiaries, in
respect of any and all agreements and obligations incurred on or prior to the
date hereof, or in respect of any event occurring or circumstances existing on
or prior to the date hereof; provided, however, that the Company and its
Subsidiaries shall not be released from any of their respective obligations or
liabilities to the undersigned (i) in respect of accrued compensation permitted
by any written agreement with the Company or its Subsidiaries which is attached
hereto as EXHIBIT A or which has been scheduled and made part of the Agreement;
(ii) in connection with any indebtedness or contractual obligation or liability
to the undersigned existing on the date hereof; and (iii) as to rights of
indemnification pursuant to the Articles of Incorporation or Association of the
Company and its Subsidiaries.
Section 2. SUCCESSORS. This Release shall be binding upon the
undersigned and his or her heirs, devisees, administrators, executors, personal
representatives, successors and assigns and shall inure to the benefit of the
Company and its Subsidiaries and their respective successors and assigns.
<PAGE> 200
Section 3. GOVERNING LAW. This Release shall be governed by and
construed in accordance with the laws of the State of Colorado, without giving
effect to Colorado principles of conflicts of law.
Section 4. COUNTERPARTS. This Release may be executed in several
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument.
Section 5. MODIFICATION. This Release may be modified only by a written
instrument executed by the undersigned and the Company and its Subsidiaries.
IN WITNESS WHEREOF, the undersigned has executed this Release effective
as of the date first above written.
__________________________________
Signature
__________________________________
Printed Name
STATE OF COLORADO Section
Section
COUNTY OF _______ Section
This instrument was acknowledged before me on ________, 199_ by
____________________.
__________________________________
Notary Public in and for the
State of Colorado
__________________________________
Notary's Name Typed or Printed
My Commission Expires:____________
2
<PAGE> 201
EXHIBIT A
---------
<PAGE> 202
EXHIBIT I
RELEASE OF CLAIMS
-----------------
THIS RELEASE OF CLAIMS ("Release") dated the ___ day of ____, 2000, is
executed and delivered by MEGABANK FINANCIAL CORPORATION, a Colorado corporation
(the "Company"), MEGABANK, a federal savings bank, and EMPIRE TITLE AND ESCROW
CORPORATION, a Colorado corporation (collectively, the "Subsidiaries").
WHEREAS, the persons listed on EXHIBIT A attached hereto and made a
part hereof constitute the duly elected directors ("Directors") and executive
officers ("Officers") of the Company and the Subsidiaries on the date hereof;
WHEREAS, Compass Bancshares, Inc., a Delaware corporation ("Compass"),
is to acquire the Company pursuant to that certain Agreement and Plan of Merger
dated as of ______________, 1999 by and between Compass and the Company, as
amended ("Agreement"), whereby the Company will be merged with a wholly-owned
subsidiary of Compass; and
WHEREAS, the Company has required as a condition to such acquisition
that the Directors and Officers be released of any claims by the Company or its
Subsidiaries against the Directors;
NOW, THEREFORE, in consideration of the premises contained herein and
ten dollars and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and its Subsidiaries
hereby agree as follows:
Section 1. RELEASE. The Company and the Subsidiaries hereby RELEASE and
FOREVER DISCHARGE the Directors and Officers from all manners of action, causes
of action, suits, debts, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements, premises,
variances, trespasses, damages, judgments, executions, claims and demands
whatsoever in law or in equity which the Company or the Subsidiaries ever had,
now have, or hereafter can, shall or may have against the Directors and
Officers, in respect of any and all agreements and obligations incurred on or
prior to the date hereof, or in respect of any event occurring or circumstances
existing on or prior to the date hereof; provided, however, that no Director or
Officer shall be released from (i) any action arising from intentional fraud,
deceit or willful misconduct in connection with the transactions contemplated by
the Agreement or otherwise, or (ii) his or her obligations or liabilities to the
Company or the Subsidiaries in connection with any indebtedness or any
contractual obligation or liability of such Director or Officer to the Company
or the Subsidiaries existing on the date hereof.
Section 2. SUCCESSORS. This Release shall be binding upon the Company,
and the Subsidiaries and their respective successors and assigns and shall inure
to the benefit of the
<PAGE> 203
Directors and Officers and their respective heirs, devisees, administrators,
executors, successors and assigns.
Section 3. GOVERNING LAW. This Release shall be governed by and
construed in accordance with the laws of the State of Colorado, without giving
effect to Colorado principles of conflicts of law.
Section 4. COUNTERPARTS. This Release may be executed in several
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument.
Section 5. MODIFICATION. This Release may be modified as to any
Director or Officer only by a written instrument executed by the undersigned and
such Director.
IN WITNESS WHEREOF, the Company and the Subsidiaries have executed this
Release effective as of the date first above written.
MEGABANK FINANCIAL CORPORATION
By:_____________________________________
Name:___________________________________
Title:__________________________________
MEGABANK
By:_____________________________________
Name:___________________________________
Title:__________________________________
EMPIRE TITLE AND ESCROW
CORPORATION
By:_____________________________________
Name:___________________________________
Title:__________________________________
2
<PAGE> 204
STATE OF COLORADO Section
Section
COUNTY OF ________ Section
This instrument was acknowledged before me on ________, 2000, by
____________________, the ______________ of MEGABANK FINANCIAL CORPORATION.
_________________________________________
Notary Public in and for the
State of Colorado
_________________________________________
Notary's Name Typed or Printed
My Commission Expires:___________________
STATE OF COLORADO Section
Section
COUNTY OF ________ Section
This instrument was acknowledged before me on ______, 2000 by
___________________, the __________________ of MEGABANK, a federal savings bank.
_________________________________________
Notary Public in and for the
State of Colorado
_________________________________________
Notary's Name Typed or Printed
My Commission Expires:___________________
3
<PAGE> 205
STATE OF COLORADO Section
Section
COUNTY OF ________ Section
This instrument was acknowledged before me on ________, 2000 by
____________________, the ______________ of EMPIRE TITLE AND ESCROW CORPORATION.
_________________________________________
Notary Public in and for the
State of Colorado
_________________________________________
Notary's Name Typed or Printed
My Commission Expires:___________________
4
<PAGE> 206
EXHIBIT A
---------
Directors and Officers
<PAGE> 207
EXHIBIT J
_____ __, 2000
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
MegaBank Financial Corporation
8100 East Arapahoe Road, Suite 214
Englewood, Colorado 80112
The Shareholders of
MegaBank Financial Corporation
Gentlemen:
We have acted as counsel to Compass Bancshares, Inc., a Delaware
corporation ("Compass"), in connection with the planned merger (the "Merger ")
of ___________, a Colorado corporation ("Merger Sub") and a wholly-owned
first-tier subsidiary of Compass, with and into MegaBank Financial Corporation,
a Colorado corporation ("MegaBank"), pursuant to an Agreement and Plan of
Merger, dated as of November __, 1999, as amended, between Compass, Merger Sub
and MegaBank (the "Merger Agreement"), pursuant to which the stockholders of
MegaBank (the "Stockholders") will receive solely Compass Common Stock in
exchange for their MegaBank Common Stock. This opinion is being rendered to the
parties to whom this letter is addressed pursuant to Sections 7.1(f) of the
Merger Agreement. All capitalized terms, unless otherwise specified, have the
meaning assigned to them in the Merger Agreement.
For purposes of the opinion set forth below, we have reviewed and
relied upon (i) the Merger Agreement, (ii) the Proxy Statement included in the
Registration Statement and (iii) such other documents, records and instruments
as we have deemed necessary or appropriate in order to enable us to render our
opinion. In addition, in rendering our opinion, we have relied upon certain
statements and representations made by certain Stockholders of MegaBank and
certain officers of Compass, Merger Sub and MegaBank (the "Certified
Representations") as well as statements and representations contained in the
Merger Agreement, which we have neither investigated nor verified. We have
assumed that all such statements and representations are true, correct, complete
and not breached, and that no actions that are or would be inconsistent with
such statements and representations have been or will be taken. We have also
assumed that all representations made "to the knowledge of" any person or entity
will be true, correct and
<PAGE> 208
Compass Bancshares, Inc.
______________, 2000
Page 2
complete as if made without such qualification.
In addition, we have assumed that (i) the Merger will be consummated in
accordance with the Merger Agreement (including satisfaction of all covenants
and conditions to the obligations of the parties without amendment or waiver
thereof), (ii) the Merger will qualify as a merger under the applicable laws of
the State of Colorado, (iii) each of Compass, Merger Sub and MegaBank will
comply with all reporting obligations with respect to the Merger required under
the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury
Regulations promulgated thereunder and (iv) the Merger Agreement and all of the
documents and instruments referred to therein are valid and binding in
accordance with their terms. Any inaccuracy in, or breach of, any of the
aforementioned statements, representations and assumptions could adversely
affect our opinion.
Our opinion is based upon existing provisions of the Code, Treasury
Regulations promulgated or proposed thereunder, and interpretations thereof by
the Internal Revenue Service ("IRS") and the courts, all of which are subject to
change with prospective or retroactive effect, and our opinion could be
adversely affected or rendered obsolete by any such change. No ruling has been
or will be sought from the IRS by Compass, Merger Sub or MegaBank as to the
federal income tax consequences of any aspect of the Merger. The opinion
expressed herein is not binding on the IRS or any court, and there can be no
assurance that the IRS or a court of competent jurisdiction will not disagree
with such opinion.
Based upon and subject to the foregoing as well as the limitations set
forth below, it is our opinion that (i) the Merger of Merger Sub with and into
MegaBank will qualify as a reorganization within the meaning of Section 368(a)
of the Code and (ii) Compass, Merger Sub and MegaBank will each be a party to
the reorganization within the meaning of Section 368(b) of the Code.
Accordingly, the Merger will have the following United States federal
income tax consequences:
1. Compass, Merger Sub and MegaBank will not recognize any gain or loss
as a result of the Merger;
2. No gain or loss will be recognized by holders of MegaBank Common
Stock who exchange their MegaBank Common Stock solely for Compass
Common Stock;
3. Any cash received by a holder of MegaBank Common Stock in lieu of a
fractional share of Compass Common Stock in the Merger will be
treated as received in
<PAGE> 209
Compass Bancshares, Inc.
______________, 2000
Page 3
exchange for such fractional share and not as a dividend. As a
result, a holder of MegaBank Common Stock generally will recognize a
capital gain or loss with respect to the cash payment received in
lieu of a fractional share equal to the difference between the cash
received and the portion of the MegaBank shareholder's basis in
MegaBank Common Stock allocable to such fractional share, unless such
payment, under each such MegaBank shareholder's particular facts and
circumstances, is deemed to have the effect of a dividend
distribution and not a redemption treated as an exchange under the
principles of Section 302 of the Code. Such gain or loss will be
long-term capital gain or loss to the extent that the MegaBank Common
Stock allocable to such fractional share was held for more than one
year as of the Effective Time of the Merger;
4. Each holder's aggregate tax basis in the Compass Common Stock
received in the Merger will equal his or her aggregate tax basis in
the MegaBank Common Stock exchanged therefore, decreased by the
amount of any tax basis allocable to any fractional share interest
for which cash is received;
5. The holding period of the Compass Common Stock received in the Merger
will include the holding period of the MegaBank Common Stock
exchanged therefore; and
6. For a MegaBank shareholder who dissents from the Merger and receives
solely cash in exchange for his or her MegaBank 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.
No opinion is expressed as to any matter not specifically addressed
above. Specifically, no opinion is expressed as to the tax consequences of (i)
the merger of an existing or to-be-formed wholly-owned subsidiary ("Merger Sub")
of Compass with Nagrom LLC, a Colorado limited liability company ("Nagrom"),
pursuant to that certain Agreement and Plan of Merger, dated as of November __,
1999, as amended, between Compass, Merger Sub and Nagrom, (ii) the merger of an
existing or to-be-formed wholly-owned subsidiary ("Merger Sub") of Compass with
1996 Newton, L.L.C., a Colorado limited liability company ("Newton"), pursuant
to that certain Agreement and Plan of Merger, dated as of November __, 1999, as
amended, between Compass, Merger Sub and Newton and (iii) the merger of an
existing or to-be-formed wholly-owned subsidiary ("Merger Sub") of Compass with
Osage 3734, L.L.C., a Colorado limited liability company ("Osage"), pursuant to
that certain Agreement and Plan of Merger, dated as of November __, 1999 as
amended, between Compass, Merger Sub and Osage, the consummations
<PAGE> 210
Compass Bancshares, Inc.
______________, 2000
Page 4
of which are conditions precedent to the Merger. Also, no opinion is expressed
as to the tax consequences of the Merger under any foreign, state or local tax
law. Furthermore, our opinion is based on current federal income tax law and
administrative practice, and we do not undertake to advise you as to any changes
after the Effective Time of the Merger in federal income tax law or
administrative practice that may affect our opinion. This opinion is being
furnished only to you in connection with Merger and solely for your benefit in
connection therewith and may not be used or relied upon for any other purpose
and may not be circulated, quoted or otherwise referred to for any other purpose
without our express written consent.
Very truly yours,
<PAGE> 211
=========================================
APPENDIX II
OPINION OF HOVDE FINANCIAL, INC.
=========================================
<PAGE> 212
December 23, 1999
Board of Directors
MegaBank Financial Corporation
8100 East Arapahoe Road
Englewood, CO 80112
Members of the Board:
We have reviewed the Agreement and Plan of Reorganization (the
"Agreement") and related exhibits and schedules dated as of the date hereof by
and among Compass Bancshares, Inc. ("CBSS") and MegaBank Financial Corporation
("MegaBank"), pursuant to which, among other things, MegaBank will be merged
with and into CBSS (the "Merger"). As is set forth in the Agreement, all of the
issued and outstanding shares of MegaBank Common Stock shall be converted into
the right to receive 3.4 million shares of CBSS Common Stock, subject to
adjustment as provided for in the Agreement (the "Merger Consideration").
Capitalized terms used herein shall have the same meaning as in the Agreement,
unless specifically stated otherwise.
Hovde Financial, Inc. ("Hovde") specializes in providing investment
banking and financial advisory services to commercial bank and thrift
institutions. Our principals are experienced in the independent valuation of
securities in connection with negotiated underwritings, subscription and
community offerings, private placements, merger and acquisition transactions and
recapitalizations. Pursuant to a Consulting Agreement dated August 25, 1999,
between MegaBank and Hovde, Hovde was engaged to assist MegaBank in exploring
various strategic options, including a potential affiliation of MegaBank with
another financial institution. Therefore, we are familiar with MegaBank having
acted as its financial advisor in connection with the proposed transaction, and
having participated in the negotiations leading to the Agreement.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of MegaBank and CBSS and
material prepared in connection with the proposed transaction, including the
following: the Agreement; certain publicly available information concerning
MegaBank and CBSS, including consolidated financial statements for each for the
three years ended December 31, 1998, respectively, as well as subsequent
quarterly statements for the periods ended March 31, 1999, June 30, 1999 and
September 30, 1999 for MegaBank and CBSS, respectively; the nature and terms of
recent sale and merger transactions involving thrift and thrift holding
companies that we consider relevant; historical and current market data for the
common stock of MegaBank and CBSS; and financial and other publicly available
information provided to us by the managements of MegaBank and CBSS.
<PAGE> 213
Board of Directors
MegaBank Financial Corporation
December 23, 1999
Page Two
In addition, we have conducted meetings with members of the senior
management of MegaBank and CBSS for the purpose of reviewing the future
prospects of both companies. We also took into account our assessment of general
economic, market and financial conditions and our experience in other similar
transactions as well as our overall knowledge of the thrift industry and our
general experience in securities valuations.
We have acted as financial advisor to MegaBank with respect to the
proposed Merger and have received a fee from MegaBank for our services. We will
also receive an additional fee if the proposed Merger is consummated. Please be
advised that we have no other financial advisory or other relationships with
MegaBank. In the ordinary course of their businesses, affiliates of Hovde may
actively trade the debt and equity securities of CBSS for their own account and,
accordingly, they may at any time hold long or short positions in such
securities.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the publicly available materials
provided to us by MegaBank and CBSS, and in the discussions with management of
MegaBank and CBSS.
Based on the foregoing and our experience as investment bankers, we are
of the opinion that, as of the date hereof, the Merger Consideration to be
received by the shareholders of MegaBank in connection with the Merger as
described in the Agreement is fair to such shareholders from a financial point
of view.
Sincerely,
/s/ Hovde Financial, Inc.
HOVDE FINANCIAL, INC.
<PAGE> 214
=====================================
APPENDIX III
OPINION OF
HOWE BARNES INVESTMENTS, INC.
=====================================
<PAGE> 215
December 23, 1999
Board of Directors
MegaBank Financial Corporation
8100 East Arapahoe Road
Englewood, Colorado 80112
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 MegaBank
Financial Corporation ("MegaBank") of the consideration to be paid for the
exchange of common shares in the merger (the "Merger") of MegaBank with Compass
Bancshares, Inc. ("Compass"), pursuant to the Agreement and Plan of Merger,
dated November 4, 1999 by and between MegaBank and Compass (the "Merger
Agreement").
Pursuant to the Merger Agreement, MegaBank will merge with and into a
newly-formed subsidiary of Compass, and MegaBank shall be the surviving
corporation in the Merger. Each share of MegaBank common stock outstanding
immediately prior to the effective time of the Merger will be converted into and
exchanged for approximately 0.426 shares of Compass common stock (the
"Consideration"). The maximum number of shares of Compass common stock to be
issued as part of the Merger is 3,370,000 in exchange for all outstanding common
stock of MegaBank. The terms of the Merger are more fully set forth in the
Merger Agreement.
For purposes of this opinion and in connection with our review of the proposed
transaction, we have, among other things:
1. Participated in discussions with representatives of MegaBank
concerning the company's financial condition, businesses, assets,
earnings, prospects, and such senior management's views as to its
future financial performance;
2. Reviewed the terms of the Merger Agreement;
3. Reviewed certain publicly available financial statements, both
audited (where available) and unaudited, and related financial
information of MegaBank and Compass, including those included in
their most recent respective Annual Reports on Form 10-K and Form
10-KSB and the respective Quarterly Reports on Form 10-Q and Form
10-QSB for the periods ended March 31, 1999, June 30, 1999, and
September 30, 1999;
4. Discussed and reviewed certain aspects of the past and current
business operations, financial condition, and future prospects of
MegaBank with certain members of management;
<PAGE> 216
5. Reviewed reported market prices and historical trading activity of
MegaBank and Compass common stock;
6. Reviewed certain aspects of the financial performance of MegaBank
and Compass and compared such financial performance of MegaBank and
Compass, together with stock market data relating to MegaBank and
Compass common stock, with similar data available for certain other
financial institutions and certain of their publicly traded
securities; and
7. Reviewed certain of the financial terms, to the extent publicly
available, of certain recent business combinations involving other
financial institutions.
We have assumed and relied, without independent verification, upon the accuracy
and completeness of all of the financial and other information that has been
provided to us by MegaBank, Compass, and their respective representatives, and
of the publicly available information that was reviewed by us. We are not
experts in the evaluation of allowances for loan losses and have not
independently verified such allowances, and have relied on and assumed that the
aggregate allowances for loan losses set forth in the balance sheets of each of
MegaBank and Compass at September 30, 1999 are adequate to cover such losses and
complied fully with applicable law, regulatory policy and sound banking practice
as of the date of such financial statements. We were not retained to and we did
not conduct a physical inspection of any of the properties or facilities of
MegaBank or Compass, did not make any independent evaluation or appraisal of the
assets, liabilities or prospects of MegaBank or Compass, were not furnished with
any such evaluation or appraisal, and did not review any individual credit
files. 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.
Howe Barnes Investments, Inc. ("HBI"), as part of its investment banking
business, is regularly engaged in the valuation of banks and bank holding
companies, thrifts and thrift holding companies, and various other financial
services companies, in connection with mergers and acquisitions, initial and
secondary offerings of securities, and valuations for other purposes. In the
ordinary course of our business HBI acts as a market maker, buying and selling
the common stock of MegaBank for our own account and for the accounts of our
customers. HBI acted as lead manager for MegaBank in its initial public offering
of common stock in November of 1998. In rendering this fairness opinion, we have
acted on behalf of the Board of Directors of MegaBank and will receive a fee for
our services.
HBI's opinion as expressed herein is limited to the fairness, from a financial
point of view, of the consideration to be received by holders of MegaBank common
stock in the Merger and does not address MegaBank's underlying business decision
to proceed with the Merger. We are not expressing any opinion herein as to the
prices at which shares of Compass common stock issued in the Merger may trade if
and when they are issued at any future time. We have been retained on behalf of
the Board of Directors of MegaBank, and our opinion does not constitute a
recommendation to any holder of MegaBank common stock as to how such holder
should vote with respect to the Merger Agreement at any meeting of holders of
MegaBank common stock.
<PAGE> 217
Subject to the foregoing and based on our experience as investment bankers, our
activities as described above, and other factors we have deemed relevant, we are
of the opinion as of the date hereof that the Consideration is fair, from a
financial point of view, to the holders of MegaBank common stock.
Sincerely,
HOWE BARNES INVESTMENTS, INC.
/ s / DANIEL E. COUGHLIN
-----------------------------------------
Daniel E. Coughlin, Senior Vice President
<PAGE> 218
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20:
Section 17 of Article V of Compass' Bylaws provides in part as follows:
Without limitation, the Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding to the full extent permitted by the
General Corporation Law of Delaware, upon such determination having
been made as to his good faith and conduct as is required by said
General Corporation Law. Expenses incurred in defending a civil or
criminal action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding to
the extent, if any, authorized by the Board of Directors in accordance
with the provisions of said General Corporation Law, officer, employee
or agent to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the Corporation.
Under Section 145 of the Delaware General Corporation Law (the "GCL"),
directors, advisory directors and officers of a Delaware corporation are
entitled to indemnification permitted by the statute as provided in such
corporation's certificate of incorporation, by-laws, resolutions and other
proper action.
In addition, Article 8 of Compass' Restated Certificate of
Incorporation, as amended, provides:
No director shall be personally liable to the Corporation or
its stockholders for monetary damages for any breach of fiduciary duty
of such director, except (i) for breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) pursuant to Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit. No amendment
to or repeal of this Article 8 shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for
or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal.
This provision is identical to, and is authorized by, Section 102(b)(7) of the
GCL.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Compass
pursuant to the foregoing provisions, or otherwise, Compass has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by Compass of expenses incurred or paid by a director, officer or
controlling person of Compass in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Compass will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-1
<PAGE> 219
Item 21: Exhibits and Financial Statement Schedules.
An index to Exhibits appears at pages II-4 through II-6 hereof.
Item 22: Undertakings.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed
pursuant to the immediately preceding paragraph or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE> 220
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Birmingham,
State of Alabama, on December 23, 1999.
COMPASS BANCSHARES, INC.
By: *
------------------------------------------
D. Paul Jones, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Director, Chairman and Chief December 23, 1999
- -------------------------------- Executive Officer
D. Paul Jones, Jr.
* Chief Financial Officer December 23, 1999
- -------------------------------- (Principal Financial Officer)
Garrett R. Hegel
* Chief Accounting Officer December 23, 1999
- --------------------------------
Timothy L. Journy
* Director December 23, 1999
- --------------------------------
Charles W. Daniel
* Director December 23, 1999
- --------------------------------
W. Eugene Davenport
* Director December 23, 1999
- --------------------------------
Marshall Durbin, Jr.
* Director December 23, 1999
- --------------------------------
Tranum Fitzpatrick
* Director December 23, 1999
- --------------------------------
Carl J. Gessler, Jr., M.D.
* Director December 23, 1999
- --------------------------------
John S. Stein
* Director December 23, 1999
- --------------------------------
Robert J. Wright
</TABLE>
*By: /s/ Daniel B. Graves
---------------------------
Daniel B. Graves,
Attorney-in-fact
II-3
<PAGE> 221
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- -----------------------
<S> <C>
2(a) Agreement and Plan of Merger dated as of November 4,
1999 by and between Compass Bancshares, Inc. and
MegaBank Financial Corporation, as amended, (included as
Appendix I to the Proxy Statement/Prospectus in Part I
of this Registration Statement)
*3(a) Restated Certificate of Incorporation of the Registrant
dated May 17, 1982 (Filed with the December 31, 1982
Form 10-K of the Registrant and incorporated herein by
reference) (File No. 0-6032)
*3(b) Certificate of Amendment dated May 20, 1986 to Restated
Certificate of Incorporation of the Registrant (filed as
Exhibit 4(b) to Registration Statement on Form S-8,
Registration No. 33-39095, and incorporated herein by
reference) (File No. 0-6032)
*3(c) Certificate of Amendment dated May 15, 1987 to Restated
Certificate of Incorporation of the Registrant (filed as
Exhibit 3.1.2 to Post-Effective Amendment No. 1 to
Registration Statement on Form S-4, Registration No.
33-10797 and incorporated herein by reference) (File No.
0-6032)
*3(d) Certificate of Amendment dated November 8, 1993 to
Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3(d) to Registration Statement on Form
S-4 Registration No. 33-51919 and incorporated herein by
reference) (File No. 0-6032)
*3(e) Certificate of Amendment, dated September 19, 1997, to
the Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 3.5 to Registration
Statement on Form S-4 Registration No. 33-55899, and
incorporated herein by reference) (File No. 0-6032)
*3(f) Certificate of Amendment, dated June 2, 1998, to
Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 4.6 to Registration Statement on Form
S-3 Registration No. 333-60725 and incorporated herein
by reference) (File No. 0-6032)
*3(g) Bylaws of the Registrant (Amended and Restated as of
March 15, 1982) (Filed with the December 31, 1982 10-K
of the Registrant and incorporated herein by reference)
(File No. 0-6032)
5 Opinion and consent of Jerry W. Powell, Esquire, as to
the legality of the securities being registered
8 Opinion and consent of Locke Liddell & Sapp LLP,
regarding certain tax matters
*10(a) Compass Bancshares, Inc., 1982 Long Term Incentive Plan
(incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form S-8 filed July 15, 1983,
with the Commission)
</TABLE>
II-4
<PAGE> 222
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- -----------------------
<S> <C>
*10(b) Compass Bancshares, Inc. 1989 Long Term Incentive Plan
(filed as Exhibit 28 to Registration Statement on Form
S-8 Registration (No. 39095 and incorporated herein by
reference) (File No. 0-6032)
*10(c) Compass Bancshares, Inc. 1996 Long Term Incentive Plan
(filed as Exhibit 4(g) to Registration Statement on Form
S-8 Registration No. 333-15117 filed October 30, 1996,
with the Commission and incorporated herein by
reference) (File No. 0-6032)
*10(d) Employment Agreement dated December 14, 1994, between
Compass Bancshares, Inc. and D. Paul Jones, Jr. (filed
as Exhibit 10(d) to the December 31, 1994 Form 10-K of
the Registrant and incorporated herein by reference)
(File No. 0-6032)
*10(e) Employment Agreement dated December 14, 1994, between
Compass Bancshares, Inc. and Jerry W. Powell (filed as
Exhibit 10(e) to the December 31, 1994 Form 10-K of the
Registrant and incorporated herein by reference) (File
No. 0-6032)
*10(f) Employment Agreement dated December 14, 1994, between
Compass Bancshares, Inc. and Garrett R. Hegel (filed as
Exhibit 10(f) to the December 31, 1994 Form 10-K of the
Registrant and incorporated herein by reference) (File
No.0-6032)
*10(g) Employment Agreement dated December 14, 1994, between
Compass Bancshares, Inc. and Charles E. McMahen (filed
as Exhibit 10(h) to the December 31, 1994 Form 10-K of
the Registrant and incorporated herein by reference)
(File No. 0-6032)
*10(h) Employment Agreement dated December 14, 1994, between
Compass Bancshares, Inc. and G. Ray Stone (filed as
Exhibit 10(i) to the Registration Statement on Form S-4
Registration No. 333-15373 filed November 1, 1996 with
the Commission and incorporated herein by reference)
(File No. 0-6032)
*10(i) Compass Bancshares, Inc., Employee Stock Ownership
Benefit Restoration Plan, dated as of May 1, 1997 (filed
as Exhibit 10(j) to the December 31, 1997 Form 10-K of
the Registrant and incorporated herein by reference)
(File No. 0-6032)
*10(j) Compass Bancshares, Inc., Supplemental Retirement Plan,
dated as of May 1, 1997 (filed as Exhibit 10(k) to the
December 31, 1997 Form 10-K of the Registrant and
incorporated herein by reference)(File No. 0-6032)
*10(k) Deferred Compensation Plan for Compass Bancshares, Inc.,
dated as of February 1, 1996 (filed as Exhibit 10(l) to
the December 31, 1997 Form 10-K of the Registrant and
incorporated herein by reference)(File No. 0-6032)
</TABLE>
II-5
<PAGE> 223
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- -----------------------
<S> <C>
*13(a) The Registrant's Annual Report to Shareholders and
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (File No. 0-6032)
*13(b) The Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 (File No. 0-6032)
*13(c) The Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (File No. 0-6032)
21 List of Subsidiaries of Compass Bancshares, Inc.
23(a) Consent of KPMG Peat Marwick LLP, Independent Certified
Public Accountants--Compass Bancshares, Inc.
23(b) Consent of Fortner, Bayens, Levkulich & Co., P.C.,
Independent Certified Public Accountants--MegaBank
Financial Corporation
23(c) Consent of Locke Liddell & Sapp LLP (included in the
opinion in Exhibit 8(a))
24(a) Power of Attorney
24(b) Compass Board of Directors Resolutions
99(a) Notice of Special Meeting of Shareholders of MegaBank
99(b) Form of Proxy for Special Meeting of Shareholders of
MegaBank
99(c) Chairman's Letter to MegaBank Shareholders
</TABLE>
- --------------------------
* Incorporated by reference
II-6
<PAGE> 1
Exhibit 5
December 23, 1999
Board of Directors
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Re: Compass Bancshares, Inc. -- Registration of 3,370,000 Shares
of Common Stock, $2.00 Per Share Par Value, on Securities and
Exchange Commission Form S-4
Dear Sirs:
In connection with the registration under the Securities Act of 1933,
as amended, of 3,370,000 shares of common stock, $2.00 per share par value (the
"Company Stock") of Compass Bancshares, Inc., a Delaware corporation (the
"Company"), for issuance and sale in the manner described in the Company's
registration statement on Form S-4 filed with the Securities and Exchange
Commission, to which this opinion is an exhibit (the "Registration Statement"),
I, as General Counsel to the Company, have examined such corporate records,
certificates and other documents as I have considered necessary or appropriate
for the purposes of this opinion.
On the basis of the foregoing, I am of the opinion that the shares of
the Company Stock offered pursuant to the Registration Statement have been duly
and validly authorized and, when issued, will be duly and validly issued, fully
paid and nonassessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Yours very truly,
/s/ Jerry W. Powell
Jerry W. Powell
<PAGE> 1
Exhibit 8
December 23, 1999
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Gentlemen:
We have acted as counsel to Compass Bancshares, Inc., a Delaware
corporation ("Compass"), in connection with (i) the planned merger (the
"Merger") of a to-be-formed Colorado corporation ("Compass MegaBank") and a
wholly-owned first-tier subsidiary of Compass, with and into MegaBank Financial
Corporation, a Colorado corporation ("MegaBank"), pursuant to an Agreement and
Plan of Merger, dated as of November 4, 1999, as amended, by and among Compass,
Compass MegaBank and MegaBank (the "Merger Agreement"), pursuant to which the
shareholders of MegaBank will receive solely Compass Common Stock in exchange
for their MegaBank Common Stock, and (ii) the Registration Statement on Form S-4
of Compass, to which this opinion letter is filed as an exhibit (the
"Registration Statement"). All capitalized terms, unless otherwise specified,
have the meaning assigned to them in the Merger Agreement.
For purposes of the opinion set forth below, we have reviewed and
relied upon (i) the Merger Agreement, (ii) the Proxy Statement/Prospectus
included in the Registration Statement (the "Proxy Statement/Prospectus") and
(iii) such other documents, records and instruments as we have deemed necessary
or appropriate in order to enable us to render our opinion. Our opinion is based
and conditioned upon certain statements and representations that will be made by
Compass, Compass MegaBank, MegaBank, certain shareholders of MegaBank, and
others as appropriate in connection with the Merger, which we will neither
investigate nor verify. We have assumed that all such statements and
representations will be true, correct, complete and not breached, and that no
actions that are or would be inconsistent with such statements and
representations have been or will be taken. We have also assumed that all
representations made "to the knowledge of" any person or entity will be true,
correct and complete as if made without such qualification.
In addition, we have assumed that (i) the Merger will be consummated in
accordance with the Merger Agreement (including satisfaction of all covenants
and conditions to the obligations of the parties without amendment or waiver
thereof), (ii) the Merger will qualify as a merger under the applicable laws of
the State of Colorado and (iii) the Merger Agreement and all of the documents
and instruments referred to therein are valid and binding in accordance with
their terms. Any inaccuracy in, or breach of, any of the aforementioned
statements, representations and assumptions could adversely affect our opinion.
<PAGE> 2
Our opinion is based upon existing provisions of the Code, Treasury
Regulations promulgated or proposed thereunder, and interpretations thereof by
the Internal Revenue Service and the courts, all of which are subject to change
with prospective or retroactive effect, and our opinion could be adversely
affected or rendered obsolete by any such change.
Based upon and subject to the foregoing as well as the limitations set
forth below, it is our opinion that the statements contained in numbered
paragraphs 1 through 5 of the section of the Proxy Statement/Prospectus entitled
"Merger with MegaBank -- Federal Income Tax Consequences", insofar as such
statements constitute legal conclusions or summaries of legal matters, are
accurate.
Except as set forth above, we express no opinion as to the tax
consequences to any party, whether federal, state, local or foreign, of the
Merger or of any transactions related to the Merger or contemplated by the
Merger Agreement. Furthermore, our opinion is based on current federal income
tax law and administrative practice, and we do not undertake to advise you as to
any changes after the respective effective times of the Merger in federal income
tax law or administrative practice that may affect our opinion.
This opinion is for use in connection with the Registration Statement.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the captions "Merger
with MegaBank -- Federal Income Tax Consequences" and "Merger with MegaBank --
Other Terms and Conditions", in the Registration Statement and the Proxy
Statement/Prospectus which is a part thereof. In giving this consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act and the rules and regulations
thereunder.
Very truly yours,
/s/ LOCKE LIDDELL & SAPP LLP
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF
COMPASS BANCSHARES, INC.
<TABLE>
<CAPTION>
Name of Subsidiary Place of Incorporation
- ------------------ ----------------------
<S> <C>
CB Transport, Inc. Alabama
Compass Bank Alabama
Compass Bancshares Insurance, Inc. Alabama
Compass Brokerage, Inc. Alabama
Compass Capital Markets, Inc. Alabama
Compass Fiduciary Services, Ltd., Inc. Alabama
Compass Financial Corporation Alabama
Compass Loan Holdings, Inc. Alabama
Compass Multistate Services Corporation Alabama
Central Bank of the South Alabama
Compass Securities, Inc. Alabama
Central Land Holding Corporation Alabama
Compass Investments, Inc. Alabama
Compass National Corporation Alabama
Compass Texas Loan Holdings, Inc. Alabama
Compass Underwriters, Inc. Alabama
Arizona Bank & Trust Company Arizona
Arizona Financial Products, Inc. Arizona
Arizona Kachina Holdings, Inc. Arizona
Tucson Athletic Club Arizona
Albrecht & Assoc. of Delaware, Inc. Delaware
Compass Auto Rec. Corp. Delaware
Compass Mortgage Corporation Delaware
Compass Mortgage Financing, Inc. Delaware
Compass Texas Acquisition Corp. Delaware
Compass Bancshares Insurance Agency of Florida, Inc. Florida
ENB Properties, Inc. Florida
Compass Western Acquisitions, Inc. New Mexico
Hartland Building Corporation Texas
P.I. Holdings No. 1, Inc. Texas
River Oaks Bank Building, Inc. Texas
River Oaks Securities, Inc. Texas
River Oaks Trust Corporation Texas
</TABLE>
<PAGE> 1
EXHIBIT 23(a)
ACCOUNTANTS' CONSENT
The Board of Directors
Compass Bancshares, Inc.
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Birmingham, Alabama
December 20, 1999
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of Compass
Bancshares, Inc. on Form S-4 of our report on the financial statements of
MegaBank Financial Corporation and Subsidiaries dated February 19, 1999,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
/s/ Fortner, Bayens, Levkulich & Co., P.C.
FORTNER, BAYENS, LEVKULICH & CO., P.C.
Denver, Colorado
December 21, 1999
<PAGE> 1
EXHIBIT 24(a)
POWER OF ATTORNEY
WHEREAS, Compass Bancshares, Inc. (the "Company") has agreed to file a
registration statement and amendments thereto under the Securities Act of 1933,
as amended, with respect to the issuance and sale of shares of common stock of
the Company in connection with the acquisition by the Company of MegaBank
Financial Corporation, Englewood, Colorado;
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that the Company and
the undersigned directors and officers of said Company, individually as a
director and/or as an officer of the Company, hereby make, constitute and
appoint each of D. Paul Jones, Jr., Garrett R. Hegel, Jerry W. Powell, and
Daniel B. Graves their true and lawful attorney-in-fact for each of them and in
each of their names, places and steads to sign and cause to be filed with the
Securities and Exchange Commission said registration statement and any
appropriate amendments thereto, to be accompanied by prospectuses and any
appropriately amended prospectuses and any necessary exhibits.
The Company hereby authorizes said persons or any one of them to
execute said registration statement and amendments thereto on its behalf as
attorney-in-fact for it and its authorized officers, and to file the same as
aforesaid.
The undersigned directors and officers of the Company hereby authorize
said persons or any one of them to sign said registration statements on their
behalf as attorney-in-fact and to amend, or remedy any deficiencies with respect
to, said registration statements by appropriate amendment or amendments and to
file the same as aforesaid.
DONE as of this the 26th day of November, 1999.
<PAGE> 2
COMPASS BANCSHARES, INC.
By: /s/ D. Paul Jones, Jr.
----------------------------------------
D. Paul Jones, Jr.
Its Chairman and Chief Executive Officer
/s/ D. Paul Jones, Jr.
----------------------------------------------
D. Paul Jones, Jr.
/s/ Garrett R. Hegel
----------------------------------------------
Garrett R. Hegel
/s/ Timothy L. Journy
----------------------------------------------
Timothy L. Journy
/s/ Charles W. Daniel
----------------------------------------------
Charles W. Daniel
/s/ W. Eugene Davenport
----------------------------------------------
W. Eugene Davenport
/s/ Marshall Durbin, Jr.
----------------------------------------------
Marshall Durbin, Jr.
/s/ Tranum Fitzpatrick
----------------------------------------------
Tranum Fitzpatrick
/s/ Carl J. Gessler, Jr.
----------------------------------------------
Carl J. Gessler, Jr.
/s/ John S. Stein
----------------------------------------------
John S. Stein
/s/ Robert J. Wright
----------------------------------------------
Robert J. Wright
<PAGE> 1
EXHIBIT 24(b)
WAIVER OF NOTICE AND ACTION BY UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS OF COMPASS BANCSHARES, INC.
REGARDING ACQUISITION OF MEGABANK FINANCIAL CORPORATION, ENGLEWOOD, COLORADO
THE UNDERSIGNED, constituting all of the members of the Board of
Directors of Compass Bancshares, Inc., a Delaware corporation (the
"Corporation"), acting by unanimous written consent without a meeting pursuant
to and with the effect provided in Section 141 of the Delaware General
Corporation Law, hereby each waive notice regarding the action contemplated
hereby and approve and adopt the following resolutions of said Board of
Directors as of the date hereinafter set forth:
RESOLVED, that the Board of Directors of Compass Bancshares,
Inc., a Delaware corporation (the "Corporation"), has determined that
it is desirable and in the best interests of the Corporation and its
stockholders to acquire (the "MegaBank Acquisition") MegaBank Financial
Corporation ("MegaBank") and its subsidiary, MegaBank of Arapahoe (the
"Bank"), the principal offices of which are located in Englewood,
Colorado, in accordance with the basic terms of such transaction as
described to this Board by the Chairman and Chief Executive Officer,
the Chief Financial Officer, and/or the General Counsel and Secretary
of the Corporation at the meeting at which these resolutions were
adopted; and further
RESOLVED, that the negotiation, execution, attestation, and
delivery of a definitive agreement or agreements and a plan or plans of
merger by the proper officers of the Corporation, in consultation with
counsel, as well as any amendments or supplements thereto, among the
Corporation, MegaBank, the Bank, and any subsidiary banks or subsidiary
corporations of the Corporation or MegaBank now in existence or to be
formed for the purposes of effectuating the acquisition by the
Corporation of MegaBank and the Bank (referred to collectively herein
as the "Agreement") are authorized, approved, and ratified Agreement in
such form as such officers, in their sole discretion, have or shall
approve, such approval to be conclusively evidenced by their execution,
attestation, and delivery of the Agreement; and further
RESOLVED, that all negotiations and any other actions taken
and things done heretofore by the officers of the Corporation with
respect to the execution, attestation, and delivery of written
agreements in principle or definitive agreements relating to the
acquisition of MegaBank, the Bank, and their affiliates are hereby
ratified and approved; and further
RESOLVED, that the organization of one or more corporations as
a subsidiary or subsidiaries of the Corporation or as a subsidiary or
subsidiaries of
<PAGE> 2
an existing affiliate of the Corporation for the purpose of
effectuating the MegaBank Acquisition is hereby authorized, approved,
and ratified in the event that it shall be determined or has been
determined by the officers of the Corporation, after consultation with
counsel, that such organization of a subsidiary is necessary or
appropriate for the effectuation of the acquisition of MegaBank and the
Bank; and further
RESOLVED, that to the extent that the approval of the
Corporation as the sole stockholder of any of its subsidiaries is
required in connection with the MegaBank Acquisition, the Corporation
hereby waives any and all notice of a meeting or meetings of
stockholders of any such subsidiary or subsidiaries for the purposes of
approving the MegaBank Acquisition or the Agreement, and the Board of
Directors of the Corporation hereby approves, authorizes, and ratifies
the MegaBank Acquisition and the Agreement as the stockholder of its
subsidiaries now existing or to be organized, it being the intent of
the Board of Directors of the Corporation that the approval by the
Corporation set forth in this resolution shall constitute any and all
approval required by law for the approval of the MegaBank Acquisition
or the Agreement by the Corporation as a stockholder; and further
RESOLVED, that the Corporation's and the Corporation's
subsidiaries' officers are authorized, empowered, and directed to
prepare, or cause to be prepared, and to execute, attest, and file all
applications, or requests for waiver of application requirements, which
they shall deem necessary or appropriate with the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation,
the Office of Thrift Supervision, the Office of the Comptroller of the
Currency, the Alabama State Banking Department, and any other
appropriate bank and bank holding company regulatory authorities with
respect to the MegaBank Acquisition; and further
RESOLVED, that, in the event that the Agreement shall
contemplate that the Corporation shall issue as consideration in
connection with the MegaBank Acquisition shares of its common stock or
other securities of the Corporation, the proper officers of the
Corporation, in consultation with counsel, are authorized and directed
to prepare, execute, attest, and file a Registration Statement on the
appropriate form for the registration of securities (the "Registration
Statement") with the United States Securities and Exchange Commission
(the "Commission") relating to the MegaBank Acquisition and the
proposed issuance of securities of the Corporation as consideration in
such transaction; and further
RESOLVED, that the proper officers of the Corporation are
authorized, empowered, and directed for and on behalf of the
Corporation to do any and all acts and things necessary or appropriate
in connection with such filing of the
<PAGE> 3
Registration Statement, including the execution, attestation, and
filing of any amendments or supplements thereto, to effectuate the
registration of securities of the Corporation to be issued in the
MegaBank Acquisition and the continuation of the effectiveness of the
Registration Statement; and further
RESOLVED, that each officer or director who may be required to
execute the Registration Statement or any amendment or supplement to
the Registration Statement (whether on behalf of the Corporation or as
an officer or director thereof) is hereby authorized to constitute and
appoint D. Paul Jones, Jr., Garrett R. Hegel, Jerry W. Powell, and
Daniel B. Graves, and each of them acting singularly, his true and
lawful attorney-in-fact and agent, with full power of substitution for
him and in his name, place, and stead, in any and all capacities, to
sign the Registration Statement and any and all amendments and
supplements thereto; and further
RESOLVED, that the proper officers of the Corporation are
authorized in the name and on behalf of the Corporation to take any and
all action that they deem necessary or appropriate in order to effect
the registration, qualification, or exemption from registration or
qualification of securities of the Corporation included in the
Registration Statement for issue, offer, sale, or trade under the "blue
sky" or securities laws of any of the states of the United States of
America or the securities laws of any jurisdiction or foreign country
where such action may be advisable or necessary, to effect the
registration of securities of the Corporation to issued in connection
with the MegaBank Acquisition, to execute, acknowledge, verify,
deliver, file or cause to be published any application, surety bonds,
reports, irrevocable consents to service of process, appointment of
attorneys for service of process, and any other documents or
instruments that may be required under such laws, and to take any and
all further action that they may deem necessary or advisable in order
to maintain any such registration, qualification, or exemption for so
long as they deem necessary as required by law; and further
RESOLVED, that the Corporation hereby consents to service of
process in any state or jurisdiction in which such consent is required
under the blue sky laws as a precondition to the offer and sale of
securities of the Corporation to be issued in the MegaBank Acquisition,
and that Jerry W. Powell, General Counsel and Secretary of the
Corporation, is hereby designated as agent for service of process in
connection with the Registration Statement and any consent to service
of process that may be required by the blue sky laws of any
jurisdiction as a precondition to the offer and sale of such
securities; and further
<PAGE> 4
RESOLVED, that the appropriate officers of the Corporation are
hereby authorized, empowered, and directed to do any and all other or
further acts, and to prepare, or cause to be prepared, and to execute,
attest, and deliver all other or further instruments, certificates,
applications, reports, and documents, including without limitation
obtaining any necessary or appropriate regulatory approvals, all on
behalf of the Corporation as they, in their discretion, may deem
necessary or appropriate to effectuate the purposes of these
resolutions, and that all acts and things undertaken and completed
heretofore by the proper officers of the Corporation in connection with
the MegaBank Acquisition as contemplated by these resolutions are
hereby approved, ratified, and confirmed.
DONE as of this the 26th day of November, 1999.
/s/ Charles W. Daniel /s/ Carl J. Gessler, Jr. M.D.
- --------------------------------- ---------------------------------
Charles W. Daniel Carl J. Gessler, Jr., M.D.
/s/ William Eugene Davenport /s/ D. Paul Jones, Jr.
- --------------------------------- ---------------------------------
William Eugene Davenport D. Paul Jones, Jr.
/s/ Marshall Durbin, Jr. /s/ John S. Stein
- --------------------------------- ---------------------------------
Marshall Durbin, Jr. John S. Stein
/s/ Tranum Fitzpatrick /s/ Robert J. Wright
- --------------------------------- ---------------------------------
Tranum Fitzpatrick Robert J. Wright
<PAGE> 1
EXHIBIT 99(a)
MEGABANK FINANCIAL CORPORATION
8100 EAST ARAPAHOE ROAD, SUITE 214, ENGLEWOOD, COLORADO 80112
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 2000
To the Shareholders of MegaBank Financial Corporation:
A Special Meeting of the holders of common stock of MegaBank Financial
Corporation, a Colorado corporation ("MegaBank"), will be held at _____ a.m.
local time, on ____________, ____________, 2000, at the corporate offices of
MegaBank located at 8100 East Arapahoe Road, Englewood, Colorado 80112. At the
Special Meeting, the holders of MegaBank common stock will consider and vote
upon:
1. A proposal to approve and adopt the Agreement and Plan of Merger (the
"Merger Agreement") dated as of November 4, 1999, as amended, by and
among Compass Bancshares, Inc., a Delaware corporation ("Compass"),
_________________, a Colorado corporation and wholly owned subsidiary
of Compass ("Merger Sub"), and MegaBank, providing for, among other
things, the merger ("Merger") of Merger Sub with and into MegaBank
and, in connection therewith, the receipt by the holders of MegaBank
common stock of shares of Compass common stock; and
2. Such other business as may properly come before the Special Meeting
or any adjournments thereof.
The Board of Directors of MegaBank has fixed the close of business on
______________, 2000 as the record date for determining which shareholders are
entitled to notice of, and to vote at, the Special Meeting or any adjournments
thereof. Complete lists of such shareholders will be available for examination
at the offices of MegaBank during normal business hours by any holder of
MegaBank common stock, for any purpose relevant to the Special Meeting,
beginning ________, 2000.
THE BOARD OF DIRECTORS OF MEGABANK UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" THE APPROVAL AND ADOPTION OF THE MERGER AND THE RELATED MERGER AGREEMENT.
The affirmative vote of the holders of two-thirds of the outstanding shares of
MegaBank common stock entitled to vote thereon is required to approve the Merger
and the Merger Agreement. If you fail to vote, the effect will be a vote against
the Merger and the Merger Agreement.
Holders of MegaBank common stock, even if they expect to be present at the
Special Meeting, are requested to sign, vote and date the enclosed proxy and
return it promptly in the enclosed envelope. Any shareholder giving a proxy has
the power to revoke it at any time prior to the Special Meeting. Shareholders
who are present at the Special Meeting may withdraw their proxies and vote in
person.
By order of the Board of Directors,
Susan A. Putland
Corporate Secretary
Englewood, Colorado
January , 2000
DATED JANUARY ___, 2000 AND FIRST MAILED TO SHAREHOLDERS
ON OR ABOUT JANUARY ___, 2000.
<PAGE> 1
EXHIBIT 99(b)
PROXY MEGABANK FINANCIAL CORPORATION PROXY
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
________________, 2000
The undersigned hereby appoints ____________ and ____________, 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 MegaBank Financial Corporation, to be held on _________,
_________, 2000, at ___________ A.M. local time at the offices of MegaBank
located at 8100 Arapahoe Road, Englewood, Colorado 80112, and at all
adjournments thereof as follows:
(1) Approval and adoption of the Agreement and Plan of Merger,
dated as of November 4, 1999, as amended, by and among Compass
Bancshares, Inc., ________________, and MegaBank Financial
Corporation.
|_| For |_| Against |_| Abstain
(2) In their discretion, upon any other business which may
properly come before said meeting.
|_| Authority Withheld
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 of Shareholders and the Proxy Statement/Prospectus dated January
__, 2000 is hereby acknowledged.
THIS PROXY IS SOLICITED BY THE MEGABANK FINANCIAL CORPORATION 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.
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_________________________________________ , 2000
____________________________________________________
Signature
____________________________________________________
Signature, if held jointly, or office or title held
<PAGE> 1
Exhibit 99(c)
MEGABANK FINANCIAL CORPORATION
SPECIAL MEETING OF SHAREHOLDERS
Dear Shareholder:
On behalf of the Board of Directors and Management of MegaBank
Financial Corporation ("MegaBank"), I cordially invite you to attend a Special
Meeting of Shareholders to be held on ______________________, 2000 at
___________________________, local time at MegaBank's offices located at 8100
Arapahoe Road, Englewood, Colorado.
At the special meeting you will be asked to vote on the proposed merger
of ______________________, a wholly-owned subsidiary of Compass Bancshares, Inc.
("Compass"), with and into MegaBank. If the merger is completed, Compass will
issue (1) 3,370,000 shares of Compass common stock to the shareholders of
MegaBank and (2) up to 150,000 shares of Compass common stock to the members of
Osage 3734 LLC, 1996 Newton LLC and Nagrom LLC, affiliates of MegaBank.
YOU ARE NOT BEING ASKED TO VOTE ON THE ACQUISITIONS OF OSAGE 3734 LLC,
1996 NEWTON LLC AND NAGROM LLC BY COMPASS. HOWEVER, THE ACQUISITIONS OF OSAGE
3734 LLC, 1996 NEWTON LLC AND NAGROM LLC WILL NOT OCCUR IF THE MEGABANK MERGER
IS NOT APPROVED.
THE BOARD OF DIRECTORS OF MEGABANK HAS UNANIMOUSLY DETERMINED THAT THE
MERGER IS IN THE BEST INTERESTS OF MEGABANK AND ITS SHAREHOLDERS AND HAS
APPROVED THE MERGER AGREEMENT. THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN
FAVOR OF THE MERGER AND MERGER AGREEMENT AT THE SPECIAL MEETING.
The accompanying document provides you with detailed information about
the proposed merger. In addition, you may obtain information about Compass and
MegaBank from documents filed with the Securities and Exchange Commission. We
encourage you to read this entire document carefully before you decide how you
wish to vote.
Whether or not you plan to attend the special meeting, please complete
and mail the enclosed proxy card. If you sign, date and mail your proxy card
without indicating how you wish to vote, your proxy will be counted as a vote in
favor of the MegaBank merger and the related merger agreement. If you fail to
return your card, the effect will be a vote against the foregoing matters. YOUR
VOTE IS VERY IMPORTANT.
On behalf of the Board of Directors, I thank you for your support and
urge you to vote "for" approval and adoption of the MegaBank merger and the
related merger agreement.
Very truly yours,
Thomas R. Kowalski
Chairman of the Board
